Gold and Silver

"Gold and Silver are the only financial assets that are not simultaneously someone else's liability" - Doug Casey.

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Exter's Pyramid

John Exter (September 17, 1910 – February 28, 2006) was an American economist, member of the Board of Governors of the United States Federal Reserve System, and founder of the Central Bank of Sri Lanka. He is also known for creating Exter's Pyramid.

Exter is known for creating Exter's Pyramid (also known as Exter's Golden Pyramid and Exter's Inverted Pyramid) for visualizing the organization of asset classes in terms of risk and size. In Exter's scheme, gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky. The larger size of asset classes at higher levels is representative of the higher total worldwide notional value of those assets. While Exter's original pyramid placed Third World debt at the top, today derivatives hold this dubious honor.

Unwinding the global fiat money experiment

The Paper Empire. - 2012


I find John Exter’s upside down debt period to be an extremely useful model for developing a visual understanding of the monetary system and economic cycles.

In order to make use of it though, we must first make the distinction between real wealth and claims on wealth. Real wealth is represented by actual items that people want or need. This can be food, land, natural resources, buildings, factories etc. Financial assets, shown as layers in the pyramid, represent claims on real wealth. In a fully developed financial system, in good perceived standing, there is a high ratio of claims on wealth to actual underlying real wealth. In this environment the average buying power of the financial assets is lower. This can best be observed by looking at the purchasing power at the bottom of the pyramid. Gold is at a minimum here. It is competing with all of the other claims on wealth for a relatively constant amount of underlying real assets.

According to Exter’s theory of money, when economies get into trouble through the accumulation of too much debt, the levels of the pyramid disappear in order from highest to lowest. As the pyramid contracts downward, the remaining layers represent a proportionally higher claim on the real underlying wealth. In other words their value increases. Using gold as our reference point, it’s relative purchasing power increases as the pyramid contracts. Gold finds itself in a secular bull market.

In the extreme hypothetical case, where all other asset classes are destroyed, including the currency itself, only gold remains. In this case the holders of gold compete with no other financial assets for claims on the underlying wealth. This scenario represents the ultimate clearing of the economy. All currency denominated debts have been wiped clean.

If a market economy remains in place then the pyramid begins to expand and grow again. The wealth claims represented in gold will be deployed as investments and a new currency will emerge that garners the faith of those who use it. As this new economy grows and expands, the previous instruments of credit and financing will appear again. Layer upon layer are added back to the pyramid. From the perspective of gold, its relative purchasing power decreases as it competes with these new financial assets for claims on the underlying real wealth. Gold is in a secular bear market as the newest levels of the pyramid are in their growth phase.

This model provides a useful intuitive understanding of the alternating secular bull and bear markets of commodities vs. equities. Bear in mind that normal cycles of expansion and contraction of the system involve only the outermost levels of the pyramid. Only in extreme historical examples does the contraction reach the lowest levels in which the currency itself is destroyed.

Of course, a visualization this simplistic is only intended to give a very broad understanding of some of the root fundamentals that drive economic cycles. On top of this are many complications that arise from not only the extraordinary complexity of the global financial system but also of the massive non market interventions of government and central banking.

Bailouts and the propping up of assets represent distortions in the anticipated successive evaporation of layers from the pyramid. Layers may temporarily appear and disappear out of order as non-market forces hold temporary reign.

Additional complexities arise when the currency itself is at risk as it usually serves are the numeraire or reference point by which the purchasing power of other asset classes is measured. During rapid currency debasement an asset may appear to be rising in nominal terms but actually decreasing as a claim on the underlying wealth. A good example of this is the difference in the DOW since 2000 when priced in Dollars vs. ounces of gold.

A note on equities

I don’t believe the original version of Exter’s pyramid included stocks. It was simply layers of debt instruments and money. The more recent addition of stocks (and real estate) as part of the model does complicate the behavior in my mind. Stocks exhibit more of a hybrid behavior as both a financial asset and as well as a hard asset. At their core they do represent ownership of an actual company but since the trading of that ownership involves no production, storage, delivery or rolling over of contracts, they behave under normal circumstance more as financial instruments. During a severe contraction of the pyramid, in which the currency is severely damaged, stocks revert to their fundamental nature as a hard asset. So unlike a debt layer which disappears completely, the equities layer will at some point stabilize even as underlying layers start to disappear. A good example of this was the Zimbabwe stock exchange during their hyperinflation. Instead of stocks going to zero they became something of a hedge against inflation as the market experienced large percentage increases.

Preservation of Purchasing Power with Gold

I was curious to put the theory to the test to see how well Gold maintains its purchasing power over decades and centuries. We have all heard the story of how a man's suit today can be bought for the equivalent of 1 oz of gold, just like it could have been at nearly any point in measured history, dating as far back to ancient Rome nearly 5000 years ago. But what about within the last 100 years? Does the theory still hold true? The answer is a resounding YES! Obverse these results:

1965 Ford Mustang Sports Car

The very first edition of this classic automobile was listed at $2368 US. At that time, the US:CA exchange rate was $1.074 and gold was trading at $35.50 US / oz. It therefore took 62 oz of gold to buy this now classic auto. The cash value of that much gold today is $102,982 Cdn!

As 01/18/2018, the latest Mustang Shelby GT350R version can be bought for $84,388 in Calgary. With Gold trading at $1661 Cdn / oz and the exchange rate at $1.25, it now only takes only 51 oz of gold to buy the latest edition. That equates to an extra 11 oz of purchasing power worth $18,264 Cdn. 

Interestingly, a used original 1965 Ford Mustang listed on, can be purchased today for the same 51oz of gold!

$84,375 Cdn

4 Bed, 2 bath Family Home in Calgary

Intrigued by these results, I then chose to compare the house at the end of the street where I grew up, three doors away from where my dad still lives. I chose this house because it has recently been modernized and is a fair comparison to a new house in 1966, when my parents first moved in. This corner home was valued at approximately $37,500 back then. At that time, the US:CA exchange rate was $1.074 and gold was trading at $35.50 US / oz. It therefore took 981 oz of gold to buy this home. The cash value of that much gold today is $1,632,482 Cdn! 03/12/20 UPDATE: $2,133,773.


As of 1/17/2018, gold was trading at $1664.10 / oz Cdn, the exchange rate was $1.2448 and the new house in its place had a value on the Calgary property tax appraisal website of $1.63 Million Cdn. As of that date, it would take 980 oz of gold to buy this home on the same lot. Thus, in the case of this particular piece of real estate in Calgary, the purchasing power of GOLD has been perfectly preserved for 52 years and counting! 

As of 3/12/2020, gold was trading at $2175.10 / oz Cdn, the exchange rate was $1.3912 and the new house in its place had a value on the Calgary property tax appraisal website of $1.43 Million Cdn. It now takes only 658 oz of gold to buy this home on the same lot. Thus, in the case of this particular piece of real estate in Calgary, the purchasing power of GOLD has not only been perfectly preserved for 54 years and counting, but it has actually increased relative to real estate! Not only could you now buy this fine home with just 67% of the gold it took back in 1966, you would also have a surplus of 322 oz of gold worth a total of $700,382 at current prices! 

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