Gold: The Monetary System's Navigational Beacon (w/ Simon Mikhailovich)

Cryptocurrencies create a fundamental privacy paradox: they provide privacy through cryptography but require all transactions to be permanently and indelibly recorded in a distributed database outside the holder's control, creating permanent audit trails that could be used against them in the future by governments.

“If you are seeking financial independence and privacy for your assets, for your wealth, do you think it's a good idea to have every transaction you perform with your money indelibly and forever recorded in a distributed database, which you do not control, which no one can control, where the only thing that prevents it from being audited and brought back to your doorstep five years from now, 10 years from now, 20 years from now, 30 years from now, is state of the art cryptography of today or maybe that's not a good idea?”

Cryptocurrencies have never been tested in a real systemic crisis, capital control crisis, or crisis affecting countries with control over networks and the internet, making them unsuitable as crisis-proof stores of value.

“we know that cryptocurrencies have never been tested in a real crisis, systemic crisis, capital control crisis, not by country like Venezuela, but by the major countries that do have control of the networks and the internet and do have capabilities.”

The United States defaulted on its gold obligations in 1971 when France sent destroyers across the ocean to collect gold in exchange for goods, forcing the US to close the gold window because otherwise all US gold reserves would have been depleted.

“What happened in the United States in 1971, is essentially by disconnecting the money from any scarce tether, you can say that the-- first of all, the reason it happened is the United States defaulted on its obligation. It could not pay, the French sent the destroyers across the ocean to pick up the gold in exchange for the goods. They said you want to keep buying the goods for IOUs, send us the real thing. They essentially called us out.”

Central banks and regulators have been using monetary tools (rate cuts, monetization) to artificially protect asset values rather than allow market correction, reversing the normal role of regulators.

“They've been doing whatever it takes to protect the value, the overvaluation of this inventory through lowering rates, through monetization, through all of these different tools.”

Gold is an officially recognized global reserve currency with approximately 10% of central banks' foreign currency reserves held in gold, and is used by half the world's population (about 3 billion Asians, including China and India) as a store of wealth.

“It is actually an official global reserve currency, whereby about 10% of central banks foreign currency reserves are kept in gold... Gold is a globally recognized official reserve currency stored by central banks, and used by half of the world population is a store of wealth. China, India, 3 billion Asians use it so you know what, it's like I've said that before.”

Every transaction with cryptocurrency is treated as a taxable barter event by tax authorities, creating perpetual tax liability for every purchase—even small transactions like buying coffee—that must be reported indefinitely, making cryptocurrency usage impractical for everyday transactions.

“Every time you spend cryptocurrency or every time you spend gold, you're essentially selling a small portion of that gold in exchange for whatever good, cup of coffee or whatever it is you're getting. That is a taxable barter transaction. It is reportable and if you're not reporting it, you're breaking the law.”

Money must meet three essential criteria: it must be a store of value that maintains purchasing power over time; it must be a unit of account allowing comparable transactions; and it must be a medium of exchange that people accept in trade.

“What is money? Money is some a substance that usually has to meet three criteria. One is that it has to be a store of value... The second one is a unit of account... Finally, it has to be a medium of exchange.”

If the US government printed enough money to give every citizen $10 million, everyone would be rich, but they would all go to buy bigger houses, cars, and better services—but there are only so many plumbers, contractors, and construction materials, so the purchasing power of each dollar would decline dramatically due to scarcity of real goods.

“if I have chickens and you have cows, and we need to perform some exchange transaction, it's complicated to equate chickens to cows... let's say tomorrow, the US government prints enough money and every citizen of the United States receives a check for $10 million. That would be wonderful. Everybody would be rich... But think practically what would really happen to the price of all these services if all of these people suddenly came up with all this money to start buying? There are only so many plumbers and there are only so many contractors and there's only so many construction materials. It's intuitively clear that the value of each dollar would lose its purchasing power dramatically in such a scenario.”

The moment of truth—when fog clears and true financial position is revealed—has not yet arrived, but outer bands of the hurricane are already visible; the system is in crisis but most people misinterpret the signs as normal drizzle rather than hurricane outer bands.

“What we have not seen as the moment of truth, when all of that, when the skies clears and we see the North Star and we bring our sextant and we're really calculate the position of where we are and we find out whether we're rich or poor in real terms, that moment remains ahead, but the signs, the outer bands of this hurricane, if you will, are right here with us. If you're not a meteorologist, you may think this is just a drizzle, but it isn't.”

Gold functions as a 'North Star' for the financial system—a fixed, immutable navigational anchor against which all other assets can be valued and financial position assessed, similar to how the literal North Star provides constant reference for navigation.

“In the same way, gold essentially for a millennia, has served as the North Star of the financial system. People say it's inert, it doesn't do anything. That's right. It doesn't do anything. It's the same thing. It doesn't change. It's an immutable same thing that's in the same place, and against which everything else rotates. It's something by which you can navigate.”

The British pound sterling has lost 99.7% of its purchasing power since 1914, requiring 300 modern pounds to equal the purchasing power of one 1914 sovereign.

“today, this coin, the British sovereign, that was pound, that was one pound sterling... Today, this is what circulates as a pound... this is 300 pounds. 300 of these coins for one of these coins. That means that the pound in 100 years since whatever, 1914-'15 through today, lost 99.7% of its purchasing power.”

The 50-year debt super-cycle that began with leaving the gold standard will resolve through massive devaluation of either financial assets or the currencies in which they are denominated, and because every dollar of debt is somebody's asset, writing down debt means the corresponding asset must also disappear.

“going off the gold standard has essentially set up a crisis, which has been now going on for 50 years that will resolve itself. It's a super cycle, it's a debt super cycle, that will resolve itself with essentially devaluation of either financial assets or currencies in which they're denominated, one or the other and because every dollar of debt is somebody's asset, then for the loss of every dollar of debt they write down, that asset disappears as well.”

The next 35-40 years will not be like the past 50 years because interest rates cannot continue their 50-year downward trajectory (from 20% to -1%) or go from -1% to -20%, making current monetary policy tools exhausted.

“I think we're in a moment in history where the next 35 years, next 40 years are not going to be like the last 50 years. Rates can't go from 20 to minus one, they can't go from minus one to minus 20. It's just not going to happen.”

The durability and longevity of electronic digital data storage is untested over long time horizons; digital data is only 50-60 years old and we have no knowledge of how bits of information will survive over 10, 20, 30, 50, or 90 years, or withstand events like solar storms or electricity disruptions.

“the entire data, electronic digital data is what, like 50, 60 years old computerization, the advent of computer science. Do we really have the information or any knowledge as to how these bits of information will survive over the next 10, 20, 30, 50, 90 years? What about a solar storm? What about some electricity disruption in the world?”

The financial system is like overvalued inventory on accounting books that nobody wants to write down—if assets are written down now, auditors, management, banks, and regulators all become culpable for having overstated values for years, so the system collectively avoids writing down bad assets.

“You can think of it as overvalued inventory on the books that nobody wants to write down. It's the same thing. Nobody wants to write down, the auditor's don't want to write down because they've been pining on the value of the inventory for the last many years and if they write it down now, they will say, where have you been all this time? You're culpable. The management can't do it because they're culpable. The banks can't afford to do it because that means they finance the inventory. If the inventory is not worth what everybody says it is, then they need to take huge write downs to their books, they go bust.”

Going off the gold standard in 1971 created 60% loss of US dollar purchasing power in just a couple of years and opened an unlimited window for credit creation and money creation out of nowhere.

“This precipitated inflation that wiped out in the course of a couple of years, a few years, the 60% of the purchasing power of the US dollar. From then on, it opened up the unlimited window to credit creation out of nowhere and money creation out of nowhere.”

Fiat currencies—money created by government fiat without commodity backing—are inherently unstable and ultimately worthless, as demonstrated by historical examples like the Zimbabwean dollar (now worth $8-9 on eBay as a collectible), Russian rubles devalued from 1:1 parity with the dollar to 1:70,000, and Indian rupees demonetized by government decree in 2016.

“None of them are worth anything. These were all money that I used while in these countries when I was there, but today, they're nothing... This is 100 trillion Zimbabwean dollars, which, of course, are now worth about $8, $9 on eBay. It's worth something as a collectible, it's not worth anything as money.”

An intelligence agent sending an encrypted message through a government-controlled postal network faces higher compromise risk than an agent using independent couriers with handwritten messages outside government networks, making network-dependent communication vulnerable.

“Imagine a situation where you need to transmit a message on which may be your fortunes, the fortunes of your family, your life depend on or imagine you're an intelligence agent who needs to transmit an urgent message to his government from a hostile territory and you have choices, you can mail a letter through regular post. Now, you do know that this is a time of trouble and that the government opens every envelope that goes for the mail. You have very thoughtful encryption methodologies how you can encrypt this letter, but you know that that letter will be tested by specialists in cryptography, or would you rather send this message by maybe several couriers independently in handwritten form but completely outside of the definite examination of the postal network?”

For 48 years since 1971, the world has been sailing without a navigational beacon—in financial fog where one cannot see stationary targets or determine actual financial position, creating situation where asset values are real and tradeable in the fog but the moment the fog clears and gold reestablishes its reference function, true financial position will be revealed.

“for the past 48 years, if my math is correct, from 1971, we have been without a navigational beacon. We're essentially sailing in a fog on a ship, where many people say we're in uncharted waters, and then they proceed to tell you exactly where we are. No, no, when you say you're in uncharted waters, it means you don't know where you are.”

In a systemic crisis where trust in institutions and financial instruments collapses, gold is more liquid and more readily accepted as payment than cryptocurrencies, because everyone understands what gold is, whereas cryptocurrencies are complex and unknown to most of the world population.

“In a difficult situation where trust is lost, where the crisis happens where people lose faith in institutions, financial instruments, in things that they don't understand, what is more liquid and more easy to pass as a form of payment, something that everybody knows what it is, or something that's fairly complex, sophisticated, and maybe wonderful, but not known to the vast majority of the human population, and not really transactable in most ways?”

Gold is completely independent from any network or counterparty, can be transferred directly from person to person like a $100 bill, and unlike fiat currency, is not issued by any authority and cannot be canceled by any authority.

“If you take the totality of these questions, and you look at gold, it answers all these questions very straightforwardly. It is the only financial asset that is completely independent from any network, any counterparty. It doesn't need anything. You can just pass it to somebody else directly, just like $100 bill, and it's over. Unlike $100 bill, it's not even issued by anybody and it can't be canceled by anybody.”

Storing private keys in one's head or on one's person creates a coercion vulnerability: governments or criminals can use threats or violence to force disclosure of private keys, whereas gold or bank deposits have additional steps of verification and fiduciary protection that resist coercive extraction.

“I recently read about situation in UK where a hacker who stole a bunch of Bitcoin was arrested and they wanted him to return the Bitcoin for restitution. Well, they didn't have to crack his wallet, they just had to crack him and it didn't take long. They said, you can go away for 20 years if you don't give us your private key, or we can cut a deal with you and you'd go away for four years or something like that, if you give us the private key.”

Currently, if someone buys legal cannabis in Massachusetts using Bitcoin and that practice becomes federally prosecuted 10 years later, they could be investigated and prosecuted based on permanent blockchain records of those transactions.

“If you're buying pot perfectly legally today in the state of Massachusetts using, let's say, Bitcoin, and then it again becomes a schedule-- by the way, it's a schedule on federal drug still. Is that a good idea if 10 years from now, the government decides to investigate who was doing that 10 years ago and then go after them”

The etymology of money-related words reveals deep history: 'pound' comes from Roman measure of silver weight; 'spend' comes from Latin 'expendere' meaning to weigh and judge, revealing that weighing was the original method of determining value.

“the word pound, the British pound, for example, that's a measure of weight. That is something that comes from the Roman pound of silver at the time... In the English language, they were to spend. We all know what it is, to spend money. That actually comes from the Latin word expendere, which means to spend also to expend, but it also means to weigh and to judge.”

Negative interest rates indicate that capital is losing its value, because capital is something that others pay to use, and if they must pay you nothing or negative amounts to use it, the capital's value is declining.

“Capital is some good that you have to give, that you give to somebody for which they pay to use it. The more valuable this capital is, the more they pay to use it. Ask yourself this question, if I'm giving my capital to somebody, and I have to pay them to use it, what is happening to the value of this commodity? What is happening to the value of these commodities is it's declining.”

The system believes in and celebrates a bull market, but in reality what is happening is capital devaluation—a distinction that will only be revealed when the moment of truth arrives and financial positions are reassessed against real value.

“even though we're thinking of it as a bull market, in fact, we are watching capital devaluation, capital being devalued.”

I was born in the Soviet Union, lived there until age 19, and left in 1978, arriving in the United States in 1979, which gave me personal experience with the collapse of a fiat currency system.

“Personally, I was born in the Soviet Union. I lived there until I was 19. Came to the United States in 1978-- '79, I'm sorry, left in '78, came in '79.”

My background is 35 years in the investment business, primarily dealing in credit, distressed credit, structured credits (CDOs), and credit default swaps, which informs my current focus on gold.

“My background is for the past 35 years has been in the investment business... primarily dealing in credit, in distressed credit, then structured credits such as CDOs, and credit default swaps. For the past five or six years professionally, I've been fully focused on gold, not because of some affinity for it, but for the reasons of my opinion, professional opinion, to which I came based on my credit experience as to the solvency of our current financial system”

Money has served critical functions for thousands of years: Hammurabi Code (1700 BC, ~4000 years ago) described financial systems including lending, derivatives, and crop financing, establishing that complex financial structures are not modern inventions.

“going back to the earliest mentions of money, in Hammurabi Code, Mesopotamia, 1700 BC or something like that, so this is almost 4000 years ago. They're talking but first of all, they have financial system, they had lending, they had derivatives, they had crop financing, all of that existed already then”