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Protecting Your Money: Create your own Personal Gold Standard

November 17, 2015

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Each time I get the opportunity to teach people how to trade, I ask them a simple question: what is your number one investment? Some suggest they do not invest, others say their retirement account, while even some do not know what an investment is. The truth is, everyone invests. Everyone has money. Currency is a form of investment since 1971 when the gold standard was removed from the currency system.

There are three forms of currency systems.

Currency System #1: Free-Floating System

The first standard is the free-floating system, which was put in place in 1971 when the United States removed the gold standard. Since 1971, all industrialized countries use a fiat free-floating system where the value of currency moves up and down relative to other currencies. For example, the EUR is pitted against the USD at 1.0855, meaning it takes 1.08 USD to buy 1 EUR. As the EUR moves up or down against the USD, your money increases or decreases in value. Since the EUR’s creation in 1992, and specifically when it became a currency of trade in 1999, the USD has devalued by 25% against all other major currencies. It will continue to devalue due to many elements working against the dollar, including the forced printing against debt due to reserve status.

Protecting Your Money: Personal Gold Standard

From 1944 to 1971, the USD was the reserve currency of the world as tied to the value of gold at $35/ounce. This meant that individuals and countries could always exchange their money for gold at that price. It was a fixed, or pegged, standard. This meant the currency had true value. In practice, very few individuals would exchange their money for gold. This wasn’t the first gold standard in United States. In 1900, the United States passed the Gold Standard Act, and prior to that, the United States had a similar system as gold and silver have typically been used throughout history as some form of currency standard. In 1933, President Roosevelt outlawed private ownership of gold. In essence, the United States government forced private individuals to turn in their gold or be prosecuted, fined, and imprisoned; with the rationale being that gold hoarding was causing the economy to stall.

Currency System #2: Pegged System

The second standard is the pegged system. A pegged system is where one nation makes a decision to peg the value of their currency to the value of another currency. A couple reasons why a country would peg their currency is one, to make international trade easier to conduct and two, to control inflation. In this type of system, the USD and the EUR are the most pegged currencies. For example, the Chinese RMB is pegged to the USD at 7.75-7.85 and Denmark is pegged to the EUR at 7.46. The biggest risk to a pegged system is when the peg is removed. In January of 2015, the Swiss, whom had pegged the CHF against the EUR at 1.20, removed the pegged value and chaos ensued. This is what we call a black swan event. In a matter of minutes, the CHF increased in value against the USD by 15%; causing hundreds of billions of dollars to be lost from traders who were long USD.

USD/CHF chart
USD/CHF chart

It was even worse against the EUR with a 25% devaluation in a fraction of a moment in time.

EUR/CHF chart
EUR/CHF chart

Currency System #3: Dollarization/Euroization System

The third type of system is a dollarization or euroization system where one country adopts the EUR or the USD as a currency of value in local markets. This means the country adopts the other currency to not only use in international trade but in local markets as well. The most commonly referenced model is that of the European Union, where 19 countries adopted the EUR. There are also countries that went through hyperinflation where they killed the local currency and adopted the USD, such as Zimbabwe, Ecuador, or Panama. This is the most radical form of currency system due to what lead the system to be adopted in the first place.

Germany money in the streets - Hyperinflation
Hyperinflation in Germany: Money in the streets.

Hyperinflation is a rapid increase in the costs of goods and services in a local market. This is usually caused by printing too much money in a fiat system where the value of goods and services go at the rate of the supply of money. For example:

Inflation infographic.

Typically, inflation is offset by rising wages. However, when wages don’t rise, the typical government response is to start printing a higher denominations to offset the rising inflation and this leads to the death of a currency, especially when it’s in a fiat system.

Specifically in the United States, the number one debtor nation due to the increase in the supply of money and thus the increase in debt, wages have not increased for consumers in any major capacity since the late 1970s, yet the consumer productivity has increased by 80%.

Chart: Earnings growth, Productivity and Wages.

There are major risks in every currency system, whether that be black swan, hyperinflation, devaluation, or debt. When these things happen, it’s the consumer that’s left to pay the bill. Government certainly won’t; the United States has proven that time after time, especially in 1933 when they robbed the American consumers of their gold. The consumer will also be left to pay the bill for the Central Bank’s 4.7 trillion in new money created to purchase US bonds, driving inflation and the nation’s debt burden higher.

How do we as the consumer protect against currency systems which are all designed to eventually fail over longer time frames? How do we protect against fiat risk? How do we protect against hyperinflation or massive devaluation? How do we protect when there seems to be so much working against the consumer? We go back to the gold standard. Not in a way that is a national or world standard; a personal one, and this time, do it on the market’s dime.

One thing traders love doing is cash flowing on a monthly basis selling credit spreads, covered calls, or naked puts on stocks/ETFs that give us passive cash flow. Let’s look at how this process would work.

Most consumers are forced through the traditional system of retirement to exchange their time through a job for money which they then put into bank accounts, watching the money become stagnant and devalued. In the United States, this is the USD, which has been a fiat currency since 1971 as the only value to the currency is the faith and confidence of the world to use the dollar. This is a negative arrangement for the consumer as time is certainly more valuable than money, especially with the money being a devalued asset class. As most consumers are forced to do this, it’s the only access they have to money, so they shouldn’t stop at that part of the process.

Consumer Process vs. Trader Process.

What the trader can do is extend the process a few steps to having a personal gold standard. Whether they have a job or not doesn’t matter; we want to protect against fiat currency through owning commodities such as gold and silver. This also means we don’t own the paper asset in the ETF, we own the actual metal.

Take, for example, naked puts on the commodity ETFs, UNG, SLV, and USO:

Naked Put on $UNG (United States Natural Gas Fund)

  • Sold June 20 contracts 11 put option
  • Cash Flow received: $400
  • Probability of Profit (POP): 83%
  • ROI: 18%
  • ROID: 105
Naked Puts on $UNG

Naked Put on $SLV (iShares Silver Trust)

  • Sold 20 contracts 13 put option
  • Cash Flow received: $200
  • POP: 90%
  • ROI: 7.7%
  • ROID: 77
Naked Puts on $SLV.

Naked Put on $USO (United States Oil Fund)

  • Sold 20 contracts 17 put option
  • Cash Flow received: $560
  • POP: 85%
  • ROI: 16.4%
  • ROID: 109
Naked Puts on $USO

Total Numbers

  • Cash flow received: $1160
  • Average ROI: 14%
  • Average POP: 86%
  • Average ROID: 97

Conclusion

The trader then takes the cash flow received at the end of the contract out of the brokerage account and purchases $1160 worth of silver eagles which have a value of around $18 currently. This allows the trader to purchase 64 silver eagles in June and repeat the process each month, allowing them to create a personal commodity-backed currency using the market’s money.

…just don’t store it in a bank lest you doom yourself to a very valuable history lesson.


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20 Replies to “Protecting Your Money: Create your own Personal Gold Standard”

  1. Sandeep Kaur says:

    I totally love it. Great Article Matt. So you simply sell OTM Naked Put and receive the cash flow and reuse the capital again for next month.

  2. Hey Sandeep, you can do it a variety of ways…that is one of them. Point is, to cashflow on the commodity ETFs as they are liquid and give good returns and then use the proceeds to invest in physical metals are reallocate in the market but one thing I do believe in is owning the metals

    1. I am with you on owning the metals. My grandparents taught me gold is real money and I never believe them until I met you guys 🙂
      But I really like it selling Naked Put on commodities ETFs and own metals with ROI.

  3. Well done and, more importantly, a simple way to build your account while you continue to learn more strategies.

  4. Paul Seward says:

    Great article Matt,
    In Section 8 of Article One of our Constitution, Congress has the power to “Coin money, regulate the value theroff, and of foreign Coin, and fix the Standard of Weights and measures”. Note that they didn’t say “print” money. Coinage of precious metals was what they were talking about. The very first coinage act set up the values of silver and gold as our money. Foreign coins such as Spanish pieces of 8 were commonly used as money as gold and silver is money, and money is money and paper its not. Interesting how not allowing citizens to own what the constitution says is money is unconstitutional as is the printing of fiat currency. It was illegal to own real money from 1933 till 1974. Regarding the confiscation of the gold from the people, Roosevelt didn’t exactly steal it, but he sorta did too. At the time, gold was valued at $20 and change, and the people were paid for their gold at that rate. He then pulled an Obama and then declared that the value of gold was now to be $35.00 per ounce. This resulted in an immediate (black swan?) devaluation of the dollar of 40%. Not only did the people get their real money taken from them, they were given devalued paper “money” in return. In the future when gold and silver increase in price 10-fold, we can be assured that our government will try to find a way to tax it or take it from us. Anyway, I plan to hold as much as I can, because I don’t want a stash of fiat toilet paper under my mattress and no gold.

  5. THANKS, this is fantastic Matt!! it really explains clearly and makes evident the tremendous advantages we have as traders when we take control of our money.

  6. Matt
    I really enjoyed this article, and would like to learn more about trading naked puts. I did a search in Tackle trading, but only a short note came up.
    Would you be willing to do do a live video, on trading naked puts., like a mini lab, pros and cons.
    But the concept makes so much sense especially for us retired dudes. I always wanted to own physical silver, but for a host of reasons , never did.
    Using their money is great. Even my wife is going to like that.

    Thanks again
    Bob

  7. Joseph P. says:

    Brilliant. This goes to what you & Steve were talking about re: strategies & systems.

  8. Raymond Royer says:

    So what happens if UNG, for instance, moves down to strike? Someone has bought your contract and you are out ….?

  9. Raymond, I think you can either let yourself be assigned and start selling covered calls or roll your naked put down and out before expiration.

  10. Think I’m with Robert. A short video on managing naked puts would be nice. :0)

  11. ScottWheeler says:

    Selling not buying, that’s my style. I would love to see more of this.

  12. hammonds34 says:

    Good Stuff!

  13. Sundar says:

    Matt, enjoying your articles on forex basics. Also, you had stressed the importance of owning metals in our class in Washington DC a couple of months ago. Thank you for the valuable guidance.

  14. Fidelserrano says:

    I like to know some rules to do a naked put on SLV UNG USO, like the typical better expiration day works better usinb 25day left, 35 day l;est or 45 days left to expiration , I really appreciate your help

  15. TimmyD says:

    Thank You Matt, for the CASH FLOW teaching. This is Priceless

  16. KitnaRhea says:

    Great advice Matt. It’s obvious you put a lot of time and work into the article. Going to work on getting Naked Call & Put ability in my account soon!

  17. Tim talked about this strategy at the workshop I attended. It’s very inspiring. I appreciate how you guys take history, broader than the markets, into account. Great article. I plan on implementing very soon. I just watched “The Big Short” last night, and your words feel every so much more alive.

  18. DEWAYNESMITH says:

    Very good article on explaining what the full process was. I never looked into buying metals before but this system makes it a very easy to obtain these metals. I opened an account with http://www.apmex.com tonight.

  19. DEWAYNESMITH says:

    I finally understand what the Personal Gold Really means. I have now bought Gold and Silver and will continue to add to my family’s portfolio.

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