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Anatole Kaletsky is the author
of the most recent Anti-Gold Gospel (www.gavekal.com,
January 21, 2008.) He is an establishment journalist, Associate Editor
(formerly Economics Editor) of The Times. He says that he
instinctively dislikes gold because
"historically gold has been a terrible investment and, even in the short
term, gold has failed as a store of value". I am satisfied to leave this
statement to stand on its own, and wish Kaletsky
good luck in seeking a better store of value in fiat currencies.
It is patently disingenuous and unfair
to compare the gold price to stock indexes. It would be fairer to compare
stashed-away gold to passbook savings. A portfolio of equities takes
managing. It may be beyond the reach of most wage-earners and pensioners
while their savings is the main target of the pilferers who run the nation's
banks and monetary system. Who said pilferers were after wealth invested in
the stock market?
I strongly object to the idea that
"gold is an investment". Gold is better described as a
non-investment, more precisely a place where you park your savings when you
cannot find satisfactory investment outlets either because
interest rates are too low, or because
the risk of holding equities is too high, e.g., after a bull run of the stock
market driven by printing-press money. Gold is not an investment any more
than a fire-insurance policy is. Governments have a sacred duty to protect
the value of funds of the weak, who cannot fend for
themselves in the investment arena. Without protection their funds would melt
away like butter left in the blazing sun. Governments have failed miserably
in discharging this sacred duty. The Biblical curse is upon them for
"tormenting widows and orphans".
Kaletsky,
like everyone before him preaching the Anti-Gold Gospel, studiously avoids
the question why the Treasury and the Federal Reserve should have the
privilege of issuing obligations that they have neither the means nor the
intention to honor. If anyone else tried to run a
business on that basis, he would land in jail like Charles Ponzi did in the 1920's.
Kaletsky
also dodges the fact that gold is the only balancing item in the asset column
that has no countervailing liability in the balance sheet of someone else. It
is this feature that makes gold impervious to defaults,
devaluations, and deliberate debasement of the currency. For this reason gold
is universally sought after as a safe haven, especially when the seas get
rough. There is simply no substitute for gold in this regard.
Gold is the indispensable regulator of
debt in society. Kaletsky apparently believes that
government bureaucrats should
determine how much debt society is able safely to carry, and they should
regulate the level of debt accordingly. Well, we have just tried this and
found that whenever irredeemable promises are to be liquidated by issuing
more irredeemable promises, debt proliferates beyond any limit. The
derivatives monster and its bastard offspring, "bond insurance," is
the beacon luring the boat of the national economy to its doom on the reefs. Clearly,
debt existing in the world today will never be liquidated through the normal
processes of debt-retirement, that is, without detours into deflationary or
inflationary territory (i.e., through default
or depreciation). It is lunacy to think that the debt-pyramid can continue to
grow indefinitely without causing
a major catastrophe further down the line. All debt will be liquidated in the
same way as subprime mortgages: through default -- or else, it will be inflated away.
By the way, did it ever occur to Kaletsky that there is absolutely no need for bond
insurance under a gold standard? The reason is that interest rates and,
hence, bond prices are confined to such a narrow range that bond speculation
becomes unprofitable. Under a gold standard capital and talent are freed to
pursue socially desirable goals.
Kaletsky's
argument that there is not enough gold in the world to serve as a means of
exchange in our sophisticated global economy is the old war-horse of the
Anti-Gold Gospel. All the output of the gold mines for the past half-century,
plus all the monetary gold disgorged by the central banks in a futile effort
to contain the gold price, has been gobbled up by gold hoarding. This is an
unmistakable sign that people do not trust the integrity of government
promises, nor do they buy the academic claptrap about gold being a barren
asset and a barbarous relic. Obituaries of gold money have been premature.
The golden corpse still stirs. People who sought refuge in gold have been
amply rewarded for their foresight. More rewards are on the way. Others who
did not avail themselves of the opportunity will have occasion to regret it. They
are to be victimized by the welfare-warfare state and its unconstitutional
power-grab in issuing irredeemable dollars. These dollars could not have been
issued under a system of government of limited and enumerated powers. All
present dollars have been issued unconstitutionally. They are the corpus delicti: proof of usurpation of unlimited power.
If constitutional money were
re-established, then gold would come out of hiding and make itself available
as a means of exchange. There is plenty of gold in existence to support a
gold standard, provided that confidence in promises is re-established. There
is no rigid rule limiting the amount of sound credit that can be safely built
upon a given gold base, especially in this age of instantaneous and free
communication. However, multiple credit construction and borrowing short to
lend long as a banking technique must be renounced.
The last word whether gold is destined
once again to become the pivot of the international monetary system, or
whether it is hopelessly antediluvian and incompatible with economic progress,
will not be pronounced by detractors of gold and devotees of
fast-depreciating fiat money. Their time is up. Their schemes and nostrums
have been tried. Now it is the turn of their victims to have their day in
court to pass judgment on the fiat money experiment. "He laughs who laughs
last". The annals of monetary history do not know one single instance in
which irredeemable currency survived the test of times. Either the currency
was returned to its gold anchor in good time and its value stabilized, or it
plunged to worthlessness within a generation. We are skirting these limits
right now. The present experiment with the irredeemable dollar has been going
on for just about a generation. You will not have to wait decades to witness
the failure of this experiment.
The dollar is hemorrhaging
on two counts: one is the trade deficit, and the other is the budget deficit.
Both the political will and the economic know-how are missing to stop the
bleeding. The U.S.
is borrowing $800 billion annually from foreigners to fund its consumption of
foreign-produced goods and commodities. The federal government is running an
annual budget deficit of almost $600 billion. At one point foreigners will
refuse to finance the burgeoning twin deficit, forcing the Federal Reserve to
monetize all the additional debt. The danger is real that the value of the
dollar, both international and domestic, will collapse at that point.
Kaletsky
says that the gold standard is totally anachronistic in our age of rapidly
advancing technology and growing populations. He might as well say that good faith behind promises have been rendered obsolete by
technological progress, and the more people there are the more the government
is justified to cheat them out of their savings through currency debasement. Kaletsky is entitled to his belief that people will
meekly continue in their assigned role of being victimized by spendthrift
governments. However, the New Year 2008 brought with it signs aplenty that
the open season of governments' preying upon savers and producers of real
goods and real services is coming to an end. People
wake up and realize that they are surrendering real goods and real services
in exchange for irredeemable promises.
The consequences of this awakening will
be most painful. The responsibility for the coming credit collapse in the
wake of the unconstitutional paper dollar rests with the U.S. Treasury, and
its partner-in-crime (partner-in-check-kiting if you will) the Federal
Reserve. It may serve as a useful reminder to recall that the French, some
seventy years before their bloody revolution, experimented with irredeemable
currency under the management of the Scottish adventurer, John Law of Lariston. When Law's system unraveled
people wanted to lynch him. He had to leave Paris in a hurry. Under the cover of night.
In a disguise. Disguised as a woman.
The finance capital of the world,
denominated as it is in dollars, is in danger of being wiped out. There is
only one way to take out insurance against this contingency: buying gold. As
I have explained above, the reason can be found in the balance-sheet concept
of gold. The only financial asset that will survive any consolidation of
balance sheets, any default, any
devaluation, any depreciation is gold.
Gold holdings are the most negatively-correlated
asset class to traditional financial assets. Portfolio-diversification can be
achieved by balancing financial assets such as bonds, equities, and
currencies by holding gold. The best timing to set up a gold hedge is when
cyclical trends change, as they do right now. The Dow/gold ratio is presently
indicating a change. It has turned from increasing to declining mode, which
is a red-alarm signal warning wealth-holders that it is time to hedge
financial assets and even to go overweight in gold.
The rising gold price and its
implications have been largely ignored by the financial press and the
investing public so far. The proposition that gold is still a monetary metal
and still has a monetary role to play is ridiculed, while some central banks
around the globe (e.g., that of Russia, China, India, Argentina, Brazil, to
mention but the most important ones) are quietly remonetizing
gold as they diversify out of dollars and build gold reserves from scratch. They
keep this activity under cover as much as possible since it is not their
intention to upset the golden apple-cart.
It is not too late to set up gold hedges
as portfolio insurance. Private and institutional investors (including
pension funds and insurance companies) have investments to protect worth some
$180 trillion. Not more than $600 billion worth of gold bullion is presently
earmarked as hedges for portfolio insurance. (Note that gold-mining shares
are not eligible for this purpose.*) In other words, only about one-third of
one percent of all the investments is protected by gold hedges while more
than 99 percent is unprotected. Even this is a gross overestimate because most of the hedged portfolios are heavily
overweight in gold, leaving that much less gold for the unprotected and
thinly protected ones. Be that as it may, if global investors decided to
allocate even a modest three percent of their assets to purchase portfolio
insurance, the consequence would be that $6 trillion paper assets would be
chasing gold bullion worth $0.6 trillion, or one-tenth, at the present price
of gold. This means ten bidders for every ounce of gold available. Portfolio
insurance is still cheap, but the cost may quickly go up ten-fold or more,
once the stampede starts.
Kaletsky
would serve his readership better if he advised caution
at this juncture. It is still too early to dismiss the possibility that the Titanic
of the world economy, having collided with the derivatives iceberg tearing a subprime hole in the hull, may
go down. Golden life-savers may yet come handy.
GOLD STANDARD
UNIVERSITY LIVE
Session Three will be held in Dallas, Texas,
February 11-17. For further information, go to www.professorfekete.com.
* Gold mining shares are not eligible as
portfolio insurance since they have an ambiguous correlation to traditional
financial assets. While from time to time they may be negatively correlated,
and there is no question of their ability to benefit from promising trading
opportunities, long-term wealth preservation demands fully allocated,
segregated, and insured gold bullion. The counterparty risk involved in
owning gold mining shares is not zero. Worse still, the full extent of this
risk is unknown. To complicate matters further, many a government (such as
that of Ecuador)
keeps a jaundiced eye on its gold
mining industry and is trying to determine the most opportune moment to
expropriate foreign shareholders. Gold bullion is not dependent on anyone's
promise, representation, or ability to perform (nor, if properly stored, is
it dependent on the propensity of the government to expropriate), in a word:
gold bullion is not someone else's liability. Therefore it is the only agent
that can provide the necessary protection against both contingencies:
systemic collapse and slow monetary debasement, while incurring the lowest
possible level of risk.
Acknowledgement:
The author hereby wishes to
acknowledge his indebtedness to various writings of Nick Barisheff
of Bullion Management Services, Inc., Canada.
Antal E. Fekete
Gold Standard University
aefekete@hotmail.com
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY. THE
AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING THAT
IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL ANY
SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND SOURCES
BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT IT IS
COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS TO BE
TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.
Copyright
© 2002-2008 by Antal E.
Fekete - All rights reserved
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