Talk Of Gold-Backed Eurobonds Another Sign Gold Is Returning To The Monetary System

Includes: FNV, GG, GLD, PHYS, RGLD
by: Simit Patel

In terms of the macro picture for the global economy, one thing is clear: the levels of sovereign debt are unsustainable, and the banking system around the world is under severe stress as a result. Bank runs are already occurring in Greece, and I consider it a reasonable expectation for a contagion effect to emerge in which this problem spreads throughout the eurozone. I agree with Wharton professor Jeremy Siegel in his view that the eurozone must ultimately insure bank deposits in order to prevent a run on banks and an ensuing run on the euro itself. I suspect that this is exactly what will occur; that the ECB will expand the money supply and socialize the losses of banks so as to ensure banks have deposits on hand for their customers.

Of course, as money and debt are inextricably linked under our current monetary system, in which all money is loaned into existence, expansion of the money supply requires expansion of debt levels. And so, we are at a point where calls for euro bonds are being voiced: witness the European Redemption Pact, a plan under which countries in the EU would give their excess debt - which is currently being defined as the amount of debt above 60% of their GDP - to a fund managed by Germany that would issue Eurobonds to raise capital for them. Countries participating in the fund would need to put up 20% collateral of their excess debt, and this 20% could be payable in gold.

That last bit is clearly important. It implies that eurobonds, if they come to fruition, will be backed by gold -- or at least partially backed by gold. It is another sign that gold is returning to the monetary system; that excessive debt is threatening the monetary system, and gold, being a form of money free of connections to debt, is seen as the solution. Remember the other signs of gold returning to the monetary system:

1. Speculation of China making the renminbi a gold-backed currency

2. Proposed regulatory changes that would give banks incentive to hold gold

Granted, it is unclear if any of these ideas will come to pass. But given that they are being taken seriously and under consideration by the world's monetary authorities - the people that will author international monetary agreements - I think it is especially important to note, and can be seen as a signal of where the world is headed.

I'm not sure if there is anything more bullish for gold than for it to be formally recognized and incorporated into international monetary agreements. It is this type of event that sets the stage for gold to go to a five figure price, and for gold to remain fixed or trade in a range after making its exponential move higher. If gold returns to the monetary system, you won't sell your gold - you'll spend it.

So, the main question: how long is going to take before we get there? A conservative estimate, in my opinion, is under 10 years; I think it will take noticeably less time. All of these signs of gold returning to the monetary system, coupled with the fact that dips below $1530 have been met with strong and fast buying, suggest we are near the bottom and that a rapid move upwards is coming.

The simple solution is to buy gold and hold it. I recommend the physical, both taken in delivery in coin form and stored in vaults, but for diversification, ETFs like (NYSEARCA:PHYS) and (NYSEARCA:GLD) are also of use. For speculation to earn even more upside, gold stocks are also an option. Unless you want to dig deep into company research and have the tolerance for immense volatility - in both directions - I recommend sticking to royalty stocks like Franco-Nevada (NYSE:FNV) and Royal Gold (NASDAQ:RGLD) that can give you exposure to many mines or to purchase stocks of established mining producers. Goldcorp (NYSE:GG) is my favorite big miner to recommend (see my previous coverage).

Disclosure: I am long FNV, GG.