Precious metals prices are in free-fall again. Support levels found in 2011 and re-tested last summer are cold comfort to investors in metal and mining shares. Despite estimates, fundamentals and earnings, the bottom keeps receding. After nearly five harsh months holders are ready to throw in the towel. But don't do it now. A new monetary order is emerging that will firmly establish valuations and resolve the disorder of the current monetary system. The collapse of currencies, societies and wealth may be stemmed in a way supportive of precious metals.
Consensus opinion is that a weaker dollar supports metals prices. But a report commissioned by the World Gold Council suggests that this need not be a zero-sum game. The emerging global monetary reserve system will include gold in a basket of major currencies. This workable arrangement is taking form beneath today's chaos. The dollar and yuan will co-exist and the diplomatic and currency cold wars will subside. This development has major importance for precious metal investment decisions and portfolio allocation. It also confirms the bullish case for precious metals. Let's review current conditions before turning to the January 2013 report by the Official Monetary and Financial Institutions Forum (OMFIF).
Regarding the health of the dollar, the Fed's balance sheet has expanded fourfold in the past five years to over $3 trillion. It is leveraged 55-1 with reported assets of only $41 million. Chairman Bernanke on Thursday told the House Finance Committee that these ratios are "irrelevant" because Fed "liabilities are non-redeemable." If the Fed is near bankruptcy as many have suggested, the metals would rise strongly while the dollar, other assets and the economy would fare badly. The debt juicing major indices and growth would finally crash the economy and ravage wealth.
Bernanke probably is right that the Fed can defend its hegemony on fiscal-economic matters until the bitter end. So the fiscal situation remains on thin ice. The racing indices, now paused are unsteady. As for precious metals, despite the continuing sell-down in physical backed assets, paper contract ETFs and miners, it may be premature to more than nibble at a favorite target or two. Recent trading is turbulent and incongruous as the metals extend repeated harsh consolidations and make new lows. It is a painful test of will. However, do not lock in a loss at these depressed levels unless your need for cash is urgent. If you have kept your allocation between 10-20% it will be okay. Trim a bit but don't panic sell. The upside for precious metals is far greater than a further fall. This fact should soon become clear.
On the last day of February, the indices settled while metals and miners sank. South Gobi Resources (OTC:SGQRF), Reservoir Minerals (OTC:RVRLF) and Focus Graphite (OTC:FCSMF), all mentioned by this writer as promising juniors in coal, graphite, gold, silver and copper, seemed like the only assets in the sector performing well. But their strength paled beside the general plunge. Soon it will be clear if there is a sustainable bottom or only a yielding, slippery abyss. The former is more likely.
In the meantime the continuing crash is broad based. Major miners like Barrick (ABX), Gold Corp (GG) and Eldorado Gold (EGO), mid-tier companies like Silver Standard Resources (SSRI), juniors like Vista Gold (VGZ) and streaming companies like Sandstorm Gold (SAND) have made new 52-week or secular lows. The junior Gold Miners ETF (GDXJ) has dropped in alarming fashion after an apparent recovery and the Gold Miners Index (GDX) has just made a 52-week low. Moreover, as cited in previous articles, economic fundamentals are troubling and deteriorating. Yet the National Traders Association and Investment Alliance this week had high praise and expectations for Anglo-Gold Ashanti (AU), Barrick, Gold Corp., Yamana Gold (AUY) and Royal Gold (RGLD). They termed these companies "the Golden Standard of Growth." The royalty dispute at Pueblo Viejo, Barrick's and Gold Corp's joint venture in the Dominican Republic is being resolved in ongoing talks, Barrick says, and the mine is producing. So there are some bright glimmers and mixed signals in the sell-down.
Despite the negatives, the OMFIF has positive expectations going forward. The thesis of its new report, prepared by Chairman of the Advisory Board Meghnad Desai, coheres with sovereign gold buying, increasing use of gold as collateral and in international commerce. Considered individually, bilateral arrangements for credit swaps, joint credit facilities and non-dollar commerce between China, Brazil, India, Australia, Chile, Russia, Japan and Iran seem like part of a dialectical conflict with Anglo-American currencies. Most of the deals were inked in early 2012 and they dwarf territorial and other disputes that get more coverage. The key point is that the establishment of these credit facilities and barter arrangements outside the petrodollar system could mesh with it and mend its fiat-debt nature. That would give the world and America a better landing rather than the global crash and impoverishment that loom over today's disordered markets and vitiated currencies. Impetus for this change comes from the BRICS and major international gold and currency consultants. It speaks directly to the need to address world-spanning fiscal crises.
Dr. Desai's January 2013 report, "Gold, the Renminbi [Yuan] & the Multi-Currency Reserve System" asserts that "all paths in 2013-2018 lead toward a multi-currency system." This would differ from the universal World Currency foreseen and described by the Economist in 1988. The OMFIF report sees a gradual 5-year movement to inception of a multi-currency reserve buttressed with gold in 2018. There is clear need for a change in the reserve system. Initial steps toward a heterogeneous, flexible and consensual new monetary order already have been made. It is likely that gold and silver valuations will rise considerably in concert with a stabilization and balancing between currencies in which gold plays a stronger part in fractional reserves.
Dr. Desai notes that the BRICS, Brazil, Russia, India, China, and South Africa are establishing a Special Drawing Rights (SDR) facility or monetary basket to facilitate trading in renminbi [renmin = people, bi = currency], rupees, rubles, the rand and real. This formalizes the free-wheeling bilateral agreements between nations noted above and could ease their merging with the dollar, which remains a vital reserve and international exchange medium. This integration could remove the unilateral and disordering fiat quality from the four major credit-debt based currencies arising from the BoJ, BoE, ECB and Fed. The era of hyperinflation and economic collapse that has been approaching could be averted as the nations turn to a more flexible and organic order. A "substantial gold content" would anchor the SDR, a point which Dr. Desai emphasizes in his summary: "the world is headed toward a double multi-currency reserve system in which the dollar will have a pivotal role in a range of other currencies." He adds, "Gold will play an important role" in stabilizing the new monetary system. Reconciling gold, the dollar and the Yuan is the core of the document. A basis for the change exists in growing accumulation of gold by Eastern nations, a leitmotif of precious metals' reporting and prices for two years. See the research reports on gold investment here.
The OMFIF report develops a sensible thesis. Among the reasons that "the role of gold will be enhanced" and the transition occur gradually is that there still are "basic uncertainties about the dollar and euro and whether the RMB can emerge as a major currency." That is a polite way of raising the issue of debt and central bank maneuvers or, as he writes further, "the world is still gripped by a financial crisis induced primarily by excess debt." This recalls comments by Ludwig von Mises:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." Planned Chaos (1947)
See also von Mises' Human Action: A Treatise on Economics (1966), chapter 20, "Credit Expansion."
A collapse resulting from debt expansion is the nightmare end game that has been approaching for decades. As Desai writes in his overview, "aside from gold, no other reserve asset seems safe from the coming dollar shock." Thus the OMFIF report gives gold a role championed by the founders and students of the Austrian School:
The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments." - von Mises, Economic Policy
Desai observes that during the past five years "the West has been assailed by the longest-running economic crisis since the 1930s." This has prompted many Sovereigns to purchase gold. Hence OMFIF brings its proposal to market as "gold stands ready to fill the vacuum created by the failings of the dollar and the Euro and the not yet requited ambitions of the Renminbi." Gold he concludes, "is the ultimate reserve asset" reinforcing the thrust of Basel III and the Fed-FDIC plan of June 2012. This urges investment in instruments like Swiss Gold Trust (PSOL), Asian Gold Trust (AGOL) and Sprott physical Gold (PHYS) and Silver (PSLV). It will be safe to invest in GDX again.
The failure to link national fiscal policies and international currency and commerce to gold cause fiscal and economic strains that underscore von Mises' point about "final and total catastrophe of the [debt] currency system." Desai and OMFIF are cogent and by giving a seat at the table to all stake holders their proposal is achievable. As noted, it interlocks with currency and commercial arrangements already formed. The OMFIF plan is an opportunity to replace ad hoc and implicitly adversarial deals with an international but not mono-cultural plan. Mono-cultures are sterile and prone to disease. This heterogeneous and truly diverse OMFIF plan has nature and self-interest on its side.
Eight months ago Dan Amoss was among those suggesting that Fed QE policies were so likely to produce hyperinflation and socio-economic anarchy that the Board must intend at last to re-order the system by pegging the dollar to gold at much higher valuations. My last three columns have quoted and linked to numerous observers making similar points. Dr. Desai presents a plan to accomplish this restructuring in a sober and cooperative way. The fact that it comes from a diverse group of nations and study groups eager to avoid repercussions from the collapse of fiat currencies should ease its acceptance and implementation. It also is enormously bullish for the price of precious metals and miners. So trim positions if you absolutely must; add to them if you can; and hold on till a measure of sobriety enters the economies and markets via a Multi-Currency Reserve System buttressed by Gold. That could make a multi-lateral world one could thrive in and humanely inhabit.