05/25/10 Laguna Beach, California – “The financial market tormentors might take Monday off, but we would expect them to return to work very soon,” your editor remarked in yesterday’s edition of The Daily Reckoning.
As it happened, the tormentors punched the time clock shortly after lunchtime yesterday, then broke out their whips and chains, and went to work on Mr. Market. By the end of the New York trading session, the Dow had surrendered 126 points – i.e., everything it had gained on Friday. The euro, likewise, surrendered everything it had gained on both Thursday and Friday.
But the news was not ALL bad for our dear Reckoner-Investors. The Daily Reckoning’s favorite metal on the Periodic Table of Elements (Hint: #79) gained nearly $15 an ounce to $1,191.40.
Gold’s multi-year bull market – like the recent volatility in the currency markets – testifies to the fact that the global monetary system is more guesswork than science; more group therapy than economics. The euro’s recent trauma – combined with the tremors rumbling through global stock markets – is a warning that the “group therapy monetary system” might be breaking down. “I’m okay; you’re okay” works much better in the comfy security of a group hug than in the vicious world of “wolfpack” currency speculators.
No doubt about it; the global monetary system is facing a crisis of confidence…and for good reason. Most of the governments that funnel currencies into this system provide little basis for confidence. These governments spend what they do not have…year after year…and conjure currency out of thin air…year after year.
Somehow or other, the global money supply ALWAYS increases. Isn’t that odd? Isn’t that a scam more than a system? Isn’t that a game of “hot potato,” writ large? Don’t be holding the Mexican Peso (in 1994) when the buzzer goes off…or the Thai baht (1997)…or the Argentinean peso (2002)…or the Icelandic krona (2008)…or the euro (2010)…or the whatever-currency-disaster-comes-next…
The global monetary system as it [mal]functions today is as much a system as the hygiene “system” your editor’s sons use to keep their bedroom’s tidy: Toss dirty and/or wet clothes on the carpet and hope someone else picks them up before bacteria and fungi begin sporing prolifically.
So far, the Developed Nations of the world – usually through the pomp, circumstance and credit lines of the IMF – have managed to clean up the “messy bedrooms” of the currency world without too much pain and difficulty. But what happens if the Developed Nations, themselves, start making a big mess of things? Who will clean that up?
Answer to question #1: They already have.
Answer to question #2: No one.
That’s why gold may be the last (and best) resort in a world of increasingly suspect currency values. To continue our metaphor, gold is a monetary HAZMAT suit. It can provide complete protection, no matter how toxic the monetary environment. Unfortunately, also like a HAZMAT suit, gold is an annoyance in a non-toxic environment. No one wears a HAZMAT suit to a restaurant, for example, or to the beach. Similarly, as long as the global monetary system continues muddling along, gold can subject investors to significant opportunity cost. Indeed, in a stable monetary environment, gold could produce sizeable losses.
So take your pick, dear reader. Wear a HAZMAT suit to the beach, metaphorically speaking, or risk fatal exposure to a highly toxic monetary system. There is a middle road, of course: buy some gold and also allocate capital to other types of investments that could flourish, even amidst extreme currency volatility.
“We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion,” laments Egon von Greyerz in yesterday’s edition of Whiskey and Gunpowder. “Clueless governments…will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money…
“Never in history,” Egon insists, “has the world been in a situation when virtually all industrialized countries are bankrupt. Therefore there is no precedent for what will happen in the next few years. What we can be quite certain about is that events will happen in a seemingly random pattern and that it will be impossible to forecast where the next crises will start.
“The nearby chart shows debt as a percentage of GDP for various OECD countries,” Egon continues. “The official debts (in red) are massive and unlikely to ever be repaid in real money. Total debts (grey bars) include unfunded liabilities such as pensions and health care. Spain has the lowest total debt to GDP of 250%. Germany and the UK have around 400%, the US around 500% and Greece over 800% debt to GDP. These figures are absolutely astronomical and prove that most governments in the world will be totally incapable of repaying their debts or funding their future pension and medical care liabilities.”
The “group therapy monetary system” is winding down. The feel-good vibe is over. Your currency is not okay; and neither is mine. But gold is still okay…maybe more okay than ever.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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