Today I would like to tell you why I think gold will start to attract investor interest, and what could drive it higher.

Disclaimer and Risk Warnings

I am not your investment advisor. You must seek independent advice from a suitably qualified professional who can advise you on the suitability of any investment in the context of your own personal investment situation. Never invest money where you cannot afford to lose some or all of it.

Before you invest in anything, weigh up the odds of gain or loss carefully. Consider all the angles. Ask “What could go wrong”.

Remember, the value of investments may fall as well as rise, and you may not get back the amount you started with.

Consider the counter-party risk. Who are you dealing with? Is your bank or broker trustworthy? Do they have premises you can visit? Can you speak to a human being? Do they answer emails? How long have they been in existence? What’s their reputation like? Are they licensed to do business? Are they properly regulated by a government agency that you trust. How big is the firm? What does Google say about your counter-party?

Confidence in paper money is only ephemeral

On average paper currencies last 20 to 30 years before they have to be replaced. The old currency is often abandoned in a time of crisis. It is replaced by a new currency which carries the promise that it will be sounder than the old one. Causes of a currency reset can include war, civil war, political turmoil, plague, overspending, loss of confidence, counterfeiting, inflation, depression, financial panics, and bankruptcy of the rulers or government. As the end of a currency approaches, the wise and informed start to try to exchange their domestic currency for other things, like foreign currencies, gold, stocks, property, land, commodities, food, and even works of art. Anything in limited supply or with an intrinsic use (e.g. a cow), is seen as more attractive than holding onto a currency which is going down the plug-hole.

The few survivor currencies have lost most of their value.

Whilst a few currencies have existed for over 100 years, most don’t survive nearly that long. Even the survivor currencies are worth a mere fraction of 100 years ago. 80%, 90% or 99% of their former value has evaporated.

Take the supposedly “strongest currency” in the world, the US Dollar. A soft drink which used to cost 1 cent now costs 80 cents or more.

100 years ago you could have swapped $20 for an ounce of gold at every and any bank in America. Today you would need 80 times as much ($1600) to buy one ounce of gold. Did gold become scarcer? No. It’s the amount of money relative to the amount of gold that inflated. Today $20 will only buy you 1.25% of the gold it used to. The dollar has already lost 98.5% of its value. How long before the last 1.25% is gone? I say it will vanish in the next major crisis.

Great Britain and its mighty pound are not so mighty.

The value of the once mighty British pound has declined even more than the dollar. In 1900, a pint of beer would have cost you threepence. Today you’d be lucky to pay less than 4 quid. Let’s not forget that there used to be 240 pennies in a pound. That makes a pint of beer 320 times as expensive than it used to be. An ounce of gold was £8. Today it’s £1200 or 150 times as expensive. A typical three bedroomed victorian terraced house in Wood Green, a distant suburb of London would have sold for around £100 in 1900. Today the same houses are on sale for over £500’000 or five thousand times as much. No matter which measure you take, the only conclusion is the the British pound has lost over 99% of its former value. When will the next crisis erode the last 1%?

Europe

I won’t go on about Europe. The present currency is barely 20 years old, and the different nations are bickering about who has to pay for the profligate spending of the others. Before the euro existed, most European currencies had had short lives. Currencies were being reset, sometimes multiple times. If you doubt what I say, visit any notaphilist or scripophilist and ask to look at their defunct bank-note collection. Look how many zeros there are on some of the notes. As currencies devalued, countries printed new higher denomination bank notes with more and more zeros, until the time came to start again.

The next currency reset isn’t far away.

You have to blind not to see that we are at the eleventh hour. It’s only a question of time.

The case for a reset is compelling. It will be of immense benefit to mankind, leading to global economic prosperity which will be greater even than the wealth created by the post-war Marshall Plan. I won’t go into why such prosperity will be created, nor how the next global currency reset will look. That would be the subject of a much larger article. Suffice it to say, there compelling reasons why a currency reset will benefit mankind, and few reasons not to start again.

Winners and Losers

Every currency reset is different. However some things never change.

The losers are the bag-holders who hold the old currency, or nominal assets like deposits, bonds or debts in the now defunct currency. They are left holding a legacy asset that they can’t spend and which nobody wants.

Winners generally hold tangible or useful assets, (like a farm), which tend to hold their relative value no matter what happens to the currency.

Currency Reset Plans.

Central banks know that we are at ten minutes to midnight when it comes to survival of the major western currencies. They all have their contingency plans. They are fine-tuning the arrangements to make the currency reset as painless as possible. I won’t go into details about the plans. They are supposed to be “secret”. In any case, the plans vary by country and have several versions to deal with a variety of potential scenarios.

Bretton Woods

Since the Bretton Woods agreement of 1944 the world has effectively come off the gold standard and onto a dollar standard. This has been of great benefit to the United States, since it has allowed them the freedom to print almost unlimited amounts of dollars and pass them to willing takers all around the world. For the time being, no currency needs to be backed by gold. Before 1944 currencies were “backed” by gold.

The next Currency Reset is likely to be Global

When the first major country resets, other countries will have no choice bit to follow in quick succession. It won’t happen in isolation. One person in the cinema shouts “fire” and runs for the exit. Everyone runs.

Central banks are quietly buying Gold

Whether or not gold will play any role in a new monetary system is a moot question. Either way, central banks will need to reassure their population that the new currency will not go the same way as the old one. Holding lots of gold will go some way to reassuring the population that the new currency has substance. The more gold a central bank holds, the stronger it will be when fiat goes up in smoke. This is why we are seeing strong central bank buying at the moment.

How are The Central Banks acquiring their Gold?

Mostly they are buying at the twice daily London Fix. I dare not call that a “rigged” market. Suffice it to say, there are a number of things which can be done (especially if you are a central bank) which will allow you to buy gold without moving the market, and at a generally lower price than if you went to any other market including COMEX. If you or I were to do such things we would be jailed for price manipulation. Days after Barclays was fined for manipulating the LIBOR benchmark, another trader from the same bank was red-handedly manipulating the London Gold price fixing to benefit his bank at the expense of a major customer. It happens.

Central banks are trying to quietly increase their gold holding in order to have their say in the new monetary order.

Central Banks vs the Gold Miners

Gold miners are no fools. They like to sell at the top of the market. They are really grateful that the Central banks are mopping up gold on a daily basis pushing the price ever higher. Gold miners also sell through the London gold fixing, via their bullion banks. The London Gold Fix is a competition between Central Banks and miners. The Central banks want to buy as much as possible at the lowest possible price whilst the miners want to get the highest possible price. The competition to outwit the other side is fierce. Miners will have a range of prices and are willing to sell more at the higher prices. It is important for the miners to be able to tell shareholders how smart they were by selling some gold at the “top”, if indeed todays price turns out to be the peak. If today is not the peak, then they will sell a bit more tomorrow.

Gold miners are selling gold which is still in the Ground.

Gold miners are not selling the newly mined gold. They sold that years ago. Now they are selling gold which will be mined several years in the future. That’s fine as long as they still have some cash to stump up the margin on the gold they borrowed.

When the gold miners are close to getting margin calls they raise cash.

Look out for bond issues by gold mining companies. When that happens it means they are getting strapped for cash. A margin call could be imminent.

Why gold?

The merits of gold as an alternative asset, as a form of portfolio insurance, and as an alternative to cash are documented everywhere. The current economic backdrop of falling interest rates and more money printing is starting to renew investor interest. The thing which could really get gold going is when the gold miners are exhausted, when they daren’t sell any more. By borrowing gold to sell now, they have to put up cash collateral. Every time the gold price goes up the haver to put up more collateral. They wont be able to dig up the gold for some years. They have their limits. With a gradually rising gold price, it looks to me like the gold miners are starting to run out of gold to sell. Who knows what would happen if one of them gets a margin call he can’t meet.