I am no gold bug nor can I claim I really understand currencies, including gold. However, I understand economics and competitiveness and it is clear that Europe’s salvation goes through a much lower Euro. If Merkosy finds the keys to unlock the ECB inflation-fighting chains, as is more and more evident will happen, the euro printing press will start spitting paper like there is no tomorrow (truly!). In his latest Basic Points, my friend Don Coxe makes the case for gold in such an environment.
- For the first time since the abandonment of the gold standard, central banks are overwhelmingly dedicated to weakening the exchange rates of their currencies. When faith in the “printed paper promises of politicians” flags, gold offers an incorruptible store of value. This is beginning to look like Gold Bug Nirvana—where panicky people protect their wealth by selling paper to buy gold. (Maybe the bankers are ahead of the pack: central banks bought 148 tonnes of gold in the third quarter.)
- Ben Bernanke has said zero interest rates will remain until at least 2014.
That means the financial heroin will continue to flow, which means
continuation—and exacerbation—of negative real interest rates as far as
most eyes can see.
- Gold is the only historic medium of exchange whose value has been rising
for nearly 11 straight years.
The forces driving it upward are accelerating.
Conclusion: Once gold breaks through its August peak of 1920, it will challenge the magic millennium level of 2000—and will eventually pierce it.
- The euro must be devalued. The target should be its value as of its inception for accounting on 1/1/99—$1.16—although the ECB should allow for downsize overshoot.
The process of devaluing it will involve massive liquidity expansion within the eurozone, thereby reliquifying the parched banking system and restoring lending activity across the eurozone.
It’s time for the eurozone to start pumping out its own brand of Bernanke heroin—until the euro reaches a globally competitive range and the European banks have rebuilt themselves to at least the minimal-to-modest strength of their American counterparts.
- As the only medium of exchange that cannot be synthesized or devalued by high-speed central bank printing presses, gold wins from eurodespair or eurodevaluation.
If the ECB—the last holdout against financial heroin—joins the lotus-eating majority of central bankers, gold would enter a spectacular bull market once it became apparent that the euroelites had decided to save their banks and their economies by rejoining the world.