I found the following blog post from Peter Schiff & interview with Jim Grant interesting: http://blog.europacmetals.com/2013/05/jim-grant-gold-is-a-bet-against-fiat-money/ It would be interesting to hear of opinions on what folks think - are fiat currencies headed for the gurgler, and if so, when?
I have to say that I don't see gold as a hedge against fiatmoney because those that invented and produced fiatmoney, stored tenthousands tonnes gold some 50 years ago, which they gradually sold off with as sole exception post 2008 when crisis. Instead they bought some, as to make it more expensive so inflict you less gold. And then, due to crisis, we come, buying gold at that higher price. It's obvious that everytime we buy the gold price up, that they gonna dump again some tonnes, until we're all in the red. The first example during the crisis that this happened were the IMF purchase of 191 ton in 2008 and its sale in 2010. Repeat that joke enough times, and the one that thought to hedge against their inflation suffered the inflation loss of a couple decades in a few years. It's not the metal that preserves your buying power, it's your own buying&selling decisions. All those that talk about 'gold is money', 'gold is a perfect hedge', and so on, well, sorry for the words, but that is just thick bullshit. Because it's not only the product that matters but also the price. Those that seem to find the price irrelevant are those that make a profit at your expense.
Quite right. The reality is that there is simply not enough gold in the world to back all the currencies or, for that matter, even the USA alone. A rough and ready calc says there is about 5-6 trillion dollars worth globally. By comparison, World War 1 cost about 26 trillion dollars. If every person on the planet started to hoard, they would have about half an ounce each. Fiat is backed by commerce, trade and commodities (production if you will). And yes, it is in the form of an IOU but one that most of us accept regardless.
"The reality is that there is simply not enough gold in the world to back all the currencies or, for that matter, even the USA alone." It would have to be revalued to 'about' US$12,000 per ounce. And I expect that just so long as the Reserve Currency is backed by gold, it would be enough. OC
Goanna, I'll follow on from OC's comment - we can also back currency with silver, assuming you have a fixed gold to silver ratio price wise. Also, if we're going to see a fiat currency collapse and replacement of the fiat with a "new" currency, this would also automatically revalue all PM's to the new "denomination", wouldn't it? And thus make a revaluation both easy, and logical/expected? Old Codger - I hear what you're saying about backing just the reserve currency (presumably, the way I read that, excluding all others) - but I don't think that would work... it would make the non-backed currencies "worthless" (nearly). I forsee if we're going to back currency with gold, it must be done for all currencies.
When a runaway deflation shock (perhaps caused by the cessation of QE) ripples through the economy, all productive & profitable enterprise ceases to be productive & profitable. Governments when faced with this consequential complete and utter social collapse initiate emergency stimulus programs and put the printing presses into overdrive. As the high volume of stimulus currency moves through the public's hands, it couples with the bank's already overloaded balance sheets. With no productive back bone to hold up & justify this mass of money, this excess liquidity is quickly 'priced in'. It is the beginning of an orgy of cheap money and hyperinflation that is only exasperating the social pressures that have jolted the government into (over) reacting. The stimulus tap can not be turned off. Those who wait a few days to spend their wage are punished by price increases on basic needs & wants. The velocity of currency increases to a point that nobody wants to store & hold their wealth in fiat. Old wealth locked away in once conservative term deposits, that justifies masses of loans on bank balance sheets is pulled quietly from the system and 'invested' in yet more conservative ways. Banks become over leveraged and soon also 'bankrupt'. As soon as the deflation reversed in this process Precious Metals began to do their 'thing'. They begin to build value against most if not all other inflating asset classes, fulfilling their role as a safe haven for wealth. Eventually, without any improvements in the economy at large, the public race toward the exits of the fiat system throwing as much of their worthless depreciating fiat as possible at those few who are willing to trade metal. Ultimately all the globes circulating fiat is trying to fit on a small silhouette cast by the small foot print of available gold. In theory at this point in time the worlds available gold could be divided by the globes money supply and this will give you a peak value for gold in this shit hits the fan scenario. And who knows after all is said and done and the public that has survived such a financial decimation, they may demand of their politicians that any future reissued currency be backed by gold so as to keep the power of money in the public's hands and not in the untrusted central banks. This would only preserve it's value.
Loosely speaking, fiat currency is backed by its issuing country's GDP. GDP goes south, so does the currency.
Hi Matthew - as GDP unlike the previous measure GNP is a poor measure of economic growth as money printing increases GDP. GDP also includes all the non -productive government jobs and government spending on BS schemes. So these days of manipulated figures, like CPI - U which is no longer a measure of inflation but a metric used to estimate cost of living adjustments for social security, these figures like GDP and CPI mean nothing. Thus today currencies will decline despite a rise in GDP. Just my opinion - but I know what you mean and if our politicians were honest you would be right but they massage and manipulate figures so they no longer measure what you think they should measure. cheers
MM, "it would make the non-backed currencies "worthless" (nearly). I forsee if we're going to back currency with gold, it must be done for all currencies." My idea is that the Reserve Currency, possibly the Yuan, would be fully backed PMs, and all the other currencies would be linked via an exchange rate, much like today. I doubt that there IS enough gold to back ALL currencies (at any price) and only a few countries actually hold enough to do the job anyway. Gold producing countries would have a huge advantage over non producers. ...and i firmly believe that the US does NOT hold 8500 tons of gold in Fort Knox, if they did they would trump the 'stock takers' by proving it! I am sure it has been flogged off! And i am sure that China has a LOT more gold than they are letting on, by the 1000s of tons. JMO OC
Ah, I see That makes sense - I had originally envisioned just one currency being backed, with floating exchange rates, and immediately thought "You watch what'll happen to anything unbacked". But a fixed exchange rate would make more sense. And, I hear you on the Fort Knox/USA gold holdings - my opinion is also that most of it isn't there any more, leased out, perhaps, and not going to return home. One thought I do have though - you could still decide to back all currencies with precious metals (I'm including silver here, if you fix the price at 16 Ag to 1 Au), but it'll require either a great reduction in the amount of currency available (reasonable to a degree, but perhaps too extreme a reduction) - the other side of the coin is that you revalue gold & silver overnight. Obviously, both would have to increase substantially - the remaining question would be, would there be a confiscation prior to this re-evaluation? If so, would it matter to a stacker provided they'll be compensated in "new" backed dollars?
