CAN IT BE DIFFERENT THIS TIME?

CAN IT BE DIFFERENT THIS TIME?

Hugo Salinas Price

I refer to the behavior of the price of gold in late 1979 and early 1980, when gold peaked after a spectacular run-up and entered a twenty-year falling trend.

Will gold behave the same way, this time around? Will gold surge up – no need to mention a target – and then fall back again, ruining thousands of investors who could not imagine such a development?

I think there are factors present today, that were absent thirty years ago, which may make gold’s behavior “Different This Time”.

First, in 1980 Central Banks had large stocks of gold in their vaults. They willingly mobilized these stocks of gold and slowly lost them by leasing their gold out to the Bullion Banks, who then proceeded to sell the borrowed gold in connection with persistent, massive strikes on the price of gold in the futures markets. This activity – which was really a “Control of the Exchange Rate of Gold Money” - produced the long bearish trend in the price of gold. The operations slowly lost the leased gold into the world market and the Bullion Banks will never be able to return the leased gold to the CBs.

The present CB stocks of gold are considerably depleted. Nobody knows how much gold they may still have, but it is likely to be considerably less than they once had. The CBs now understand that the gold they leased is gone and irrecoverable, though they may not want to register this condition on their Balance Sheets. Their change of policy was signaled by the “Washington Agreement on Gold” (1999).

Second, the fall in the price of gold over twenty years was ignited by P.A. Volcker’s savage increase in the interest rate in the US. The 15% yield on Treasuries at the beginning of his war on inflation convinced the world that it was preferable to own Treasuries than to own gold. Confidence in the dollar was restored, and the US has coasted on that confidence since then.

At the present time and probably for a long time yet, the thinking of those who run things in the US is that very low interest rates are indispensable to get the economy moving once again. This factor puts ownership of Treasuries in a poor light, compared with the ownership of physical gold, whose price is strong and in an uptrend.

Third, thirty years ago, if the threat of inflation hit the dollar and frightened investors into gold, there were other currencies to run to. The specter of “Sovereign Debt Default” was non-existent. Some analysts now conclude: “There is nowhere to hide except gold.”

The current situation in the world is a huge overload of debt. There is no way around that situation. The existing debt in the world is excessive and cannot be serviced and rolled-over. Therefore, it must and shall be reduced either by inflation, or by defaults, or by paying it down over decades. Most likely, there will be a combination of the three means.

The prospect is thus one of storms of bankruptcies, public and private, together with inflationary storms and high taxation. This is a very ugly picture to which there cannot be an alternative. With this prospect, gold will remain a haven for savings and will attract them increasingly as an understanding of the situation dawns upon people. This catastrophe in the world’s economy will be affecting humanity for decades to come. This is another reason that gold may behave differently this time.

A fourth reason is that the present Great Financial Crisis (GFC) is actually the Bankruptcy of the Welfare State (BWS). GFC=BWS, if you like formulas.

The Age of the Welfare State, inaugurated by Otto von Bismarck, the great German statesman who created modern Germany, has arrived at a dead end. Now what?

Bismarck invented the Welfare State 130 years ago, in 1880. He was the first statesman to introduce Social Security as a government policy. He expanded it further to include Accident Insurance, Unemployment Insurance and Pensions. He did this to pacify the workers of Germany who were being fed socialist ideas by agitators. He had lived through the Revolution of 1848 which shook up all of Europe before it was contained, and didn’t want to see the same disturbances break out again and ruin Germany. Practically all nations in the world today are Welfare States.

Today, all the great powers are actually bankrupt. They are all carrying on by issuing more Sovereign Debt - government debt – even when as things are today, it is not at all clear who can and will purchase that debt.

Thus, there is either going to be a massive world monetization to “purchase” the debt of the world’s governments with fiat money, or else a savage retrenchment in government spending.

Either way, the Welfare State has now arrived at a dead end; because if the governments resort to printing money a deadly inflation will take hold which will kill all currencies and nullify the benefits of the Welfare State. If on the other hand, governments around the world reduce their expenditures, they must inevitably slash Welfare spending at a time when unemployment will be raging. Result: world unrest (WU).

So we can expand our formula: GFC = BWS = WU.

In a world in turmoil and unrest, it will be all the more true that “There is nowhere to hide except gold”.

I can add a fifth reason why gold’s behavior may be different this time.

There is not a single currency in the world today, which offers any special protection to the saver. Not one.

Today the world is learning a truth: gold is money, and always has been and always will be money. (As J.P. Morgan once said: “Gold is money, and nothing else.”)

I have lived in Mexico all my life and witnessed several devaluations of our peso – something Americans have yet to experience.

When people suspect devaluation is coming, they exchange their money for some other currency not similarly threatened. Mexicans have traditionally rushed into dollars when they have thought the peso was under threat. The point I want to make is that once an investor has left his native currency, he rarely returns to it. “Once burned, twice shy”.

For the same reason, in a world in chaos (GFC = BWS = WU) investors who are today fleeing from all currencies into gold will not be selling their gold any time soon.

Admittedly, hoarding gold does nothing to improve things. But when a ship is sinking, the only reasonable thing to do is to take to the lifeboats.

Let us hope that somewhere – in Germany, China, Russia? – some great statesman or group of statesmen realize that the Age of Fiat has ended in disaster and that a new age must be inaugurated, where gold will figure as an element anchoring currency. It is no use fighting gold any longer; gold must be embraced once again. The sooner this is done, the better.

So, perhaps as regards gold, until such leaders arise it may be “Different This Time”.