What Could Derail Gold?

by David Galland

Acting in my role as master of ceremonies at the Casey’s Gold & Resource Summit, I asked the faculty this question on more than one occasion. The answer is quite simple and has been discussed in previous editions of these daily musings.

Namely, real interest rates will need to become discernibly positive. In other words, interest rates will have to increase to a level that outstrips currency depreciation. At that point, an increasing number of investors will look to park their cash in "safe" instruments that pay them a real rate of return on their money.

In order for that to happen today, the world’s governments would have to be willing to raise short-term interest rates and encourage long-term rates to rise by changing course from loose money policies to tight money policies.

Stated so simply, current or prospective gold investors might worry that this could easily come to pass. But viewed through the lens of reality, tighter monetary policies and higher interest rates would turn the debt-soaked economies into the equivalent of large smoking holes in the ground.

Unless and until they are forced to it by circumstances beyond their control (think Greece without the eurozone to backstop them), the world’s deadbeat governments – of which Uncle Sam is by far the largest – will avoid higher interest rates and tight monetary policies like an Ebola ward. And by the time they are forced to it, gold will be selling for multiples of where it is today.

Of course, there is one more thing that could trip up gold. Namely that there’s no question that global governments are increasingly being discomfited by what might be termed a "gold problem."

Basically, rising gold prices are revealing the insane fiscal and monetary policies of governments for the desperate shams they are. In the era of zero ethics and a “whatever it takes” attitude of governments, it is certainly conceivable that they may get together to do some dark deed to damage gold’s intrinsic value to buyers.

It could be a much higher tax regime, it could be by meddling in the commodities exchange rules, it could be through confiscation, or ultimately it could be by returning to something of a gold standard that effectively sets an artificially low price.

We get questions about the government’s possible intervention in gold markets all the time, and it was discussed at some length in the summit proceedings, but the reality of the situation is that it will be nowhere near as easy for any one government to effect a fundamental change in the gold market as it was back at the time of Roosevelt’s confiscation.

For one thing, central bankers are increasingly becoming net buyers of gold, a straw in the wind that they see the price moving higher, not lower. The failure of fiat currency systems is now obvious to anyone paying attention – it’s just how the transition to something else will unfold that is still uncertain. And in uncertain times, the trend will clearly be towards owning more, not less, gold.

That said, as governments grow more desperate, we can’t rule anything out – but neither can we dwell on the unforeseeable. Instead, we take the measures we must to protect ourselves today, while keeping one ear tightly to the ground in trying to monitor likely governmental actions as they evolve.

On that last front, Doug Casey and I agree that we need to be very attuned to continuing moves by governments to push for a cashless society. Once they have done away with cash, it’s a simple turn of the knob to declare that the criminal classes are using gold instead of cash to transact their business, and to announce new controls.

Again, something to watch – but nothing to stop you from taking the steps you need to now to protect your wealth.