Gold Shines Even Brighter as the Global Economy Dims

As the Global Economy Stumbles, Gold Goes for a Touchdown

Before we get started, congratulations Kansas City Chiefs fans!

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: The global economic stumble makes a strong case for gold, man’s search for value, and what would the end of fiat currency do for gold?

Thorsen Polleit: “What economic recovery?”

Thorsen Polleit, Degussa’s chief economist and Kitco contributor, isn’t optimistic on global economic prospects. As he notes, the real money supply is shrinking. His recent in-depth analysis features many apparent contradictions, which actually very much paradoxically fall into place. Although it seems that pumping money into the economy (also known as “quantitative easing”) should increase the money supply, well, yes, it does. If we’re talking about the nominal money supply.

“Nominal” in this case refers to the economics definition of the word:

prices or rates that are correct at the present time but do not show the effect of inflation

Conversely, real money supply refers to the purchasing power of currency. We might call it “the value of money.”

Here’s the shocker: as calculated by the Organization for Economic Cooperation and Development (OECD), the real money supply contracted by 7.3% – the biggest loss of value on record.

On its face, this doesn’t quite make sense… You’d expect the prices of goods and services to increase in direct proportion to any increase in the nominal money supply. But that’s not what’s happening.

Rather, today’s rising prices are outpacing the inflation of the global money supply. At the same time, global monetary tightening is slowly reducing the money supply.

These kinds of macroeconomic conundrums can seem as surreal as a Zen koan. Polleit does a decent job of summarizing the cycle:

The initial increase in the quantity of money results in a rise of the real money supply, which fuels consumption and production. Then, goods price inflation takes off, and, at the same time, monetary expansion slows down. The result is a very sharp decline in the real money stock, which, in turn, leads to lower economic activity, even recession.

The contraction of output and employment, in turn, exerts downward pressure on rising goods prices, establishing a new relation between the outstanding money stock and goods prices in accordance with peoples’ preferences. Once this adjustment has run its course and the nominal money stock remains unchanged, goods price inflation dies out. The economy ends up with a higher level of goods prices when compared with the situation before the nominal money supply had been increased.

Makes sense so far, right? Supply and demand seek a balance, just as Adam Smith told us.

Here’s the problem: this decline in real money stock leads to a “stabilization recession, an economic contraction to break the inflationary wave.”

The problem is that central banks only know of one way to relieve an economic recession.

That’s right: money-printing.

When the recession occurs, Polleit tells us:

…the political pressure on central banks to lower interest rates again and keep the economy afloat with new credit and more money would be foreseeable. In the hour of need, governments and the public at large will likely see the policy of the least evil in increasing the money supply. Even a sky-high inflation policy becomes acceptable from their point of view to escape a perceived even greater evil.

He goes on to remind us of both the Great Financial Crisis and the Pandemic Panic, two very clear examples of the central bank-sponsored boom-and-bust cycle.

Over and over, we’ve seen this cycle play out…

Money-printing fuels the boom
The boom leads to inflation
Monetary tightening creates a collapse in the market and a recession
Which is relieved by money-printing

The problem is that each boom and bust in the cycle are getting bigger, more severe.

Here is what Polleit expects might transpire when central banks can no longer tighten:

If central banks are not stopped from doing what they are doing – causing booms and busts by manipulating market interest rates downward and relentlessly expanding the quantity of money created out of thin air – their actions will eventually lead to a level of inflation well beyond what we have witnessed over the past year and a half. From this perspective, the sharply contracting real money stock in the world economy is – it has to be feared – the harbinger of a new round of super-easy monetary policy and super-high inflation, even hyperinflation, further down the road.

Well, now you know why central banks bought a 70-year record quantity of gold last year. Apparently, they see the writing on the wall, too.

Why gold and intrinsic value are inseparable

The Wyoming Reserve’s Miguel Perez-Santalla’s recent podcast, Man’s Search for Value, was fantastic. Either a “must-read” or a “must-hear” depending on your preferences. It’s a lengthy, highly-detailed look into what went wrong with the financial system, when it went wrong, and some forecasts on what to expect next.

Since practically everything Santalla covers in the 24-minute-long piece is relevant, we’ll try and stick to what’s important to precious metals investors.

For starters, as Santalla points out, currencies don’t work. Anyone who’s paying attention to their own bills agrees that the official 6.5% annual inflation number is laughable. Holding paper money, Santalla says, cost you 20% of its purchasing power last year. And if you’re paid in paper money (alas, I am!) it’s worth 20% less than it was a year ago.

Santalla goes very deep into history, and as we know, the further we go, the more history becomes myth, speculation and guesswork.

Even so, these points stand out as almost self-verifying:

In 1694, the Bank of England was created for seemingly the sole purpose of increasing the government’s wealth at the expense of the populace. It took all of two years until the government had to bail it out for the first time, creating the still-ongoing tradition of “banks make the loans, taxpayers pay the bill.”
The Bank of Amsterdam filed for bankruptcy in 1790, the same year the public learned the bank didn’t have the gold and silver bullion reserves it claimed to back its paper money.
In 1913, the Federal Reserve was born – and took less than 60 years to break the two century-old link between gold and the U.S. dollar. Santalla believes this was an inevitable consequence of its creation.

Santalla says that America became a superpower because of three things: blood from World War II, sweat from the industrial revolution and using gold and silver as money. Even just examining the nation’s holdings when the Bretton-Woods agreement was signed tells us precious metals weren’t consigned to just one of those three themes. Gold was a requirement to participate in the global economy (and the U.S. owned 75% of the world’s monetary gold).

The Fed eventually brought on the current speculative foreign exchange (forex) market, which Santalla describes as follows:

That is why we have such volatility in prices and exchange markets. This benefits only the wealthy and traders, that brings no real value to the world economy. This part of the financial market which was recorded in 2016 by the Bank of International Settlements at $5.4 trillion daily, exists only for price discovery. How does that feed the people, keep them warm or enable growth?

Santalla’s primary focus is actually cryptocurrencies, bitcoin but also altcoins, because of the autonomy they bring to individuals. He has a fundamentally bullish take on them. Despite the recent “crypto winter,” I won’t dare question his perspective.

But for all the praise he heaps on crypto, he cannot imagine gold and silver moving from their current role as the safe-haven store of value everyone should own – and not just due to crypto’s roller-coaster volatility.

The two, he says, go hand-in-hand. Both are government-agnostic types of money not subject to central bank tampering.

How realistic is a collapse of fiat currencies in the near future?

James Turk, founder of Canada’s Goldmoney Inc. recently appeared on KingWorldNews. The resulting interview is a little difficult on the listener. Turk moved out of the U.S. in the 1970s to work in Asian banking. This gave him both an American and an international perspective on the high inflation that was going on then, as well as the one that is going on now.

I’ll save you a few minutes and cover the prominent themes.

Denial, whether on behalf of the government or its citizens, was a common theme back then. The U.S. dollar was the global reserve currency, so there was a belief it couldn’t realistically lose too much value. That was as far as domestic affairs were concerned.

Abroad, faith in the dollar eroded to a point where some banks wouldn’t accept dollars in exchange for the local currency.

Global crisis was avoided by the Federal Reserve hiking rates. Here is where we must arrive to some difficult conclusions, which aren’t exactly new ground for us but are ignored often in the mainstream.

Interest rate increases worked back then because “elevated” rates meant double digits. The Fed’s effective rate reached 20%. That’s what worked back then.

Today we’re already hearing talk about recession, seeing political leaders call the Federal Reserve a pack of economic terrorists due to interest rates less than 1/4^th as high as the peak of the last severe inflationary episode.

In the 1970s, the long-extinct German currency, the Deutsche Mark, was considered a safe haven from U.S. dollar inflation. And the very pro-gold German people were firm believers in their Deutsche Mark back then.

Turk believes that the destruction of unbacked currencies is an expected part of the long-term economic cycle. (History would tend to agree with him.)

Eventually, the global economy will have to go back to being fueled by production instead of money printers. When it does, gold and silver will return to their role as money in a more formal sense. In the meantime, Turk says gold will stay above CAD$1,950 and silver above CAD$24 (Canadian dollars or “loonies” as my forex-trading friends say). He also says, if you haven’t bought gold already, you probably should now.

2023, Featured, global economy, gold as money