Many gold and silver investors remain perplexed that the prices of the metals did not skyrocket as the situation in the eurozone deteriorated. At times, it looked hopeless. It was not until the most recent EU summit when German Chancellor Angela Merkel made concessions on the use of Eurozone bailout funds that the metals reversed course and turned up.
But, the question remains: Why did the prices of the metals not reflect the severity of the crisis before Angela Merkel decided to play Joan of Arc? Basically, the problem rests with the success that the Establishment has had in selling Keynesianism.
Read Establishment publications and you will find articles, editorials and blogs that assert the solution to Europe’s and the world’s problems lies with implementing “growth policies,” which is a euphemism for turning on the printing presses. At the heart of Keynesianism is the notion that the solution of economic stagnation, no matter now severe or what the cause, lies with increased government spending, with printing more money. In modern terms, it means expanding the money supply, government spending and government subsidies to those who will spend. Quantitative easing falls under “growth policies.”
Regardless of how extravagant the solutions, no one (save economists from the Austrian school of economics) objects. Nobel laureate Princeton professor Paul Krugman early on called for the Fed to inject $8 to $10 trillion into the economy. More recently, an economist for a TV network called for the Fed to create at $2 to $3 trillion fund dedicated to alleviating the eurozone’s financial woes. No member of the Establishment deemed these actions over the top. Such is Keynesianism revered in Establishment circles.
To make its position tenable, the Establishment ignores the history of fiat money, which derives its value from government decree but nearly always ends up worthless. Paper, although a useful commodity, is cheap and has long been governments’ preferred fiat money. Since the advent of computers, though, digital money has become governments’ favorite fiat money. Digital money can be created at the stroke of a keyboard, creating an electronic impulse on a silicon bubble. (Meanwhile, gold and silver, throughout history have been the people’s preferred monies.)
Ominously, the history of fiat money is that politicians print it until it is worthless. This little discussed fact leaves us the near certain reality that massive price inflation, possibly even hyperinflation, awaits us. This is the Establishment solution to today’s financial problems.
Why do governments go down the paper money road when the end is so evident? Because it’s the easy way out. Avoiding tough decisions, such as imposing the austerity programs proposed by Angela Merkel, mean that the pain and suffering of the recovery process can be delayed until sometime in the future, perhaps even generations. But, the longer the recovery is put off the greater the pain.
In the face of all this recent turmoil in the eurozone, the dollar became a safe haven (rising during the financial upheaval) while gold and silver traded as “risk assets” (falling in price). However, go back only a few years to the advent of the GFC (global financial crises) to see how the dollar traded. It collapsed, and gold and silver – albeit sharp drops of short duration – made massive moves to the upside. So, how was it that the dollar only a few years ago was an anathema to investors and today is a safe haven even after the quantity of dollars was doubled?
Again, the Establishment is to be congratulated on its success in selling Keynesianism. But, is Keynesianism the end all, the final answer? I don’t believe so.
My readings and study lead me to believe that the Austrian school of economic theory has the best understanding of money, including the dire consequences of massive infusions of fiat money. Investors who have only a small grasp of Austrian theory are way ahead of investors who have been indoctrinated in Keynesian economics. These investors remain committed to the metals despite temporary drops in price because they grasp the economics of the situation.
The best source of information on Austrian economic theory is www.mises.org. Mises.org not only makes available all the great books on Austrian economics but makes many of them available free as pdf. downloads. Additionally, the site carries editorials and pieces that often expose the fallacies of current economic policies, whether they are domestic or international.
My favorite newsletter that is grounded in Austrian economic theory is The Privateer, which I have subscribed for the last twelve years. The Privateer comes out of Australia and is published biweekly by William Buckler, who is affectionately called The Captain. The letter is delivered via the Internet. I can say that when it pops into my email every other Saturday night and I’m home, I print it and read it immediately.
The Privateer is twelve pages and starts with a five-page Global Report, followed by individual reports on the economic/financial affairs of the US, Asia, Europe and Australia. The Captain closes each letter with a Global Market Report that ties together his views for that letter. Because the US is the important player in the world of economics and finance, much of the report is devoted to developments in the US, which makes the letter especially relevant to Americans.
Of special interest to investors who are heavily in the metals should be Buckler’s Gold This Week, which is posted weekly on his site. However, Gold This Week is available only to subscribers. The subscription rate for The Privateer is $180 Australian. The Captain also offer s six-month subscriptions at $AU 100 and a one-time only five issue trial for $AU25.
I can say unequivocally that the investors who have enjoyed the greatest benefits from owning gold and silver are those who understand money, who know the difference between sound money and cheap money, who know how money comes into existence, and the results of unlimited fiat money creations. Visiting www.mises.org and subscribing to The Privateer will set you well along the road to being one of those investors.