Conundrum

Some gold specialist and investor and adviser suggested that gold and silver are now the things to hold onto for wealth and for the keeping of value, nay, for increasing the value of wealth. 

The argument is that the interest rate is going to go sky high to as much as 20% per annum and more. This means that debtors will default and banks will go bankrupt - which we agree.

The government will also default but it will respond by printing more money which will make money worthless - which is debatable.

In the money-using world that we are living in today, there will always be money which is currency which can be paper or electronics. It doesn't matter the form, but the accounting. Whatever item that is going to play the role of money in the world economy will have to be managed properly for the money to stimulate the economy and keep it going for as long as the economy can. For a fact, gold and silver will not replace the currency as money, be it the US dollar or something else. Somebody go to print enough money for the economy grow smoothly.

Just to close the argument with the gold investor specialist, when the interest rate hits 20% per annum and more, money will flow from gold and silver to the currency because it is giving such a good return. Money has been going to gold and silver because of the near-zero interest rate for the currency, thanks to quantitative easing. The point we are trying to make here is that it is not true that gold and silver will continue to go up in price when the interest rate goes up significantly. Gold and silver prices are likely to crash because of the speculative nature of the buying of precious metals.

An underlying argument of gold is that central banks are now trying to replenish their holdings of gold in their reserves. This is true to BRIC which is trying to create a new international currency to replace the US dollar. The only argument they have is that the proposed new international currency will be backed by gold - going back to the gold standard. The fact that the gold standard was abandoned by the US in 1973 was because it limited the growth of money for sustainable trade especially after the hike in the price of oil at the time. If all the money were to be used to pay for oil, then there would be insufficient supply of money for the rest of the economy to grow. Abandoning the gold standard was correct. So if BRIC wants to go back to the old regime of managing the reserve currency, it is likely to face similar problems regarding the rigidity of the management of the money supply. Let BRIC buy gold and we'll see what they can do with their proposed new international reserve currency.

Apart from BRIC, ordinary holders of gold will sell when there are signs of gold price coming down especially when there is an alternative way to obtain a higher return on their money.

For sure, the interest rate is going to go up. Now that the US has hit again its limit on the federal deficit, this means that there is already a slowing down in the expansion of the money supply when there are no new base money to stimulate loan expansion. The economic dynamic is a very fragile thing. The moment the upward momentum is killed, the downturn happens immediately. This is because the markets are now so transparent and live and market reactions are now extremely rapid. After four decade of quantitative easing and easy money, a long period of downward adjustment is bound to happen and so many events are trying the reversal of the global economic boom. First, covid. Second, Russia invasion of Ukraine. Third, China overproduction and global dumping and the US tariffs. Fourth, the lack of funding for the US federal government. All these have stopped the issue of new loans globally and hence the growth of the money supply.

The only people who have plenty of money or cash are multinationals and private equities. These are not normal businesses as we know them - honest entrepreneurs working with neighbours to produce goods and services for the purpose of taking care of the workers (and owners) and their families by satisfying the needs of customers. The concerns of national governments used to be to stimulate investment and create jobs so that all able-bodied citizens can get a decent job in their neighbourhoods. Now, this is no more. National governments attract multinationals to invest by offering tax holidays and tax concessions and even cash incentives to create jobs for lowly paid foreign workers so that at the end of the day, the rate of growth of the GDP looks good - good enough to argue for another term in the political office. Foreign investors especially private equities are out to make their money back plus an extremely high rate of return within a couple of years or so. They raise selling price and suppress wages and they can do that in an environment of high liquidity. There is no doubt that quantitative easing and easy money has made the lives of ordinary workers miserable with suppressed wages and inflated asset prices especially for real estate.

Of course, we are all sitting on our hands waiting for the downward adjustment to unravel itself, as it is now doing. Quantitative easing and easy money has inflated the ego of China who is now going for world domination. Sure, in the long long term, the China economy with its modern infrastructure will surpass that of the US economy with is aging infrastructure. It is a great mistake to dismiss the need to manage the money supply probably and rely entirely on the superiority of the production function. In a deprived economy, there is a need to increase the output because there is a desperate need for it. Once the need is satisfied, it is often likely that output capacity is overshot because of the lumpiness of industrial investment projects. This is where the trade cycle shows its face. And this is where demand management becomes an art which must be left to the trained professionals.

After four decades of printing money, how is the excess money going to be destroyed? Insolvency. This is where merchant banks or investment banks will be at work. For you and me, you keep gold, I keep cash. In the short term, it is good to have money to spend.