Why This ‘Ludicrous’ Investment Keeps Going Up.
The Economist calls it ‘nonsense’, and commentators on CNBC call it‘ludicrous’ and ‘nonsensical’.
But they would wouldn’t they?
And if you ask most people in the banking industry about it, they’ll laugh and tell you it’s for cranks and nutters.
In that case, we’re proud to be a crank and a nutter.
But the longer the mainstream mocks it, the more certain it is that one day the current system will fail, and the old system will return.
We’ll explain why below…
Two weeks ago we wrote to you about the US Republican Party’s plan to set up a committee to discuss the return to a Gold Standard.
In all honesty, the chances of a Gold Standard coming back through choice rather than necessity are fairly slim.
Our bet is the Republicans will discuss it and decide it’s a tool of the past…too strict…not modern enough. Or as one of the commentators on CNBC put it:
‘Back in the 50?s or before that, when you were making economic decisions on a quarterly basis, you could move slowly. You got to make decisions on a quarter of a second basis here, and when having a gold standard doesn’t allow you to make those changes as quickly as you could in other types of systems that we currently have…’
Of all the arguments we’ve heard against the Gold Standard that has to be the most ludicrous.
The benefit of a gold-backed currency is that it prevents governments and central bankers from printing money to falsely stimulate an economy.
And because gold-backed money is a valued and limited commodity, it means investors protect it more. Without the ability to print money from thin air, banks would be more careful to whom they lend money.
That’s the real reason you won’t see a voluntary return to a Gold Standard. A gold-backed currency restrains governments that want to spend other people’s money so they can buy votes and get re-elected.
The top chart is the increase in US M2 money supply. The lower chart is the increase in China’s M2 money supply.
When governments and central bankers treat money and wealth with such disdain, it creates the kind of boom-and-bust cycles you’ve seen over the past 40 years.
The beginning of the end of that huge boom-and-bust cycle began in 2008 (although as we pointed out last week, the actual beginnings of the current crisis began many years before 2008).
It should be obvious to anyone that constant booms and busts lead to economic instability. It means firms can’t plan for the long term, because they don’t know in what way the government and central bank will meddle next.
Your editor wasn’t alive in the 1950s, so we can’t know for certain how businesses planned for the future. Maybe they did plan a quarter or more in advance. But if they did, they did so because they had some certainty about the economy.
Today, we’re sure businesses would like to plan in advance too. But they can’t. The government-driven economy is too unstable.
What the commentator on CNBC doesn’t realise is that businesses don’t plan in quarter-second blocks out of choice, they plan in quarter-second blocks due to central planner meddling.
Get the central planners and meddlers out of the way and businesses will go back to what they used to do – plan for the future…implement a business plan and stick to it.
But as we say, that won’t happen yet. It will take more money-printing and more civil unrest in the West before central bankers and governments give up their wealth-killing policies.
The rising gold price is a clear sign that investors and markets expect further devaluation of paper money.
And not just in the US. The European Central Bank (ECB) has made it clear that it will do whatever it takes to prevent the euro from collapse.
That can only mean one thing, creating money from thin air that it will deposit in the banks, so the banks can keep buying bankrupt European government debt…and if the banks don’t need more bonds, then the ECB will buy them for its own book.
Of course, with gold at this high price there’s the inevitable talk of a price bubble.
As with any asset, there’s always the potential for a price to overshoot. Arguably that happened last year when gold hit USD$1,900.
But it’s also important to remember gold’s role. It’s not just an asset like shares, housing or other commodities.
Gold reflects economic uncertainty. And it also reflects the inverse value of paper money. The more central banks print money, the more it devalues paper money. Naturally, the gold price rises to reflect this devaluation.
So for those who argue gold is in a bubble, we simply argue that it’s only a bubble if central banks stop printing money.
Based on everything we’ve seen in the mainstream press and everything we’ve heard from policymakers and central bankers, there’s little chance of the money printing stopping anytime soon.
In fact, in most cases the very people who claim gold is in a bubble are the very same people who cheer for more money printing.
Yes, the price of gold is fast approaching record highs. But does that mean it’s over-valued or in a bubble? No, not when those with the power to do so are intent on destroying paper wealth.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.