Return To The Gold Standard?

Is it me or has anyone else noticed an increasing number of normally level-headed market experts joining ranks with the goldbugs to warn of impending financial crises? That is the question dealt with in a column I just finished writing for Canadian Business Online.

What piqued my interest was an article by Christopher Whalen on Seeking Alpha that reported Henry Paulson believes "a financial crisis is long overdue.” This is rather sobering given Paulson is the former head of Goldman Sachs who was appointed in July to be President George Bush’s Treasury Secretary.

My column lists several other mainstream analysts who recently have expressed the pessimistic perspective, including the No. 1 ranked market strategist in Canada, Peter Gibson of Desjardins Securities. He says past episodes of monetary have typically been followed by financial shocks and he expects the panic for this cycle is to come in the second half of 2007 or in 2008 (originating from the hedge fund or mortgage-lending industries).

Thus, the advice often heard to place 5% to 15% of one’s portfolio into gold (and other precious metals or hard currencies like the Swiss franc) is now sounding more appealling to me, whether it is in the ultraconservative form of gold coins or in the chancier form of claims on gold through certificates and exchange traded funds. It’s a hedge: a way to protect the real value of a portfolio during a collapse in the U.S. dollar and other fiat currencies.

But I don’t see a return to the gold standard. History books show that the latter was much more disruptive than the present tabular standard (wherein an elastic currency is anchored to the standard of price stability).

What’s needed is a widening of the notion of price stability under the current regime to include asset prices . Then we can allow consumer prices to go moderately negative for periods of time in order to curtail the formation of bubbles in tech stocks, house prices and other assets (and to avoid compounding chronic imbalances such as trade deficits).

Gold will be a transitional store of value while waiting for a crisis to motivate corrective measures. It will not be a permanent store of value: once the required changes are made to the exisitng monetary system, gold will likely revert to commodity status. So it is more of a trade – albeit many years in duration – that one should be prepared to unwind at some point.

Comments

[Paul Meisel]

"widening of the notion of price stability" -- a logical and comprehensive way of describing the futility of the ongoing disagreements between people arguing about which measure of inflation should be heeded.

Money is a means of exchange without any other utility. Its utility to buy stocks, food, razor blades, vacation houses, and cheap wine is identical. The traditional calculations of inflation were tested based on old assumptions about the behavior of economic participants.

Perhaps an approach focused more on financial markets may be more useful.

[Ray Lopez]

It was argued that the bull market of the 1980s was funded by cheaper money. Who knows? Perhaps we're living in a house of cards? I like the survivalist tone of this article (I'm long on gold, about 10% of my net worth), and this was my favorite sentence: "Thus, the advice often heard to place 5% to 15% of one’s portfolio into gold (and other precious metals or hard currencies like the Swiss franc) is now sounding more appealling to me, whether it is in the ultraconservative form of gold coins or in the chancier form of claims on gold through certificates and exchange traded funds."

Chancier form... that was a cool phrase, gives the article an edge. Nicely done.