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Gold: The World's Currency

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Central bank and government actions around the globe increasingly prove that gold is the place to be.

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Central bank and government actions around the globe increasingly prove that gold is the place to be.

Here is an interesting Bloomberg headline that shows what I mean: Central Banks to Retain Gold to Manage Debt in Crisis:

Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

"Once they've sold, that's it, and buying back would be extremely expensive," said Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., who's studied metals markets for 20 years. "They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt."

Gold rallied to a record this week as rising government debt burdens and weakening currencies boosted demand for a haven. Central banks are the biggest gold holders, and Thailand, South Korea, Kazakhstan, Mexico and Russia have added to reserves this year. The precious metal is the "currency of the world" amid the debt crisis, economist Dennis Gartman wrote Aug. 19.

"Under conditions of austerity we're going to see a further deterioration of debt," Richardson said in an interview yesterday. "Rising risk argues in favor of holding on to their gold reserves rather than selling them because they've only got one shot at selling."

Currency Credibility

"The European central banks won't sell their gold because while it may be a means to raise cash, it definitely won't be enough to settle their debts," said Duan Shihua, head of corporate services at Haitong Futures Co., China's largest brokerage by registered capital. "Besides, none of the central banks believe in the currencies of other countries."

Central Bank Actions Speak Louder Than Fiat

Check that last comment out: "none of the central banks believe in the currencies of other countries."

Clearly that is an opinion, but I believe a accurate one.

Gold, Unlike All Other Commodities, Is a Currency

Occasionally Alan Greenspan says something that make sense. For example, yesterday Greenspan said Euro 'Breaking Down'.

It wasn't just the headline that caught my eye, it was this pair of statements:

"The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system."

"Gold, unlike all other commodities, is a currency. And the major thrust in the demand for gold is not for jewelry. It's not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating."

Gold as Collateral for Loans

Also note that the German Labor Minister Wants Gold Collateral for Additional Loans to Greece.

Why not? Why shouldn't there be collateral for loans? And what makes more sense than gold as collateral?

Why Governments Buy US Treasuries

So why do governments buy US treasuries? Because they need to, as a simple mathematical balance-of-trade fact as I have pointed out on numerous occasions.

China and Japan (and the world in general) want to keep their export engines alive. They do not want rising currencies. Japan and Switzerland have recently intervened in the Forex markets to suppress their currencies. China does so on an ongoing basis with a peg.

As a simple mathematical necessity of trade imbalances and currency suppression, central banks accumulate US dollar-denominated reserves (while complaining about it the entire time).

Gold's Honest Discipline

Speaking of trade, the way to solve trade imbalances is clear. For details, please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited.

Gold Is Money

I made the case before and I repeat it now: Gold Is Money.

Central bank and government actions speak louder than fiat, regardless of what nonsense governments force citizens to accept by decree.

No positions in stocks mentioned.
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