In this article, Claudio Grass looks back and answers the question what really changed in 2013 when it comes to money, (physical) gold and liberty. In his position of managing director at Global Gold Switzerland, he is in touch with a lot of people in the gold industry. Besides, his expertise in monetary history helps him to provide sound and fundamental views on money and currency. This article comes from the latest Global Gold Outlook Report, released earlier today. Read the full report or subscribe for future updates on www.globalgold.ch.
The last year has been an interesting year in many respects, especially for precious metals. We saw strange fluctuations in the gold price, mainly because of the paper market, and also “creative” ideas by governments on how to control their citizens and their wealth. It seems that on a daily basis more and more is uncovered on how the US is spying on its citizens through the NSA. Also FATCA, which will be implemented shortly, will make all financial assets of US persons transparent to the IRS. What about: Privacy? Democracy? And above all: Liberty? Sadly, we think that these principles have been thrown overboard and it is unlikely that the infringements of natural rights will end any time soon.
In the following I would like to share my personal thoughts about how I experienced the past twelve months and what key elements I am focusing on. I can tell you what I am not focusing on: the mainstream media. I recently came across the following quote by Professor Mark Crispin Miller: “Media manipulation in the U.S. today is more efficient than it was in Nazi Germany, because here we have the pretense that we are getting all the information we want. That misconception prevents people from even looking for the truth.” I believe that this is not only true for the US, but also for most of the other countries across the globe. The media has become the main propaganda tool of governments and large corporations. In the United States, six corporations control 90% of what people read, watch and listen to. If you are looking for valuable information you need to look beyond the mainstream media. This is what we have been trying to do since the very beginning with our different reports and articles.
Gold is your insurance!
A few weeks ago, while having dinner in Zurich I had a conversation with a conservative Swiss Banker, working for one of the oldest private banks in Switzerland. When I told him what we do at Global Gold he said: “So you work with the real stuff – dealing with real money!”. He went on to tell me that he holds physical gold as his own personal insurance. His remarks highlight the most important aspect why someone should hold physical precious metals. Gold is not a speculative vehicle, but rather an insurance policy against the collapse of the financial and monetary system. Neither my clients nor I know exactly when the collapse will take place, however we are all convinced that it is long overdue and will happen eventually due to the unsustainability of the current system. What has changed since the price decrease of more than 700 USD since the peak in 2011? Absolutely nothing!
Fiat currency is not real money!
J.P. Morgan once said: “Gold is money – everything else is credit”. Although I don’t share a lot in common with the Morgans, I fully agree with this quote. What most people consider money today is nothing more than debt! I am critic of un-backed currencies in general, a credit-based monetary system is, however, much more dangerous than “simply” having an un-backed currency. A backed currency, such as a gold standard, restricts the powers that be from issuing new currency whenever they need it. Our credit or debt-based system however implies that no matter what happens, the money supply has to be constantly increased, because as everyone knows debts need to be repaid with interest. Assuming a constant velocity of money over time, there is no way the debt, which is the basis of our money, can be repaid if the money supply is not increased. The system is, therefore, inflationary in its root and is bound to fail in the long run. As Voltaire already noted: “Paper money eventually returns to its intrinsic value – zero.” The only question is not if but rather when.
Will the money printing stop?
No! The FED announcing that it will reduce its asset purchasing program by 10 billion on a monthly basis is like an arsonist saying “I will use a bit less gasoline in the future”. I am confident that real interest rates will stay low for the foreseeable future. Why? First, I believe that the CPI is manipulated in favor of the government. If you take the statistics calculated by Shadow Stats, for example, the current US inflation figure is closer to 5%. One-year government bond yields would have to increase almost 40-fold to come close to that number. That isn’t really a likely scenario with the debt levels worldwide standing where they are today. Governments simply cannot afford to pay more interest on their debt.
Secondly, I am an Austrian. To me, inflation is the increase in the money supply per se; this means that I don’t measure the debasement of a currency by an arbitrary basket of goods (CPI) defined by the government. Newly created money doesn’t flow evenly into an economy and lead to a steady increase in all prices. Although we have hardly seen any increase in the CPI figures, we have seen other prices increase, mainly asset prices!
Keynes is dead!
Sometimes I feel like a broken record, however I can’t stop myself from emphasizing what I think is the biggest problem of our times: DEBT! Roghoff and Reinhard said once that the 5 most expensive words in history have been “this time it’s different”. I agree, this time will not be different! The most optimistic scenario I can think of (with today’s debt levels) is an average double-digit inflation rate over the next 10 years, which will reduce the debt levels of governments back to sustainable levels. It seems to me that most central bankers worldwide have dismissed the ideas of the beloved and “prudent” Keynes and have adopted Gono-Economics as their leading economic theory.
As you might know Gideo Gono is and has been the governor of the Reserve Bank of Zimbabwe since 2003. In this time he has helped make Zimbabwe one of the most prosperous nations on this earth and has created more (nominal) wealth than all of the world’s central bankers put together!
No more property rights? Almost!
What we have seen until now is just a foretaste. The bail-in in Cyprus, the restructuring of debt in Greece and of course the negative interest rates are all just the beginning of much bigger things to come. Wealth redistribution by means such as higher taxation, negative interest rates and outright confiscation will intensify in the coming years. The IMF recently came out with a report in which they analyze the benefits of a “one-time” wealth tax of 10% on government debt levels. Confiscation or other measures can happen in any country, I do think, however, that it is a prudent approach to keep one’s wealth in a country such as Switzerland. Why? Switzerland has a federalist system of government, which limits the power of central government and has a long-standing history of respecting property rights. More importantly, however, Switzerland is in a very sound fiscal state. Such countries are not only unlikely to confiscate, they simply have no need to do so.
Monetary history as you compass in turbulent times
My mentor Ferdinand Lips always told me that teaching and talking about monetary history is one of the most important things we can do, because there is a deep misconception regarding this issue. This is especially true today, a time where understanding monetary history is more important than ever. This is one of the reasons, why we have started a series of book summaries. In this Outlook you will find a summary of Lips’ “Gold Wars”. I cannot think of a book that has impacted me and the way I understand the world more than this book. I really hope that you enjoy the summary and also find the time to read the full book.
As Mark Twain said: “History doesn’t repeat itself, but it does rhyme.”. Therefore everyone should understand the details of monetary history to understand how to prepare for the times ahead.
Changes during the past year
If you look beyond the noise of the price fluctuations in the paper gold prices you will realize that nothing has substantially changed or at least nothing, which negatively impacts the reason, why my clients and I personally hold gold. If anything, everything I have mentioned until now is an indication that the reasons why most people hold gold are more relevant and actual than ever. The mainstream media seems to have a different opinion. The physical gold market, however, speaks a completely different language. The Chinese and the Asians in general are buying gold like there is no tomorrow and all the refineries I deal with are still reporting massive delays because they are unable to cope with the high demand.
I personally have been accumulating gold since 2003, when I first came in contact with monetary history through Ferdinand Lips. What do I do when the insurance premium on the health insurance cover I couldn’t afford just a couple of months ago becomes 30% cheaper? I buy it! I simply do the same for my insurance against a monetary collapsed. In my view that is the only prudent thing to do.
This article comes from the latest Global Gold Outlook Report, released earlier today. Read the full report or subscribe for future updates on www.globalgold.ch.