Guest Post: Uncle Scam
Submitted by David Galland at Casey Research
The latest data on global gold trends, Q2 2010, just popped into my email box from the World Gold Council.
The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year.
If you’re thinking “Hey, that’s not that bad!”, you’d be right. On this
date last year, gold closed at $950… which is $286 below where it
trades as I write. In other words, a 30% rise in price has resulted in a
decrease of just 5% in jewelry sales.
And even that number is skewed, because the currency value of the gold
purchased is up – way up. For example, India – the 800-pound gorilla in
the global gold jewelry market – saw total gold jewelry sales fall
only by 2%, but in local currency terms, there was a 20% increase in
the nominal value of the gold trading hands. China, which only
relatively recently reauthorized private gold purchases, saw a 5%
increase in jewelry demand, but that translated into a 35% increase in
local currency terms.
So, that’s the bad news.
The good news – at least for fiat money skeptics – is that total
physical gold demand in Q2 rose by a whopping 36%. More tellingly, the
increase was 77% when you take into account the dollar value of the
As you’ve already figured out, the bulk of the physical demand is
coming from investment – with the amount of gold held by ETFs growing
414% over the previous year.
Too far, too fast? I don’t think so.
In my opinion, as the fiat money monsters are brought to bay, the price
of gold can really only go higher. Overly confident? I don’t think so.
That’s because when people lose faith in a currency, as they will
before this crisis is over, they unfailingly rush to exchange the
unbacked paper money for something more tangible. While pretty much
anything with an intrinsic value will do – real estate, antique cars,
old masters – for all the reasons that Aristotle enunciated, gold is
viewed in a class of its own, and so has an unblemished history as a
universally accepted store of value. And, thanks to its portability,
divisibility, durability, and consistency, it has also always been
looked upon as a convenient form of money.
The most pressing macro-observation I’d like to make – an observation
that’s critical for investors to understand (though most don’t or
won’t) – is that the tectonic monetary shift now underway is truly
global in nature. And it’s not going to be over until a new and
markedly different monetary regime has been implemented.
It’s like this: Throughout history governments have experimented with
fiat money. They have done so because the benefits to the government
and the insiders that invariably latch on to power are just so damn
attractive. The Romans did it by debasing their coinage, but the modern
version goes one better by completely disconnecting a currency from
any value whatsoever, and then wantonly printing as politically
motivated needs or wants arise.
The latest fiat system kicked off in earnest in 1944 when Uncle Scam,
in Bretton Woods, NH, got the leaders of the world’s war-weary
countries to agree to accept the U.S. dollar as their reserve currency.
In return, the U.S. agreed that the currency notes it would
subsequently issue would be convertible into a corresponding amount of
gold. Then Tricky Nixon came along in 1971 and canceled the right of the
bearer to swap the notes for gold. Overnight, the link between the
currency and anything tangible was lost.
That, of course, opened the door to all subsequent politicians to
engage in the whole print, print, print thing. The keystone asset of
the former system – gold – soon became a distant memory for the new
crop of central bankers and, remarkably, to the bearers of the notes.
For any number of reasons, most of which related to the illusion of
increasing prosperity, people simply stopped paying attention to what
Uncle Scam was up to. Of course, that illusion was largely based on the
increase in nominal wealth: if one year you’re worth $100,000 and
three years later you are worth $150,000, the tendency is to feel
richer even if your actual purchasing power has gone up by far less or
even has declined due to a debasement of the currency.
Today’s dollar is worth just 18 cents in 1971 terms.
But all scams must, in time, come to an end. And that’s what’s going on
now. It ends here. Before this is over, the current iteration of the
U.S. dollar – the vaporous construct with no actual value – will lose
its value as money.
Which brings me to an important nuance in this discussion.
Most failed fiat money experiments involve a single currency. The most
convenient recent example is provided by Mugabe’s Zimbabwe. Rather than
actually supporting the creation of marketable goods and services in
what he sees as his private fiefdom, he took the low road of
energetically abusing his fiat currency to the vanishing point.
In a situation such as that, the local citizenry suffers – as well as
anyone foolish enough to be holding bonds denominated in the debased
currency. But that’s about it.
In the current scenario, the keystone of the entire global monetary
system is the U.S. dollar. Which means that the primary reserve
holdings of virtually all the world’s significant central banks are at
risk of going up in smoke.
And it’s even worse than that, because the dollar is also the number
one trade currency – which means corporations around the world are
sitting on huge holdings or are dependent on commercial contracts
denominated in dollars.
And even that’s not the end of it. Because Uncle Scam has long served
as a role model to other world leaders, those leaders have
enthusiastically followed suit and universally launched fiat monetary
systems of their own. It’s bad enough that the world’s reserve currency
is a fiction – but the situation becomes really dire when you accept
as fact that all the world’s currencies are a fiction.
Man, we’re in a lot of trouble.
If you have so far resisted our constant urgings to make gold – which
is to say, real money – a core portfolio holding, it’s not too late.
Just start buying on the inevitable dips. I can assure you that as the
fiat monetary structures continue to crumble – and they will – more and
more people will be turning to gold. The latest World Gold Council
data is just a straw in the wind.
In fact, thanks to the convenience of the gold ETFs (which you should
make an effort to understand before blindly investing in them – there
are important differences between them), once the show really gets
underway, the relative trickle of investment funds moving into gold
today will quickly become a torrent, completely outrunning available
gold supplies and sending prices much, much higher – and in a hurry.
While no one can say when the big spike in gold will occur, one can say
accurately that, given the systematic frailty, it could literally
happen on any given day. That’s what happens when scams are unveiled.
Remember Bernie Madoff? How many people do you think tried to give him
money the day after he was arrested, versus desperately scrambled to
get their money out of his sticky web? The answers are “No one” and
“Everyone” – that’s what happens when people lose faith in a currency.
Of course, gold bullion, and gold bullion proxies, aren’t the
only asset classes that will do well in the coming currency collapse.
The chart below shows what looks to be a trend change in the gold
stocks. In previous recent stock market corrections, people thought of
gold stocks more in terms of being stocks and overlooked their direct
connection to gold. That appears to be changing, with a divergence
between gold stocks and the broader markets. The leverage in gold
stocks to gold bullion could make them especially attractive.
Regardless of what you do, do something – because to stumble on as
if this crisis will end with a whimper would be a dire mistake.