The Return of the Gold Standard?
Recently
by Peter Schiff: Supreme
Errors
In my latest
book, The
Real Crash: America’s Coming Bankruptcy – How to Save Yourself
and Your Country, I devote a full chapter to the merits
of the historical gold standard and reasons to reinstate it. What
I did not mention and few investors notice is that central banks
are already returning to gold as the ultimate safe haven asset.
I believe this
change in policy, combined with continued inflation of Western currencies,
is creating a stable floor for the gold price and an even brighter
upside potential.
A Strategic
Shift
The return
to gold is unmistakably the product of a strategic, not merely a
tactical, shift in global central banking policy. Central banks
in the developed world have now altogether stopped selling bullion.
This was foreshadowed by their behavior over the past decade, when
they sold even less gold than they were permitted to under the anti-dumping
Central Bank Gold Agreements. Clearly the concern about dumping
gold was out of step with the trend. But more importantly, central
banks in the emerging markets have been buying gold by the truckload.
Since the financial
crisis of ’08, nations as diverse as Mexico, the Philippines, Thailand,
Kazakhstan, Turkey, Ukraine, Russia, Saudi Arabia, and India have
led the way back to gold as a primary reserve asset. Russia alone
has added an impressive 400 tonnes of bullion to its reserves, most
of it coming from domestic purchases. Mexico has added over 120
tonnes, including 78 tonnes from one mega-purchase in March 2011.
The Philippines have bought over 60 tonnes, with 32 tonnes coming
in as recently as March 2012. Thailand has added approximately 60
tonnes, and Kazakhstan just shy of 30 tonnes. Turkey amended its
regulatory policy late last year to allow commercial banks to count
gold towards their reserve requirements, adding over 120 tonnes
to its official reserves. And bullion imports into mainland China
through Hong Kong have been reaching all-time highs.
Finally, loyal
US allies Saudi Arabia and India, in what is sure to leave particularly
bitter taste in Washington’s mouth, have been adding gold to their
reserves by the hundreds of tonnes.
In short, the
governments of emerging markets recognize that the global monetary
order is on the verge of a reset. These emerging markets are the
economic engines of the 21st century, and they’re determined not
to be undermined by Western fiat paper.
Taking the
Long View
The depth of
this new strategy has been on display throughout the precious metals
correction of the past few months. Emerging market central banks
have continued to be aggressive buyers. This is very bullish. As
governmental actors, central banks seek out stability and predictability.
When they shift course, they do so only deliberately and gradually,
much like aircraft carriers. Western central banks have set a clear
course toward inflation, while emerging market banks are shifting
toward sound money.
The implications
here are enormous for private investors. We now see the biggest
market participants buying the yellow metal massively on the dips.
What’s more, because central banks enjoy substantial clout in the
gold market, their purchasing decisions have an outsized effect
on price. Institutional investors are coming to once again see precious
metals as a ‘legitimate’ form of investment. It is this positive
feedback loop that will serve to stabilize gold as it re-emerges
as a reserve asset.
It’s Still
The One
Gold remains
the bedrock of reserve holdings at central banks, even in a world
dominated by fiat currencies. Apparently, when it comes to a paper-based
global monetary system, it’s easier to talk the talk than walk the
walk. Government officials the world over, but especially in the
developed world, have been quick to call gold an anachronism –
unsuitable for a modern, globalized economy. But these same governments
have never found it in themselves to sell off their holdings, or
for that matter, to surrender even a substantial fraction of them.
Those who have clamored the loudest have, in fact, behaved the most
conservatively.
The US, which
has a whopping 75 percent of its reserve holdings in gold, and the
Western European countries, which have an average of approximately
64 percent of their reserve holdings in gold, seem to believe no
one should own gold – except them! It shouldn’t surprise anyone
that emerging market central banks have spotted the double standard.
As they advance economically, these nations are less likely to do
what Washington tells them is right and more likely to think for
themselves. And with an average of less than 20 percent of their
reserve holdings in gold, they clearly know they have some catching
up to do.
Behind the
smoke and mirrors then, central banks in the developed world are
hoarders. Central banks in the emerging markets are scramblers.
Significantly, nobody is selling, only buying.
The Fiat
Fantasy Meets Reality
What is causing
the rush back to gold? Two words: excess debt. Independent central
banking has always been more of a dream than a reality. Politicians
knew from the beginning that they could run up the tab and then
corner central bankers into bailing them out via inflation, AKA
stealth default. Regrettably, central bankers have dutifully obliged
– no one, for example, has yet resigned in protest. Only a
few have ever defied their governments, and only for short periods.
Of course,
governments throughout history have created the conditions for their
own collapse by tampering with their money supply to pay debts.
Undermining the currency means undermining the entire economy, which
lowers tax receipts and creates more debt. Soon, the unintended
consequences of the policy overwhelm its intended consequences,
and the state collapses – along with the jobs of those central
bankers. Committed, nonetheless, the central bankers are.
Valuation
Insurance
Against this
historical cycle, the best insurance policy is physical gold. Those
with the most of it will best weather the coming rounds of competitive
devaluation. No wonder that central banks in the emerging markets
are scrambling to play catch up to their developed-world counterparts.
How much gold
will central banks stockpile? We cannot and do not know for sure.
What we can and do know for sure is that they have prudently decided
on a strategic shift in policy. This is creating a floor for the
price of gold and a brighter future ahead for those who are prepared
for the return of sound money.
July
6, 2012
Peter
Schiff CEO of Euro Pacific
Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. He is author
of The
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse. His
latest book is The
Real Crash: America’s Coming Bankruptcy, How to Save Yourself and
Your Country.
Copyright
© 2012 Euro Pacific Precious
Metals