Is Gold A Safe Haven from a Greek Default?

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Is Gold A Safe Haven from a Greek Default?

Posted by Jeff Rubin on September 21st, 2011 under SmallerWorldTags: gold, Greece, PIIGS • 10 Comments

When virtually every global financial institution is exposed to one other in today’s world of free flowing capital markets, where do you hide when bankrupt borrowers like Greece default?

Certainly not in French banks, which have lost almost half of their share value over the past year due to their Greek exposure. And if French banks go down, the country’s credit status could get downgraded.

That would not be good news for German taxpayers, who, according to the terms of the Eurozone’s Stability and Growth Pack, would have to shell out an even bigger share of the mounting costs of the bail-outs for the PIIGS (Portugal, Italy, Ireland, Greece and Spain) than they are already shouldering.

With German taxpayers frustrated at sending so much of their good money chasing bad, they are unlikely to want to open up their wallets any more than they already have.

Until the Euro loses its PIIGS, it is going to remain a troubled currency, with growing dissension among the ranks of the 17 member monetary union.

But across the Atlantic, the U.S. dollar is no more attractive a sanctuary from the shockwaves reverberating around global debt markets. The U.S. banks are not vulnerable to the contagion effects of a debt default by the PIIGS but Washington has some major league debt issues of its own.

The fact that so much of America’s debt is now foreign-owned makes devaluation of the U.S. dollar intrinsically appealing to the U.S. Treasury.

That leaves gold, which once again becomes the de facto global currency and the safest sanctuary from the risk of sovereign debt defaults. For all intents and purposes, gold has become the other side of the trade for everybody who wants to bail out of U.S. dollars.

What makes gold so appealing in today’s unsettled currency markets is unlike the Japanese yen or the Swiss franc, which saw their country’s central banks quickly push back when their currencies were getting too strong for their economy’s liking, gold has no one central bank to lean against the wind.

As well, gold has no export sector upon which the livelihood of millions of workers depends upon the competitiveness of their exchange rate. In today’s world of faltering economic growth and rising unemployment, these are admirable qualities for a currency or, in this case, a surrogate currency to hold.

George Assad

GOLD IS MONEY YOU CAN TRUST.
Anonymous

It seems like a possible solution for large institutions and investors but for someone with little savings, who lives from one paycheck to the other (a very large chunk of the population in North America and Europe), gold is irrelevant since it isn’t edible or easy to pay rent with.

If we could direct people’s savings towards access to fertile land, cheap transportation and accessible housing maybe most of the current problems could be more easily solved or their results mitigated more efficiently.
k.cobley

Gold isn’t money. You can’t carry a bar around with you and use a nail file to shave off a fraction of a gram using a digital scale when you want to buy a beer.
My dad was a coin collector and his old gold coins minted in the twenties had the edges shaved off them, bits gouged out of the faces, sanded faces, by people wanting their coin to go further, same occurred with silver coins.
Gold can be “forged” by diluting it slightly with nickel and copper, all gold has to be checked by both weight and density for it’s authenticity.
Only Physical Gold is gold, certificates saying you own gold are worth nothing, like a credit default swaps they are only as good as the institution issuing them and if the system collapses so do your certificates.
Gold isn’t a “safe haven” in the 30′s gold had to be sold to the US Govt, and in Australia it had to be sold to our government. In Germany large sectors of the gold holding community ended up without their gold and later without their lives.
There are many things that may be even better than gold, for instance Silver, Nickel, Copper, Zinc, Lead, Tungsden, Cobalt or even Potash. I don’t think too many Governments will try to seize your stash of these things unless things get really bad.
The point is, commodities will generally hold their value in an inflationary environment better than fiat money, however if the environment is deflationary fiat money is better.
At present I would suggest that there is large scale deflation at present as property values unwind worldwide, this will be followed by falling stock values as investors realize that large sectors of investment returns are also headed for long term decline. Europe, US and other western nations are in the same position as Japan 10 years ago, they are unable to grow. Some have a falling working population, some have falling real wages, other nations can no longer grow because their resources are too expensive. A decade of deflation was the result in Japan and it didn’t really matter how much money they threw at the problem, nobody was ever going to spend because they were all too old.
The problem hit Japan earlier because the boomer generation began earlier and finished earlier.
Older people earn less and spend less.Older people are in much larger numbers than in the past. The smaller youth base has to pay higher taxes to support older retirees. It’s an inablility to spend that’s a large factor in the decline. A failing resource base is compounding the problem by increasing prices of commodities in particular Oil.

Don’t count on any safe havens, Don’t listen to the barkers of doom that have “investment schemes to save you” live simple and save a lot buy a cheap home while you can.
C Singh

Excellent summation Jeff of why Gold has become the only genuine long term defence against the folly of central bankers worldwide, global QE as it has become known.
K.Cobley you miss the point of Gold as money in the current economic climate. Gold will perform beautifully in the coming debt deflationary spiral. As credit stresses in this deflation continue, investors will seek refuge in Gold as it has no counterparty risk, nor does it carry the long term liabilities of a government in the form of pension commitments etcera. As JP Morgan themselves once quoted, Gold is money everything else is credit. Gold will also maintain purchasing power in a hyperinflationary environment, history has shown this to be true. The only time that Gold has been a bad investment has been in the period from 1980-2000. This was not a period of deflation or hyperinflation, it a period of massive a incredible credit expansion, via the dominance of the US petroldollar to crank global trade and commerce. Sat behind the petrodollar was the abillity to double global oil production every 20 years, everyone knows that story right? We are leaving that world behind pretty rapidly.

I can understand the benefits of having a safe haven currency like the traditional Swiss Franc which is divisible and liquid, however claims of Gold being illiqiud and something clumsy that cannot be used as currency are false. Gold has 5000 years of history behind it as currency, blink and you might miss the reversion to the mean of Gold being money again. Hoard it, stack it, while you are still able to get hold of it.
C Singh

Excellent summation Jeff of why Gold has become the only genuine long term defence against the folly of central bankers worldwide, global QE as it has become known.
K.Cobley you miss the point of Gold as money in the current economic climate. Gold will perform beautifully in the coming debt deflationary spiral. As credit stresses in this deflation continue, investors will seek refuge in Gold as it has no counterparty risk, nor does it carry the long term liabilities of a government in the form of pension commitments etcera. As JP Morgan themselves once quoted, Gold is money everything else is credit. Gold will also maintain purchasing power in a hyperinflationary environment, history has shown this to be true. The only time that Gold has been a bad investment has been in the period from 1980-2000. This was not a period of deflation or hyperinflation, it a period of massive a incredible credit expansion, via the dominance of the US petroldollar to crank global trade and commerce. Sat behind the petrodollar was the abillity to double global oil production every 20 years, everyone knows that story right? We are leaving that world behind pretty rapidly.

I can understand the benefits of having a safe haven currency like the traditional Swiss Franc which is divisible and liquid, however claims of Gold being illiqiud and something clumsy that cannot be used as currency are false. Gold has 5000 years of history behind it as currency, blink and you might miss the reversion to the mean of Gold being money again. Hoard it, stack it, while you are still able to get hold of it.
Rojelio

“…buy a cheap home while you can.”

And it would be so much easier to buy that home if you’ve collected gold over the last 10 years.
rfk

Gold does make sense when you look at that way.

You also have to consider government action, look what happened with the huge health care bill in the US. Buried inside of that is legislation the classified gold as a collectible and tacked on something like am associated 20% tax rate, someone has their eye on the ball.
Instincts

Ya, but imagine the ripple that will occur when a number of those with large shares of gold (on paper) start selling off and price starts to fall with lightening speed. Those of us with common sense call the current gold spectacle ‘putting one’s eggs in one basket’; yet another example of a measure of extreme desperation for those who put so much faith in Wall Street.

Land is among the few tangible safe havens to invest, if we must linger on with this monetary subject. People have to eat. Land can produce. Even if land values deflate, land still produces But like anything else, its got to be done sustainably. Mega agri-industry agriculture and associated massive land grabs we’re witnessing worldwide face the same threats that we’re now seeing globally in most other markets. But even so, because people have to eat, and as long as human population doesn’t crash, it stands to better weather this global storm. But climate change, poor land uses, water and soil erosion issues, pushing limits to GMOs, chemical inputs, etc. all contribute to destabilizing mega agri-industry. Monsanto and others are ensuring that.

Using GDP as the primary metric of social/economic well-being is a thing of the past, and sooner or later must be scrapped for metrics that can move humanity forward with some level of a better future. Read Heinberg’s bood, Peak Everything, where he proposes new metrics: Genuine Progress Indicator (GPI) and Genuine National Hapiness (GNH). Adaptively replacing GDP with these metrics can provide humanity with some hope for what, at the end of the day, really matters most in life. Striving to having lots of money X number of years down the road is increasing becoming a red herring that will only lead to disappointment for a lot of us.

It matters how we psychologically approach this thing we call ‘life’, and it has been proven time and time again that monetary wealth isn’t the key to unleashing ultimate well-being in our lives. The sooner that most of us embrace this, the sooner things can collectively start to get better.
Johnym

Well said sir. Even if there is a debate on the syntax, the semantics are undeniable. However it happens, we clearly need to be making the move toward a sustainable system, and people will inevitably re-decide the focus and importance placed on our “success” meters.
Ram

That is not true. There are taxes in the new health care law but not on gold.

Recent Blog Post

What the leaders need to understand about Canada’s shifting economy

Is Gold A Safe Haven from a Greek Default?