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- Gold
remains ultimate form of payment
- US debt levels unsustainable –
dollar losing status world reserve currency
- Gold
prices required to counter balance all US
public debt held in foreign hands exceed the $10.000 mark
- China, Russia
calling for new world reserve currency
Gold is sneaking its way towards the $1000 barrier
again which is prompting as usual the gold bears to come out swinging
declaring the end of the bull market for gold. For newcomers to the gold
market it’s very confusing to hear ultra bearish reports from one side
calling gold prices to crash, some even predicting gold to crash below the
$300 mark while from the other side they’re hearing ultra bullish
reports calling for gold prices heading to $5000, some even predicting gold
prices to top $10.000. Well, that’s quite a difference and sure enough
some analysts will be proven terribly wrong over the next few years.
In my previous piece ‘Gold Heading for $200 or
$10.000’ part I wrote a fictive exchange between a staunch gold bull
and a newcomer to the gold market being fed with all bearish arguments for
gold you can think of. This piece was received very well since it was a real
eye-opener especially for newcomers what gold is all about and why it is so
much hated by governments today. Readers having missed that piece can read it
HERE.
This update is again aimed at newcomers to the gold
market and shines a light on all fundamental reasons to own gold.
When I started writing about gold 7 years ago (2002)
it was my aim to paint a clear picture about gold’s strong fundamentals
pointing to significant higher gold prices the years ahead. I started writing
a Gold Drivers Report discussing all critical drivers (declining dollar,
increase demand, decline supply, negative real rates, come back in monetary
system and record high short positions) that were pointing all to much higher gold prices indeed.
Now after 7 years one could easily argue that the
Gold Drivers Report has been a lucky shot indeed since gold did appreciate
from $250 to almost $1000 but to set things straight, I’m not writing
this piece to prove up my point for the last seven years but to make the case
for a record run still ahead of us. Especially during times like these where
many gold bears are screaming ‘SELL’ it’s good to know where
gold came from, why it did rise from $250 to $1000 in the first place and how
the critical drivers that lifted gold are affected these days.
So gold bull over or $5000 gold?
Readers who have followed my work over the years
know that I belong in the latter camp which calls for gold prices heading to
$5000 or more within a few years. I’ve written extensively for reasons
why but I want to emphasize that the primary reason for gold investing should
be wealth protection, not to get rich quick. Gold heading to $5000 of course
reflects the underlying weakness in our current monetary system so the basic
question here is what to trust more. Should you trust your hard earned money
to gold which has proven itself as the ultimate protection of wealth for more
than 6000 years or should you trust the honest bankers keeping your savings
in paper instruments yielding astonishing interests of slightly more than one
percent? Of course all guaranteed by our beloved government that favors and
guarantees a strong dollar.
The gold bears are opting for the latter since they
are basically saying that gold will be losing purchasing power. Saying gold
will be losing purchasing power equals saying the dollar will be gaining
purchasing power. Saying the dollar will be gaining purchasing power equals
saying our monetary system is healthy and functioning well.
This week in part I (point 1,2
and 3) we shine a light on our monetary system well being and is part of an
extensive summary “10
fundamental reasons to own gold. Even the staunchest dollar bull will
have to admit after reading this piece that all is not well in the financial
hemisphere.
10 fundamental reasons to own gold
- Gold
remains ultimate form of payment – No counter party risk
- Currency
debasement – US Dollar losing status as world reserve currency
- Gold
crawling back into the monetary system
- Negative
real rates
- Falling
gold supply vs increased investment demand
- Gold
& Historic averages – gold should be trading above $2300 these
days
- DOW/GOLD
ratio points to $5.000+ gold before 2015
- Gold
& US public debt – gold prices required to counter balance all
US
public debt held in foreign hands exceed the $10.000 mark
- Large
short positions – half of all central bank’s gold has been
leased into the market. (about 15.000 tons).
Covering these short positions is not possible without catapulting gold
prices to unimaginable highs.
- Gold
acting as safe haven in times of rising geopolitical tensions
1. Ultimate form of
payment – No counter party risk
Gold still represents the
ultimate form of payment in the world." - Alan Greenspan, Testimony before US House Banking
Committee, May 1999
Gold has been used as money for thousands of years,
it may have even been the first metal used by humans. A funny detail concerns
the oldest known map called the Turin Papyrus, an ancient Egyptian mining map
1320 -1300 BC, which is showing the plan of a gold mine together with indications of
the local geology.
The bottom line is that gold has retained its
purchasing power over thousands of years and therefore has proven itself as
the ultimate protection of wealth. Gold has no counter party risk, gold is
not some one else’s liability, gold can not be printed out of thin air,
no nation has the capability to destroy the value of gold, gold does speak
for itself.
Some one who understood gold’s real value
against paper money very well is former French President Charles de Gaulle:
There can be no other criterion, no other standard
than gold.
Yes, gold which never changes, which can be turned into ingots
bars, coins, which has no nationality and which is eternally and
universally accepted as the unalterable fiduciary value par exellence”
Charles de Gaulle
In
February 1965, President De Gaulle said in a landmark press conference
“What the United States owes to foreign countries, it pays, at least in
part, with dollars that it can simply issue if it chooses to”.
De
Gaulle not too happy with the implication of having the dollar as the reserve
currency responded this way:
Since
dollars could still be exchanged for gold at the time, De Gaulle instructed
the Banque de France to increase the rate at which
new dollars were converted to gold bullion and sent the French navy across
the Atlantic to hand over dollars and pick up gold bullion in exchange. In
1965 alone, the French navy ferried back over $150 million of gold bullion
thereby increasing the proportion of French national reserves held in gold
from 71.4% to 91.9%.
The
bottom line is that De Gaulle didn’t trust the paper dollar which were
circulating in ever increasing quantities and opted for real money which is
of course gold.
History
leaves no doubt it. The only money that stood the test of time is gold, all
other currencies have failed. Gold is the only true protection of wealth.
2. US
debt levels unsustainable - Currency debasement inevitable - US Dollar losing
status as world reserve currency
You may wonder why De Gaulle didn’t trust the
dollar since the US
had pledged the dollar to be as good as gold in accordance with the Bretton Woods agreement. The answer is simple. In the mid
sixties the US
couldn’t finance the Vietnam war without the help of the printing
press. Needless to say the US
money supply took off thereby debasing its own currency. For the US
it didn’t matter since the world was forced anyhow to accept the US
dollar as a reserve currency. Yes, the US promised the dollar to be as good as gold and
yes, foreign central banks were allowed to exchange their dollars for gold
but the US made it very clear that foreign nations exercising their right of
exchanging dollars for gold would be considered as ‘American
unfriendly’.
Sure enough De Gaulle wasn’t too much
impressed and sent the French navy across the Atlantic to hand over dollars and pick up
gold bullion in exchange. The US gold reserves were shrinking at such an
alarming rate that President Nixon was eventually forced (1971) to close the
gold window.
The bottom line is that countries printing their way
out of debt will see its currency depreciating. A good example concerns the
German Reichsmark. After World War I Germany tried
to print its way out of its debt which eventually led to a worthless currency
being used to heat up stoves.
Germany : Inflation 1923-24:
A Woman feeds her tiled stove with money.
She chose to feed the stove with Money because
it cost less than buying the wood with Money
A more recent example concerns the Zimbabwean
dollar. Robert Mugabe called for the printing press coming to the rescue as
well but we all know the outcome by now. Inflation numbers running at levels
exceeding 200 million % aren’t exactly reflecting a strong currency
showing off much confidence.
What we are witnessing these days is a massive
currency debasement on a world wide scale. A trillion dollars bailout here, a
trillion dollars bailout there, all done with money that does not exist but
extracted from the printing press.
All this freshly printed money is adding of course to governments
ballooning debt which can only be paid back by issuing even more funny paper
notes..
Since most countries world wide are fighting the
derivative fall-out with fresh printed money (most countries are running
their printing press at double digit numbers these days) their currencies
will not devalue much against each other..
So in which currency to park your hard earned money
then if all major currencies are debasing at the same time?
The answer is quite simple, the one and only true
alternative remains of course gold which can not be debased at will.
Now let's go back to the US
government’s spending attitude. As mentioned above the government has
no other choice as to bail out failing banks that are too big too fail. A
failing bank here, a failing bank there, the list goes on and on. You don't
have to be a rocket scientist in order to understand what impact these bail
outs have on the administration's budget deficit. Sure enough it'll explode.
How the government responds to exploding deficits is predictable. They just
raise the federal debt limit whenever necessary. They will raise the federal
debt limit to $12.1 trillion allowing them to take on another trillion
dollars of debt from current levels. Current reading of federal government
debt stands at $11.2 trillion which is an increase of more than $5 trillion
over the last 6 years, see chart below:
This chart leaves no doubt,
the federal government debt is going up in a straight line which is very
dollar negative. In order to prevent a free fall of the dollar the rest of
the world has simply no other option as to buy this debt.
Unfortunately foreign willingness to take on that
debt is in sharp decline which leaves the FED with no other option than buy
up some debt itself. This is what we call turning on the printing press..
Now
if the $11.2T federal debt wasn't already bad enough, the picture only worsens
when looking at total US
debt which clocked an alarming $57 trillion last year. The chart below speaks
for itself:
As
you can see here total US
debt is growing faster than its national income. Ever tried to run a business
which its debt grows faster than its income? Needless to say you would be
heading straight into bankruptcy. And that's exactly what's happening with
the US,
they're heading straight into bankruptcy which isn’t exactly a big plus
for the dollar.
But
wait, the US
still maintains a triple AAA rating right? So what’s the problem?
Yes,
the US
maintains a triple A rating indeed but please note that its debt is rising
faster than a Saturn V rocket. At least this should raise some eyebrows and
therefore it’s no wonder that former US Comptroller General David
Walker raises his concerns as well. In the Financial Times this week he said:
America’s
triple AAA rating at risk
Financial Times – May 12, 2009
David Walker, former US
Comptroller General:
How can one justify bestowing a triple A rating on an entity with an
accumulated negative net worth of more than $11,000bn (€8,000bn,
£7,000bn) and additional off-balance sheet obligations of $45,000bn? An
entity that is set to run a $1,800bn-plus deficit for the current year and
trillion dollar-plus deficits for years to come.
END.
So we’re facing debt levels appreciating at an ever increasing pace
thereby underming the US
triple AAA rating. Needless to say this underminines
the credibility necessary for a nation that issues world’s reserve
currency. Now how is the US
going to work its way out of its exploding debt?
The answer is shockingly simple, they can’t do it without
destroying the value of the US$. Destroying the value of the dollar is
destroying world’s reserve currency. Sure enough this raises serious
concern among other big players and it seems déjà vu all over
again with the sixties. As
Charles De Gaulle didn’t like the US currency debasement in
the sixties, China
is challenging the US
for a new world reserve currency now.
China Takes Aim at Dollar
Wall Street Journal
– March 24, 2009
BEIJING -- China called for the
creation of a new currency to eventually replace the dollar as the world's
standard, proposing a sweeping overhaul of global finance that reflects
developing nations' growing unhappiness with the U.S.
role in the world economy .
Moving to a reserve currency that belongs to no individual nation would
make it easier for all nations to manage their economies better, he argued,
because it would give the reserve-currency nations more freedom to shift
monetary policy and exchange rates
http://online.wsj.com/article/SB123780272456212885.html
END.
Well, let’s see:
“Moving
to a reserve currency that belongs to no individual nation would make it
easier for all nations to manage their economies better, he
argued…”
Sure enough the only currency which does not belong
to an individual nation is gold. Is that why China
ramped up its gold reserves by 76% in the last 6 years?
China
confirms talk by unveiling big pot of gold
Reuters – April 24, 2009
SHANGHAI/BEIJING (Reuters) - China revealed on
Friday that it had secretly raised its gold reserves by three-quarters since
2003, increasing its holdings to 1,054 tons and confirming years of
speculation it had been buying.
Speculation has gathered speed over the last year,
since the tumbling dollar has threatened to weaken China's
buying power -- and give it yet more reason to diversify into gold, oil and
metals
END.
China has taken the golden path and now they want
the world to know about it. They clearly delivered a message to the financial
markets that they see gold as an important part of the overall international
monetary scheme.
Last week China
raised its concens again and send out its clearest
warning to date that western stimulus could be setting off worldwide
inflation and undermining global bond markets.
China
fears bond crisis as it slams quantitative easing
Telegrapgh – May 7, 2009
China has given its clearest warning to date that
emergency monetary stimulus by Western governments risks setting off
worldwide inflation and undermining global bond markets
A
policy mistake made by some major central bank may bring inflation risks to
the whole world," said the People's Central Bank in its quarterly
report.
"As
more and more economies are adopting unconventional monetary policies, such
as quantitative easing (QE), major currencies' devaluation risks may
rise," it said. The bank fears a "big consolidation" in the
bond markets, clearly anxious that interest yields will surge as western
states try to exit their QE experiment.
END.
You
don’t have to be a genuis in order to
understand that something needs to be done in order to restore confidence in
our current monetary system. In
the end our monetary system is nothing but a confidence game. When confidence
is gone, currencies end up being valued to the equivalent of toilet paper.
As long
as confidence remain on the wane more countries will turn to gold like China
and maybe calling for a greater role for gold in a new monetary system. After
all not being on some sort of gold standard has been an expiriment
which lasted for 38 years and has miserably failed (unless you call the
creation of a quadrillion dollars derivate mountain a major achievement in
human history).
So how
to restore confidence then? Gold? Will gold ever makes it comeback into a new
monetary system?
3. Gold & Monetary role
The
gold standard has always been the anchor of world finance in the 19th Century
but began breaking down in the early 20th century during world war I as
governments engaged in unprecedented spending. Then it collapsed in the 1930s
when the British Empire, the US, and France
all abandoned their parities.
After
world war II it was revived as part of fixed dollar system (Bretton Woods) until US President Richard Nixon was
forced to close the gold window in 1971 in order to halt the dramatic outflow of
gold caused by foreign central banks (France) changing their dollars for
gold.
Ever
since 1971 the US dollar has lacked any external anchor. It is widely argued
that the financial excesses and extreme debt leverage of the last quarter
century would have been impossible - or less likely - under the discipline of
gold.
It seems now that after 38 years gold becomes an attractive alternative again
for some foreign nations since the dollar as a wolrd
reserve currency is losing confidence fast.
We’ve seen China
upping up its gold reserves and calling for a new world reserve currency that
belongs to no individual nation. It seems that Russia
is thinking alike:
Russia
backs return to Gold Standard to solve financial crisis
Telegraph.co.uk – March 31, 2009
Russia has become the first major country to call for
a partial restoration of the Gold Standard to uphold discipline in the world
financial system.
Arkady Dvorkevich, the Kremlin's
chief economic adviser, said Russia
would favour the inclusion of gold bullion in the
basket-weighting of a new world currency based on Special Drawing Rights
issued by the International Monetary Fund.
END.
And what about the US
itself? Do they back the idea of a new world reserve currency?
The answer is rather predictable:
Obama
dismisses need for new international reserve currency
Washington - March 25, 2009
U.S. President Barrack Obama sees no need for a new global reserve
currency as proposed by Russia and China,
declaring the dollar "extraordinarily strong."
"I don't believe that there is a need for a global
currency," Obama said during a prime-time news conference on Tuesday.
Russia has submitted a proposal to the G20 summit
due in London next week for
the IMF to examine creating a supra-national reserve currency, a move that
was supported by the chairman of the People's Bank of China in an essay released
on Monday.
END.
You don’t have to be a genius in order to
understand why the US
does not want to give up the exclusive rights to print the world reserve
currency.
De Gaulle called
the Dollar "America's
exorbitant privilege", repeating a phrase of his favorite
economist, Jacques Rueff. This privilege gave the United States
exclusive rights to print the Dollar, the world's "reserve
currency", and force it on everyone else in payment of debt. Under the
post-war Bretton Woods Agreement of 1946, the
Dollar could not be refused.
Or as Amsel Rothchild once said:
Give me the right to print money and I care not who
makes the laws.
He who controls the money streams rules.
Amsel Rothchild.
The battle for a
new world reserve currency will unfold itself over the next few years whereby
gold will shine as the only currency which no nation has the capability to
destroy its value.
END.
Next week point
6,7,8 which will back up the gold predictions of
$5000 to $10.000 before 2015.
If
you would like to be kept updated on our charts and dispatches then you could
sign up for the FREE Gold Drivers Report. You will receive our TGDR Chart of
the Day, Discovery News and Trading Halt/Resume Alerts. You can sign up for
free HERE
If you are interested in buying some physical gold
yourself then you can do so in our new bullion store at https://www.golddrivers.com/store where we sell Valcambi Suisse bars (including assay certificates) in
the 1 – 100g range for almost the lowest prices on the web.
Eric Hommelberg
Editor,
the Gold Discovery Letter, the Gold Drivers Report
www.golddrivers.com
All
articles by Eric Hommelberg
If
you would like to be kept updated on our charts and dispatches then you could
sign up for the FREE Gold Drivers Report. You will receive our TGDR Chart of
the Day, Discovery News and Trading Halt/Resume Alerts. You can sign up for
free HERE
If you are interested in buying some physical
gold yourself then you can do so in our new bullion store at https://www.golddrivers.com/store
where we sell Valcambi Suisse bars (including assay
certificates) in the 1 – 100g range for almost the lowest prices on the
web.
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