Cash was king - now gold is God

Cash was king - now gold is God
Americans are piling into gold as national debt and inflation soar, says Philip Delves Broughton

The national debt clock which ticks away over Union Square in Lower Manhattan, showing Americans the speed at which their country is sinking into the red, ran out of digits on Wednesday. The federal government's debt had tipped over $10 trillion and it will take until next year for the property developers who own the clock to update it. They promise to add two digits so that it can go up to a quadrillion.

Meanwhile, in the city's streets and bars, the talk was all about the one commodity holding value: gold. Whether it's a wedding ring, your grandmother's jewellery or a bar of gold bullion, it's what everyone wants. Cash may be king, but gold is God.

The price of gold has been moving upwards all year as smart investors around the world saw what was happening in the world of paper money. The SPDR Gold Trust, an

exchange traded fund which buys and sells gold bullion dependent on investor demand, had 755 tons of bullion on hand last week, the most in its history and more than the reserves of the UK, Japan, China or the European Central Bank. Meanwhile the price of gold relative to currencies around the world has been hitting record highs.

Gold and silver traders are frazzled trying to locate, buy and ship stores of gold, whether coins or bars. With prices so volatile and insecurity so rampant, deals and promises are proving hard to nail down.

Gold Bugs, a curious group of traders who exist on the periphery of global finance, suddenly find themselves smack in the middle. They believe we should liquidate everything held in a bank, print out any stock certificates and lock them away and then retreat under the bed with a shotgun and a couple of gold bars.

All of this should make Gordon Brown squirm about his decision to sell more than half of Britain's gold reserves in 1999 when the price of bullion was at a 20-year low.
Gold and silver traders are frazzled trying to locate, buy and ship stores of gold, whether coins or bars

The price of gold has since soared three-fold and Brown's decision has cost the Treasury around £3bn. Aside from the direct financial hit, it would have been extremely comforting for the British government to have had 400 extra tons of gold bars in its vaults these days versus stacks of Euro-denominated bonds.

It would be easy in calmer times to dismiss the Gold Bugs as wackos. But the evidence in their favour keeps on piling up. Sixteen per cent of American homeowners now owe more than their homes are worth, up from six per cent last year. One incredulous Wall Street analyst told me that there was a day last week when not a single new car was sold in the United States. The average daily sale used to be about 40,000.

Gold's value is also likely to rise with fears of inflation. The debate over inflation has become impenetrable. Official figures suggest it is under control. All those banks who cut interest rates this week don't seem to be worried about it. And yet anyone who has to fill up their car or go to the supermarket
An incredulous analyst says there was a day last week when not a single new car was sold in the United States

knows the truth: everything is much more expensive than it was a year ago. The only conclusion can be that official inflation figures can no longer be trusted.

There is another reason to believe that inflation is secretly desired by the United States. It would be the quickest way of erasing its debts - far quicker than actually working to pay them off.

Milton Friedman said that inflation is a purely monetary phenomenon. The more money sluicing through an economy chasing a limited supply of goods, the higher inflation goes. Many economists argue that this fundamental link has been broken by globalisation, the rapid growth of emerging economies and more sophisticated money management by Central Banks.

But it is hard not to suspect that all those colossal cheques being written by the US government and others will not have some effect on prices. Ten per cent inflation by the middle of next year will make the gold hoarders look even smarter than they do today.
FIRST POSTED OCTOBER 10, 2008



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