3 Wise Men – Why You Need Gold

As there is continuing speculation amongst analysts that we are currently witnessing the end of this epic credit cycle that started in the early 70’s when we left the gold standard, it worth reviewing 3 quotes that walk one through this journey.  The first predates leaving the gold standard (currency backed by gold not government promise – Fiat currency) and ominously warns of the consequences, the next 2 from just last week.  What makes the first the more extraordinary (and ironic) is that it was penned by ex (1987-2006) US Fed Chairman Alan Greenspan in an essay in 1966.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

So having done as he warned against and left the gold standard, the next quote is from noted market bubble expert Doug Noland which explains where we’ve gone since…

“A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global [scale]. This historic experiment climaxed with a seven-year period [since the GFC] of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed—and the unwind has commenced.

The gold card is the only one in the financial deck that has yet to be played by the world’s central banks—but the markets are in the process of playing that card for them—and there isn’t a thing that central banking can do to stop it.”

Finally as a specific case study, and whilst most eyes are on the US it is arguably China that has ‘gone the hardest’ with debt creation to fuel growth, this from hedge fund manager Kyle Bass:

“The unwavering faith that the Chinese will somehow be able to successfully avoid anything more severe than a moderate economic slowdown by continuing to rely on the perpetual expansion of credit reminds us of the belief in 2006 that U.S. home prices would never decline. Similar to the U.S. banking system in its approach to the Global Financial Crisis (“GFC”), China’s banking system has increasingly pursued excessive leverage, regulatory arbitrage, and irresponsible risk taking….. What we have come to realize through these discussions is that many have come to their conclusion without fully appreciating the size of the Chinese banking system and the composition of assets at individual banks. More importantly, banking system losses – which could exceed 400% of the US banking losses incurred during the subprime crisis – are starting to accelerate.

Our research suggests that China does not have the financial arsenal to continue on without restructuring many of its banks and undergoing a large devaluation of its currency. It is normal for economies and markets to experience cycles, and a near-term downturn that works to correct the current economic imbalances does not qualitatively change China’s longer-term growth outlook and transition to a service economy. However, credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world. What we are witnessing is the resetting of the largest macro imbalance the world has ever seen.”

Now lets give Mr Greenspan the final word (interview October 2014):

“At some point in the future, the price of gold will trade "materially" higher than it is now---and also by the fact that certain entities are buying massive amounts of physical silver in all forms, which will ensure that someday, silver will certainly become the new gold.”