Can Gold Save The World From The Credit Bubble?

In a financial world of contradictions, chaos, and confusion, perhaps a “gold-centric” perspective will provide clarity.

The media is filled with comments from notable “gold-bashers” such as Benjamin Bernanke, Warren Buffett, and Bill Gates. Their criticisms of gold (in my opinion) boil down to:

Gold has no real value – you can’t eat it or do much with it except make jewelry. It is a barbarous relic etc.
Gold makes no sense. Why dig it from the ground, refine it, and then lock it in a vault where it sits producing nothing?
Gold prices are volatile.
Gold is an unsafe investment.
Gold pays no interest.
101 more criticisms of the oldest money in the world.

However, if the “gold-bashers” were correct then why are the following true?

1. “Wealthy Hindu temples such as this one are repositories for much of the $1 Trillion US worth of privately help gold in India – about 22,000 tons, according to an estimate from the World Gold Council.” The temples have accumulated 1 $Trillion worth of gold, but “gold bashers” claim it has no real value. I think gold has value.

2. “Prime Minister (India) Narendra Modi’s government is looking to monetize India’s vast hidden wealth…The gold, officials said, would be melted down and sold to jewelers.” If gold has no real value, but jewelers want it, and the government wants to monetize (sell) it and convert real gold to fiat currency to support the government, then the “logic” escapes me.

3. “El Salvador’s central bank sold about 80% of its gold reserves last month to diversify risk and take advantage of the metal’s appreciation, a central bank official said on Friday.” Really? Gold in dollar terms is down 40% and the central bank wants to take advantage of the metal’s appreciation. They sold gold and converted it to fiat currency to diversify risk. I doubt it. They need the cash and the gold is valuable or there would have been no buyer.

4. Greece and their financial troubles: “… upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal.” In summary, print euros, lend them to Greece, take Greece’s gold upon default, and the result is the euros are spent, Greece’s gold is gone, and the lenders possess real gold, not digital euros. What a simple and brilliant plan to convert paper into gold! If gold is so useless why demand Greece’s gold?

We can find many other examples of the real value of gold and the global recognition of such. Ask yourself:

What happened to Libya’s gold after the bombing and NATO invasion?
What happened to Iraq’s gold after the US invasion?
What happened to the Ukraine gold after the revolution in 2014?
What happened to Kuwait’s gold after Iraq invaded in 1990?
Why has China purchased many thousands of tons of gold in the past 5 years?
Why has Russia substantially increased their gold reserves?
If gold has so little value and use, why was Fort Knox built?

It has been reported that global debt is about $200 Trillion. Central banks supposedly hold about 30,000 tons of gold. If the total debt were backed by central bank gold at 40%, that would price gold about $80,000 per ounce.

In the US, the official gold reserve, which has not been audited in about 60 years, is about 8,200 tons. Official national debt is about $18 Trillion. If the official gold backed the debt at 100%, the price of gold would be about $70,000 per ounce.

Interest rates are at multi-generational lows. It has been reported that over $5 Trillion in sovereign debt “pays” negative interest. German 10 year debt pays less than 0.20% per year. Some European mortgages have negative amortization. Clearly credit, debt and currency bubbles have been created. All bubbles eventually pop, often with disastrous results.

The credit bubble has grown so large that the supposed central bank gold would have to be valued at $40,000 to $80,000 per ounce to back all the debt. Revaluing gold higher by a large factor may become necessary in the future to reestablish confidence in currencies. However a revaluation certainly will not be welcomed by central banks, governments, or most individuals. The transition to $80,000 gold, or even $10,000 gold, would be very traumatic.

But can the world increase debt forever, inflate the sovereign debt and global credit bubbles even further, and not create an equally disastrous hyperinflation or a severe deflationary depression? Something is likely to break.

Governments and central banks created the credit and currency bubbles. When fiat currencies crash in the next crisis, backing currencies with gold could “save the world” and restore confidence in fiat currencies but only after significant trauma.

Perhaps central banks will do the “right thing,” but only after they have exhausted all other alternatives. It will be a long and difficult wait.

Gary Christenson | The Deviant Investor