Take a look at the barometer
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What a week! Storms whipped up the North Atlantic. Bad weather ripped through markets too, and roughed up investors all over the world. Tempests are never welcome. But they are most regretted when you are least prepared for them.
“All debt, for the young or the old, increases risk and reduces future opportunities,” wrote Lord Rees-Mogg in The Mail on Sunday. “It is the same for individuals, corporations or nations. At some point debts have to be repaid. In the meantime, interest has to be paid.
“In Britain there is now 1 trillion pounds of private debt… When debts are first undertaken, they stimulate economic growth. But when the time comes for repayment, or people decide to reduce their debts, the effect is the opposite… A world in debt is a world at risk both of recession and inflation.”
A world in debt is a world without room to manoeuvre. Storm clouds appear on the horizon and the poor debtor cannot batten down the hatches and wait it out. He has debts to pay. The poor man has no choice; he has to put on his foul-weather gear and keep his sails unfurled. No wonder so many go under. Bankruptcy rates in Britain are at record levels – and the storms have barely begun. The Clink would be overflowing with new arrivals, if they still put bankrupt debtors in prison.
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Sooner or later, now or in the future, fierce weather is inevitable. Debt begets repayment. Bull markets beget bear markets. Stability begets instability. What can you do to protect yourself? We turn to no less of an authority than Alan Greenspan himself (we can’t think of any less of an authority), who said in 1999: “Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted.”
When the wind blows hard – that is to say, in extremis – everything begins to fly away. People look for something solid to hold onto.
So far, gold has gone up no more than base metal. Since 2001, gold is up 249%. Lead has risen 240%. This tells us that people have not even looked at the barometer yet. Meanwhile, the Bush administration says it no longer intends to continue the ‘strong-dollar policy’, under which the dollar lost about half its purchasing power. We can’t wait to see what happens under a weak-dollar policy. And all over the world, people have built up huge piles of dollars, yen, euros, and pounds… and staggering large claims and counterclaims against them, including a trade in derivatives that is now close to $300trn per year. Against all that, the current stock of gold is a mere pittance, a tiny island in a vast sea of paper money. And when the winds really begin to howl, our guess is that there will be many people who want a piece of it.
As Adrian Ash describes in Is the Bull Market in Gold Finished?, we have a faith-based world-financial system. Fortunately, here at MoneyWeek, our faith is strong. We have faith in gold simply because we lack faith in central bankers. Never before have they resisted the temptation to destroy a paper currency. They will not resist this time either.
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