roger maxims

Own Gold? Time to Fold

I tend to agree with the author, but for reasons other than inflation expectations.

1. No return to Bretton Woods

The economies of the G7 and China have been benefiting immensely from the fiat currency standard since its establishment. There is no way that any of them would agree to resume the gold standard and limit their pace of growth to the supply of gold.

2. Gold is sold in US$

If US were to default on its Treasuries, US$ would become worthless. Gold price would rise exponentially to US$1billion / ounce, which is equal to GBP 0 / EUR 0 / JPY 0. Bit of a one-way trip for gold bugs really.

Then again, US would only default on its Treasuries if China refuses to sweep up the freshly printed ones due 2038. (Japan is already downsizing its holding, Europe doesn't care.) China will always be kind to Uncle Sam, not because of the nuclear drone planes, but because US is China's top credit customer. Losing US demand for its Walmart toys means putting back years of growth.

3. Conclusion

Gold will trade in a range no doubt, as EUR/USD, JPY/USD have done this year due to risk aversion. Doubt it will be much higher than $1100 since most mutual and hedge funds (aka the real players) are still stock-focused.

Governments don't want to touch their gold reserves as they are saving the REAL economy with paper money that buys loaves of bread.