by: Nick Barisheff
March 17, 2010
Gold Is Money
Unlike the world’s currencies, gold retains its value.
In a speech I recently gave at The Empire Club of Toronto, I referred to gold as the "anti-currency." Gold is not and never has been a currency. Gold is something entirely different and far more valuable, it is money.
Sacha Tihanyi, a currency strategist for Scotia Capital, said:
If you're holding paper currency, you have to have some kind of trust that the country that issued it is not just going to print its way out of its problems. That's a real concern right now. Gold, on the other hand, has real intrinsic value, unlike a paper currency which can be debased by its government.
Currency vs. Money
Most investors confuse money and currency, but they are not the same thing. Money is defined as a medium of exchange, a unit of account and a store of value. For centuries, money referred to coins made of rare metals (gold and silver) with intrinsic value, and to notes backed by precious metals.
Currency, while it is a medium of exchange, is not a store of value. It only derives its value by arbitrary fiat government decree and hence the term “fiat currency.” Paper banknotes represent money, but they are not money. They are simply promissory notes whose long-term “value” or purchasing power depends entirely on the fiscal and monetary discipline of the government that issued them.
And therein lies the problem. In an era of massive fiat currency expansion by profligate governments across the globe, today’s currencies are depreciating in value faster than yesterday’s news. Fortunately for precious metals investors, gold and precious metals have risen in value, and will continue to rise in value against all currencies because they have once again resumed their historical role as stores of value: money.
John Tamny, an economist for H.C. Wainwright Economics, said:
When the price of gold moves, gold's price isn't moving; rather it is the value of the currencies in which it's priced that is changing.
The Decline of the World’s Currencies
Currency debasement isn’t a recent phenomenon. For decades governments around the world, through their central banks, have been creating money out of thin air to cover their excessive spending and mounting debt. Investors have for the most part accepted this subtle form of taxation, because it seemed to have little personal impact. However, appearances can be deceiving. Investors are discovering that the value of their dollar-denominated assets has a staggering 82 percent since 1971 (not coincidentally, the year the US cut its link to the gold standard). Figure 1 tells the story.
(Click to enlarge : http://static.seekingalpha.com/uploads/2010/3/17/saupload_841_thumb1.jpg)
The Media Are Using the Wrong Measuring Stick
Every day, the media (via currency traders) informs Canadian investors about the latest price of the Canadian dollar in US dollar terms, while US investors compare the US dollar to a basket of the world’s major currencies. But this information gives investors surprisingly little insight into the true value of their portfolios. If we started measuring the world’s currencies against money (i.e., gold), investors would be horrified at the stark decline in the value of all currencies. Most investors’ portfolios are heavily weighted towards currency-denominated financial assets (stocks and bonds), but few realize that the true value or purchasing power of their portfolios is declining every single year because of currency depreciation.
The Rate of Currency Decline Is Accelerating
Since 1913 (the year the US Federal Reserve was established), the US dollar has lost over 95 percent of its value. The US and Canadian dollars have lost 82 percent of their value since 1971, as noted earlier. But the rate of currency decline is now accelerating.
In the past ten years alone, the US dollar, the Canadian dollar, the UK pound and the euro have collectively fallen 70 percent in value if measured in real (currency-debased) terms. In other words, when they are priced in terms of gold (Figure 2).
(Click to enlarge : http://static.seekingalpha.com/uploads/2010/3/17/saupload_842_thumb1.jpg)
It’s All About the (Fiat Currency) Money Supply
Not too long ago, all the world’s major currencies were backed by gold because it was a universally recognized store of value. The gold standard imposed fiscal and monetary discipline, since each country had to hold enough gold to equal the amount of money in circulation. But not any longer. Government spending around the world is exploding, and (fiat currency) money supply, along with government debt in the world’s major economies, is exploding along with it. But nowhere in the world has spending become more out of control than the US (Figure 3), where the monetary response to last year’s financial crisis is creating yet another bubble, and this time it will be the bubble to end all bubbles.
(Click to enlarge : http://static.seekingalpha.com/uploads/2010/3/17/saupload_847_thumb1.jpg)
Countries Are Increasingly at Risk of Sovereign Debt Default
Puru Saxena, an editor/publisher for Money Matters, said:
In the process of saving a few ‘too big to fail’ corporations and their bond holders, policymakers are greatly increasing the risk of sovereign defaults.
The risk of massive and widespread sovereign debt default has never been higher. “Official” US government debt has soared to 90 percent of GDP, while multi-trillion-dollar budget deficits for the next several years will send that number soaring. Japan, the world’s second-largest economy, was recently put on credit watch. Its debt is twice total GDP, yet its newly elected government has announced much higher spending for 2010. The UK’s 2009 budget deficit will be over 14 percent of GDP, adding to a net debt that will reach 56 percent of GDP this year, 65 percent in 2010 and 78 percent by 2015.
Spain, Italy and Portugal are facing major fiscal deficits, as is Eastern Europe. Dubai is billions in debt and its prize jewel, Dubai World, is bankrupt. Greece's credit rating has been slashed, and its debt is forecast to reach 130 percent of GDP. And then there is Iceland, whose debt had exploded to seven times GDP before the global meltdown. The country’s banking system has now collapsed, its currency is deeply devalued, its real estate market has imploded and the country is in a full-blown economic depression.
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