Gold Symposium 2012: What is the End Game for the Global Monetary Crisis?

Thoughts from the presenters at the 2012 Gold Symposium in Sydney on how the monetary crisis may end:

When 90% of the audience puts their hand up in answer to the question “who owns physical gold or silver?”, there was always going to be an element of “preaching to the converted” at an event titled the Gold Symposium.

We intend to outline over the next week or two what a number of the speakers covered last week in Sydney in more detail, but there was a fair amount of similar content amongst many of them, so we thought to begin with we’d cover the question “how does it all end?” That way you’ll see a mixture of opinions from the various speakers as to how the current monetary crisis might come to a head. Now on to the various scenarios presented…

Egon von Greyerz – Matterhorn Asset Management

Egon Von Greyerz commented that austerity will be a vote loser, so therefore governments will continue to run ever larger deficits. There will be unlimited money printing as already put in place by Bernanke 2 months ago. The US dollar will fall sharply but so will other currencies. Interest rates and taxes will surge as will unemployment. Asset prices will continue to fall in real terms i.e. against gold and silver. Exchange controls will be implemented to prevent capital leaving the borders of countries.

New political parties and leaders will emerge. Pensions and social security will collapse. This will result in social unrest and increased crime. Famine will also occur resulting in falling population. Geopolitical problems will emerge.

Eventually all this money printing will result in a hyperinflationary depression.

Jim Rickards – Author: Currency Wars

Rickards believes the US will not relent in the currency wars. It will continue to debase so we should expect global inflation. Rickards then went on to outline the Four Horsemen of the Dollar Apocalypse. These were his 4 possible outcomes from the ongoing debasement of the US dollar:

● Multiple reserve currencies. So we could see the US dollar fall as the global reserve currency but remain part of the mix. He outlined a possible mix of 35% USD, 35% EUR, 10% JPY, 20% GBP, CNY, CHF, CAD, AUD and other. But with no anchor this option would be inherently unstable.

● IMF’s Special Drawing Rights (SDR’s). Rickards believes this is the prefered option of the global elites. SDR’s would not be a local currency but rather used for global transactions such as for the likes of oil, global corporations and settling global balance of payments (like gold once did). This turns the IMF into a world central bank with currency and an expanded balance sheet and the power elites maintain control.

● Gold Standard. Rickards 3rd option is a return to a gold standard and he went on to outline various options including what the reserve ratio would be and what price gold would need to go to in USD’s at these different reserve ratios. These prices got as high as $30,868 per ounce to balance out existing US money supply and $40,552 to balance out global monetary supplies.

● Chaos. This was his final option and the one he believes is most likely to come about as a result of currency wars. As they will lead to trade wars and geopolitical disagreements and eventually real shooting wars.

Louis Boulanger – Independent Investment Advisor

Louis Boulanger, transplanted French Canadian, fellow Aucklander and a friend of ours for a number of years now had a great slide where he presented a number of possible outcomes including a few already mentioned. These were;

● Status Quo – that is global financial repression in the form of negative real interest rates, inflation, involuntary funding and capital controls
● IMF’s SDR as new global currency – as per Jim Rickards above
● China’s Renminbi redeemable in silver and gold
● Eurozone fiscal union and a Euro backed in gold
● US dollar becomes redeemable in gold again
● Gold and silver coins are legal tender again
● War, financial collapse, revolution and chaos – as per Jim Rickards most likely outcome

Louis stated he was an optimist so didn’t think the worst case scenario was as likely. He thought a very possible outcome was China eventually making its currency redeemable in gold and silver. In fact the $64 trillion dollar question was just how much silver China still has. China has a long history in using silver as money and it is unknown how much they still have and how much more they have been accumulating in recent years.

Dan Denning – The Daily Reckoning Australia

Dan Denning’s presentation was chiefly on Exters Inverse Pyramid which we have featured previously here.  The premise was that a great credit contraction is underway and financial assets are breaking down steadily with gold being at the bottom of the pyramid and will be the last man standing.

David Evans – Gold Nerds Gold Stocks Researcher

While David Evans likely outcome to the monetary crisis did not differ markedly from the others mentioned so far, he gave an interesting presentation where he gave a possible timeframe for the existing debt to be inflated away. Evans believes without political interference, the current debt bubble would collapse in a massive deflation like the 1930’s. But governments and banks will interfere to prevent this by manufacturing more money. They are deliberately causing inflation to reduce the real value of all the debt that has been accumulated. His scenario assumes that central banks manage to stay in control and this is their best case outcome if they do. The main risks they (and we) face are:

1. Deflation
2. Hyperinflation
3. Banking crisis
4. Physical gold market blows up (see permanent gold backwardation below by Keith Weiner)
5. Major War (a.k.a. Jim Rickards chaos outcome)

If the bankers succeed he sees high but tolerable inflation, or a more intense version of the 1970’s. David calculated that if this inflation started in 2014 it would take 14 years for “reversion to mean” of the current debt from 350% of GDP back to 150% of GDP. This is based upon annual inflation of 12% versus modern CPI of 5-8% and interest rates of 6%, so real interest rates would be -6%. He projected gold would rise 21% per annum under this scenario which is similar to what it has done in USD terms for last 11 years. So by 2028 gold might reach US$50,000 – although before we get too excited this would only be $8,400 in todays money due to the amount of inflation required between now and then. At around this time interest rates may also rise rapidly to say 15-20%, governments would have to cut spending drastically and run surpluses to finally bring the inflation to an end!

Keith Weiner – Gold Standard Institute USA

Keith Weiner concurred with Professor Fekete, who he studied under, that permanent gold backwardation is the likely end result. That is where the futures price of gold will remain permanently below the price in the physical market. Normally when this occurs it is arbitraged away as there is “free money” to sell your physical gold and buy a futures contract at a lower price.

However permanent backwardation would mean that no one was willing to sell their physical gold at any price. Paper money, govt bonds etc would all be worthless in this scenario.

What Do We Reckon?

We’re hoping for a more severe version of the 1970’s much like David Evans predicts – so this would be a stagflationary environment as we wrote about 2 weeks ago. Maybe hoping isn’t quite the right word to use, but this outcome would likely be the least severe for most people given how unprepared the majority are.

The downside is that perhaps the status quo remains and we get more of the same in terms of the banking elite running the global monetary system for many decades yet. However we’re not so sure that David Evans outcome of a long term inflation and then high interest rates to put an end to it is that likely. 14 years of very high inflation might be pushing it for central banks to remain in control.

We don’t know what the “end game” will be exactly but we don’t think it will be the status quo. Gold is likely to return to the monetary system in some form or another. We would be inclined to think that Louis Boulanger’s theory that China will attempt to make the Renminbi redeemable in gold (and silver) seems like a possible outcome, after a period of high inflation.

Regardless of the final outcome gold, silver and other hard assets seem to us to be a must have protection in the years to come. Unsurprisingly the presenters at the Gold Symposium all thought much the same. That hoarding gold and silver and delaying “investing” in other assets until golds price equals its value was also a wise option