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 net sellers. 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 Their Currencies
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
unpalatable.
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 the currency. 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 constantly devaluing money...almost unnoticed.
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 person. Government statistics using
arcane methodologies such as seasonal adjustments, 'headline' and 'core'
inflation numbers, hedonic adjustments and substitution are all facilitators
of this deception.
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:
- the US
dollar will be replaced by a basket of currencies, appropriately trade
weighted, including International Monetary Fund SDR's (Special Drawing
Rights).
- gold 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.
- the 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.
- better 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.
- all 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.
- interest
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.
- individual
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 deteriorating
circumstances.
High Gold Prices Will Devalue National Currencies Significantly
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 incurred.
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 and cheap?
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 appropriate evasive
action which anticipates this eventuality.
