Physical Gold is the antidote against the ongoing global debt crisis

This article is a summary of a video presentation that was recorded by Claudio Grass, managing director at Global Gold in Switzerland. It is brought to you by GoldSilverWorlds.

Global Gold’s vision is that the Gold bull market still has a long way to go. The current economic climate provides the ideal conditions for a continuing rise in the Gold price. The view of Global Gold is influenced by the Austrian School of Economics. In their essay, they come to the following conclusions: savings and investment are the basis of a sound economy, not consumption and debt; values of currencies are declining and fiat money has no intrinsic value; today’s debt levels are unsustainable; physical Gold is the antidote against the ongoing global debt crisis.

Austrian vs Keynesian economics

The last centuries have been dominated by the theories of John Maynard Keynes, which are based on centralized government structures. Mr. Keynes turned the world upside down with his argumentation that savings is not a premise for investments; by contrast, it is a burden for economics. His opinion was that wise and clever planners could correct macro economic imbalances by manipulating market signals. That’s why he saw an easing of lending as the only solution.

The Austrian School however stands for private ownership, free markets, healthy money and a free-thinking society. It enables us to understand the economy under consideration of the unpredictability of human actions. The Austrian School takes into consideration the important role of decisions of individuals on transactions and explains how things are settled into order despite the apparent chaos of individual actions.

Striving for personal and individual happiness is key. The basis for such a society and economy is built on market money which can be chosen by people themselves, free of any constraints or enforcement. As history shows us, market money has to possess the following features: it has to be comparable, dividable, it has to be rare and easily transportable. Gold and Silver accomplish these features best; that’s why they have been the medium of exchange for 5000 years. Gold and Silver have an “inner value” and are not dependent upon promises of debt redemption by a third party.

It is wrong to stick to a monetary paper system (fiat) which is based on the promise that the accumulated unpayable debts have to be redeemed by the actual and future generation via taxes and inflation. Furthermore, it is a plain fact that all past fiat systems have ended up in hyperinflation. Our current fiat system is the longest-lasting so far.

The current macro-economic trends

Looking at today’s economic trends, one can conclude that we are living in exceptional times and that we are literally in uncharted waters. The economic burden is unsustainable at its current course because of the massive amounts of debt. Not only the US but the whole world is currently facing the highest level of public debt in times of peace.

This is a summary of the most important macro-economic trends (more details and the associated graphs are to be found in the paper):

  • The expansion of the “True Money Supply” (US) went in an hyperbolic phase since the beginning of the past decade; the True Money Supply is already hyperinflationary.
  • Funded debts (US) are at a record high and growing at an accelerated pace. The funded debts doubled in the last 5 years, while it took 11 years before to double.
  • Interest rates are kept artificially low by central planners. The debts have risen at a much faster rate than interests. One instrument to push interest rates down is by monetizing debt directly through the central banks. In 2011, 61% of all US bond issues were bought by the Federal Reserve.
  • Unfunded government debts which include for example social security and pensions; they are approximately five times as high as the funded (explicit) debts in countries like the US, Germany, France, UK.
  • The debt level as a percentage of GDP is at the highs of the past 50 years and keeps on rising.
  • Unemployment rates are approximately 10 percent in Europe and 8% in the US. When using the “old” calculation methods of governments (as measured by Shadowstats), the unemployment rates are much higher.

It is simple and logic that “you can‘t fight over-indebtedness by adding even more debt.” One way or another, central planners seem to ignore this obvious statement.

Based on the current course of governments, it seems unlikely that interest rates will be pushed up anytime soon. Additionally, central banks keep on  flooding the market with new paper money. As a consequence, there is a very high probability that we will see negative levels of interest rates. That will undoubtedly be one of the key drivers behind the rising price of Gold.

What we see happening in the world today is contrary to the belief to the Austrian School of Economics. In the Austrian view, “the driving forces of economic health are savings and investments, not consumption and debt.” That’s because every act of consumption has to be preceded by production first. Debt is nothing but consumption brought forward, which will consequently not take place in the future.

There does not seem to be any painless therapy for all aforementioned problems. That’s why Global Gold strongly believes that Gold is an effective antidote.

Insights from monetary history

The 19th century was the age of the Gold Standard. It was a period of prosperity and economic growth without inflation. The basic rule of the Gold standard was a fixed price for Gold, with each currency being convertible into Gold at a specific rate. All balance of payment deficits on an international level were settled in Gold. It was impossible for politicians to manipulate the Gold price and therefore it provided citizens with a currency that maintained its value. The world economy was operating to its full-potential and rising standards of living for the masses meant low or no unemployment. Interestingly, consumer prices (eg in the UK) have been stable between the 17th century and 1914.

As from 1914 however, the Gold Standard was abandoned. Exploding consumer prices and rising debt levels were the new normal since then. By pushing Gold out of the monetary system, it became possible to finance World War I. In his book “Gold Wars“, Ferdinand Lips stated even that “had the Gold standard not been given up, the war would not have lasted more than a few months.”

Between 1922 and 1929, the Gold Exchange Standard was introduced, under which the dollar and the British pound were considered as good as Gold and could be held as reserve currencies. The reserve countries were able to run balance of payments deficits without being punished as long as the other nations had “confidence“ in their currencies. This new system set a gigantic money and credit machine into motion and created the inflationary boom of the 1920‘s. The new mechanism proved to be an engine of inflation whose product – excess purchasing power – flowed abundantly into the real estate and the stock markets. This was the cause for the inevitable corrective Depression starting with the crash of 1929.

Since the Great Depression, Gold has been part of the monetary system, closely connected to the Dollar. Depending on the economic climate, there were periods where only governments were allowed to own Gold. The yellow metal was also an international medium of exchange.

As from 1971 however, US President Nixon decided to ban Gold from the monetary system. It is not a coincidence that a massive explosion of debt has taken place since then. The problem with these debt mountains is that it simply cannot be paid back. Debt is, as John Exter mentions, “a funny thing: it always must be repaid, if not by the debtor, then by the lender, or worse still, the taxpayers.” All major currencies have also been declining in value for several decaded. “Voltaire” who has been a witness of the so called “Mississippi-bubble” (another fiat-money adventure established by John Law in France around 1720), stated once: “ Paper money eventually returns to its intrinsic value — zero. ”

Current state of the gold market & why Gold is not in a bubble

The Gold price has risen from USD 278 at the beginning of 2002 to USD 1590 by mid July 2012: an increase of 471%. Gold in Euro 316% and Gold in CHF rose 238%. “Gold is the barometer that indicates that there is something wrong with the fiat currency.” [Reason 1 why Gold is not in a bubble].

On the supply side of Gold (and Silver), we see a big difference between annual production and total available supply. The aggregated volume of all the Gold ever produced comes to about 170 000 tonnes. Annual production was close to 2 600 tonnes in 2011. So Gold is not precious because it is scarce, but because the annual production is so low relative to the supply. Gold has acquired this precious feature over centuries, and cannot lose it anymore. This stability and safety is a crucial prerequisite for the creation of trust. And it is what clearly differentiates Gold and Silver as monetary metals from commodities and the other precious metals. Commodities are consumed, whereas Gold is hoarded.

The demand side of Gold gives a totally different picture. First of all, the world‘s central banks became net buyers of Gold for the first time in 2010 after they were previously net sellers for many decades. During 2010, the world‘s central banks bought 87 metric tonnes of Gold more than they sold. Especially countries in the Middle East and emerging markets (such as Mexico, Russia, Turkey, South Korea but especially China and India) have become the buyers. [Reason 2 why Gold is not in a bubble].

Besides, the current Gold bull market is coinciding with a strong increase in investment demand, being one of the three pillars in the demand side. Investment demand grew from 352 tonnes in 2002 to 1 641 tonnes in 2011, an increase of 366%. (Chart courtesy: World Gold Council)


Moreover, people are buying precious metals as a hedge against all sorts of crises: political, financial, economic, currency, geo-political, etc. If one assumes that these crisis scenarios are still in place, then the reasons for having a crisis hedge are becoming more convincing every day, leading to a higher Gold investment demand and higher Gold prices. [Reason 3 why Gold is not in a bubble].

History tells us that every bull market ends in euphoria and excess. The Gold bull market of 1970-1980 for example saw a 20-fold increase in the Gold price. By 1980, 23% of the world total assets were invested in Gold and 14% in Silver (based on prices at that time). Comparing it with the numbers of 2011, we see that only 3.6% of the world financial assets are invested in Gold and 0.7% in Silver. “ The only similarity to the situation in 1980 vs. today is that we are again confronted with a possible, extremely dangerous, conflict in the Middle East and Iran in particular.”  [Reason 4 why Gold is not in a bubble].

The chart below illustrates that, in the USA with the current Gold price of USD 1 610, only 16% of the monetary base is covered by Gold. This is only slightly higher than the 11% at the absolute lows in Gold in 2001. Do you see the high after the end of Bretton Woods in 1980, when 168% of the monetary base was backed by US Gold reserves? The red line shows the average coverage during the past 40 years has stood at 34%. The Shadow Gold Price reflects the price level that Gold would have, if all the paper dollars would have been backed by Gold. [Reason 5 why Gold is not in a bubble].


A last point of view is the ratio Dow / Gold which now stands at 7.8. It’s currently valued above the long-term median of 5.8x. This means that Gold is still relatively inexpensive in comparison with the Dow Jones Index. In 1932, the ratio was 2x, at the end of the last bull market the ratio was 1.3x. Therefore we can expect that the values of 2x might be reached again as a result of the secular bull market. Under this assumption of a constant Dow Jones index, Gold would therefore have to rise to USD 6 200/ounce. Long-term bull markets never end around averages but always set extreme values versus other asset classes at the end of the trend. This supports the argument that Gold is still attractively valued and that the Gold price has not entered into its final trend acceleration phase yet. [Reason 6 why Gold is not in a bubble].

Different gold investment options & why to avoid paper gold

There are different ways to get invested in Gold. Without going into detail on investments like mining shares or online precious metals buying programs, the focus in this chapter is on the difference between paper Gold (mostly in the form of the popular ETF’s) and physical Gold.

Paper Gold is in fact nothing more than a promise to Gold. It is closely tied to the root of the current monetary (fiat) system, which is mostly backed by … promises. In a real crisis scenario you can‘t be sure to receive any metal at all. You will come to that conclusion by simply reading the T&C’s. It reveals for example that the ETF’s are maybe not audited to provide proof of the existence of the underlying Gold, that there could be no insurance (risks like theft or fraud are passed on to the investor), that the quality of the Gold is not confirmed, and so on.

In general it seems that we have been going through a gradual shift from paper Gold investments towards physical purchases. In 2012, physical investment demand will most likely exceed ETF demand by a factor of 5, as confirmed by Ronald Stöfferle. Only a few years ago, the situation was exactly the opposite, with ETF‘s accounting for 80% of investment demand. This paradigm shift shows the gradual loss of confidence in paper Gold.

It all comes down to this principle: “If you can‘t hold it, you don‘t own it“. Global Gold offers a solution based exactly on that principle. The service is designed to be resistant against a potential crash of the actual monetary and financial system. That’s why Global Gold’s services are facilitated “outside” the banking system. There is no dependence on the function of stock exchanges or banks. A financial crisis will not stop the program from operating. It does not have any cash settlement clauses or other provisions that would restrict the delivery or selling of the precious metals promptly.

In closing, Global Gold is different from several points of view: it’s a service outside the banking system, the owner has direct ownership of the metal, there are no small-print cash settlement clauses, the storage is very secure, the service is insured and audited, bullion and coins are physically stored, the owner can have delivery at any time, it’s tax-free, competitively priced and 100% Swiss.

More info? We have a paper, video presentation and podcast

You can chose between two video presentations :

The written version of the presentation (a paper) has been made available on Scribd. The document counts 28 pages.

The presentation has been recorded as an audio podcast as well.