Sunday, September 26, 2010

Gold is the final refuge against universal currency debasement - Telegraph


I am not an advocate of gold as an investment, as I have written several times on this blog.

However, it is certainly worth considering what the price of gold may be telling us. Today's Ambrose Evans-Pritchard column in the London Telegraph presents sober reading. Here's an excerpt:

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.. The Brazils and Indias of the world are replacing some of this half trillion lost juice, but not all...

..So we have an early 1930s world where surplus states are hoarding money, instead of recycling it. A solution of sorts in the Great Depression was for each deficit country to devalue, breaking out of the trap (then enforced by the Gold Standard). This turned the deflation tables on the surplus powers – France and the US from 1929-1931 – forcing them to reflate as well (the US in 1933) or collapse (France in 1936). Contrary to myth, beggar-thy-neighbour policy was the global cure.

A variant of this may now occur. If China continues to hold down its currency, the country will import excess US liquidity, overheat, and lose wage competitiveness. This is the default cure if all else fails, and I believe it is well under way.

Basically Mr. Evans-Pritchard is contending that all countries (with the possible exception of Germany) are attempting to juice their domestic economies by allowing their currency to lose value against their trading partners.

If this is the case, the rise in the price of gold is more a reflection of concerns over the intentional debasement of currencies rather than a foreshadowing of inflation.

I hope he's wrong - because historically the end of game of a currency "race to the bottom" has never ended well - but Evans-Pritchard is a pretty savvy observer.

Gold is the final refuge against universal currency debasement - Telegraph