Protecting your wealth with aluminum

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How can you protect your assets in an uncertain world? No one can know for certain when the next war will break out, the next cataclysmic natural disaster will occur, or the major central bankers will produce too much or too little money. Because of these unknowns, many financial advisors recommend a balanced portfolio – including stocks and bonds, real estate, and gold and silver – as the best way to preserve wealth over the long run. In addition to this traditional balanced portfolio, in this paper, I argue that it is wise to add aluminum to the mix.

In order to make it easy and inexpensive to add aluminum to a portfolio, LuminiumCoin.com digitizes existing stocks of aluminum, which it acquires, and turns into fully-backed digital aluminum tokens, equal to one kilo of aluminum.

The world has been plagued by endless fluctuating exchange rates between countries and persistent and highly variable rates of inflation ever since the major countries of the world began to erode the gold standard during the twentieth century as a direct result of having to finance major wars. Transactions costs, using cash, credit or debit cards, check or wire transfers, are all unnecessarily high. These problems have undermined saving, investment, and trade – all of which have reduced GDP growth, employment, and real wage growth.

The solution is to move to a world of privately-created money with real backing, such as a basket of commodities, or one or more metals such as gold, silver, or aluminum – which would be exchanged in digital form through the use of ledgers and/or blockchain type techniques. The innovative blockchain software technology enabled the creation of cryptocurrencies such as Bitcoin and Ethereum.

The use of the blockchain solves the problem of double-spending and, through the use of encryption, protects financial privacy while verifying the transaction in close to real-time. The actual transaction cost can be negligible, and national borders are irrelevant. The problem with existing cryptocurrencies like Bitcoin is that, even though the developers have found mechanisms to limit the total amount of currency issued, there is no benchmark or real basis for actual value; hence, the prices have fluctuated very wildly. To overcome this problem, innovators have created so-called “stable coins,” which are backed by various types of government currencies. The problem with “stable coins” is they do nothing to protect against irresponsible excess money creation by governments. The U.S. dollar, like all major currencies, is what is called a fiat currency with no specific backing (i.e., the U.S. gold reserves are only a tiny fraction of the total money supply), but the government does have the ability to acquire resources through taxation. That is, the value of the U.S. dollar is based on the correct belief that the government has sufficient coercive power to tax real assets. But the power to tax is also the power to destroy, and there are all too many cases in which governments have destroyed their own economies (and value of their currencies) because of excess spending and taxing.

Private parties are moving to the use of gold, aluminum, or other commodities as a benchmark and backing for money without government permission. Prices for all other commodities, goods, and services can be listed in troy ounces of gold, pounds or kilos of aluminum rather than U.S. dollars, euros, U.K. pound sterling, Japanese yen, or any other central bank-issued fiat money. Nobel Laureate F. A. Hayek, in his classic “Denationalization of money – the Argument Refined,” published in 1976, clearly explained why it was preferable and practical to have non-government issued money, with competitive suppliers. There is no more reason for the government to have a monopoly on money than there is for government to have a monopoly on the production of toasters. Historically, many private parties minted gold, silver, and copper coins, which were fully interchangeable with government-minted coins of the same weight. The only need for government to be involved with the production and quantity of money is to designate what is legal tender for the payment of taxes and government payments to others. If the dollar is defined for U.S. government purposes as, for instance, 1/1000 of a troy ounce of gold or one kilo of aluminum, it matters not as to who minted the coins or supplied the metal as long as it meets the defined standard. The technical hurdles for implementing Hayek’s concept for private money no longer exist as a result of the Internet and blockchain.

Gold, for many good reasons, has served as the most commonly used commodity standard for money. Ever since being officially adopted by the U.K. in 1821, as well as by Germany, France, and the U.S. in the 1870s, gold served the global economy well. It became, in essence, the world currency, thereby eliminating the chaos of multiple fluctuating foreign exchange rates. Goods and services, all around the world, were denominated in gold. And given the cost of mining new gold, persistent inflation did not occur. This was an economic golden age in which the world economy grew rapidly.

In a Wall Street Journal article (August 2, 2021), economists William Luther and William Salter observed: “Nearly all economists believe a central bank can manage the money supply better than the gold standard. But in practice, the Fed has failed to govern the money supply responsibly. Inflation averaged only 0.2% a year from 1790 to 1913, when the Federal Reserve Act passed. Inflation was higher under a Fed-managed gold standard, averaging 2.7% from 1914 to 1971. It has been even higher without the constraint of gold. From 1972 to 2019, inflation averaged 4%.”

There are many arguments for going back to gold; but for several practical reasons, it is very difficult. The dollar’s peg to gold at $35 per ounce was officially (and abruptly) abandoned in 1971, and in 1976 the U.S. dollar officially became a fiat currency. But even after the 3,000 percent rise of gold versus the dollar in the 46 years that followed, the money supplies of all nations vastly exceed their gold supplies, even at the current price for gold. It is unpalatable politically for central banks to now re-peg their currencies to gold at whatever high rate is feasible and give up the power to control their money supply. Though desirable, the re-adoption of a global gold standard would also restrict governments from running large and persistent deficits, something they are loath to do.

In theory, there is no reason why private parties cannot issue gold coins. There are many private minters who currently do. The problem arises if these gold sellers call their coins money because it then falls under government regulation, and the U.S. Treasury has been aggressive in shutting down private issuers of gold money when so labeled (both coin and digital gold money). It should be noted that under Section 8 of the Constitution, Congress has the power to coin money; however, it does not specify that only Congress should have this power.

The price of gold has also been much more volatile than aluminum and a number of other commodities over the past thirty years. The volatility is due to the fact that the price of gold is very much influenced by world events and the actions of governments – such as gold sales and purchases – that own a major share (18 percent) of the outstanding world stock of gold. Relatively small sales or purchases of gold by governments can greatly affect the price of gold since, like all commodities, it trades at the margin.

There are many alternatives to gold, including a variety of commodity baskets; but after extensive analysis, we determined the best alternative is aluminum. As unlikely as it may seem, aluminum-based money overcomes several of the problems with gold. Like gold, most of the aluminum ever produced is still in use today (more than 90 percent of the gold ever produced and more than 75 percent of the aluminum). These two metals do not disappear with endless recycling and environmental degradation (they do not “rust”), unlike virtually all other metals. A high and growing percentage of aluminum is recycled because approximately 40 percent of the cost of primary aluminum production is energy, yet energy is only five percent of the cost of recycled aluminum, so there is a strong incentive for recycling.

In the past, gold had the attraction that a tiny amount was of great value, so it was easy to carry around and useful for high-value coins. This advantage disappears in the digital age and, in fact, can be a disadvantage. Because of its high value to weight, gold is easily stolen, which makes it costly to store. It is much more difficult to steal a significant value of aluminum because of its low value to weight. If aluminum becomes widely used as a global monetary standard, issuers of aluminum-backed money would need to demonstrate that they have possession of – or at least the ability to procure within a short period of time – the necessary aluminum to fulfill redemptions.

Aluminum is the most versatile and useful of all metals, in that it can be substituted for other metals at some price, as well as many plastics, wood, etc. Over the last 30 years, aluminum has had far less price volatility than gold or silver, and all other major metals and most commodities. Its price volatility should continue to decline as the stock of existing aluminum grows relative to new production of primary aluminum. The cost of producing secondary aluminum will always be less than that of producing primary aluminum because of the energy cost differential. This imposes a natural limit on how much primary producers can charge.

Aluminum is an industrial commodity with a one-world price because it is traded on both the International Metals Exchange (IME) in London and on COMEX in New York. Investors in aluminum can always know the price on a minute-by-minute basis because of the active cash and futures in the metal.

At the moment, the Chinese have more than half the world’s primary production capacity; but even so, they cannot “corner” the market because of the huge global stock of secondary aluminum, equal to about 15 times yearly primary output, and there are both many primary and secondary aluminum producers in numerous countries who can ramp up production. Aluminum accounts for about 7 percent of the earth’s crust, so no country can obtain a lock on the raw material, most notably bauxite (of which there are large deposits in many countries).

The. U.S. government benefits from having the dollar as the world reserve currency. Many countries resent this system, including countries as diverse as China and Switzerland, because they have lost some of their monetary and regulatory independence to the Fed. Countries who have done a poor job in managing their own fiat currencies find that they are subject to de-facto dollarization, thus depriving them of the seigniorage (the difference in the cost of printing the currency and its face value) and the float (the interest-free loan that a country receives from users of its currency).

Thus, there is a strong incentive for countries to try to find alternatives. El Salvador recently decided to allow Bitcoin as a legal tender in addition to its own government-issued currency. Luminium Coin, while not being a money (it is merely a very convenient way to hold and buy and sell aluminum), could easily evolve into a currency if a government decided to make it legal tender. (Note: the U.S. and many other governments allow choice in payment for goods and services, provided both buyers and sellers agree. Gold and silver coins, and cryptocurrencies like Bitcoin, are used in legal and enforceable transactions without being legal tender.)

As noted earlier, the problem of cryptocurrencies without a real anchor is well recognized, so there are attempts to find the most acceptable backing – gold, silver, commodity baskets, or whatever.

The classical gold standard using coins and/or bullion for transactions provided a great deal of financial privacy for the users, particularly if they did not use banks. The new cryptocurrencies, including stable coins backed by either government paper or commodities, have the potential to provide near the same level of privacy because the networks can be peer-to-peer, rather than having the money run through a bank or other financial institution.

Governments will, of course, try to ban/monitor/regulate/tax cryptocurrencies, but it is a battle they are likely to ultimately lose in the same way new technologies have been almost fatally disruptive for traditional book stores, video rental shops, film cameras, newspapers, etc. Private cryptocurrencies with real backing are likely to become the ultimate disruptive technology and finally free people from government monetary tyranny.

Luminium Coin is not now a cryptocurrency; it is merely another tool for wealth preservation. It should be a very good hedge against inflation in government-issued currencies, including the U.S. dollar. Unlike stocks and bonds, its value will not fall to near zero, because aluminum is endlessly useful and the cost of producing primary aluminum provides a natural floor. Like gold and silver coins, Luminium Coins are very liquid – but are likely to be far less price volatile – and will be able to be redeemed all over the planet in a variety of government currencies and cryptocurrencies or in the underlying metal.

Prudent investors interested in wealth preservation, while maintaining total liquidity, would be wise to add aluminum to their portfolio. Luminium Coin is the practical low-cost way to achieve that goal. Each coin is equal to one kilo of standard internationally-traded aluminum. Coin purchasers can choose to buy and sell a few hundred or tens of thousands. Luminium Coin is more liquid than real estate, and safer and less volatile than stocks, bonds, gold, and silver over the long run.

Richard W. Rahn was Chief Economist of the U.S. Chamber of Commerce (the world’s largest business federation), an advisor to the New York Mercantile Exchange, the first non-Caymanian member of the Cayman Islands Monetary Authority. He is the author of “The End of Money: and the Struggle for Financial Privacy” and of more than a thousand published articles. He has testified before the U.S. Congress on economic issues more than 75 times. You can also find Richard Rahn on Twitter: https://twitter.com/RichardWRahn

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