Gold Begins to Shine Again Dr David Evans Gold Symposium, Sydney October 2012
Novel money system started in 1971 when Nixon “closed the gold window”, changing from gold base to paper base. Historically, paper currencies usually die after 25 – 50 years. It’s now 41 years since 1971. Stagflation in 1970s, reset in 1980 by 20% interest rates.
Amount of money ≈ Debt (gov’t + private) Size of economy ≈ GDP This is the financial story of our times…
Debt-to-GDP Ratio Total US Credit Market Debt ("Bank Money") as a % of GDP400% Q1 2009 1933 depression, 298% 385%350% (debt down 20% but GDP down 46% from crash)300% 1987 crash 1929 crash 230%250% 196%200% Normally150% 130 - 170%100% Restart 1982 Federal Reserve created 1913 Base money: gold -> paper50% 1971 20% interest rates 1980 0% 1880 1900 1920 1940 1960 1980 2000 Sources: Federal Reserve - Z1, US Census Bureau - Historical Statistics of the United States, Colonial Times to 1970. Data 1871 to end of Q1 2012. Data quality excellent from 1945.
World ran low on borrowing capacity: 1. Not enough income to service more debt ▪ Debt ≈ 400% of GDP ▪ Interest rate ≈ 4% ▪ Interest payments ≈ 16% of GDP 2. World running low on unencumbered collateral. Money manufacture in the private sector stalled in 2008 Global Financial Crisis.
2008 – 2011 Now Governments took up Most governments cannot slack of money borrow much more. manufacture in 2008: Realization: private sector Borrowing is debt-saturated, no return Some printing to pre-2008 “normal”. (“quantitative easing”) Only option left for Lowered interest rates. manufacturing money is… government “printing”. ? ?
1930’s, but worse – debt-to-GDP ratio much higher, global. During the 25 years of bubble, extra money (= debt) increased GDP. Like a credit card spree! To return the debt-to-GDP ratio to Debt-to-GDP Ratio normal, maybe a 15 – 25% fall in GDP. Total US Credit Market Debt ("Bank Money") as a % of GDP 400% 350% 300% 250% Double depression! 200% 150% 100% Normally 130 - 170% Politically unacceptable!! 50% 0% 1880 1900 1920 1940 1960 1980 2000 You spent it, now you gotta pay!
Last year’s debt has to be repaid with interest, so every year the money supply must increase or there will be widespread business and bank failures (a la 1930). World at a fork: or Print, Don’t print,inflate deflate
Basic democratic calculus: Lenders: Few Borrowers: Many (vote, might riot). Powerful business interests: Need to repay their debts. Portugal, Oct 2012 Greece, June 2012 Spain, Sep 2012 The Keynesian fog will be used to excuse this choice, to “reduce the people’s debt burden”.
Political system won’t allow Bernanke Quantitative failures of big banks and easing corporations. TBTF. (2008) Bernanke won’t allow 1930’s deflation. Establishment economists already suggesting running mild inflation (6%) for a few years. Rogoff (D) Mankiw (R) Governments everywhere spending more than tax receipts.
IMF concluded that austerity does not work. Had previously encouraged austerity in Europe. (Oct. 2012) Krugman (leading Keynesian) Crows “times like this are different” European integrationists winning in struggle with Germany’s central bank over printing: Draghi promises “whatever it takes” and announces “Outright Monetary Draghi (ECB Head) Transactions” (July, Sept 2012) Outright Monetary Transactions
Without political interference, the current debt bubble would collapse in a massive deflation (like the 1930s). Governments and banks will interfere to prevent this, by manufacturing more money. Increasingly, they are deliberately causing inflation to reduce the real value of debt. Investors mainly fearful of deflation inflation plays are cheap now.
Money is a promise – of similar purchasing power in the future. Work is motivated by those promises. Too much money = Too many promises Promises cannot be kept: not all debts can be repaid in dollars near current value. Political system, not usual economic rules, will determine the losers. Major political issue: How fast to break the promises? 1 - 2 years: deflationary, austerity, better long term 1 -2 decades: inflationary, printing, nicer short term.
Gold is a currency. It is the main non-government currency, evolved in the marketplace over 5,000 years. Gold was the world’s base currency until 1971. Gold is still a reliable store of purchasing power. Gold is a superior form of cash that debases much more slowly than paper currency.
Gold is not used in jewelry because it is shiny and yellow – there are lots of cheaper alternatives. Jewelry is made of gold because gold is valuable. Gold is valuable because it is money. Gold is not a commodity, like wheat or iron, because it does not get used up. Gold is not a productive investment, something that produces goods and services (like farms or factories), because it is just a medium of exchange (like cash).
No one can print it. No one can make more without great effort. vs We wouldn’t be in the current debt mess if our money system was still based on gold! You have to earn it before you can spend it. You either have it or you don’t.
The long-term value of currencies is mainly determined by the relative rate of manufacture (debasement): Aboveground gold: 1.7% pa Paper currencies: 5% - 25% pa since 1982 ~15% p.a. 1.7% p.a.
The reasons for gold to go up are intensifying, not going away. Big picture: Gold goes up forever against paper currencies, at a rate roughly equal to the difference in their rates of debasement (on average). $1 million per ounce is only a matter of time. Gold price fell for 20 years to 2001 some catch up in store.
That’s an amazingly straight line for any market! Graph from Nick Laird at Sharelynx.com
Gold rose 20-fold 1968 – 1980, at 20% p.a. 20% interest rates in 1980 stopped money manufacture and inflation of the 1970’s. Paul Volcker Fed Chairman 1979 Volckers Fed elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (Wikipedia).
Gold is a currency. Most of the time, gold is a weak investment. Gold becomes a good investment only when the other currencies are failing, inflating, profligate, debasing, corrupt, …. Timing is everything
Assumes central banks stay in control. This is their best case. Main risks: 1. Deflation 2. Hyperinflation 3. Banking crisis Increasingly narrow path between the disasters of deflation and hyperinflation 4. Physical gold market blows up 5. Major war.
Debt strangles the world economy. Moribund industries and zombie banks, mired in debt. Society’s “pie” growing slower now, some groups lose social tensions Governments keep real interest rates low. High but tolerable inflation, a more intense version of the 1970s.
Debt-to-GDP Ratio Total US Credit Market Debt ("Bank Money") as a % of GDP Reversion to the mean debt level 400% 350% 300% The Age of Deleveraging, 2009 - 2028 ? 350% of GDP 150% 250% 200% Normally 150% 130 - 170% Reduction to 42% of current value 100% 50% 0% 1880 1900 1920 1940 1960 1980 2000 2020 How much inflation is required? Start 2014. 12% inflation (modern CPI : 5-8%). Interest rates of 6% (so real interest rate is negative 6%) 14 years reduces original debts to 42% of original real value 2028
Sign that inflation will end? Governments must halt the money manufacture: Raise interest rates sharply, to 15 - 20%. Cut spending severely, run surpluses.
Gold price will rise until interest rates rise rapidly to 15-20%, maybe around 2028. Rate of gold price rise might be: 11%+ pa — difference in debasement rates 5% pa — uncertainty over future of paper money 5%- pa — catch up for 20 years of falling gold prices Total: 21% pa Last 11 years: 21% pa 1970’s: 20% pa
Nominal prices in USD per ounce: 1980: $ 850 $3,300 in today’s money 2001: $ 260 Start growth of 21% p.a. 2012: $ 1,900 2015: $ 3,500 2020: $ 10,000 $4,600 in today’s money 2028: $ 50,000 $8,400 in today’s money
Gold price suffered in the banking crisis of 2008 because it was a tier 3 asset in the Basel formula. Gold only counted 50% towards their capital adequacy, so banks sold it to raise cash. Upcoming rule changes will likely see gold soon become a tier 1 asset, counting 100%.
Many believe that the western central banks have been putting downward pressure on the gold price since 1995, to: 1. Reduce the perception of inflation. 2. Reduce competition for their paper money. However, in a future with substantial money printing, central banks might encourage the gold price to rise. By selling their gold to the public, they soak up some of the newly printed money, reducing actual inflation. seekingalpha.com
Investment success: 60%: right sector at the right time 40%: choices within sector. Main gold investments: Gold bullion in your possession Gold bullion held by others Risk ▪ Perth Mint, Guardian Vaults, etc. and ▪ ETFs Leverage ▪ Not banks (paper money competes with gold) Gold mining and exploration companies Gold futures and options.
Security: Drawbacks: Secure, convenient ownership Company risks of companies via CHESS share Mining risks system (ASX only). Country risks Companies own mining rights Mining stocks do not to gold in the ground. necessarily track the gold price. Leverage: Gold in the ground typically $20 - $200 per ounce. Can buy more ounces more profit as gold price rises.
Ratio of gold stock prices to gold price is at a 30 year low: Why? Most investors afraid of 1930’s deflation, not inflation. “Gold in a bubble” story widely believed.
Started GoldNerds, to choose gold stocks. Compare all companies in sector, peer pricing. No recommendations. GoldNerds has the www.goldnerds.com information required to make informed decisions.
GoldNerds sells sophisticated spreadsheets for investors, comparing all 250 ASX gold stocks. Microsoft Excel spreadsheets (Windows only). Subscription New spreadsheet every two weeks.
Price dropped compared to peers for no apparent reason in April 2011. Later confirmed as a fund selling out. Recovered by Aug 2011.
Took over Allied Gold late June. Price dropped 40%. Cost of gold in the ground very low compared to peers, overdone?
Ever noticed that there are a lot more regulations around than there were, say, 20 years ago? So someone is doing more regulating. Government is gradually getting bigger, it is making more decisions for us, and we have less freedom.
The biggest political issue of our age. Echoes of the old communism vs capitalism fight, morphing into big vs bureaucracy vs the marketplace. This is having a major effect on the investment landscape.
Prefer big government. Wordsmiths. An intellectual University-educated. upper class of word users, Prefer government who regulate and (politics and coercion) to pontificate rather than the marketplace (voluntary produce real stuff. transactions). Arguably a class of parasites Prefer to pay themselves enriching themselves at the what they think they are expense of producers. worth, out of tax revenues. The rest of us are under Core belief: they are the discipline of the superior to the rest of us marketplace. Smarter More moral (e.g. less racist). Dislike capitalism. Justifies less democracy, more decisions by them.
Bigger government more business and social welfare more dependency on government. In Europe, a bureaucratic super-state is replacing national democratic governments: Most government decisions made in Brussels bureaucracy. Lisbon treaty: referendums overridden. Greece and Italy ruled by appointees. MSM sympathetic: Most journalists identify with the regulating class. Regulating class threatens media with more regulation.
Keynes was a socialist in the 1930s whose economic theories were used to justify Artificially low interest rates Large-scale government intervention in the economy Distribution of newly-printed money by government. Keynes’ ideas were considered crackpot before the 1930s: Problem of high debt/money levels solved by more of same?? Counterfeiting by government is the solution?? Really? Distorts economy with appearance, but not reality, of cheap capital. Transfers value from savers to recipients of government largesse. Keynesianism is poor in the long run.
Why is this theory soimportant to the regulatingclass?1. To regulate CO2 emissions is to control energy use throughout the economy.2. To regulate CO2 worldwide requires being able to regulate every economy. Axel Rouvin
All the world’s leaders met, to Power would be parlayed up sign the Copenhagen Treaty. into strong global bureaucracy China refused, citing affecting more than uncertainties in the science. emissions. On the Internet. Media almost entirely silent 181 pages of dense about the treaty and loss of bureaucratic language. national sovereignty. Narrowly-averted silent coup A UN bureaucracy would by the regulating class. regulate CO2 worldwide. Over-ride national government Climate “science” is clearly as required. flawed, just an excuse. It could tax and fine any signatory government. No democracy or elections.
Macroeconomics and Climate Science: Governments (and their allies the banks) Fund university departments. Are the main employer and ultimate provider of lucrative consulting jobs. Only hire like minded people. "We are all Keynesians now“, R. Nixon 1971 Cannot get a PhD without believing and being trained in the theory. SkepticalScience.com All certified “experts” believe in the theory.
Artificially low and near-zero interest rates will hurt savers and retirees for years. Excuse to promote their agenda: More bureaucrats running more of the economy Higher taxation Less democracy, increasingly global bureaucracy. Lower growth, lower investment returns Ultimate Keynesian solution to any crisis: PRINT.
If you oppose the regulating class, you get called: “extremist” “nut” “conspiracy theorist” every version of “stupid” and “ignorant” The names mean nothing, except they want to shut you up. If they’re not calling you names, you’re not over the target.
Scares most people into submission. Name-calling only works because the media is on their side, framing the public discussion. They don’t debate, just denigrate their opponents. They always get last word.
Western public was 20% climate- skeptical in 2008, now 50%. Internet trumps the mainstream media – it just takes a while. Suppressed data (not shown by MSM) gets through. Precedent: Printing press broke church’s monopoly on “truth”.
Chairman of the UN’s IPCC, Rajendra Pachauri Head of the IMF, Christine LagardeThe President of the The regulating class don’t like:European Council,Herman Van Rompuy The private sector People who make real stuff Capitalism.Freedom fromthe demands of a Bleak mainstream investingnew hostile ruling class. outlook. Bet against government Buy gold!