I’ve been warning for years that an inflationary storm was coming. I’ve recently tailored my forecast to allow for a resurgence in deflation based on QE 2 ending and the economy diving, but my long-term forecast remains the same: inflation WILL be exploding in the years to come.
Indeed, even the biggest proponents of paper money (central banks) have begun to realize that their grand experiment is coming to an end. Central banks officially became net buyers of Gold last year. And we now find that they have acquired the most Gold in over a decade.
The Financial Times reports:
Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade.
The move, disclosed in the BIS’s annual report, marks a sharp reversal from the previous year, when central banks added to deposits of gold at the so-called “bank for central banks” rather than lending it directly to the private sector amid growing concerns over counterparty risk.
Let’s consider this. If you’re a central banker and you actually believe in the value of paper money and your ability to create wealth by printing it…why would you be loading up on Gold?
The answer is simple: you see the writing on the wall.
The central banks of the world are in a competition to devalue their respective currencies against each other. They will work together to suppress a particular currency if a carry-trade gets too out of control (see Japan earlier this year), but in general the ECB wants a cheap Euro, the Fed wants a cheap Dollar and so on and so forth.
These guys know that the financial system is broken. They’ve known it for over a decade (Greenspan even admitted that derivatives could “implode” the market in 1999). But they’re going to kick the paper money can down the road as long as they can… primarily because the entire financial system is banking on their ability to “fix” things.
The 2008 crisis was the first taste of systemic risk. The central banks threw everything including the kitchen sink at the problem in an attempt to hold things up. And it’s worked temporarily in the sense that the financial world still believes central banks can handle the situation.
However, the fact remains that the central banks actually didn’t fix anything. After all, you can only fix a debt problem by paying the debt off or defaulting. Moving it around and issuing more debt to meet current payments does nothing.
In this sense, the world’s central banks literally “bet the farm” on themselves and the view that sovereign balance sheets can stomach this toxic waste. As we’re now discovering in Europe, the laws of the markets (oversaturation of debt, default and the like) apply to countries as well as private banks.
The central banks know this and are now acting accordingly. It is not coincidence that they became net buyers of Gold within two years of the 2008 crisis. Nor is it coincidence that they are now loading up on Gold at the fastest pace in over a decade. They know (not think) that systemic risk is still on the table in a big way and that they will be powerless to address the next crisis when it explodes.
You can already see this in their public statements. Bernanke himself even admitted the Fed has no idea why the economy isn’t recovering. If you extend the implications of this statement it becomes clear Bernanke and pals are realizing that printing money is not going to patch up the financial system… Hence the Gold purchases.
In plain terms, the real crisis, the crisis that was put off temporarily during the last two years, is coming. It will not be a Crisis of stocks or bonds. It will be a crisis of the financial system itself. A crisis in which entire countries default. And it will make 2008 look like a picnic.
Remember, every asset class is defined relative to sovereign bonds. So if sovereign bonds begin defaulting… KA-BOOM. Round One (2008) of the Financial Crisis wiped out over $11 trillion in household wealth. Round Two will wipe out…?