Federal Reserve Chairman Ben Bernanke has gone on record stating that, if the need arose, the Fed would print dollars by the helicopter load to smooth over a collapse in the 25-year borrow-and-spend bubble, a collapse that is now underway.
Putting Bernanke’s words into action, since early August of 2007, the Fed has stepped up to the plate with tens of billions of dollars. On November 15 alone, the Fed injected almost $50 billion into the banking system, the largest single-day cash infusion since 9/11.
Then, on December 12, the Fed announced that it would open the spigots by providing lending $28 billion created out of nowhere to the nation’s banks in exchange for a “wide variety of collateral.'
In other words, the Fed will accept as collateral even the very same toxic waste paper now bedeviling the financial system.
And that’s just one of many ways that the government is scrambling to keep the house of cards from falling.
Faced with the very real threat of a deep recession caused by a freeze-up in credit, falling home values and soaring loan defaults, the Fed is left with a rock-and-a-hard-place decision. Hold tight and let the economy fall… hard. Or, open the money spigots wide in an attempt to maintain liquidity in the markets, sacrificing the dollar in the process.
Given two untenable choices, it is my view that the government will continue on the path of a loose monetary policy, the implications of which disastrous for the well being of all people.
Sticking with the helicopter metaphor for a moment longer, creating billions of new dollars out of thin air to smooth over a litany of problems caused by decades of irresponsible debt creation is analogous to a helicopter trying to put out a raging forest fire by dropping tank loads of gasoline.
In other words, the “solution” is more of the same. It is only making the situation worse.
The result is simply this: as more and more dollars are created and injected into the economy, the purchasing power of all the dollars in circulation comes under pressure. It’s called inflation.
In times of inflation, people turn to gold, the only real currency. Viewed in that context, it is perfectly understandable why gold has been moving higher. Moreso, in 1987 prices gold should trade at $1500 per ounce.
The younger generation of money managers know little about gold. They know about structured investments such as those that are now failing left and right, but they don’t know about gold.
While gold doesn’t go up in a straight line – no investment does – it has been considered real money since about 4,000 B.C. Compare that track record against that of government-issued paper currencies. Actually, there is no comparison.
Given the historical record, it’s hard to argue with the adage that all paper money continually falls in value, just at varying rates of speed.
For the last 6 years, gold has been a better investment than paper currencies. I expect this trend to continue and to accelerate.
But why is it that gold is still considered a store of value after all these millennia? Why is it that record numbers of investors – private and institutional – are beginning to turn to more modern forms of gold, including gold ETFs and, of course, the shares of established gold mining companies?
For the answer to that question, I defer to none other than Aristotle who, in the fourth century BC, explained why gold is money…
To serve well as money, an object must be:
durable, which is why we don’t use strawberries as money;
divisible, which is why artwork isn’t practical;
convenient, which is why lead isn’t very good;
consistent, which rules out real estate;
and useful in itself, which is why paper is such a weak choice.
Of all the 92 naturally occurring elements, none fits the requirements better than gold. No one ordained that it should be money; it grew into that role through the practical decisions of millions of people over thousands of years. Not to pick a fight with Aristotle, there’s another essential characteristic I’ll add to the list. For an object to serve well as money, it must be difficult to produce – otherwise, a growing supply of the object will undermine its value. Gold is again the standout. Adding to gold reserves requires a massive expenditure of labor and capital to find it and dig the stuff out of the ground.
So difficult is it to produce, all the gold ever mined would fit into a cube roughly 25 meters on a side -- and that’s something no politician or banker can ever change. How different from paper money, and even more different from the deposits the Federal Reserve regularly creates just by running electrons (there are plenty of them, and they don’t cost much) through a computer.
Key for gold is how little supply is added in a year -- only about 80 million ounces ($62 billion worth at today’s prices). That amounts to a gross “inflation” rate for gold of 1.6% per year, compared to the existing supply of approximately 5 billion ounces. And gold’s net inflation rate is actually a little less than that, since some amount of metal disappears every year in uses that are not fully recoverable. Competing forms of money – the U.S. dollar, for example – typically increase at an annual rate of 15% . In the final analysis, if you have not yet bought gold , it is high time now to protect your savings with gold.