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Why gold is back

Investors are buying gold as governments have failed to get us out of the money trap.



In investment terms, we face a scenario that says neither bonds nor equities are likely to rise.  The ‘uncertainty’ is greater than ever.  And it is ‘uncertainty’ that drives people into gold, not relative values in paper currencies.  We have to think that gold is the central thing around which everything else moves.  Not the other way round.

In policy terms, as the IMF admits, the situation is as risky as in 2007-08.  We are about to have a new leader in China, Obama is into a second term where he may pursue left-wing policies with greater confidence, we have fiscal cliffs in the US and Japan, a new Bank governor here, Japan probably going into recession, Germany close to recession, and if Janet Yellen succeeds Ben Bernanke in 2014, a true expansionista will be busy printing money at the centre of the system ….

A continual stream of new regulations flow from Basel and national capitals: Basel III, Volcker Rule by 2015 in the US and in the UK capital requirements/ring fencing a la Vickers, plus 100 others.  If you want to know what a mad world the regulators live in, read chapters 15-19 of the latest Communique of the G20, written by the FSB. Such measures would raise costs hugely, precipitating the collapse of the G-SIFIs (as outlined in Chapter 14). Already, at the margin, crippled banks are being replaced by asset managers.

Corruption, mismanagement, lack of proper controls, all provide material for regulators to keep piling on more restrictions — bankers feels like saying to politicians ‘why don’t you run the banks then?’.…The cost of liquidity is very high –low interest rates mean banks holding liquidity earn nothing on it. But the basic problem is that banks are paying the price for their immoral earnings and greed of the last ten years. Those money laundering, hidden accounts for drug dealers, terrorists, sanction busters, etc are going to burden them for years ahead.

Banks going bankrupt, far from being “resolved” as the fairy story goes, will then be propped up again, so long as governments can tax us to pay for the subsidy. At least some of them will be – the banks with political influence. Taxes will be used to help those banks pay for the new regulations designed to protect the public, and of course for their bonuses. The key aims of bank management are to invest in political inlfuence and to keep that cash pipeline from governments to their pockets clear and fit for purpose.

For the investor, cash is not the answer. The difference between cash and gold, or securities, is that cash is with banks which may go bust.  But gold and securities are yours and – barring force majeure, as in the anti-gold legislation of the 1930s in the US – they can’t easily be taken away.

No wonder many investors are seeking refuge in gold. Unless governments adopt an alternative solution, such as that proposed in The Money Trap, a gold rush could set the stage for a wider collapse.