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November 25, 2014

 

Are gold bugs nuts?

The economic intelligentcia regards the precious metal as just another commodity.

 

This week (on November 30th) Switzerland will hold a referendum on whether to hold 20 percent of its national bank assets in bullion. The timing is odd. Gold has fallen dramatically during the past three years from US $1,921 an ounce from its 2011 high, to the US $1,200 range this week.

 

Major economists at the big Canadian and international banks, universities and monetary authorities laugh gold off. It’s time is long gone they argue. Paper money and digital currencies are the future. The Canadian government for its part holds little gold relative to the amount of currency in circulation. The highly influential Economist Magazine once suggested that readers regard gold the same way as any other metal dug out of the ground. So why would Switzerland want its gold back?

 

The sound money fanatics

“(Gold) is the only sound money still available,” says Marc Faber, publisher of the Gloom Boom & Doom report. Faber got his PhD. in economics Magna Cum Laude, from the prestigious University of Zurich, before heading to Wall Street and then Asia, where he is now based.  

 

Like most “gold bugs,” Faber believes in ridiculous theories such as that governments should balance their books, pay back debts and target sound money. Faber argues that seemingly permanently low global central bank interest rates and money printing, which have global boosted stock and housing prices, foretell economic distortions and could lead to massive inflation.

 

To be safe, he recommends that investors put one quarter of their assets in stocks, one quarter in bonds, one quarter in real estate and … one quarter in gold, a huge proportion, far higher than any conventional economist would recommend. To be safe, Faber recommends that much of those holding be kept outside the investor’s home nation.

 

Are the Swiss wandering off the reservation?

Today’s economists, - the Janet Yellens, Stephen Polozs and Mark Carneys of this world, most of whom come from a small clique of ivy league schools, - act as though governments can print money almost limitlessly and that public sector debt never need be paid off. All central banks have to do is to print more money to pay of the interest. Any resulting inflation they argue is a good thing, as the value of government, business and household debts fall in real terms.

 

The Swiss though are threatening to wander off the reservation. Switzerland was one of the last countries to sell the lions’ share of its gold reserves. Now it looks like some are regretting that decision. Faber doubts that the referendum will succeed as the institutional forces lined up against gold are too strong.

 

Greenspan rejoins the gold bugs

That may be true. However earlier this month an important new member joined the ranks of the gold bugs: former US Federal Reserve chairman Alan Greenspan. Rejoined is a better word. Greenspan, a former Ayn Rand follower, was in fact was a big sound money proponent in his youth, and actually wrote a convincing paper in favour of gold, which was published in an Objectivist newsletter in the mid-1960s.

 

Earlier this month, Greenspan told an investment conference that he never really abandoned those beliefs and suggested that the massive money printing that he led while he headed the US central bank was done for political expediency purposes.

 

There was a tad of revisionism in Greenspan’s comments, which were likely made in large part to publicize a new book he is promoting. However the fact that Greenspan now describes gold as “currency,” something Ben Bernanke, his successor as Fed chairman, and much of the existing economic intelligencia refuse to do, is a major step. Whether that, or the results of the Swiss referendum, will effect the short-term gold price is doubtful. However over the longer term, those developments may well prove to be a turning point.

 

Investors will need to pay significant attention to the yellow metal in the coming years.

 

peter@peterdiekmeyer.com

 

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