The Politics of Gold
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, August 28th, 2012.
As long as humans have had society, politics has played into economic interaction up and down the scale, from how one pays the butcher to international trade. In fact, it would be fair to say that politics plays as important a role in our economic interaction as the laws of supply and demand (the laws of nature), especially as we move further away from free market rule. Today, our collective political economy has morphed into a tapestry of mature dynasties with America still at center because of US Dollar ($) hegemony supremacy since Bretton Woods, fading as this may be. Moving forward this is changing however, first with China and other emerging economies feeling the benefit of a mature Western model (capital shifting to the East in search of lower labor costs); and second, with the eventual decentralization that will follow this Globalization.
Peak oil, political economy lifecycle, and the increasing stress this creates on the global front will be seen as primal catalysts in spurring such change in hindsight, change that will eventually force a radical reorganization of the global monetary system at its core. Central to the proliferation of Globalization was the easy money system provided by the $, where not only has it served as the world's reserve currency, inappropriately recognized as 'money' throughout the globe unparalleled in history, but more, it also allowed for the exponentially expanding credit facility all fiat currency systems demand due to diminishing returns associated with scale, where we now find ourselves saturated with a debt based system that is no longer sustainable. The upshot of all this is an eventual sovereign debt reorganization that will involve massive defaults and a renewed distrust amongst international trading partners.
This is why gold will re-emerge as the world's true reserve currency in time. In itself, gold is not the best conduit for day to day money because of its high value; however historically, it has always been viewed as the best store of wealth and savings because it fits all the other important characteristics that good money requires like no other element on earth. What's more, and because of these same characteristics, it's no accident that gold is also the ultimate currency backer as well, which is of course why well-grounded societies (ex. America in 1776) established monetary systems utilizing a gold standard. (i.e. making it the ultimate political metal.) So, to say gold is a political metal is actually an understatement. It would be better to say that gold is the ultimate political metal, followed closely behind by silver.
Side note: At this point it is important to distinguish between currency and money, with the former defined primarily in terms of interchangeability and fungibility, and the latter in terms of characteristics that give it lasting and intrinsic value. Therein, and because of its attributes, not only is gold the ultimate political metal, at the same time it is and has been viewed as man's ultimate form of money as well, above all else because of its scarcity. Any good currency needs to be durable, divisible, and portable; however to be considered money possessing intrinsic value within which one may hold wealth it cannot be easily debased in order to guard against this insidious form of confiscation.
Many of you may be wondering why I am on this topic today when so much has already been written about it, and by implication, must be widely (and well) understood in our 'educated society'. Why then? Answer: Because this is not the case at all. In fact, when it comes to understanding and respecting money, our supposedly educated society is presently (this will change) quite ignorant in these matters due the prolonged period of 'easy money' (our fiat currency / fractional reserve monetary system) discussed above, formally imposed on us back in 1971 when Nixon (at the behest of the banking cartel of the day), closed the gold window.
Ask somebody about their favorite TV show and chances are they will have much to talk about. Ask them about what constitutes good money and all you can expect is a blank stare. Not just because they do not know, but also due to the belief one need not know about such things with government in charge of these matters. Here, it's important to understand most in the West still have an unquestioned trust of government, actually believing it has their best interests at heart. (i.e. when it only cares about its own proliferation.) But like Rome in its time of Bread and Circuses, today the mob is bought with hush money in our ever-expanding bureaucracies, a circumstance that is now ripe for reversal.
This will not come easily of course, nowhere near as easy as fiat currency continues to flow from central bank coffers. Radical change will come never the less however; with either far less currency flowing at some point in the not too distant future or substantially higher precious metals prices in backing new currency regimes that will demand backing. (i.e. a return to a gold standard is inevitable.) The only question is what degree of hyperinflation the larger monetary system will allow before trading partners, and then the public, lose complete confidence in counterparty risk. Because while it's true governments have a monopoly on legal tender (money), this does not mean our money(s) will remain limited to fiat currency indefinitely just because it suits the Western banking establishment and the crony friends in government and business.
China alone has a great deal to lose in the present system and they are now fully awake regarding the situation and buying gold (and general commodity procurement) by the boat load these days in order to protect their future / wealth. Just in June alone they bought more gold than many countries hold in reserve, making them not only the world's largest producer of gold (none of which is allowed to be exported); but also now undoubtedly the biggest importer as well. So at some point it will be in China's best interests to disclose their increased holdings of gold and challenge $ reserve currency supremacy in the future, first to disrupt the present status quo, and then to bring expanding global credit creation possibilities to Chinese banks.
While just when this could happen is unknown, one thing is for sure, the price of gold would need to be much higher than it is today to backstop $ money supply. And that's if the States has the gold they claim to have. If it is discovered they don't, where many think Fort Knox lay empty these days, then the $'s days of supremacy would be over quickly indeed, which is likely the reason why China is not just diversifying its foreign currency reserves into other fiat currencies, but instead increasing its gold reserves for an envisioned and quickly approaching paradigm shift in the globe's monetary system. (i.e. back to gold [and silver] standard[s].) Such a time would finally cause the America public to lose faith in the $ and status quo, bringing a serious bid back into gold, silver, and under-owned shares.
So you see, the forces at work on precious metals are both internal and external from a US centric perspective, however Americans still chose only to see the former at present, leaving foreigners (led by the Chinese) time to accumulate more Western gold. (i.e. Westerners are selling gold reserves in a vain attempt to suppress prices.) One only need consider central bank politicking concerning the election, which may be putting Fed policy 'behind the curve' given both real and paper economic indicators point to a slowing economy (despite the propaganda), to understand why more accommodative policy remains contained. Of course some think the Fed's more recent tendency to hold back on money printing is more profound than this, likely to fail or send us into hyperinflation; but, even if this were true, would it not be good reason for the remonitization of gold (and silver) as well?
Like Paul Simon's song 50 Ways to Leave Your Lover, its apparent Western banking interests, politicians, and the larger bureaucracy will in harmony concoct 50 reasons to keep precious metals prices as subdued as possible, never mind talk about why good money policies should be reinstated. (i.e. with Ron Paul the exception.) Because this would be the end for them. The party would be over. All the hypothecated money they print would be restricted to whatever a gold standard would allow for, meaning gold would need to rise to $50,000 per ounce just to get the government out of the whole its already dug for itself, never mind the one easy minded bureaucrats would still like to put us in. But such a turn of events will never come voluntarily from these people. Change will need to be imposed on them, and for this we need to look no further than the bond market. (See Figure 1)
As you can see above, it appears that despite all of their efforts central planners are having a heck of a time maintaining a bid in US long bonds these days with existing QE efforts, which is why you can expect a whole lot more in my opinion. Therein, despite Operation Twist being extended into year end, remembering this program is designed to support the long end of the market (think to keep mortgage rates low to support real estate / the wealth effect / etc.), from both technical and fundamental perspectives interest rates appear set to move higher, possibly in a 'big way' if enough money printing appears. In this regard it's important to remember the Fed could be behind the curve right now, where the longer they wait the more QE that will be required later.
So, is it any wonder the Chinese are not buying US long bonds these days, and on the flip-side of the equation, adding gold into its foreign reserves as fast as it can. (i.e. note there is no way China's gold reserves are only 1054 tonnes now.) As alluded to above, it already holds a boat load of US financial assets (along with everybody else) and doesn't want anymore, which will eventually have a material impact on the $. In this regard it's important to note that between increasing direct trading relationships with other countries and less demand for (US) credit (America's chief export) the $ is in real trouble on a fundamental basis moving forward. The $ has problems no other fiat currency has on the planet because as it continually loses reserve currency status / market share at some point the demand / supply equation will tip over (the tipping point), and the Greenback will plunge in value. (See Figure 2)
Because despite the present consensus there is bound to be more QE than is expected whether it works or not because although they would like you to think differently, central bankers only have one response to a weakening fiat currency based economy - that being more fiat currency - and this is especially true of the US which has exported most of its manufacturing base to emerging markets (led by China) to keep capital happy. It's all about the paper / digital economy (the new economy) in the States now, where the value(s) in the stock market largely control everything from consumer sentiment to actual consumption. This is why the Fed could not be happier right now, as stocks are rising running into the election on subdued money printing, not showing favoritism to either party. (See Figure 3)
In this regard it appears that in spite of non-supportive sentiment (the bears have been squeezed and far too many now expect QE3), better market rigging capabilities by the bureaucracy's price managers have been able keep stock prices afloat anyway, along with precious metals well contained. What's more, while gold and its proxies look increasingly attractive from the most important fundamental perspectives (wealth preservation, currency hedge, and value looking at the shares), unfortunately at present they remain in a stasis of negative sentiment from the go-go boys because of better prospects elsewhere, along with Presidential Cycle politics. What's more, the problem with the present set-up is it's much like that witnessed in 2000, evidenced by what risk adjusted broad market measures are doing (see above and below), which means at least precious metals shares could still be in for more downside as they did not bottom until November of that year. (See Figure 4)
While recurring Presidential Cycle timing supports this view, where a top of significance in the broad measures of stocks is undoubtedly forming as we speak (evidenced above), unusual times can lead to anomalous outcomes, which has an equally good chance of occurring running into next year in my opinion. Along these lines, what I am referring to the fact our fiat currency economy(s) is so mature now that with the Fed holding back running into the election it will need to play some catch-up in money printing next year, limited as this might be, again, considering Presidential Cycle timing.
With troubles in Europe causing capital to flee back to the states along with increased money printing on their part the Fed has had a 'free ride' this year off their coat-tails (not having to accelerate $ debasement rates), but about the time the election is passed, so should the perception troubles over the pond are worse than in the States, putting the $ back in the 'hot-seat'. And as you know from Figure 2 above, technically the $ is 'poised to plunge' at present, where we are in fact getting a taste of this here in August, but where the real fun may not begin until after the election. But who knows for sure - right? Because if Bernanke wants Obama to win, expect accelerated $ debasement before the election, not after. In addition to the initial reaction in equities we are presently witnessing, this would keep things moving higher into next year, so stay invested. And this especially true for precious metals considering how badly they are presently lagging other markets, not to mention the alterative currency aspect. (i.e. as economies and currencies collapse gold will return as the world's reserve currency and store of wealth.)
So while shades of the equity market(s) debacle that gripped the world at millennium's turn (the tech wreck) will eventually hit macro conditions again at some point without a doubt (look for a double top in Figure 4 to signal the timing), in the meantime far more upside possibly exists for equities; and again, especially for precious metals if the $ takes the nose dive into next year both technicals (see above) and fundamentals (Fed members are now openly conceding the economy appears to be in trouble ahead of the election) suggest is possible (probable?). This is what happens in fiat currency based economies that need ever-increasing stimulation (like a junkie) to keep working. No matter how much money printing is provided it's never enough.
And if the junkie's new and growing appetite is not satisfied seizures will ensue, which will become an issue post-election when talk of the 'fiscal cliff' gains traction in the US. Remember, even using the government's doctored numbers (never mind the real numbers), the US debt to GDP ratio is set to rival that of periphery European economies soon, and you know what's happening there right now. It's either keep the economy going at all costs or become like Greece. The dye is already cast in this regard, so don't let 'fiscal cliff' talk confuse you - because that's what it's designed to do. (i.e. it's two party system double talk as the banks largely control Washington.) Once the election is past fiscal cliff rhetoric will be replaced with money supply growth rates that would challenge any mountaineering aficionado no matter who is in the White House or at the Fed. (i.e. apparently Romney will give Bernanke the boot if elected.)
It was the bureaucrats who wishing to hang on to their lavish jobs and growing empire(s) that put Hitler in power and present day bureaucracies are no different in their desires and lengths they will go to get what they want. (i.e. the loss of liberties already witnessed is prelude to eventual Marshall law, dictatorship, etc.). And again, what the American bureaucracy wants is to preserve the status quo and their jobs, so don't be surprised at a timely reversal of budget cuts and tax increases before year end, which would scuttle the $, fueling precious metals, commodities, and prices in general.
Never forget that the huge bureaucracies who empower the politicians (and bankers) run the country, economy, etc. and that the situation is very mature at present, but not done yet. (i.e. we're not in Napoleonic like times [think dictatorship] just yet.) If history is a good guide, this will not come until the currency has been completely debased and the power held by the larger bureaucracy squandered. (i.e. presently world gold demand is approximately 6500 tonnes set against 4000 tonnes of supply, making a 2500 annual deficit that is likely still being filled by depleted Western central banks in an attempt to continue suppressing prices according to Eric Sprott.)
In the meantime however, but perhaps only until just after election time now, it should be understood a genuine bid in precious metals will not materialize until the public loses faith in the status quo (government, banks, business leaders, the system et al.); and again, the falsehoods represented by the $ sold. (i.e. a currency crisis at home will be difficult to both ignore and escape, even for bureaucrats that see themselves as being well insulated.) Because the next round of QE will need to be bigger than the last or it will fail quickly, bringing the need for a more profound currency debasement (note repos are starting again) until prices finally get so high that even those in deep denial are forced to face reality. (i.e. that America is bust.)
Good investing all.