Alan's Finance Blog

Wall Street’s Best Bet for Crisis-Beating Returns

By: Adrian Ash, BullionVault

So how did the top US mutual funds stack up vs. the gold price since 2007…?

PAST PERFORMANCE is no guide to the future. But if you don’t study history, just what will you track instead?

December 2011 marked the fifth anniversary of the end of Ownit Mortgage Solutions – a small lender in the big scheme, but “maybe the canary in the coalmine,” according to one mortgage-backed security manager back at the end of 2006.

Let’s hope he found a new career in short order. Because come March 2007, tittle-tattle claimed that distress was spreading from the subprime collapse to US and Eurozone hedge funds. In July, news leaked and then broke of the collapse of two hedge funds at Bear Stearns, and the permanent emergency had begun.

What fun lay ahead! With the gold price at just $650 per ounce too! Silver was knocking around $13 the ounce. Together, that’s made for quite the track record since…

The Top US Fund Managers: Annualized Returns in Per Cent

1. US Dollar precious metals prices from the LBMA, periods ending 30/12/2011.

2. Fund count by BullionVault, using Lipper data via WSJ Online.

3. Single-best fund, best return & average return of all mutual funds taken from MorningStar.

USAA Precious Metals & Minerals you probably know. Co-manager Mark Johnson stepped down last month, leaving Dan Denbow to continue running the single-best performing US mutual of the last 10 years. Other big precious-metal miner funds pack the list of 11 mutuals to outperform silver and the gold price.

GVPIX you might expect to know too, what with it delivering 44% returns in calendar-year 2011. ProFunds US Government Plus led a bunch of long Treasury-bond portfolios. The old Lehman’s TLT tracker returned 34% – who needed active management, let alone risk, last year?

But the stand-out fund over both the last 3 and the last 5 years? The only mutual to beat gold for US investors since the eve of this crisis is Oceanstone. Don’t feel hard cheated if you’ve never heard of it. Apparently it’s got less than $15 million in assets, even though the minimum investment is $3,000. Its stellar 5- and 3-year records include a ridiculous 264% made in 2009, just from doing what it does – seeking value in common stocks on the NYSE.

Yes, it can be done. And yes, it could be done too. US investors really could beat gold since the alarm bells rang out at the turn of 2007. Because out of the 7,500 separate funds available – with 22,000 shares classes to choose from – one fund managed it. Just like 7 funds (go on, count ‘em) managed to beat silver since the turn of 2009, and fully 11 separate US mutual funds managed to beat silver since the start of 2002.

Adrian Ash

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

What Happened in 2011 – What’s up for 2012?

By Euro Pacific Capital Research

2011 began as a year with much promise for investors. After losing nearly 40% in 2008, the S&P 500 gained nearly 20% in 2009 and 13% in 2010. These results convinced many that a long steady recovery from 2008 was ongoing. The first six weeks of 2011, which saw a healthy 6% gain in the S&P 500, seemed to confirm this expectation. Most attributed the stock gains to an overriding belief that the Great Recession was finally winding down. But then a new chapter set in. Click here to access full report >>

As the first quarter ended, major events such as the cascading Arab Spring and the magnitude 9.0 earthquake, tsunami, and nuclear disaster in Japan, initiated a round of major volatility. The Japanese stock market lost 19% in 5 business days. But these political and climactic events were not enough to shake confidence. Even the Japanese market recovered, rallying 13% by the end of March (Bloomberg, 2011). It took the lingering concern over unsustainable debt to turn the market on its ear.

In the first half of the year, investors still did not appreciate the magnitude of the sovereign debt problems in Europe and the United States. With fear taking a back seat, by May the S&P was up 8.4% on the year (Bloomberg, 2011), which turned out to be the high water mark of 2011. But the second half of the year saw both the slow motion train wreck of European sovereign debt negotiations and the comic charade in Washington over extension of the debt ceiling. The resulting uncertainty regarding the euro and a downgrade of US debt returned substantial amounts of fear into the marketplace. In September the Federal Reserve’s Open Market Committee sent markets lower still when it failed to explicitly extend quantitative easing. Since then, amid a general realization that the lackluster statistics were not a temporary blip, stock market performance has been sideways and highly volatile. Foreign markets finished down on the year, but it was the volatility that left investors shell shocked. Should we expect more of the same in 2012?

While the initial boost of the unprecedented monetary stimulus that was injected into markets in 2008, 2009, and 2010 had an unquestionably positive effect on stock prices, it did not engender sustainable real growth. In our view, the developed world simply can’t grow encumbered with such excess debt. Consumers and business are trying to lay the foundation for future growth by continuing to deleverage. Yet at the same time, governments are counteracting the deleveraging in the private sector with large fiscal deficits and printed money. Total leverage therefore is not decreasing and deflationary forces have not been allowed to take hold.

With the monetary skids so generously greased, we think it unlikely markets will crash as they did in 2008, at least in the short run. On the other hand, we don’t see any catalyst for a runaway rally either. In our view maintaining a large cash position, however tempting, is unwise given that negative real interest rates will consistently erode purchasing power. But until a solution is found for the European debt crisis, heightened volatility is likely. Aggressive corrections will likely be met by equally aggressive market rallies as monetary stimulus remains extremely accomodative. As long as governments are willing to coordinate world-wide liquidity injections, they will likely have the ability to kick the can down the road for the immediate future. There is much evidence to conclude that this level of coordination is increasing.

Our expected inflation in asset prices runs counter to the prevailing negative sentiment. Short interest on the New York Stock Exchange is near record levels not seen since 2009 (Bloomberg, 2011). Economists have almost cut their 2012 real GDP growth estimates for the G10 in half over the course of 2011 (Bloomberg, 2011).

The next round of quantitative easing won’t necessarily be triggered by lower asset prices or sustained high unemployment. It could come simply as a way of financing the 2012 US deficit. In 2011 the Fed bought approximately $720 billion of US Treasury securities (Bloomberg, 2011), in essence financing 59% of the US deficit with printed money. We should expect the same with this year’s similarly ugly projected deficit. More easing from the Fed should be a positive for commodities, stocks and foreign currencies.

While most pundits view the most recent summit of European leaders a failure, the measures they did introduce seem likely to put a lid on solvency risk for some time. The fundamentals aren’t fixed, but in our opinion policy makers in Europe have bought themselves some time. Hopes are high that the US is immune from the troubles the world faces, yet in our opinion it is part of the cause. We expect that analysts will likely reduce their American growth estimates to an equal level with their international peers. As a result we expect US stocks to underperform international stocks in 2012.

This all lends itself to a volatile, but nearly flat trend for stocks and bonds in 2012. Fundamentals don’t yet support a run-up, but easy money may put a floor underneath assets over the short run. Unless the situation were to change, we believe aggressive dips in stock markets represent buying opportunities. We tend to think bonds will underperform equities in 2012, given their dramatic outperforming in 2011.

Euro Pacific remains underweight the Euro, Yen, Pound and Dollar. We seek to invest in securities that have minimal exposure to these regions both in our equity and bond portfolios. We continue to believe that by focusing on countries with the strongest fundamentals, we will outperform our peers over the long run.

Merk Commentary: Perils of Celebrity Central Banking

Axel Merk, Portfolio Manager, Merk Funds

January 6, 2012

Axel Merk January 6, 2012

Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).

The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising.

If the Swiss were asked whether they would like to adopt the euro, the popular vote would almost certainly be an overwhelming “NO”. Despite this, an unelected official seemingly single-handedly moves the currency at his whim. Arguments about deflation and competitiveness are given; with an unemployment rate of only 3.1%, the argument might have as many holes as Swiss cheese. Importantly, should the market doubt Hildebrand’s conviction, the peg-rate policy may turn out to be amazingly expensive – in 2010, the last time the SNB had aborted its intervention and all those euros purchased had fallen in value, the central bank reported tens of billions in losses. The Swiss public may sympathize with the buzzword “competitiveness”, but understands losses of that magnitude for tiny Switzerland is a lot of money.

In the U.S., we face similar challenges. Federal Reserve (Fed) policy appears all too dependent on Fed Chair Bernanke rather than what central banking should be about: the preservation of purchasing power. We hear the latest whim on what trick might work to boost the economy, disguised in the name of transparency.

What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.

We would not be surprised to see the Swiss franc rise against the euro as Hildebrand’s position may be weakened. Similarly, in the U.S., should credibility in Bernanke’s policy erode, it may have negative implications for the U.S. dollar.

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

He Chose Well

By: Paul Tustain

David Cameron was today forced in Brussels to choose between the free market and the vanities of overreaching politicians…

TODAY is a very sad day. We believe that the markets are telling us that there is a horrible abscess in Europe, and that the Euro is the pus. We believe that fuelled by injustice, the infection of nationalism will now tear Europe apart – making outright enemies of Germany and Greece, France and Italy, the Netherlands and Spain.

Our European friends are today irritated by Britain’s refusal to come to their drunken party. Not for the first time we are the odd man out, and being pointed at by the shallowest politician in Europe. It’s OK. We can live with a little name-calling for the moment, and we look forward to quietly rebuilding our friendships with every one of you in the future. We hope it will be soon.

You are right. Our financial system contributed – in part – to the mess we are in. But you are wrong as to the reason and the solution. What happened is that over a period of years the political classes in London, New York and the smaller financial centres of Europe worked together to hold down the cost of credit. Ever since 2001 they suppressed the will of the market for higher interest rates. They did this to foster the ‘feel-good factor’ and to get themselves re-elected. It was the irresponsible and self-serving policy of elected representatives all over the western world, and it is without any doubt the root cause of the explosion of credit which we now have to pay for.

The result of the explosion of credit was an enormous pile of cash accumulated at the banks of the world. It represented the savings of an older generation, and there was far too much of it. It was lent very unwisely. That happens. It’s life. And usually it means the creditors lose their money and gain some wisdom.

Only this time some of the creditors – particularly Germany and France – don’t want to lose their money. They want to force two or three generations of Greeks, Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany and France lent to your father, yet you become the indentured slave.

That should never be how bad money-lending is resolved. The lender should take the hit when the borrower cannot repay; it helps to focus his mind before he lends. In Britain we got rid of inter-generational debt servitude 200 years ago, and it is not progress to return to it.

As it happens in Britain we have the same deep insolvency problem to resolve, but it is going to be resolved in a different way. Our government is going to have to print to eliminate the debt – just watch. There is going to be a storm and Sterling will be murdered. Interest rates are going to climb sharply as world markets demand the return of their rightful position as the setters of the cost of money. Those rate hikes and concomitant inflation are going to eliminate twenty five years of savings, and twenty five years of a silly, credit-fuelled house price bubble. By the time it ends the creditors will have paid in full. Houses will be again affordable by anyone with a half decent job. Retirement at 55 will have been consigned to the dustbin. Student loans will have inflated to irrelevance, and Britain will again be a great deal fairer than it currently is.

In Europe you will doubtless laugh quietly as this storm hits us. But you will have no reason to make war on us, and you won’t want to, because your strength will be all used up making war on each other. We do not believe that 1,000 years of carefully constructed and often hard fought mutual independence should be sacrificed on the altar of a bad monetary union. We do not believe the people of Europe will want it when nationalist tensions materialise. We think that Europe’s political class is making a monumental error in order to hold on to something which carries their political credibility. We think they will fail and that Europe will suffer dreadfully for it.

It is a black day, because contrary to your belief we love Europe. We also love our free market and the way it exposes the vanities of overreaching politicians. Today you forced David Cameron to choose between the two, and he chose well.

Paul Tustain

Director

Settlement-systems specialist Paul Tustain launched BullionVault in 2005 to make the security and cost-efficiencies of the professional wholesale gold market available to private investors. Designed specifically to meet his own gold ownership needs as a risk-averse investor, BullionVault now cares for some $1.5 billion of client gold property, all of it privately owned in the client’s choice of low-cost, market-accredited facilities in London, New York or Zurich.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Catfish, Your Savings & Japan’s Gold Coin Giveaway

Don’t be greedy, or a giant catfish might force you to spew out your savings…

UNLIKE us – who are so smart today – ancient folk in ancient times used to believe the oddest things about how the world worked.

The Japanese, for instance, long thought that earthquakes were caused by a giant catfish, shuffling and shifting whenever the great god of Kashima forgot to keep his foot on a heavy stone which held the beast down, deep beneath the coast of Honshu. Honoring the Kashima shrine, some 80 miles north-east of what was then Edo (modern-day Tokyo) was therefore a good idea. Because tectonic upheaval, causing death and destruction, was a sign that the god was neglecting his duty.

November 1855 saw Kashima skip town, or so legend soon had it, leaving the god of fishing in charge of the stone and the catfish. What a mistake! The Great Ansei Earthquake killed 7,000 people at a stroke, and many more in the days and weeks after.

But it wasn’t all bad…

“Don’t be greedy!” one of the laborers urges his mates in this popular print, Mr.Moneybags launches forth his ship of treasure. “You’ll regret it if you save this money and an earthquake comes.

“Better go and spend it at the brothels and keep it circulating.”

The Kashima shrine itself was damaged in March 2011′s catastrophe. But the poor idiots of old-time Japan would still find a silver lining. Although some of the hundreds of namazu-e (catfish pictures) from 19th-century Japan show the beast captured and beaten – or even committing hare-kiri to say sorry – he also became a folk hero to laborers and shopkeepers, because he forced the wealthy to spend money on repairs and rebuilding.

Think of it as a divine take on Bastiat’s “broken windows” parable. Knocking things down is good for society (or so society says), since the glazier is paid and then spends that money in turn. Earthquakes are great for production, because they force cash out of locked chests into the pockets of carpenters, plasterers, bricklayers and masons – just the right type to keep it circulating again.

“For Edo residents,” one scholar explains, “the earthquake of 1855 was an act of yonaoshi, or ‘world rectification’.” In print after print, catfish shake or squeeze wealthy old hoarders who vomit or shit out gold coins, quickly scooped up by dancing laborers eager to spend it on booze, noodles and trips to what’s now known as Soap Land.

“Like typhoon-season floods and dry-season fires,” notes another 2011 look back, “earthquakes and tsunamis were understood as corrections of temporary imbalances in the vital force perpetually flowing through the world (known in Japanese as ki and in Chinese as qi). Periodic eruptions of natural violence released pent-up force and kept both nature and human society healthy by renewing them…Confucian philosophers as well as ordinary people believed that the economy followed the same principles. Just as ki flowed continuously in nature, money should be kept moving in the economy too, not allowed to stagnate and foster greed. For this reason, many people viewed capital accumulation distrustfully. Nature, they believed, censured it.”

Could anyone hold such a medieval view of economics today? Not outside a central bank or university, you might think. But greed is central to our depression’s mythology. From there, the attack on capital accumulation can’t be far off. And it’s ironic that to help keep money moving after the terrible earthquake and tsunami which hit Honshu this spring, Tokyo is now offering gold coins to investors buying its reconstruction financing bonds. On the minimum ¥10 million investment ($150,000) needed to qualify, however, Japan’s reconstruction bonds pay 0.05% per year without the coin, and a barely less miserly 0.3% with it if gold stays at today’s prices by the end of 2014. So the net effect is still to shake down Mr.Moneybags – otherwise known as Japan’s diligent household savers today.

Anyone calling this special half-ounce commemorative gold coin an “incentive” might sound like they need to raise money themselves to buy a calculator. But it’s not the first promotional effort tied to Japanese government bonds. Word reaches us here at BullionVault that special flyers – posted by door-drop in Tokyo – have recently been advertising government debt straight through the mailbox. As for coupons and premia, the Nomura brokerage is already offering its retail clients free shopping vouchers if they buy JGBs and lend to the government, too.

“The wealth of the realm belongs to the realm,” wrote Confucian scholar and advisor Yamaga Soko – who also developed the Samurai code of chivalry, bushido – in the mid-17th century. “It is not the wealth of a single person. Well should it circulate.”

Now compare and contrast French politician and essayist Claude Frédéric Bastiat writing 200 years later. “What would become of the glaziers, if nobody ever broke windows?” he asked in his famous parable of 1850, paraphrasing the “vulgar” mob who applaud the shards of glass on the street. Yet it is the shopkeeper needing to get his window fixed, “the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause…who is always kept in the shade…who shows us how absurd it is to think we see a profit in an act of destruction.” It is also the tradesman who stands for the capitalist, the diligent drudge minding his business. Shaken down like old Tokyo’s Moneybags, he can only watch in horror as his money – his treasure – is launched forth to common approval.

Here in the early 21st century, Occupy Wall Street think they know just who to choke with a catfish. “Hey, Paulson, you can’t hide, we can see your greedy side!” chanted the self-declared 99% at the hedge-fund manager in October, little caring that his fund has halved in value in 2011-to-date. The echo-chamber of TV news and financial blogs reckons the entire system is run by greedy bastards anyway. No doubt they’re right, but even before the crisis blew up, Fed chairman Ben Bernanke long ago blamed Asia’s savings glut for building imbalances in the global economy.

So how to shake cash from the hoarders? A Tobin tax on financial transactions looks a good start, even though retirement savers will end up paying, of course, as their pension-fund managers pass on the cost. Capping bank dividends only hurts savers again, because their income depends on such yields. Setting interest rates at zero aims to scare (or at least hurt) them for not spending money today. So too does printing more money, as Japan’s modern-day Moneybags know only too well.

“Your key financial asset, your medium of exchange – money – is also a savings vehicle (a store of value) and a safe asset (a unit of account),” explains Berkeley professor Brad DeLong. So “if an excess demand for financial assets is seen to cause a collapse in production and employment” – especially money hoarded in money, rather than being spent on new windows and brothels – “then it would seem immediate and obvious that generating an excess supply of financial assets would cause a revival.”

Immediate and obvious like a giant catfish making the rich puke gold coins, perhaps. Forcing a revival of spending by flooding the market with cash still hasn’t worked in Japan, but it has led to door-drops and vouchers to try and find new loans for the State. And further to DeLong’s proposal, our key financial asset and means of exchange is now something else, too: money is first and foremost a credit, held on deposit rather than hoarded in sock drawers at home. And being a credit, rather than tangible property, the vast bulk of money today is already out of the savers’ control.

Today’s Mr.Moneybags is by definition a lender. Indeed, his money’s already been lent out with gusto. The old miser has no choice; cash on deposit is owed to him, he does not own anything inside the bank’s vaults. On the bank’s balance-sheet, his savings are deemed “liabilities”, while on the other side of the ledger sit the banks’ “assets” – the loans it has made, using Moneybags’ cash. If the old miser (aka retiree or saver) withdraws all his cash, some debtor somewhere must repay their loan. And debt forgiveness is already being talked up – whether for governments in Europe or over-spent US consumers.

So blame greedy hoarders if you like. Just watch for the mob gathered round your broken windows, ready to choke you with a metaphorical catfish.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Great Western Crackup

By Peter Schiff, CEO of Euro Pacific Precious Metals

From World War II until very recently, the West – specifically Europe and the United States – was on a course for greater centralization, greater integration, and greater economic intervention. But this consensus is breaking down. In Europe, the euro has gone from steadily adding new members to now facing the prospect of having its weaker members quit. In America, the US Congressional Supercommittee has now officially failed in its mandate to bring even meager cuts to the bleeding US deficit.

This is the beginning of the end. Both the EU and US are politically paralyzed, seeming only to be able to make compromises that involve more spending, more debt, and more central planning. The results are all too predictable to free-market thinkers: bailouts leading to moral hazard, low interest rates leading to ballooning debt, and eventually a cascade of systemic failures – leading to more bailouts.

This was confirmed yet again last Wednesday when central bankers on both sides of the Atlantic announced a coordinated tidal wave of new money to bailout the Western banking system yet again. Now, the only money you can trust is the gold and silver in your pocket.

LIKE LEMMINGS OFF A CLIFF

The poison of Keynesianism has left the politicians unable to even listen to free-market solutions. Personally, I have found it nearly impossible to find a Keynesian professor or official to debate me – even though (or perhaps because) I have a track record of accurate economic predictions. You would think at least one of them would want to tell me why I’m wrong… to offer some excuses for their failure to predict the dot-com bubble, the housing bubble, or anything that has come after that.

This is just an illustration of what we, as investors and citizens, are facing. The halls of power, the media, and academia are completely closed off from reality. They’re clutching their theories and hoping that they don’t end up having to work for a living like the rest of us.

EUROPE

I have repeatedly stated that the fact that Germany has been resistant to printing more euros is the main argument in favor of the euro. Of course, the mainstream consensus is the opposite. The same people who pushed for entitlement programs that Western nations couldn’t afford are now arguing that the EU must use the power of the printing press to “help” bankrupt Greece, Italy, Spain, and others. Really, this is just a secret tax on those who chose to save for a rainy day, and it will lead the euro on the road to ruin just like the US dollar.

If Greece, Italy, et al, can’t stomach the austerity that comes with staying in the euro, they should withdraw and see how the bond markets treat them without the implicit backing of Northern Europe. Either way, they must be made to face the market consequences of their previous spending.

Unfortunately, with this past Tuesday’s announcement that the EU would provide another $10.7 billion bailout to Greece and Wednesday’s bank bailout announcement, there is no sign that Europe’s politicians are going to allow market forces to play out. Instead, repeated bailouts will ensure that other ailing economies, like Italy or Portugal, do not make the necessary cuts in time to avoid needing their own bailouts. And no one, save perhaps China, can afford to bail out the likes of Italy.

Thus, like pulling off a bandaid, the politicians have made the euro crisis more painful by drawing it out. This means more risk and more volatility for investors, causing them to abandon the supranational currency in droves.

AMERICA

Abandoning the euro looks like a wise course of action, but it becomes extremely unwise when you buy dollars instead. Remember, my concern with Europe is that they have started down a path that may lead them to the sorry state of the US. If you’re worried that your refrigerator doesn’t get as cold as it used to, you don’t move your perishables to another fridge that won’t even turn on!

In other words, the current status of the dollar is the nightmare scenario for the euro: no significant member-states are thriving, bailouts are assumed and given without significant debate, and the money supply is growing rapidly to cover the debts. At worst, the EU could be facing a rump euro comprised of the healthier Northern economies or years of debt monetization to try to “save” the PIIGS. But the US has already spent decades monetizing its debt and is now facing a ‘game over’ scenario. Remember, the EU might be going along with the latest bank bailout scheme, but the US Fed spearheaded it and the swaps are denominated in dollars.

The failure of the Congressional Supercommittee shows how laughable Washington – and, by extension, the dollar – has become. The Federal Reserve is frantically buying Treasuries at auction to make up for wilting demand from foreign creditors, such that it may soon hold 20% of all outstanding Treasury debt. Meanwhile, the Supercommittee failed in its meager mandate to slow the growth of new spending by $100 billion a year, barely a dent in an annual deficit that runs over $1 trillion a year – not to mention the $15 trillion in debt already accumulated. The failure caused ratings agency Fitch to downgrade its outlook on US credit, potentially joining S&P soon in stripping the US of its AAA. Perhaps the analysts at Fitch realize that if the Fed were to stop buying Treasuries, say because consumer prices started rising too quickly to ignore, then rising interest rates would add additional trillions to the debt problem, making default inevitable. Or maybe they’re starting to realize that getting paid back the whole coupon in worthless dollars is just another form of default.

In short, the US is going to be mired in economic depression for the foreseeable future, with no reform efforts likely, and so the Fed will continue printing as much as it can to paper over the problem. This is tremendously bearish for the dollar, even moreso than a euro facing the loss of a few weak member-states.

THE BUCK STOPS HERE

The knee-jerk buying of US dollars, which has sent metals prices on a roller coaster this fall, represents pure market manipulation by the Fed. Private buyers and foreign governments were selling dollars and Treasuries before this recent market action sent confusing signals. We saw a short rally, but on last Wednesday’s bank bailout news, dollar selling resumed in earnest. Overall, the trend remains: the Fed will continue to buy a greater and greater share of US debt until all the new money it’s printing sends inflation into the double digits.

So, in a world where the two major reserve currencies are both faltering, which asset is going to become the new foundation for international trade and personal savings?

A look at history sees periods of monetary debasement and market mania followed by a return to more fundamental values. Every successful civilization in history has relied on sound money to grow, always in the form of precious metals. With globalization, we live in a world where investors don’t have to live with their governments’ bad choices. Allocating a portion of your portfolio to precious metals means being able to sit on the sidelines and laugh at the comedy of the sovereign debt crisis. It means that when new dollars or euros are printed, your metals simply go up in price.

That is the ultimate resolution to this crisis. More banks, institutions, and individual investors will simply withdraw from the fiat money system and rely on precious metals as their reserve asset. As they do so, the fiat system will be all the weaker for the those left behind. After this period of uncertainty, a new consensus is sure to form, and the 24% run up this year alone indicates that gold may play a central role.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.

Gift Wrapped Liquidity

Is the ECB about to give Europe’s governments and banks the biggest Christmas present of their lives…?

WITH CHRISTMAS a little over three weeks away, the European Central Bank may be about to hand indebted European governments – not to mention its banking sector – the biggest gift they ever received: an unlimited credit backstop.

It is now being widely reported that there ‘only ten days left to save the Euro’. Even Metro – the free newspaper found discarded by commuters on British trains and buses each morning – made it their front page splash today.

The FT’s Wolfgang Munchau was pushing this meme earlier in the week – but it was European commissioner for economic and monetary affairs Olli Rehn that really got it going with these comments yesterday:

“We are now entering the critical period of ten days to complete and conclude the crisis response of the European Union…There is no one single silver bullet that will get us out of this crisis.”

The ten day dead deadline refers to the European leaders’ summit at the end of next week. Is such a deadline justifiable? Will the Eurozone begin to disintegrate if no convincing solution comes out of that summit?

Quite possibly. Predictions of Eurozone demise within the fortnight could turn out to be self-fulfilling. An ultimatum has been laid down – if politicians appear to have ignored it, it could be fatal for what little confidence investors have left in Europe.

All of which could go some way towards explaining yesterday’s coordinated central bank action. The headline move was the lowering by 50 basis points (half a percentage point) of the cost of borrowing US Dollars. This makes sense given the speed at which international capital is fleeing Europe, as investors head for the perceived safety of the world’s sole reserve currency.

The coordinated central bank statements, though, seem to be preparing the ground for something else too. The following paragraph was common to all six of the central banks involved in the action (The Federal Reserve, the ECB, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank):

‘As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the US Dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. The swap lines are available until 1 February 2013.’

In other words, central banks are preparing to step up their provision of currencies other than the Dollar. This could be a sign that the ECB is about to take a more active role in the Eurozone crisis.

Indeed, each central bank’s statement had a version of the following, taken from the ECB, dealing with its own particular currency:

‘The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This action will enable the Eurosystem to provide Euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese Yen, Sterling, Swiss Francs and Canadian Dollars (in addition to the existing operations in US Dollars).’

Here’s a rough outline of where we stand in this crisis:

• Investors are wary of Eurozone government bonds. This reluctance to lend to governments has pushed borrowing costs to unsustainable levels in Italy and Spain. France may be next.

• It is hoped that the Eurozone’s rescue fund, the European Financial Stability Facility, will be able to solve this problem by ensuring there is sufficient demand at government bond auctions to bring yields back to sustainable levels – for example by offering partial guarantees on losses. However, the EFSF lacks the necessary funds to do this for larger countries, and is having trouble raising cash itself.

• French finance minister Francois Baroin has called repeatedly for the EFSF to be given a banking license so it can borrow from the ECB (Germany is dead against this). And here’s what Bank of France governor and ECB Governing Council member Christian Noyer said yesterday: “In a period of intense market disruption, it is essential to ensure that the monetary policy transmission mechanism actually works. This may involve temporary and exceptional interventions on those market segments where dysfunctions are most apparent.”

• European leaders now have a de facto ultimatum: sort this out by the end of next week, or else.

There is an ongoing push, led by Germany, for a ‘fiscal union’ – involving greater oversight of national budgets and the like. But fiscal integration is preventative measure – not a solution to a crisis that has already erupted.

Markets are looking for a solution this side of Christmas. The only agent in a position to act that quickly is the ECB.

ECB president Mario Draghi spoke to the European Parliament this morning. While he gave his support to what he called “a new fiscal compact”, he did make some comments that may hint at further ECB action over and above its ongoing bond purchase program (which clearly isn’t working, as Italian and Spanish bond yields attest).

“As you know, the ECB’s monetary policy is constantly guided by the goal of maintaining price stability in the Euro area over the medium term,” said Draghi.

“And when I say this, I mean price stability in either direction. This applies to both the setting of official interest rates and the implementation of non-standard measures.” (emphasis ours).

There was also this potential hint:

“I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.” (emphasis again ours)

Might that “credible signal” be an offer to provide whatever liquidity is needed to assuage fears in key markets?

There are several mechanisms, for example, by which the ECB might seek to prop up government bond prices (and thus keep yields down). It could find a way, as touched on above, to get more Euros into the hands of the EFSF. It could buy the bonds directly at auction (unlikely, and currently forbidden by several European treaties, but at this stage of the crisis little can be ruled out…). Or perhaps some other method would be found.

The net aim is the same whatever the mechanism: to get Euros to governments who need to roll over their Euro-denominated debt. If there are insufficient investors willing to hand over their Euros, logic suggests that one solution is to turn to the ECB, from whence Euros originate. The ECB, after all, has access to an unlimited number of Euros.

There are also fears over the banking sector, which yesterday suffered a swathe of downgrades from Standard & Poor’s (which in turn may have precipitated the central banks’ announcement). Lower ratings could seriously impair some banks’ ability to borrow in the money markets – which is also a reason we see the world’s lenders of last resort priming their pumps.

In short, get ready for a world of uncapped credit availability, as the authorities step up their fight against deleveraging – like the cavalry in a Western, riding over the hill when all hope seems lost. Saddle up, Draghi!

Long term, a liquidity boost would tend towards a higher gold price, other things equal. However, there could be significant downside risk for gold, with or without a solution being announced at next week’s summit.  If markets are unconvinced, we could see the sort of mass liquidation that has been common in recent weeks – and that has hit gold and silver along with stock markets.

If, on the other hand, the markets buy whatever the Euro leaders are cooking, then we could see some weakening of safe haven demand for gold, at least in the immediate term.

Either way, though, Europe will still be in a mess. Growth is sluggish (today’s Eurozone purchasing manager’s index shows a manufacturing sector shrinking at an accelerating rate).

Outstanding debts, therefore, will either be dealt with via default, or they will have their real value diminished – which means reducing the value of money itself. Default or devalue remain the watchwords for creditors.

So while the ECB may be convinced that it has ‘ten days to save the Euro’, if it ramps up its liquidity provision it could end up doing the exact opposite.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Where Would We Be Without Rules?

“Where would be if we didn’t have rules?”

“FRANCE!”

“And where would we be if we had too many rules?”

“GERMANY!”

– UK comedian Al Murray, the (very British) Pub Landlord

“The GREAT DEPRESSION was caused by the Gold Standard,” reckons NYU professor and professional media star, Nouriel Roubini.

Like pretty much everyone else, Roubini thinks the Gold Standard’s tiresome rules brought about that cataclysm. Those manacles meant having to swap paper for bullion every time investors and savers got jumpy about the size of your deficit, your debt or your money-printing.

Really, what an idea! So 80 years later, the Gold Standard is deader than punk. Yet here we are in another depression again.

What’s caused this catastrophe if gold was to blame before?

“First, it is Europe itself that is in crisis. Not finance. Not the economy. Europe. Its culture. Its genius. Its unconscious conscience. Its immemorial and its memory. All that makes up its bases and its origins. Its heart, that beats more and more faintly. Its soul. Its common and hidden grammar. The distinction, that it invented, between law and right. Or between man and citizen. The articulation, that is its own, of multiple forms of the Multiple and of the unique name of the One…”

There’s more of this – much, much more – from French “superman and prophet” (© Vanity Fair) Bernard Henri Lévy. A “vain, pontificating dandy” according to the professional pie-thrower who’s been attacking Lévy’s enormous hair since the mid-80s, the nouveau philosophe “[has] no equivalent in the United States,” according to his biog’ on the Huffington Post. Which is lucky for the US. Because in France, Lévy “is accorded the kind of adulation that most countries reserve for their rock stars,” says the UK’s Guardian.

Scarier still, he’s best-friends-forever with French president Nicholas Sarkozy. Most scary of all, Lévy would in fact make a clear and sensible point, if only he swapped the word “Europe” for “money” above. Deflation is a “deterioration of the monetary standard” just as much as inflation, as sometime Reagan advisor and WSJ editor Jude Wanniski noted in 1982. No less disastrous for everything built on the grammar, culture and genius of money than its apparent opposite, deflation is “characterized by falling prices”. And as money rises in value, “it affects more and more debtors in global Dollar contracts” – the Dollar still being money today, and the only cash that counts in a panic.

Research shared with BullionVault today shows that, in 8 out of 10 of the best weeks for equities since 2007, the Dollar fell on the currency market. It rose in each of the worst 10 weeks for stocks. You might have noticed this mechanism gutting your portfolio again this month, as well. But what of the Dollar’s sometime challenger for reserve currency status?

“The Euro represents the mutual confidence at the heart of our community,” declared Wim Duisenberg, then-president of the European Central Bank, when accepting the Charlemagne Prize on behalf of, well, on behalf of the Euro currency itself, in 2002.

“It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state.”

Lacking those two legal attributes – attributes held by pretty much all money ever until the mid-20th century – the Euro did have rules, however. “In order for [monetary union] to function smoothly,” as the European Council still says today (just above a warning that “this page is under revision”), “member states must avoid excessive budgetary deficits. Under the provisions of the Stability and Growth Pact, they agree to respect two criteria:

“A deficit-to-GDP ratio of 3% and a debt-to-GDP ratio of 60%.”

Now, if everyone had stuck to those rules, perhaps the Euro would have avoided this crisis. (Not adding the debt of your entire banking sector to the deficit, as Ireland did in 2008, would have helped too.) But nobody kept to 3-and-60, because those rules were just rules, and they were there to be broken.

“If a Member State exceeds the deficit ceiling, the excessive deficit procedure (EDP) is triggered at EU level. This entails several steps – including the possibility of sanctions – to encourage the Member State concerned to take measures to rectify the situation.”

Tough talk! The “possibility” of sanctions would “encourage” miscreants to “take measures”, or so the Growth & Stability Pact pretended. Yet as we wrote a year ago, nearly 12 months to the day, the “ghost of the Mark” (as Nobel-winning economist and ‘father of the Euro’ himself Robert Mundell called it) saw the Euro’s strict rules – learnt and applied during 50 years of Teutonic discipline – over-run at every turn.

• The European Central Bank’s own target for money-supply growth first became merely a “reference value”, and then it was ignored outright. Set at 4.5% per year to start, it hit well over 12% at the height of the banking bubble in 2006-7;
• Luxembourg aside, all member states have long since breached the Eurozone’s government deficit and debt ceilings – Germany included;
• Barred by its founding treaty from financing government deficits directly, the ECB first bailed-out commercial banks by lending to them against government bonds put up as collateral, and then threw the whole thing over by agreeing to buy and hold government bonds outright – the weaker, the better, of course.

There has been resistance, of course. But it was awful late in coming. German ECB member Axel Weber stood down in February 2011, proclaiming discomfort at the majority of his central-bank colleagues voting to buy government bonds to shore up Athens, Dublin and Lisbon. Yet this was over nine months after the first Greek deficit crisis, and a mere eight years after Germany and France breached the 3-and-60 rules themselves. Where were his principles when breaking the rules didn’t matter?

Six months after Weber, the ECB’s chief economist Jürgen Stark also made a principled stand, announcing that he would leave his post, two years early, in December. Why? Because “If the central bank starts to finance governments, it decreases the incentive for governments to address the root causes of the crisis,” as Starck told an interviewer last week.

“It is not so much that bond purchases will lead to inflation at this particular moment. The ECB regularly draws down the liquidity again; it later soaks up the money spent. What is important and problematic is that the interest rate on government bonds is affected by the purchase of bonds and thus has a fiscal effect.”

Buying bonds, in short, means that the independent ECB policy wonks “influence the conditions under which governments can borrow,” says Stark. “This is absolutely not our job.” Given that everyone knows the rules are being broken, of course, “There is an open discussion about extending our mission,” says the ECB man. “This not only affects our independence, it threatens it.

“Principles apply…Rules are there to give direction, especially in times of crisis.”

How brave, insightful and utterly naïve! Tilting at windmills, Stark misses the one true lesson of the Great Depression’s Gold Standard just as badly as Nouriel Roubini does. Hasn’t anyone got a library card these days?

“The advantage of gold, in theory, is that it affords a safeguard against the dishonesty of Governments,” writes British philosopher Bertrand Russell in a dusty tome from 1935. “This would be all very well if there were any way of forcing Governments to adhere to gold in a crisis, but in fact they abandon gold whenever it suits them to do so.”

Replace the word “gold” with the words “Europe’s Growth & Stability Pact”, and you’d think it was the end of November 2011. And just like the Euro’s would-be saviors today – or at least, just like those world-improvers who don’t believe rules should get in the way – Russell thought the only solution to mankind’s economic problems was “an international Government”. That way, tiresome democracy would be made irrelevant as expert technicians did the best for all in all possible ways.

Now voters in Greece, Ireland, Portugal, Spain and most plainly Italy have shown they can’t handle democracy – not in a rules-based currency system. Time and again they have voted for people and policies which now make the rules aimed at defending the State’s independence impossible. Little wonder their sovereignty’s now vanishing, along with the rules.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Gold Jumps after Central Banks Launch “Prudent” Liquidity Measures, S&P Downgrades “Leave Banks Facing Short-term Funding Concerns”

London Gold Market Report

U.S.DOLLAR gold bullion prices leapt 1.7% in 30 minutes Wednesday lunchtime in London – hitting $1744 an ounce – following an announcement of coordinated action from central banks worldwide aimed at increasing Dollar liquidity in the global financial system.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank will all lower the price on existing Dollar liquidity swap arrangements by 50 basis points (0.5 percentage points), effective Monday.

As well as strengthening Dollar liquidity provision, the central banks “judge it prudent” to make arrangements to offer enhanced liquidity provision in other currencies ” so that liquidity support operations could be put into place quickly should the need arise”, a Bank of England statement said.

On the currency markets the Dollar fell sharply following the central banks’ announcement.

Despite its rally, the price of gold bullion this lunchtime remained only marginally above where it began the month.

Spot market silver bullion prices also surged – jumping 3.5% to $32.51 per ounce in the space of 36 minutes – while stocks and commodities also rallied.

By Wednesday lunchtime in London the FTSE was up over nearly 3% on the day – while Germany’s DAX was up more than 4%.

A few hours earlier, ratings agency Standard & Poor’s cut its ratings on 15 of the world’s largest banks late Tuesday – while at the same time raising its rating for two Chinese banks.

Bank of America, Barclays, Citigroup, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS all had their debt ratings cut by one notch each – reportedly as a result of changes in ratings methodology at S&P.

Despite this technical explanation, the downgrades “will likely raise concerns about their short term funding,” says Andrew Fraser, investment director at Standard Life Investments, speaking before the central banks’ announcement.

“They will be sidelined by money market funds who are the traditional buyers of that short-term paper.”

S&P could also change its outlook on France’s AAA rating from stable to negative “within a week, perhaps 10 days” reports French newspaper La Tribune, citing an anonymous diplomatic source.

European leaders meantime “are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” European economic and monetary affairs commissioner Olli Rehn said Wednesday.

The next European leaders’ summit is due to take place on December 9.

Eurozone finance ministers meantime agreed Tuesday on measures aimed at boosting the Euro area’s rescue fund, the European Financial Stability Facility.

One mechanism will be a “partial protection certificate” for government bond investors, worth 20-30% of the initial amount invested. These certificates, will be detachable and separately tradable, according to an official EFSF statement.

The other measure agreed involves creating “one or more Co-Investment Funds”, to attract additional investment.

“Both options are designed to enlarge the capacity of the EFSF,” said Klaus Regling, the rescue fund’s chief executive.

“[However] it is really not possible to give one number for leveraging because it is a process…we will need money as we go along.”

The EFSF’s current effective lending capacity if €440 billion, backstopped by guarantees from Eurozone governments. Some of that €440 billion is already committed in loans, however, while the guarantees offered by countries like Italy and Spain have been compromised by those countries’ recent fiscal difficulties.

There are widespread concerns that the EFSF is not large enough to rescue either of those two nations should they require a bailout.

“We will have to look at the IMF,” Dutch finance minister Jan Kees de Jager told reporters after Tuesday’s meeting.

“We have talked about leverage though private money, but it would be two or two and a half times an increase so not sufficient… I think countries in Europe and outside of Europe should be prepared to give more money to the IMF.”

Tuesday’s meeting also brought an agreement to release €8 billion of bailout funding to Greece.

A poll of economists by newswire Reuters meantime shows a majority expects the ECB to cut interest rates when it meets next week.

Switzerland has become the number one destination for Italian exports – primarily owing to a large jump in gold bullion shipments, Italian business daily Il Sole 24 Ore reports.

In Vietnam meantime a number of gold bullion refiners are reported to have shut down their processing operations following a central bank draft decree that some fear will hand a monopoly to a single refiner, Saigon Jewelry Co.

The State Bank of Vietnam has previously allocated gold bullion import quotas to refiners, one trader in Ho Chi Minh City says.

“Over the last few months [though] only the Saigon Jewelry Co was allocated quotas.

SBV governor Nguyen Van Binh last week announced that the central bank has “administratively acquired” SJC – the latest in a series of moves aimed at regulating Vietnam’s gold market.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Money Crisis’ First Blush

“I cannot think of anything which would more surely lead to a danger of all-round deflation than the collapse of international monetary confidence.”

- Roy Jenkins, then British chancellor, debate on the London Gold Pool, 18 March 1968

This SUMMER’S FIRST U.S. debt downgrade came after Washington failed to fix the debt ceiling one way or the other. Three months later, and Washington just failed again.

Yet that first downgrade also saw 10-year Treasury yields fall to 3.0% as US debt prices rose. And today, with a second downgrade nailed on, that yield is already down below 2.0%.

What gives? Why is the financial world piling into US debt – driving its price higher – even as the security of that very debt risks being de-rated further below the magic risk-free AAA mark?

“Most risk and return models in finance start off with an asset that is defined as risk free,” explains an NYU professor. “The expected returns on risky investments are then measured relative to the risk-free rate.” The loss of “risk free” as a concept thus plays hell with Wall Street’s investment confidence, let alone its models.

Pricing stock-market options using the Black Scholes equation, for instance, starts by assuming that “it is possible to borrow and lend cash at a known constant risk-free interest rate.” Remove the “risk free rate”, and things fall apart faster than Long Term Capital Management, the hedge fund built on Black-Scholes’ model, which collapsed when the world changed but the equation didn’t.

More urgently, messing with the concept of “risk free rate” also plays havoc with the insurance and banking businesses. “A reduction in the risk-free rate increases lending profitability by reducing funding costs and increasing the surplus the monopolistic bank extracts from borrowers,” the IMF explains. “Insurance contract cash flows…are discounted using a locked-in discount rate determined at inception date,” say consultants PwC, “[calculated as] the risk-free rate plus liquidity premium.”

So no risk-free rate, no baseline for banks or insurers, those multi-trillion-dollar industries pervading pretty much every deal, order and purchase you can think of today outside the black economy. But even cash-only gangsters aren’t free of the crisis hitting the financial world’s only other competitor for the role of “risk-free” reference point. Because in Eurozone bonds, the very denomination itself is now in question.

“Reintroducing the national currency would require essentially all contracts – including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else – to be redenominated in the domestic currency,” warned economics professor Barry Eichengreen of Eurozone break-up in 2010. The currency historian thought this hurdle was “insurmountable”; no member state would quit the Euro because the procedural obstacles were too great.

“Exit is effectively impossible.” But in reality? It will be a real mess – a big, ugly, deflationary mess in which lending collapses and trading grinds to a halt.

Irony guarantees that we get the word “crisis” from the Greek, of course, via the Romans. Transliterated with a “k”, it means “decision, judgement, event, issue, turning-point of a disease” according to the Shorter Oxford Dictionary – and that monetary madness which is the Euro has certainly reached one fork in the road or another.

The Esperanto Experiment clearly can’t go on, won’t go on, as it is. Whatever replaces or mutates it, one immediate horror is not knowing whose contracts with whom might be about to lose a surer foundation than the very ink in which they’re written. Not just inside the Eurozone; around one-third of UK banks’ lending is owed across the Channel. London-based asset managers are also “reducing their Eurozone exposures,” says eFinancialNews, “for fear of capital controls freezing Euros and other assets held” inside the fissuring union.

“When the wall is lifted, the Euros might be new Drachma or new Pesetas or new Lira – you don’t know what they’ll be,” the website quotes Alan Brown, chief investment officer at Schroders. But no matter the flood of non-Eurozone money getting (and staying) out of the Eurozone, there’s more money pouring in, as Eurozone institutions pull back their money from outside. Over the 12 months to September, says ECB data, net portfolio inflows to the 17 member states hit €335 billion – more than 10 times the volume over the previous year, and “all the more significant” says Reuters “[because of] ample evidence that overseas investors have been exiting Eurozone securities.”

“As Eurozone banks and other Eurozone entities lose access to funding markets abroad, they are forced, at least partly, to sell foreign assets,” the newswire quotes Morgan Stanley. “This creates the rather counterintuitive result that stress in funding markets abroad induce repatriation flows that support rather than hurt the Euro.”

Witness peripheral Europe outside the Eurozone, for example. What used to be called the “New EU” states risk being drained of capital as banks in core-member countries liquidate assets to hoard money closer to home or are told to stop new lending by their domestic regulators. That means the local currency falls (see the Polish Zloty for instance). Hence the crisis-defying strength of the Euro on the currency market. Less bothered by 2011′s money crisis than Lehman’s collapse in 2008 or the first Greek deficit crisis of early 2010, the Euro’s strength is no less bizarre than US Treasury debt rising in value as Washington’s credit rating is cut. But that’s deflation for you – a dash for cash that sells first, asks questions later, and holds currency…the very stuff called into crisis…above everything else.

Thus Roy Jenkins’ unwitting paradox of 43 years ago, quoted up top, still holds true. It is hard to imagine a more deflationary event than the collapse of confidence in the monetary system. “Feelings are reasons too,” as Glyn Davies wrote in his History of Money, and short term, currency and near-cash Treasury debt look the only refuge from the system beneath them. As the US and Eurozone crises roll on, however, crushing Dollar-dependent and Euro-denominated asset prices worldwide, it’s unsurprising to find demand to own physical gold and silver bullion surging worldwide, not least as the precious metals join the indiscriminate price fall.

Gold and silver’s zero-yield is plainly risk free. Their value isn’t denominated in any one currency or system. If this first blush of crisis turns red with anger, escaping all currency risk-free could become very much more popular still. Three-thousand years of monetary use will likely stand out as the 10-year Euro experiment and 40 years of Dollar dependency unwind together.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.