Gold bugs will be vindicated

In recent weeks, while the eurozone has suffered escalating levels of systemic stress in government bond markets and its banking system, the gold price has fallen under $1,600. One would have thought that – but for the occasional fat-finger trade – gold would rise in all this instability, not fall. Putting aside short-term considerations, the simple reason has to be that the investment establishment, which has bought into the bond market bubble, does not believe that gold is any longer an alternative to paper money.

We can understand why they think this. Though the Keynesian vs Austrian economic debate is attracting increasing attention, financial services companies recruit economists who have been trained in the traditions of Keynes and Friedman. They are thus immersed in economic disciplines that assume gold is old-fashioned and has no meaningful place in a modern economy. While they might accept that gold has an historical attraction for some investors, they see it as a “risk-on” investment. This is jargon for something you buy when you want to take risks, the opposite of gold’s traditional role.

For further proof, you need look no further than the average level of portfolio exposure, which across the global investment management industry is said to average less than one per cent. This is certainly not compatible with the level of risk in today’s markets, with many nations on the edge of bankruptcy. The result is that flaky gold bulls are experiencing the discomfort of rising panic.

Let us go back to fundamentals. The Keynesians and Friedmanites are oblivious to the debt trap faced by all major currencies. Central banks are printing money to fund government deficits at the lowest possible interest cost. The inevitable consequence of printing money is price inflation, and price inflation always leads to higher interest rates. Higher interest rates exacerbate budget deficits.

You cannot put it more simply than that. The alternative is to stop printing the money and jack up interest rates, but in that event at the head of the insolvency queue is government itself, so this can be ruled out as a deliberate policy. That is what a debt trap is all about: whichever way you turn, there is only one outcome: bankruptcy.

When a government goes bust, its paper is valueless: not just its bonds, but its fiat currency as well. On the surface it is different in Euroland, because the nation states do not issue their own currency. On this basis the demise of the euro is an event one step removed from the bankruptcy of individual nation states. The relationship with the other major fiat currencies is direct.

The destruction of fiat currencies themselves is becoming more likely by the day. Meanwhile, the weakness of “risk-on” gold has led to a serious mispricing in the market. This has happened because the financial community, sucked into the bond market bubble, has not even begun to discount the debt threat to government paper from sovereign bankruptcies.

When this mispricing is inevitably resolved, it is unlikely to be gradual. It will be so swift that those old-fashioned enough to own gold for insurance purposes will have the protection they sought. Those that fall for modern neo-classical economics will learn a very sudden lesson about what gold is actually for.

This article was previously published at

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2 replies on “Gold bugs will be vindicated”
  1. says: Paul Marks

    The establishment economists (whether they follow Keynes or Friedman – really whether they follo Keynes or Irving Fisher) do indeed fail to see reality.

    They obsess over whether there is going to be “inflation” or “deflation” – they fail to see that the whole financial and monetary order is going to go (de facto) bankrupt.

    Fiat currencies are the creatures of the state that produce them – when those state go bankrupt….

    And they are going to go bankrupt (in fact – even if not officially) – that is set now (the out-of-control Welfare State, and the credit bubble finanial system, are unsustainable).

    Human beings will still need money (a medium of exchange and a store of value – the latter function being vital, without it the whole concept of “savings” is meaningless). If fiat currency does not fill that role (and the fiat currency of a bankrupt state can not fill that role) then other things will have to take the place of fiat currencies.

    Unless we are going to collapse down to cigarettes (or perhaps ammunition) being money, then gold (and silver?) looks likely to resume its customary function as money.

    Remember the use of precious metals as money is far older than coinage – in the many centuries before coinage, money was simply a certain weight of either gold or silver (which operated as defacto competing currencies – rather than having a fixed exchage rate).

    People expected payment in a certain weight of either gold or silver (specified in the agreement) of a certain purity.

    No need for special names (such as Dollar or Pound) and no need for the head of a King or Queen on a coin (indeed no real need for a coin).

    These days ownership of gold (and so on) can be moved electronically – without any need to physically move the metal.

    Although electronic transfers remain under threat from criminal (inculding governments – the ultimate criminals) activity.

    Also the physical metal must be stored somewhere.

    Might I suggest that people whose physical gold is stored in the United States might be wiser to move the physical gold away from places like the New York Federal Reserve (where many supposedly private American banks actually store their gold).

    Indeed even the American government knowing that a someone (citizen or noncitzen) has gold is not a good idea.

    Ditto (I suspect) the European Union.

    Hopefully such places as Australia, New Zealand and Canada will prove more civilized.

    “Tax Havens”.

    Small islands (and other such) are vulnerable to political pressure.

    And they do not have a good record to standing up against the forces of “global governance” (“international cooperation” – and the rest of totalitarianism-by-the-installment-plan). For example, it would be in the interests of the people of the Channel Islands and the Isle of Man for their governments to tell the United Kingdom to go to …., but their GOVERNMENTS tend to cave in to pressure.

    Although this is part of a general problem with governments – regardless of the size of the country they represent.

    Politicians listen to civil servants (and to other “expert” opinion) and they love going to international conferences (and so on).

  2. Just of to stroke my nice pile of full and half George V Sovereigns… least they are still legal tender and spendable. Hack-sawing a gold bar into slices may be less practical.

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