That governments will want - and will NEED
- much, much higher
gold and silver prices in
the future is counter
intuitive, given that they have done everything within their power till now to throttle back and to keep a lid on bullion prices. Let me explain why.
Although we have seen eleven consecutive
years of gold bullion price rises, such increases have been incremental, measured and at levels which
make the remainder of the
commodities and equities markets look volatile. Governments have
used their preferred bullion banks as agents in the paper
futures markets and their
central banks, in conjunction
with their respective Treasury bureaucracies, to limit the inexorable rise in precious metals prices as much as possible to keep gold - the only
‘real money’ - from drawing
unfavorable attention to their
own failing fiat currencies and uncontrolled sovereign debt.
Recently central banks
have become net purchasers
of gold bullion after many years being
In 2011 central banks
purchased 430 tonnes of gold, five times more than in 2010 and the highest since 1964. Much of this new demand has come from ‘emerging markets’ central banks like Mexico, Russia, Turkey, South Korea and of
course China and India.
This causes one
to speculate as to why governments would suddenly, however quietly, turn into buyers rather
sellers of gold.
Could it be that gold is the
only ‘real money’ in a world comprised of paper money backed up
only by faith and confidence, or lack thereof?
Are ‘paper money
bugs’ losing their confidence and swagger?
Are governments positioning
themselves for a period when paper money loses its value faster than they can
create additional digital versions of it?
COUNTRIES WANT TO CHEAPEN
The owners of the globe’s
respective currencies, especially
the important and freely traded
currencies, are constantly,
deliberately and competitively
devaluing their currencies against those of other nations. They don’t admit that is what
they want and are doing, which is to make their
goods and services more competitive
in international markets, because
voter reaction would be too politically
Even more important in the future, will be the need
for governments to be
able to meet the promises made to their own citizens
for pensions and health care as well
as payments for past debt to bond holders. What better way than
to pay debts than with nominal devalued dollars, euros, yen and pounds?
Financial repression (see my article entitled “Financial
Repression” May Become
Our Worst Nightmare! Here’s Why) is a tried and true public policy mechanism designed to take care of the massive debt following WWII.
It works its magic simply by keeping prevailing interest rates lower than the real rate of inflation. Well managed, it allows
for the imperceptible and inexorable devaluation of
Implemented with precision and stealth by governments and their central banks, it works
magically over a relatively
short period. It allows governments to pay for their promises and obligations with
Given the role of asset inflation, citizens may even think
they are getting wealthy as the nominal price of
their investment assets increase. Instead, it is a form
of taxation and confiscation invisible to the average
using arcane methodologies
such as seasonal adjustments, ‘headline’ and ‘core’ inflation numbers, hedonic adjustments and substitution
are all facilitators of this
A NEW GLOBAL RESERVE CURRENCY IS COMING
The US dollar is in the process of losing its special
status as the means of pricing and paying for the goods and services traded internationally.
This is happening daily
with special bilateral arrangements between trading partners which use something other than the US dollar for political and financial reasons. Before long:
US dollar will be replaced by a basket of currencies, appropriately trade
weighted, including International Monetary Fund SDR’s (Special Drawing
will also be a featured element of this new multipronged global reserve
currency. Given that gold remains
the only real money in a world of the crumbling paper variety, a thick veneer
of gold is essential. Member
nations of this new global reserve currency, of course, will not want the
constraints or discipline of a full-blown gold standard, only its appearance
for reasons of credibility.
new global reserve currency will no longer be American which will be a big
win for the internationalists
and globalists who value multinational alliances and who will no longer have to
defer to one dominant nation, namely America.
yet, any institution comprised of several members will make it extremely
difficult to assign blame, which in academic language means responsibility
and accountability. Clearly a
global currency used in foreign trade, operated by a committee of nations, will
be perfect for dispersing blame.
nations will continue with their own faltering currencies for all internal
pricing and transactions.
National fiscal and monetary policy will remain with individual
nations thereby avoiding untenable constraints currently faced by countries
such as Greece and Portugal in the Euro zone.
rates will invariably rise from their current arbitrary, market manipulated
and unprecedented low levels in response to the growing concerns of bond
holders about risk.
nations will point their fingers accusingly at other nations and especially
at the global committee of nations responsible for the new reserve currency.
political scapegoating will
become national pastimes designed to justify high taxes, lower currency
values, price inflation and low economic growth all resulting in much lower
living standards of the citizens.
Confused citizens will be inundated with multiple reasons for their
HIGH GOLD PRICES WILL DEVALUE NATIONAL
National governments almost universally want their currencies to devalue versus those of other nations primarily to protect their competiveness in international markets. They also want cheap currencies to make good on their obligations to their own citizens for pension and health care promises too. Cheapening
the currency makes paying off bond debts easier since the currency today is worth less
than when the debt was originally
Ever higher gold prices, the only real money,
have the effect of devaluing
national paper currencies
in relative terms. This again is custom made for politicians
and governments to point their
fingers in blame, rather than assuming
responsibility and accountability
for their own profligate financial behavior and decisions. (Read a
previous article of mine entitled
America’s Political Process Guarantees Another Financial Crisis!)
HIGH GOLD PRICES WILL BECOME THE
PREFERRED PUBLIC POLICY
Nations which have stocked up on gold will occupy the catbird seat. Their large foreign exchange holdings comprised
of gold place them in a particularly advantageous
position. Is it
any wonder that nations such as China, India and Russia, as well as many other emerging nations, are feverishly working to acquire as much gold as they can afford
while it is still available
A WINDFALL PROFITS TAX WILL LIKELY BE
IMPOSED ON GOLD
Private investors, institutional and individual, will become wealthy
simply by being invested in gold in this environment. Stupendous capital gains with
gold priced at USD $5,000,
$10,000 or $15,000 or more per troy ounce should be expected. But should we assume that hugely indebted governments, whose citizens are struggling with ever lower
living standards, will stand idly
by while investors reap what will
be characterized as unwarranted and unearned capital
gains? Not very
likely! I can already hear populist calls for a Windfall
Profits Tax to confiscate
these unwarranted gains
in the name of fairness
and equity. Owners of gold,
therefore, might be wise to take
action which anticipates this eventuality.