Gold no longer has a legal role in the world’s monetary system, but because of a collapse of faith in sovereign obligations – fiat currencies/paper money – and a coming complete lack of trust in governments and financial institutions, gold is going to quickly become a core banking asset.
So why do I believe gold is going to become a core banking asset, what exactly does gold have going for it to make this possible?
"Gold, measured out, became money. Gold's beauty, scarcity, unique density and the ease by which it could be melted, formed, and measured made it a natural trading medium. Gold gave rise to the concept of money itself: portable, private, and permanent.” A brief History of Gold, onlygold.com
“The history of reserve currencies reveals that the position of a country as a superpower (whose currency acts as a reserve currency) tends to rotate in a natural cycle of around 100 years. Will history repeat? From 1450 to 1530 it was Portuguese (80 years). From 1530 to 1640 (110 years) it was Spanish. From 1640 to 1720 (80 years) it was Dutch. From 1720 to 1815 (95 years) it was French. From 1815 to 1920 (105 years) it was British. And then the US dollar gradually dominated the scene….” Richard Russell
A Fiscal Cliff
“Gold has firmly established itself as a portfolio asset. Investors are not likely to abandon it…Gold is the only insurance available to protect one from the fiscal cliff set to cause the U.S. economy to fall into recession in January.” Gold Thoughts, Ned W. Schmidt
Increases in taxes and reductions in spending, the infamous $600 billion “fiscal cliff” that’s looming in the new year, will reduce the US federal budget deficit by 4%-5.1% of gross domestic product (GDP).
The US Congressional Budget Office (CBO) analyzed two different scenarios if the fiscal cliff was left in place:
- As measured by fiscal year - the combination of policies under current law will reduce the federal budget deficit by $607 billion, or 4.0% of gross domestic product (GDP), between fiscal years 2012 and 2013. The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. With that economic feedback incorporated, the deficit will drop by $560 billion between fiscal years 2012 and 2013.
- If measured for calendar years 2012 and 2013, the amount of fiscal restraint is even larger. Most of the policy changes that reduce the deficit are scheduled to take effect at the beginning of calendar year 2013, so budget figures for fiscal year 2013 – which begins in October 2012 – reflect only about three-quarters of the effects of those policies on an annual basis. According to CBO’s estimates, the tax and spending policies that will be in effect under current law will reduce the federal budget deficit by 5.1% of GDP between calendar years 2012 and 2013 (with the resulting economic feedback included, the reduction will be smaller).
Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5%, CBO expects – with the economy projected to contract at an annual rate of 1.3% in the first half of the year and expand at an annual rate of 2.3% in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.
Safe Haven/Preservation of Purchasing power
Institutional investors tend to prefer investments that are thought to contain the potential for growth: growth = sprouts. An investment has to produce a growing revenue stream – if it doesn’t grow it doesn’t compound. Gold is rejected as an investment because it doesn’t produce sprouts, meaning the steady income and systematic growth so sought after by institutional investors just isn’t there.
Gold performs two jobs that fiat currencies, or any other financial innovation, cannot do; gold acts as a safe haven in times of turmoil – to escape Nazi Germany, or buy food and water in a crisis. Perhaps even more important gold preserves your purchasing power. In 1913 (the year the US Federal Reserve was born) the US dollar was, well, a dollar and gold was US$20 an ounce. Today, at almost the 100-year anniversary of the Fed the dollar has lost over 95% of its purchasing power and gold is almost $1,800.00 an ounce.