Monetary Disorder and the Role of Gold

Transcription

1 Monetary Disorder and the Role of Gold The ongoing role of gold in the financial system and prudent money management Louis Boulanger, CFA, Founder & Director, LB Now Limited Presentation for CFA Sri Lanka in Colombo on 29 July 2011 Gold is money and nothing else. That s what J P Morgan himself said when he was asked about the role of gold in the financial system

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3 3 Agenda Money its origins and what it is Gold its role and is it a bubble? Crisis the true nature of the ongoing crisis fiat abuse and the new currency wars Bullion demystifying it!

4 About money It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. -Warren Buffett ( ) American investor

5 5 On the origins of money... Carl Menger s essay (1892) is the most important reading source to fully grasp and understand the true origins of money a social phenomenon of practice/habit money is... a social (not a state) institution a gradual realisation of the different degrees of saleableness of goods and commodities money is the unpremeditated resultant and spontaneous outcome of human actions

6 6 The role of the state... Came much later... Precious metals became money before coins Not as a rule, but because of their saleableness No accident or state compulsion effected this State recognition and state regulation of what people had already decided was money: caused the state to coin (administrative role) perfecting use of precious metals as money

7 7 What is money? Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are: 1. as a medium of exchange; 2. as a unit of account; and 3. as a store of value

8 Is this good (sound) money? 8

9 There s more and more of it 9

10 What s wrong with this picture? 10

11 11 If the American people ever allow private banks to control the issuance of their currencies, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered. -Thomas Jefferson ( ) One of America s Founding Fathers; 3 rd President of its United States ( )

12 12 Well, guess what? It s already happened! I call it the Monetary Tragedy of the 20 th Century 1910: the Fed is surreptitiously created 1913: the Federal Reserve Act is passed 1933: gold possession became illegal in US 1971: END of gold exchange standard set in 1944 in Bretton Woods (President Nixon unilaterally declares US dollars owned by foreign states are no longer redeemable in gold, as was intended by the BW system)

13 13 Can you spot the differences? Before 1913, bills were labelled along the lines of Silver Certificate - This certifies that there has been deposited in the Treasury of the United States of America One Silver Dollar payable to the bearer upon demand. After the institution of the Federal Reserve, currency was moved to unbacked notes that bore the phrase Federal Reserve Note - This Note is Legal Tender for all debts, public and private that relied simply upon the Federal Reserve saying they had value.

14 The role of gold Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted. -Alan Greenspan ( ) In a speech to the US Senate Banking Committee in May 1999

15 Is gold really a barbarous relic? 15 No, but some have famously suggested so: In truth, the gold standard is already a barbarous relic. -John Maynard Keynes ( ) British economist whose ideas had a major impact on modern economic and political theory. He was a key figure behind the 20 th Century global monetary system post WWII (i.e. Bretton Woods). Above quote from his Monetary Reform, 1924, p172

16 16 Far from a barbarous relic Gold is one of the world s most misunderstood assets Powerful governors of its price (esp. since 1971) Despite this, gold remains valued around the world Why? Because it s real and used as stateless money Gold is money and nothing else J P Morgan, 1913 It cannot be debased by creating it out of thin air by government fiat like all currencies today Gold is nobody s liability (unlike other financial assets)

17 17 Gold is special and unique The only commodity produced for accumulation Entire aboveground gold stock is 160,000 tonnes Gold s supply is its aboveground stock This is crucial to understand the true role of gold Gold is the commodity with the lowest marginal utility that s essentially why it was adopted as money socially Amount of gold mined each year still only increases the aboveground stock year after year by about 1-2% p.a. A gram of gold mined today is no different from a gram of gold mined by the Romans two-thousand years ago

18 All currencies are now in decline 18

19 19 But all we look at is the gold price... GOLD Price (% Annual Change) USD AUD EUR NZD CHF GBP Average* % 11% 1% 12% -5% 2% 1% % 11% 8% 9% 5% 5% 8% % 14% 6% -1% 4% 13% 15% % -11% -1% -5% 7% 8% 6% % 1% -2% -4% -3% -2% 0% % 26% 35% 25% 36% 32% 26% % 14% 10% 19% 14% 8% 17% % 19% 18% 21% 22% 29% 21% % 33% 12% 39% 0% 44% 18% % -4% 20% -1% 20% 12% 15% % 13% 39% 20% 17% 33% 24% Annual Compounded 1,000 Invested On 1 January % 11% 13% 11% 10% 16% 13% 4,928 3,129 3,682 3,280 2,861 5,080 3,923 *The average %s and amount shown in this colums are based on 10 currencies: the above six plus the CAD, CNY, INR and JPY.

20 Gold appears to be in a bubble 20 But is it? Gold is the canary in the coal mine It signals problems with our fiat currencies It signals that it is time for monetary reform Until then gold will continue to rise in price first as an alternative money to fiat currencies later as a numéraire or anchor for the system Is it not more that the rising price reflects a very gradual managed remonetisation of gold globally?

21 21 What is a financial bubble? A speculative bubble forms when prices rise above a level justified by fundamentals For this to happen, lots and lots of capital must flow into the given asset, bidding it up to irrational price levels A look at investment flows proves that gold is not anywhere close to being overbought...

22 This is where the bubble is! 22

23 23 The truth about gold is That most people simply don t own it yet!

24 One last chart to debunk the myth that gold is already in a bubble 24

25 About this crisis... We cannot solve our problems with the same thinking we used when we created them. -Albert Einstein ( ) A man who should know

26 26 The true nature of this crisis It s not a credit crisis It s not a housing crisis It s not a banking crisis It s not a financial crisis The above are all symptoms/manifestations of The Great Global Monetary Crisis

27 27 Fiat money has no place to go but gold. If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it. - Alan Greenspan (AGAIN!) At a speech (Q&A) to the Council on Foreign Relations in Washington in September 2010

28 28 Irredeemable currencies Without the ability to redeem fiat money (i.e. any paper currency) at fixed weights in gold, paper money as a result is only as good as: the ability of the issuing state to pay its debts AND the belief that holders of that money (or any financial asset denominated in that currency) have in its value being preserved by the state It s all a confidence game! (with central bankers as croupiers)

29 29 US debt (i.e. US$) is the key! Since 1961 the US national debt has never gone down It took the US government 191 years from 1791 until 1982 to run up its first US$1 trillion in debt The national debt stood at US$10.6 trillion on the day Barack Obama took office as President Since then Obama has already added US$3.7 trillion in debt (it now stands at US$14.3 trillion officially) The US debt ceiling was increased in February 2010 by US$1.9 trillion to its current level of US$14.3 trillion 93 rd increase in the so-called debt ceiling is imminent

30 A great credit card to have 30

31 Make that $46,605 now and growing!

32 Consider this: Source: Bud Conrad, Chief Economist, Casey Research, October 2010

33 Time to let go of false beliefs Central bankers can and will do miracles Governments can t default on their debt Inflation is dead or Deflation is dead We are in better shape than The worst is over (!) IT S TIME TO START MEASURING THE PRICE OF THINGS IN GOLD (OUNCES)

34 34 Measures of money Lots of aggregate measures of its supply M0, M1, M2, MZM, M3, etc. But what of the basic unit (of measure) itself? Nothing to be found in absolute terms Abundance of data in relative terms: Currency exchange rates Price level in terms of currencies

35 35 Standards of measurement In all scientific endeavours, the standard used for units of measure is fixed; it does not float! Think of weight, length, time: the precision of their units of measure even improved over time The ONLY exception is economics and, in particular, monetary economics Fiat money floats! It is based on what could only be described as a highly elastic measure

36 Gold as a unit of measure 36

37 37 In summary: Fiat currencies (in which financial securities are all denominated) are rapidly losing value There is no exception; there are only timing differences and currency volatility is increasing This has happened before and, if history is any guide, CURRENCIES WILL COLLAPSE So if fiat money is dying, what can you do? DIVERSIFY AWAY from fiat currencies!

38 Let s get physical! God created everything by number, weight and measure. - Isaac Newton ( ) English physicist Master of the Royal Mint

39 39 You should own some bullion NOT ETFs (that s not bullion; it s paper gold) NOT shares (that s not bullion; it s equity) Bullion can only be the physical metal itself But remember: Bullion IS NOT an investment IT S MONEY Owning bullion is like a vote of no confidence Will need to redeploy that money (after crisis)

40 Bullion Bullion investment categories 40 Physical metal holdings coins or bars Near physical holdings allocated storage unallocated storage Pseudo bullion or paper (investments) certificates, derivatives, shares, ETFs

41 41 Physical vs. paper gold/silver Physical: Bullion coins (e.g. Maple Leafs, Krugerrands) London Good Delivery bullion bars (e.g. 400oz) Numismatics (rare coins; like art and stamps) Paper: Certificates (e.g. Perth Mint Certificates) Derivatives (e.g. options & futures on COMEX) ETFs (e.g. GLD listed on the NYSE) Shares (e.g. Newmont, Oceana Gold)

42 42 Near physical holdings ALLOCATED storage/custody: you OWN the gold or silver bullion you hold legal title to that bullion your asset is nobody s liability UNALLOCATED storage/account: you are OWED the gold or silver you are an unsecured creditor you have credit/counterparty risk

43 43 Investing in precious metals may well be a great idea right now! but this presentation was NOT about that The aims of this presentation were to: recall the role of gold in the financial system argue that a monetary reform is inevitable propose an interim solution to protect wealth encourage you to (re)learn all about money

44 44 Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history. - Charles de Gaulle ( ) 18 th President of France; 1959 to 1969

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46 Want to know more?

47 47 Suggested books to read Gold Wars, by Ferdinand Lips, 2001 Dying of Money, by Jens O. Parsson, 1974 Debt & Delusion, by Peter Warburton, 1999 The Origins of Money, by Carl Menger, 1892 Petrodollar Warfare, by William R. Clark, 2005 The Reigning Error, by William Rees-Mogg, 1974 The Theory of Money and Credit, by Ludwig von Mises, Liberty Fund, 1981 (translation of )

48 48 Some of my sources

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50 Thank You. Any questions? Louis Boulanger, CFA Founder & Director, Louis Boulanger Now Limited P O Box St Heliers, Auckland 1740, New Zealand tel: ; mob: ; louis@lbnow.co.nz;