Addictive though the hacking inquiry is, the average Brit is probably more worried about
the slow decimation of his spending power at a time when salaries are flat. Against this backdrop, the price of gold today has broken $1,600 an ounce. With inflation and the Fed’s printing
presses whirring, faith in paper money is taking a knock – and this is reflected in the price of gold. Fears of a debt crisis in Europe add to it too, with a disaster scenario all too
easy to imagine. Over the last decade, the West blew a bubble fuelled by low interest rates and debt-financed consumption. The bubble burst. Solution: even lower interest rates, and even more
debt-financed consumption – but this time, with added inflation. If there is a crash again, and interest rates are already at rock bottom, governments’ only tool will be the printing press.
Today’s Wall St Journal Europe has an interview with James Grant, who has been warning about this for some time and calling for a return to the gold standard – and he has been dismissed as a lunatic for so doing. Since our combined economic geniuses missed the last crash, I have felt there’s a case for listening a little bit more carefully to dissenting voices. This is what he has to say about the “fiat” banknote:
“It is one of the world’s astounding monetary creations. That a currency of no intrinsic value is accepted as money the world over is an achievement that no monetary economist up until not so many decades ago could have imagined. It’ll be 40 years next month that the dollar has been purely faith-based. I don’t believe for a moment it’s destined to go on much longer. I think the existing monetary arrangements are so precarious, so ill-founded and so destructive of the economic activity they are supposed to support and nurture, that they will be replaced by something better.”
But perhaps the most eloquent comment on all of this came in a letter in today’s Times from Dr John Doherty:
“Sir, Gordon Brown complains that Civil Service advice prevented him from initiating a hacking inquiry when he was Chancellor, civil servants advised him not to sell our gold reserves. He crushed all opposition to sell 400 tonnes of gold at $275 an ounce. The price today is more than $1,500”
As the chart below (from the Forex Gold index) proves, the price has now risen to a record $1,600 an ounce:
Like the hacking scandal, it would be a brave man who can tell where this will all end. But the stakes are infinitely higher.
In his editorial for tomorrow’s CityAM, he goes on to say:
“What a farce. The tests’ preposterous lack of credibility – they didn’t even envisage the possibility that a government could go bust – have been greeted with the contempt they deserved. The key problem is that if markets don’t know what will happen to smaller, less well-managed financial institutions in the event of a sovereign default, then they will be less likely to lend to them or engage in other sorts of relationships. Perceived counterparty risk, as it is called, will intensify – and these less transparent firms will soon start running out of cash, potentially triggering a liquidity crisis. The amount of credit available to troubled economies will dry up, assuming that bigger, more obviously well-capitalised banks are unable to step in and fill the liquidity void.”
PPS: Merryn Somerset Webb gives her take on gold here http://bit.ly/pUOi6H
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