Big banks do not typically give themselves over to political pronouncements, but that did not stop the Erste Group from declaring on the front page of its gold report published last month, “The foundation of a return to ‘sound money’ has been laid.” The Austria-based financial services provider surveys the new dynamics of gold and monetary policy and finds that not only is its price likely to continue to rise, but so will its acceptance by governments as money.
“The past months have shown a clear trend: gold has been more and more regarded as the purest form of money and increasingly less as a commodity,” writes Erste analyst Ronald-Peter Stoferle. He tracks this status change in the way financial institutions like J.P. Morgan are accepting gold as collateral, states in the U.S. are pushing to declare gold as legal tender, and foreign central banks are adding it to their reserves. Why the movement to gold per se? It is an emphasis on asset-based rather than debt-based money. As Stoferle puts it, “The possession of gold is tantamount to pure ownership without liabilities.”
The rise in gold’s dollar-denominated price, going back not just the last couple years but the past decade, is impressive: 17 percent per year on average since 2001. This performance is indicative of a remonetization phenomenon rather than a bubble. Investors and central bankers have woken up to the reality that paper currencies decline over the long run because governments cannot resist pump priming in the face of economic slowdown.
The pump priming meant to nudge the economy out of the early 2000s recession spawned the housing bubble and its disastrous endgame. No central bank action, and virtually every possible one has been tried, has turned things around. The Erste report acknowledges a system failure: interest rates cannot go any lower, government debt has saturated the economy, and the misery index (the sum of the unemployment and inflation rates) in the U.S. is close to its average in the 1970s. Indeed, the real economy in addition to the financial system is deeply flawed. Forty-four million Americans are on food stamps and the effective unemployment rate is closer to 20 percent than the reported 9 percent.
Michael Pollaro [send him mail] is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank’s Cash Equity Trading Division. He is a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. He is a columnist on the Forbes blog.