Gold: Keep your insurance policy!

Wednesday, April 17, 2013 // Written by Enzio von Pfeil

In our  previous blog on gold, "In gold we trust" (6th December 2012), I obviously could  not foresee Monday's plunge.  Despite being wrong,  I did note some reasons why gold is  "must have" insurance for you:

In all likelihood, the Fed will maintain its asset-buying programme worth $85bn/month. Traditionally, when the Fed buys assets, gold has gone up, and

the markets will be hugely disappointed: brainwashed into believing in "bazooka solutions", they will find out that just like Europe's politicians have no vested interest in solving the Neuro-crises, America's don't want to solve the fiscal cliff at all. Instead, both sets of politicians just tell the respective Central Banks to print more money....Thus, gold seems to be a sensible investment against this backdrop of bankrupt democracies.

I stick with this view.  Central Banks have become fig leaves for politicians who refuse to attack their country's structural problems. Instead, these politicians glibly  refer their voters to the cheap money that they have told their  Central Banks to  print. 

So much for yesteryear's "independent" Central Banks.  Indeed, the newer answer to "who invented the printing press?" is not goldsmith Johannes Gensfleisch zur Laden zum Gutenberg (1395-1468) , but Messrs Haruhiko Kuroda, Ben Bernanke and Mario Draghi !

 I cannot foresee politicians allowing these printers letting-up their presses.  Therefore, I cannot foresee currencies remaining that purported "store of value". Instead, what we  can foresee is that these printers are debasing their currencies -  as well as stoking that fire of inflation. Already, we detect billows of smoke... 

So, where do you turn once your currency has become nothing more than printed paper? Hard assets, of course. Obviously, gold is one such asset, hence it must be in your portfolio. NOt as an "investment", BUT as an insurance policy.

Now to Monday's sell-off drama - resulting in gold's most violent two-day convulsion  since 1983.  .I am not a buyer of "the market's" reasoning.  Were you to believe Tuesday's Financial Times headline, gold was dumped because "investors" are getting more relaxed about the global economy.  Apparently

  1. the neuro-zone's debt crises are receding, and
  2. the US economy is recovering strongly, and

Wrong, and wrong again!

Particularly the Neuro's problems are worsening: Portugal,  Greece, and Cyprus  just have been foreplay. Now the main drama begins:for some months, my French friends have been hinting that their country is the next in the queue, along, of course, with Spain.  And don't think that any economic cycle, including my Economic Clock, are going to haul these countries out of their recessions: Europe is plagued with "structural slumps" - caused by politicians promising lifelong welfare, knowing that they themselves will leave office in four years - often in order to cash-in on lucrative offers from the private sector.  Thus, I cannot see the Eurozone's debt crises receding: how can they, given that the economies have been asphyxiated by viral welfare expectations of the public at large?  Indeed, other market participants dumped gold precisely because they feared that some of the Euro's national central banks would have to sell their gold holdings as a "fire sale". So there is a contradiction in thought: the Euro's crises are receding - but markets fear that some of its central banks will have to raise cash by dumping their own gold holdings.... Does not make sense to me, at least.

Now to America, where I remain  a sober optimist because her  "Economic Time" keeps improving. This is occurring because America still has an economic cycle: contrary to Europe, the welfare state has not choked the Americans' basic "can do" attitude.  However, I also have suggested that her economic cycles will be less violent/pronounced than in the past.  This means that America's economy is recovering - but gingerly.  .

What we are left with, then, is that the basic reasons for having gold as an insurance policy have not tottered:

  1. the G-3's Central Banks have replaced Gutenberg's printing press, thereby debasing currencies and fanning inflation;
  2.  the sickly Euro members' problems are not receding; instead, the action is about to begin once France and Spain wilt, and
  3. America's Economic Time keeps improving - but not dramatically.

Thus, any reasons to sell your insurance policy seem less valid in the cold light of day.

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