In the End, Why Going Back to the Gold Standard May Be the Only Alternative
Friday, November 23rd, 2012
By Michael Lombardi, MBA for Profit Confidential
What no politician has the guts to do:
Step 1: stop printing more fiat currency; Step 2: have all fiat currencies backed by gold.
It wasn’t too long ago that the global economy had the gold standard—only a certain amount of money was printed and that printing was based on the holdings of gold bullion a country had.
Now, after a few decades of running away from the gold standard and flooding global economy with paper fiat currency that can be created out of thin air, countries are regretting what they’ve done.
We are starting to see countries in the global economy turning their attention towards gold as a source of safety—something that has stored value for much longer.
Since the inception of paper money, the amount of economic risk in the global economy has simply increased. The biggest concerns are inflation and the constant debasement of money. A dollar U.S. in 1970 is now worth $5.96 in the U.S. economy. (Source: Bureau of Labor Statistics, November 14, 2012.) For American citizens, their currency value has declined almost five-fold since we stepped away from the gold standard. It’s the same situation elsewhere in the global economy. Fiat paper simply has less purchasing power as the year passes.
All this leads to a simple question: to stop the erosion of the purchasing power of paper money, what do we do? Go back to the gold standard?
The Prime Minister of Turkey thinks we should do just that. He is urging the International Monetary Fund (IMF) to consider gold as its base currency. He suggested that the IMF has heavily relied on the U.S. dollar and this factor alone has caused more chaos for the other countries in trouble. (Source: Sabah, November 14, 2012.)
Along the same theme, a study done in the European Union (EU) is recommending countries in the eurozone area use gold as collateral, as this can bring down their borrowing costs. If the eurozone area combined all its gold and pegged it to the euro, it could potentially put a stop to the crisis destroying the global economy. The eurozone area has 10,792 tonnes of gold. (Source: CNBC, November 5, 2012.)
- Even as the market tanks...
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From all of this, what I get is that gold bullion prices are going to increase. Uncertainty and debasement of currencies in the global economy will certainly change attitudes of countries toward gold. Are we going back to the gold standard? I don’t know, but for a gold bull like me, what’s happening with the deterioration of the purchasing power of fiat currencies is a good sign for gold. As the global economy deteriorates further, we might just get a gold rush dominated by central banks—and I believe we are already seeing some action on this.
Going forward, I will not be surprised to see more world leaders coming out and agreeing with the prime minister of Turkey. Fiat currencies have created more trouble in the global economy than they have benefits.
Where the Market Stands; Where it’s Headed:
For the Dow Jones Industrial Average, we are near the end of a multi-year “head-and-shoulders” formation.
In technical terms, looking at the multi-year chart, the left shoulder was created over the years 1995 to 2002. The neckline was created in the years 2003 to 2007. The right shoulder creation started in 2008. The right shoulder has likely reached its peak and we are now starting the long-term trend down for the right shoulder.
At this exact moment, the market is oversold from its recent sell-off, but any upside rally will be limited in scope.
What He Said:
“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.
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