You Can Print Money as Much as You Like, but You Can't Print Gold


"For years, institutions like the Federal Reserve and most central bankers have publicly stated that gold is effectively an irrelevance—yet they continue to hold huge amounts of it."

money printing

A quote from a Swiss gold refiner/trader puts the case for gold as sound money very succinctly and coupled with the suggestion that it is a Giffen good, bodes well for further price rises.

The title of this article is very much a truism that says much about the position gold has held as an international standard for many centuries and why, ultimately, it will hold its position as the monetary yardstick against which all global currencies in this fiat money world will ultimately be measured, and fail to pass muster. Indeed, if some far cleverer analysts and economists than I are to be listened to, these currencies will collapse into a morass of hyperinflation unless the money printing can somehow be brought under control. With QE to infinity policies currently in place in most of the world's key financial blocs, the likelihood of such controls coming into place before at least one major currency does collapse is becoming more and more remote. And if one does collapse, the dominoes could rapidly start to fall, plunging the world into financial Armageddon where the middle classes in particular will have their wealth totally destroyed. One sincerely hopes that somehow this doomsday scenario can be avoided, but it's as well to be prepared just in case.

I am indebted to an article on Swiss dominance in global gold refining on website for the quote used in the title—(from Frédéric Panizzutti, spokesman for MKS SA, a Swiss company, which specializes in gold trading and which owns the Pamp gold refinery). Interestingly, Switzerland is a nation that is not among the principal money printing areas of the world, although by recently tying its currency to the euro it is increasingly losing control over its financial destiny, potentially eroding many years of Swiss financial propriety. It has been finding that the strength of the Swiss franc from these years has been a limiting factor on its exports, but many feel that its attempts to keep its currency parity stable (or debasing it as some would say) to aid its competitiveness in its biggest export market will prove impossible to maintain long term.

So, while it is possible to continue churning out additional paper money, seemingly ad infinitum, the global gold stock can only grow by a few small percentage points a year which, in the days when currencies were tied to gold, gave them a huge degree of stability. Nowadays, continual expansion of the money supply, with no backing, has ultimately to be inflationary—and the more the money supply is expanded, by whatever means, the more likely is it that this inflation will turn into hyperinflation.

What the commentators who say that gold is in a bubble and hugely overpriced do not take into account is that gold may not really have risen much in value at all—but is primarily reflecting the debasement of all the major currencies—even the Swiss franc now it has been tied to the euro. As noted above, gold is the ultimate monetary yardstick, which is why governments and central banks don't like it as it shows up their policies for what they really are. For years, institutions like the U.S. Federal Reserve and most central bankers have publicly stated that gold is effectively an irrelevance—yet conversely they continue to hold huge amounts of it. The odds are that they also massage the price to keep it from surging, in the same way that governments try to manipulate anything which can show them up in a bad light.

That Britain's Gordon Brown sold off 60% of the UK's gold reserves back in 1999-2002, when the gold price was at rock bottom, was that this self-styled statesman and "savior of the world" from a Scottish backwater—or perhaps rather a misguided historian who obviously learned little from his historical studies—was, as a relatively raw chancellor of the exchequer (finance minister), totally misled by the world's central banking elite into ordering this sale at a price (forever to be known as the Brown Bottom) in what in retrospect was a disastrous decision from the U.K.'s economic point of view. OK, it is easy to be wise after the event, but perhaps Brown was actually the patsy in a global scheme to downplay the role of gold, and was led into doing this by central bankers who had no wish to put their own gold reserves on the auction block.

Now central bankers are again buying gold—particularly those from nations in areas which, for the most part, have historically regarded gold as the ultimate store of wealth. Indeed, with China notably circumspect about what it is actually prepared to announce regarding its gold holdings, central bank purchases could well be far higher than official figures would appear to show.

What this all means for the gold price at the moment is that it is pretty much underpinned with some big buying coming in on dips in price, while each recent upward surge has seen consolidation at higher levels (involving a small drift backwards), followed by a further surge. On this basis one would anticipate the $1,800/ounce level being attacked again on the next vaguely pro-gold piece of news to surface and the current fallback being fairly short-lived.

In his latest Thunder Road Report, Paul Mylchreest, who is always worth reading, poses the question: "Is gold a Giffen good?", the definition of such being "one which people paradoxically consume more of as the price rises, violating the law of demand. In normal situations, as the price of a good rises, the substitution effect causes consumers to purchase less of it and more of substitute goods. In the Giffen good situation, the income effect dominates, leading people to buy more of the good, even as its price rises."—Wikipedia. The pattern of gold ETF holdings, and now central bank purchases, suggests that gold should nowadays be so classified and, if this is the case, as the price rises demand may well continue to increase, thus driving the price ever higher given the tiny increase in global supply each successive year. We shall see.

Lawrence Williams

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