How gold will end up at the heart of the global currency system againPosted on 05 June 2013 with 4 comments from readers
The brightest economic savants are beginning to realize that the crisis that is going to face the global economy next is a currency crisis. When central banks print too much money that is what happens. There is a point beyond which an economy is ruined by money printing.
The Weimar Republic of post-First World War Germany is the most often visited example (click here). More recently post-Soviet Union Russia destroyed its savings with a hyperinflation. Argentina has launched and destroyed four currencies in the past century. Now the US is doing the same with the dollar, except that Japan is now trying to get their first with the yen.
One of the symptoms is rising volatility in financial markets. The West has not felt that just recently but Japan is seeing a remarkable escalation of volatility. It’s stock market rose 70 per cent from the dead over the past six months and has crashed over the past couple of weeks.
However, we are now seeing a rise in US bond yields that has some of the more sensible guys on Wall Street worried. The bond market is anticipating a wind down in the purchasing of bonds by the Fed which is the only thing keeping the stock and bond markets are their present levels. You have a bubble in equities and an even bigger bubble in bonds.
Thank the QE or money printing for these twin bubbles. The awkward part comes next as these bubbles go pop. Curiously most Wall Street analysts don’t much argue with this conclusion, it is only a matter of timing and they like to tell buyers that the can will be kicked down the road for at least a few years.
How on earth do they know that? What we do know is that bubbles have been created and will come to a sticky end. What investors have to do is to protect themselves now for that eventuality. It will be far too late to do it when everybody leaves US equities and bonds and the dollar is crushed.
The smart money has been shifting out of US dollars and into real assets for some time. Look at Abu Dhabi buying half of Dubal yesterday (click here). These asset prices also fall in a depression but real assets have intrinsic value. But what will function as money after the paper currencies of the world have been trashed?
Last week the 1999 Nobel Prize winning economist Robert Mundell was in Amman talking about the concept of a new global currency with special drawing rights backed by major currencies and administered by the global central bank, the International Monetary Fund.
He said: ‘The US dollar is now not backed by gold, but only by trust. And since most commodities and major goods such as oil and gas, major metals are exchanged based on the US dollar, it was quite logical that the US government had to increase its power through inflationary measures that made the US dollar less stable.
‘The new system should not be based on any single currency. It should rather allow the introduction of Sprecial Drawing Rights which are assets issued by the IMF, to make the world financial market much more stable,’ he said noting that the SDR should have a value based on the dollar, euro, yuan and yen.
SDR and gold
Professor Mundell is also an advisor to the Chinese government whose central bank has expressed its interest in SDRs backed by gold reserves as well as paper currencies. Ultimately SDRs will have to be backed by gold to win the trust of the world after a catastrophe caused by paper money.
Sadly we have to go through that catastrophe first. But investors ought to realize that for the limited and rather fixed supply of gold available in the world to perform this function it would have to be revalued to a much higher price than it has at present. Herein lies the real top of the bull market for gold.
And this is how gold will end up back at the heart of the global currency system again.