“If The Entire System Collapses, The Gold Stock Provides A Collateral”

As readers of The Golden Investor probably know, gold is a typical safe-haven. When uncertain times start to hit and financial troubles seem to lie ahead, gold rises. The value of gold isn’t measured in the use of the commodity, it lies in its ability to function as hedge or speculation against possible losses. The value of gold is purely a practical and psychological one. It is abundant enough for coin-making, but still is rare enough to maintain its value. It does not rust or corrode and people love the shining color of it. Even though gold hasn’t got a very wide use, some is used in cellphones, gold has been a currency or valuable asset for thousands of years. This doesn’t say that gold nowadays is as valuable as it used to be. However because of the safe-haven characteristics of gold the commodity still holds value. It is relatively scarce material making it allegedly safe against inflation. In that perspective platinum and palladium seemingly are better options, but they are too scarce to function as currency or trade-able good in a world market. And where palladium seems like a good option due to its wide use in labs, this same usage could deteriorate when an innovation hits, making this commodity less necessary and valuable. Gold however is owned by all the powerful people worldwide. And not only powerful people, also central banks use gold ‘as back-up if everything falls apart’ to paraphrase The Dutch Central Bank.

“If the entire system collapses, the gold stock provides a collateral to start over. Gold gives confidence in the power of the central bank’s balance sheet. That gives a safe feeling.” – The Dutch Central Bank

With a decade full of quantitative easing by most central banks, it starts to look like the value of money (if it already wasn’t) has vanished. Money is only worth as much as we think it’s worth. And where most people are unaware of inflation or how it works, it seems like the tenfold increase of the monetary base in the last decade lies even further away from their imagination. A big rise in inflation hasn’t hit the real economy yet, but with bank reserves higher than ever, stock markets on two/three times higher than the post-financial crisis lows, real real-estate prices rising to 2007 highs, the global debt at extremely high levels, interest rates too low for pension funds to cover their spending and a rise in interest rates unbearable for lots of zombie-companies, this will only be a matter of time. What happens if the excess reserves created by quantitative easing do reach the real economy. What if a bank falls (see Deutsche Bank) and banks start to use their reserves? The decade of growth is over and the damage done is irrecoverable.

Disclaimer: The writer of this article holds gold stock, this article shoudn’t be interpreted as investment advice or anything like that.

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