Posted January 12, 2021
By Byron King
The Energy of Money
People commonly refer to dollars as money. We all do it.
Its common to refer to dollars in your wallet or bank account as money. Or the dollars you have invested in the stock market. Or the dollars it takes to buy a house, etc.
Thats fine, as far as it goes.
But lets transcend common rhetorical convention and view money as energy.
This line of thinking has roots in both physics and chemistry. Professors everywhere drill into students heads that energy is the capacity for doing work.
Theres kinetic energy, like a cannonball flying through the air. Or potential energy, like with a boulder perched atop a hill.
Theres thermal energy, which we feel as heat, like from a burning log. Or electrical, chemical, nuclear energy.
The point is that energy is all about the ability to do work. And I may as well mention that in physics, work is defined as force times distance.
Which brings us back to money.
Because money true money is a means to store energy. And when you use it, money is how you apply force over distance.
Except that right now, we live in a country and culture thats wrecking its currency, the dollar. Were watching dollars fade away as a measure of the energy that backs up its money.
The energy of our so-called money is bleeding away.
Lets dig into this
Gold is money, said the banker J.P Morgan over a century ago. Everything else is credit.
Morgan was right. Gold is real. It has mass. Its scarce in terms of using it for monetary purposes. And if you hold gold, theres none of whats called counterparty risk.
Look at it this way. An ounce of gold is worth what?
You might say that an ounce of gold is worth whatever the daily spot price is; today, about $1,840.
The more accurate answer, though, is that an ounce of gold is worth exactly an ounce of gold. When you look at things that way, a dollar is worth 1/1,840th of that ounce.
Gold doesnt change or alter. Its an element; number 79 on the periodic table. For a variety of atomic reasons, gold resists corrosion. When alloyed with other metals, its still reasonably easy to recover. In many respects, gold lasts forever.
Meanwhile the value of the dollar, relative to gold, goes up and down.
Its no stretch to say that gold is immutable.
Its your dollars that carry counterparty risk.
Heres another example
Lets say that 100 years ago, your great grandparents had a $20 gold coin and they stashed it in a box that passed down through the family.
One day you find the box, and voila gold coin. Lucky you!
Dont focus on the numismatic value of the coin. It might be valuable just as an artifact. For now, just focus on the gold content.
Back then, a gold $20 coin was worth 20 dollars, based on the gold. In other words, a dollar was 1/20th of an ounce of gold. (Allowing for alloying at the mint, with minor amounts of silver and copper.)
Now, return to the present when a dollar is worth 1/1,840th of an ounce. Do the math.
Over 100 years, the dollar lost 92% in terms of its relation to an ounce of gold.
This illustrates the long-term abuse of the currency by our countrys political and financial class. The central bank issued too many dollars to cover government obligations, and the overall value of the currency has declined.
Along these lines, last summer I discussed the long-term staying power of gold. I used the example of a stash of Roman coins discovered in Britain back in the 1960s.
Over 2,000 years later, the gold in the coins still reflects the economic value of the Roman era (although of course, those ancient Roman coins are near priceless as museum specimens).
I also discussed how to value relatively old things in terms of gold by comparing the then-versus-now (1940/2020) cost of building a World War II battleship.
The idea was to demonstrate how gold offers a reasonably accurate, long-term barometer of inherent values.
Heres some of the takeaway from this Its not hard to make the case that gold holds its value over time while cash fades.
As the Roman coin example shows, people have mined and used gold for many thousands of years. Way before Rome, in fact.
Consider other even more ancient civilizations like Sumer or Egypt. People of those places and eras prized gold. And to obtain it, they dug mines and/or conquered other lands that had it.1
Now, lets think about the process of mining gold in terms of the energy content.
Of course, mining requires human energy. It requires labor, meaning mental labor of geologists and engineers as well as physical work out in the pits.
Mining also requires tools and equipment, such as (historically) picks and shovels.
So when you look at specimens of ancient gold art or coinage in a museum those Roman coins above, for example the gold tells a story of value, although that current valuation is distorted by the scarcity and archaeological importance of the items.
Fast-forward to today, when mining is a complex industrial process.
Mining requires all manner of people, skills, equipment, supplies and more. Think of the complexity of what goes into drilling, blasting, earthmoving, crushing, material handling, applying chemical treatments, heat inputs, etc.
Some modern mines are so massive you can see them from space:
Barrick Gold, Goldstrike Mine, north-central Nevada. NASA image.2Giant mines like Goldstrike have a massive footprint. Theres much disturbed land. Large amounts of rock blasted, crushed, moved about. Immense processing systems.Some modern gold mines move over 100,000 tons of material every day. Think about that Its equivalent to an aircraft carrier in displacement. Every. Single. Day.All this effort to get gold. And in some places, to mine it at the scary-low grade of fractions of a gram per tonne.And whats key to all of it? EnergyThink of diesel fuel being used, from drills to dozers, trucks, pumps, generators and more.Think of electricity, as well. Yes, the mine might pull power down from the grid, but somewhere upstream is a plant. Perhaps a coal-fired plant, or maybe hydro, nat-gas or even nuclear.Somewhere a power plant spins electrons into those wires. Its an energy system at work.Or consider the explosives used to blast rock. Thats chemical energy, packaged at an explosives plant somewhere and made from oil or natural gas.Keep moving along the industrial food chain. Consider the energy that goes into the steel for the machinery, equipment or that goes to burn lime and make cement.If you want to get granular in terms of the overall energy accounting process, think of workers driving their trucks to and fro every day.The fundamental fact of mining is that energy oil, gas, coal, nuclear, hydro is absolutely central to the overall system. You need energy to break and move rock, moil the gold out and turn the product into shiny coins or whatever else results.So back to that ounce of gold, which currently sells for $1,840 per ounce.It looks different when you think of it in terms of energy.Because at root, a gold coin is little more than a means to store energy. It reflects energy from the current era, applied to ancient rock and turned into indestructible gold that will last forever.J.P Morgan was right; gold is money.But gold is also energy.Now, lets move to another, more modern form of so-called money, namely cryptocurrency.Consider two popular names, Bitcoin or Ethereum. Look at the two-year chart, in terms of the relation of each one to the dollar.
Ethereum and Bitcoin, in Dollar comparison. StockCharts.com.
Obviously, both cryptos have soared in recent months. Indeed, the last months of 2020 and thus far in 2021 have been a stampede of demand, driving prices stratospheric.
Just what are these cryptos? Why are people bidding up the price so much?
Basically, cryptos are an encoded series of numbers. They come out of crunching extremely large numbers via massive computing power. And it all relates back to Energy.
That is, production facilities for cryptos tend to be in regions of low-cost electricity, where people have access to large arrays of computers. There, people and machines crunch numbers to find the prime sequences involved.
Again, were looking at this new form of money through the lens of energy content.
Put another way, Bitcoin and Ethereum represent a means to store current energy output in a mathematical way.
But heres the big issue with cryptos. Will they hold up over thousands of years like gold? Its too early to say, obviously.
But clearly, investors are throwing serious dollars onto the table to acquire title to their electronic lucre.
Meanwhile, I dont mean to be a spoilsport. But the counterparty risk is more than evident here. Its the idea that the entire edifice relies on a working power grid and ample amounts of reliable energy to maintain the computers and servers.
Lose the grid and crypto is toast.
Or back to J.P Morgan. Everything else is credit.
People arent thinking along those lines, though. Right now, crypto is in a buying frenzy. Its a market meltup.
Now, lets wrap up this discussion of gold and crypto, both of which are in demand and in a rising trend.
It gets back to something I discussed the other day. Namely, The End of Work as We Know It.
The article touched the chronic issue of out-of-control spending by Congress, far more than government tax receipts. The difference taxes versus outlays is being made up by the Federal Reserve, which literally creates money supply out of the ether.
The Fed carefully accounts for this largesse by keeping a balance sheet. Heres a graph, courtesy of my colleague Dave Gonigam at the 5-Minute Forecast:
Right now, the Fed balance sheet is at a record high of $7.2 trillion. It has not-quite doubled in two years. Its up by a factor of 7x since the 2008 Crash.
The Fed balance sheet shows serious step-ups over the past decade, via more and more so-called stimulus in the wake of the crash over a decade ago.
The Fed and financial pundits call it quantitative easing (QE), of which there were three numbered phases, QE1, QE2 and QE3.
Although the joke is that QE has become such an unending gimmick that we may as well call it QE-forever.
Its no mere coincidence that cryptos have recently followed a rocket-launch trajectory, while the Fed hemorrhages dollars into the monetary system.
I suppose its a cultural thing. Many investors in the U.S. and overseas are drawn to crypto because its the latest and greatest shiny thing, versus old fashioned gold which is still doing just fine over time.
Perhaps we really are transitioning from an old-fashioned analog economy to the glorious digital future. So people are desperate to climb aboard with crypto, although plenty of safe money still holds gold too.
At the same time, the rush to exit dollars is coming because the Fed creates them faster than any source of energy can keep up.
For 100 years, the nominal price of gold has gone up because the Fed created more dollars than the overall energy of the economy could support.
Now with crypto, were watching people flee to the perceived safety of a digital domain, again because the Fed is out of control.
Were entering the final phases of the dollar as we know it.
Washington, D.C. is collectively crazy. Spending is out of control. Our political class dont understand the concept of value. There are simply no limits, no boundaries anymore
To secure your future, look at whats happening through the lens of energy. Money is energy. But dollars are outrunning the system.
It cannot end well. Its basic physics, in fact.
On that note, I rest my case.
Thats all for now Thank you for subscribing and reading.
Byron KingManaging Editor, Whiskey & Gunpowder
P.S. Feel free to forward Whiskey & Gunpowder to friends, family and colleagues. If you received this article from someone and would like to subscribe, click here. Thank you.
2 Goldstrike Mine, Nevada, NASA