In response to an FT article by Henny Sender on 6th May 2016, entitled 'Will the inflation scaremongers be proved right?''
“For years since central banks launched their unconventional monetary policies, many investors believed the result would be massive inflation and that, as paper money lost its value, gold would be the safest haven… For years they were wrong”
Thanks Ms. Sender.
Now...get ready to laugh…the people who said 'buy gold' were not wrong…they were early…very early as it turned out. OK, now quit with the mirth and let me explain :-)
In terms of investment, being early can be exactly the same thing as being wrong if you bail out at a loss. But in terms of policy, the policies undertaken 8 years ago were identified by the people who said 'buy gold', as doomed to failure. They were not alone in that assessment, but they were very loud, and they were very early. Eight years on, however, the easy money idiocy has not worked...and it will not work...the fundamental assessment was correct.
The central banks now have three choices:
1. Allow a deflationary bust to take place - hell will freeze before they allow the banks to go bust, thus proving what a waste of time their policies have been
2. Reset the global monetary system - they lack the wisdom, the courage, and the will to do this until forced into it by catastrophe - which they will be
3. Inflate away the debt though massive fiscal expansion, and debt monetization. Number three is always an option for any central banker with a printing press. (Puerto Rico hasn’t got one, which is the only thing that makes their governmental mismanagement look so much worse than Japan - it isn't). They will take this option and they will create inflation by hook or by crook: using QE, direct monetization of fiscal expenditure, or even the purchase of commodities, openly or through their various back channels.
They will take number three, it may even appear to work for a while, but sooner or later it will produce a collapse in ‘confidence’ in government, which will accelerate velocity. That is when they will encounter a situation fit to disturb even Princeton/Harvard/Berkeley levels of hubris. Eventually there will be a sovereign debt crisis, carnage in the bond markets and they will be forced to take option 2 - global reset.
The world, including the US will neither want or allow the dollar to continue as the global reserve, and there will be a new Bretton Woods type agreement, and a new global reserve currency, probably based on the IMF's SDR and/or a basket of currencies/commodities - gold may well be one of those. Whether it is, or isn’t, it will have fulfilled its role – gold is a hedge against crappy government – and there’s never any shortage of that.