Gold, Currency Debasement and the Fall of the Roman Empire

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Have you seen what the gold price is doing? It’s tanking almost as dramatically as the green energy investments, that’s what. Though, of course, for rather different reasons.

The latest downward move has been prompted, at least in part, by Cyprus selling off its gold to meet its debt obligations. And also, perhaps, by Goldman Sachs revising downwards its estimate of where the gold price is going to be at the end of the year.

As a goldbug, obviously this troubles me. But not a lot. Like many true believers of the Austrian school (Margaret Thatcher was one of us, I suspect), I see this more than anything as a tremendous buying opportunity. I’m thinking this especially having read the fascinating new report from The Real Asset Company, which argues gold could go at least as high as $6,000. (Over four times its current price)

You’ll say: “Well obviously they’ve got an interest in talking up the gold price.” But they don’t actually. On the occasions I’ve rung to ask them about where they think gold’s going, they say: “We haven’t a clue.” As far as their business model is concerned it doesn’t matter which way gold goes, because their money is made on a percentage of each trade, rather than the gold price itself.

So why, if they have no view on gold, are they yet hinting at this dramatic rise? Because, they argue, both history and market fundamentals show that it cannot be otherwise.

What’s happening to fiat currency, they note, is much the same as what successive Roman emperors did to the denarius – debasing it to the point of near worthlessness. They quote The Collapse of Complex Societies by US anthropologist Joseph Tainter, which argues that monetary collapse was one of the main reasons for the Fall of the Roman Empire.

“By debasing currency, increasing taxes and imposing stringent regulations on the lives of individuals, the Empire was, for a time able to survive. It did so however by vastly increasing its own costliness and in doing so decreased the marginal return it could offer its population. These costs drained the peasantry so thoroughly that population could not recover from outbreaks of plague, producing lands were abandoned and the ability of the state to support itself deteriorated.”

Gold analyst and trader Andy Smith made the same point at the Dubai Precious Metals Conference earlier this month. At root, he argues, it’s all down to government overspending. He quotes Tainter’s point that currency debasement was a politically expedient measure adopted because “those who lived off the treasury were more numerous than those paying into it.” And Gibbon, noting that “a large portion of public and private wealth was consecrated to the specious demands of charity.”

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