Alan Greenspan has recently stated that gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments and central banks. Moreover, the former Fed Chairman has said "significant increases in inflation will ultimately increase the price of gold. Investment in gold is now insurance."
Since the global financial system is under enormous stress due to failed government policy and unprecedented central bank intervention it is appropriate to take the time to reassess gold's place in the financial universe. Is gold just a shiny relic of bygone financial eras or is it the most widely recognized and universally accepted reserve asset upon which the global financial system depends?
Gold has been money -- not a commodity, but real money -- for over 2,000 years of human history. Not only has gold been the only form of money to survive for millennia but it has also been used in all corners of the globe. It is and has been the singular best store of value, medium of exchange and unit of account throughout recorded history.
In all cases, when great and lesser civilizations and powers have chosen to devalue their money, the currency has not survived but gold has! This important lesson seems to have been lost on current leaders, however. The massive money expansion programs of TARP, QE, and zero or negative interest rates have resulted in unprecedented global debt levels. This historic credit creation, sponsored by governments, has infected all corners of the globe in both developed and developing economies.
The 2008 financial crises marked by the failures of Bear Stearns and Lehman Brothers was attributed to the excessive and unsupportable debt levels in the U.S. housing market. The U.S. government, as well as the Federal Reserve, resorted to the extraordinary measures we mentioned to save the financial system.
At that time there were roughly 15 major banks in the U.S. Today, after years of consolidation, there are five banks, now referred to as "too big to fail." With the concentration of financial power in a handful of banks, systemic risk has only increased.
In 2008, U.S. government debt was about $10 trillion. Today, the debt is about $20 trillion. But the U.S. isn't alone in this. The same explosion of debt has occurred simultaneously in Europe, China and Japan. The risk that this debt poses to the global financial system is enormous and growing. The question becomes not one of how do governments reverse course but how and when do governments and central banks get off this path and onto a totally new path?
Thus far government and central bank policy has been to "inflate" our way out of trouble. Paying off debt in an inflationary environment has been far less painful than it would have been to pay off debt in a stagnant or deflationary environment.
Zero and negative interest rate policies have been implemented to help governments inflate their way out of the crisis. Unfortunately, this has been exceedingly difficult to engineer. Debt levels are rising 4% annually while growth is only at 2% at best. This is unsustainable over time.
Again, governments and central bankers have chosen the path of least resistance, concentrating exclusively on the short term. However, efforts have not produced the desired effect. As interest rates begin to rise, the risk of a crippling recession or worse looms large.
It is becoming increasingly clear that substantial changes to the financial system must be made, either before or after a collapse.
Behind the scenes, governments and central banks are hedging their bets. Sales of gold bullion by central banks ended in the financial crises of 2008. In fact, according to the Official Monetary and Financial Institutions Forum's research document, "Seven Ages of Gold," central banks have been net bullion buyers every year since 2008, adding more than 2,800 tons or 9.4% to reserves.
The European Central Bank and U.S. have maintained consistent stockpiles of gold while emerging economies such as Russia and China have become significant buyers. This development appears to be slowly restoring gold as a central element of monetary management after four decades of attempting to demonetize the precious metal.
If gold is quietly being accumulated as an essential reserve asset of central banks shouldn't we, as prudent investors, sit up and take notice? Every portfolio should include gold, a liquid, real asset whose value is not dependent upon the financial system.