“Gold is money. Everything else is credit.”
J. P. Morgan,
Congressional Testimony, 1912
"The consensus investment view seems to be that the credit crisis of 2008 was a freak occurrence, unlikely to repeat. That is wishful thinking. Monetary policy has painted itself into a corner. Based on our present course, there will be more bubbles and more meltdowns.
Financial markets and institutions sense trouble, as reflected in the flight to supposedly safe assets such as Treasuries and corporate-debt instruments with paltry yields, as well as the reluctance to lend by commercial banks. We are stuck in an epic liquidity trap. The irony is, if global central banks succeed in creating inflation, the value of these safe assets will be destroyed. It is a slaughter waiting to happen.
In the pedantic mentality of central bankers, their playbook creates just the right amount of inflation. As inflation accelerates, consumers will spend to get rid of their dollars of diminishing value and spur the economy. Once consumers start spending, it will be time to raise interest rates because a solid foundation for prosperity will have been established, they say.
The belief among policy makers and financial markets in the possibility of this sort of fine-tuning is preposterous, but it is the slender thread on which remaining investment and business confidence rests.
The breakdown of the monetary system will be chaotic. When inflation commences, it will be highly disruptive. The damage to fixed-income assets will seem instantaneous. Foreign-exchange markets will become dysfunctional. The economy will become even more fragile and unpredictable.
Gold is an imperfect, but comparatively reliable, market gauge for the extent of current and future monetary destruction. The recent acceleration in the dollar price of the metal to $1,381, a record high in nominal terms, coincided with talk of a new round of quantitative easing and highly visible discord among major nations on trade and currency-valuation issues.
Naysayers point to gold’s price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency. The sudden torrent of commentary on gold isn’t the sign of a bubble. Anti-gold pundits provide a great service to those who grasp this historical moment: they facilitate the advantageous positioning of the one asset most likely to be left standing when the dust settles."
John Hathaway, Tocqueville Asset Management, October 28, 2010
"We suspect that shorting gold has come to seem like a riskless proposition as long as there is confidence in the Fed. Synthetic gold is the perfect substance for a carry trade: an easy borrow with very low carrying cost and little upside basis risk.
Such a hypothesis, in our opinion, does much to explain the incongruity of a declining gold price while fundamentals for paper currency, and the U.S. dollar in particular, obviously deteriorate; while demand for physical gold has exceeded new mine supply for several years running; and while above-ground 400-ounce .995-gold bars located in London, New York, and other financial capitals (in cohabitation with speculative trading activity in paper markets) have steadily dwindled and disappeared into Asian financial centers reformulated as .9999 kilo bars."
John Hathaway, Tocqueville Gold Newsletter, 2Q 2015
"Gold has worked down from Alexander's time. When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."
Bernard Baruch, 20th century American financier
What determines the relative value of a currency?
I don't think we need to beat the question of 'what is a currency' to
death. I think everyone over the age of 12 has developed a feeling for
that. Except for propeller heads who are paid to pick nits.
Is it just something that exists in a finite amount? Is it just relative scarcity?
How much of your portfolio do you have invested in Limited Edition Nascar plates? Beanie babies?
Faith, fraud, and force in varying degrees determine the relative value of a currency. Where faith, or rational expectation in the continuing integrity of the redemption value in goods and service of a currency falters, fraud may suffice - for a time.
Some monetary authorities love to misrepresent the relative value of real things compared to their favorite issuance, or so we hear.
But at some point, official narratives and misrepresentations grow thin, and the day to day experience of people tends to scour away the ornaments of the monetary Pharisees.
And so, in the end, the issuer may come to rely on varying degrees of force. But it only works where you are able to apply that force, the area which you control, and how effectively you can control it. Empires like to extend their span of control for this reason.
Faith is easily lost. And once lost, force is a tool that has a difficult task in restoring faith. At most it can obtain varying degrees of compliance. But that is not easy to sustain for longer periods of time.
What has been in place for most of our lifetimes, the dollar hegemony, seems to be changing - slowly. And so the prudent may seek alternatives. And others may not.
Stocks continued to decline today, with a little more conviction. The perception of their values may be wearing a bit thin. You think?
Gold and silver were holding their own with varying degrees of success. I would imagine that the open interest of the December contracts has declined quite a bit this week, as it rolls over to March.
This rigging of the markets for profit is force, being applied by the enablers of the financial system. They obtain their pound of flesh from the other market participants in return for promoting the official narrative which calls for graceful declines in confidence when necessary. This is why the officials tolerate certain levels of price manipulation, when they are not doing it themselves.
I think we are well beyond the notion that markets are not manipulated. Maybe not. But at this point the facts speak for themselves. A big difference from the dumb debates of 20 years ago. Some people learn nothing, and new crops of greater fools show up to be harvested.
The risk in equities remains elevated. We are one exogenous event away from a serious revaluation of that risk. And I have never been more certain that it is coming.
I am trying to remain optimistic, but everything that I see suggests that it will be rough seas ahead.
Hope for the best, but prepare for the worst. Or not.
"A fire broke out backstage in a theatre. The clown came out to warn the public; they thought it was a joke. He repeated the warning, but the applause was even greater. I think that's just how the world will come to an end: to general applause from those who believe it's a joke.”
Søren Kierkegaard
To remain standing firm in difficult times, in the great falling away, is what matters.
Everything else is pride and ornament.
Have a pleasant weekend.
