Historically, the Only Reserve a Central Bank Can Trust is Gold

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After spending a week trying to figure out how to run a wilderness ranch here in Argentina…and a few days with our old cowboy friends, Doug Casey, Rick Rule and Porter Stansberry…we’re back in Buenos Aires.

We’re back in civilization… Wait…you call this civilization? Looks more like Bubble Land again!

Gold is headed towards $1,100…

Bonds are soft…so is the dollar…

Speaking of old friends, Marc Faber says he’s long the dollar. Faber thinks the buck is over-sold. It could rise 10% in this last quarter.

But the Fed says it will keep interest rates low for an “extended period.” So there is still no sign of the kind of policy turnaround that might send the greenback back up.

Instead, we’ll have to wait until the bubble pops!

Oil is over $80…

Republicans are winning elections…

Hey, party like it was 2006…

The Dow is moving back up, too…and so are all the world’s markets…led by Asian stocks. China is booming…with its stocks up 4 days in a row…

The rise in gold comes as India’s central bank does the smart thing. Central banks need reserves. And historically, the only reserve a central bank can trust is gold. Putting US dollars in your vault – instead of gold – is a little like laying in a supply of lettuce to tide you over in a bad harvest year. Imagine what would have happened if pharaoh had stocked up on radicchio instead of grain? Those 7 lean years would have been a lot leaner than they were.

The Chinese have seen what happens when you rely on dollars for a reserve. You’re stuck. Because your reserves can wilt fast.

The Indians have a better idea – they’re buying gold.

The metal has outperformed stocks and bonds this year as it heads for the ninth straight annual gain. The Standard & Poor’s 500 Index has risen 15 percent in 2009 through yesterday while returns on the benchmark 10-year US Treasury note are down 5.7 percent.

Gold may average $1,125 in 2010, “with strong investment demand anchored by a negative real-interest-rate environment and probable central bank purchases,” analysts at Toronto-based Desjardins Securities Inc. said in a report.

And here’s another interesting item we found when we got back to an Internet connection: “Companies that become too big, complicated and debt-ridden should be allowed to ‘creatively destruct,'” says our friend Nassim Taleb, author of The Black Swan.

Taleb likens the process to natural selection. “Why is it that there are no land animals bigger than an elephant?” he asks. “Because nature doesn’t permit it. Bigger animals die off. Likewise, the market system disposes of companies that are ‘too big to fail.’ It gets rid of them.”

Unfortunately, says Taleb, the US government is impeding this natural process. The government is preventing the bankruptcies of large corporations that would clear the way for a new generation of healthier, more nimble, corporate organisms. Furthermore, these trillion-dollar bailouts are polluting the financial ecosystem with toxic piles of debt.

“We’re not destroying debt,” Taleb complains. “When you move it into the government, it stays in the government and that’s a problem.”

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. After I did some Internet searching to discover dozens of amazingly innovative companies and prototype ideas for very efficient road vehicles from complete outsiders to the large scale car manufacturing business, ideas many of which easily deserved to win in a fair market, GM creaks and lurches from the dead weight of its many fruitless branches. Now picture an old dying tree in the jungle, a tree that has branches in the uppermost canopy layer, about 200 feet up. Many seeds wait in the ground for the day when unfiltered sunlight comes streaming down through the clearing left if such a giant were to fall. I was hoping that the fall of GM would allow those innovators to get more attention. Who would imagine that some forest preservation “experts” would come 4-wheeling through the jungle to prop up the old tree? They need some wood to prop it up, so they saw off some limbs from neighboring trees. They only “tax” about 20 or 30% of limbs and branches from nearby trees, so they can be happy to not fall over as well. With the old tree propped up, the complex structure requires continued oversight and intervention, “lest all those taxes go to waste.” The monkeys seem to mock the endeavor with howls of laughter.

    Reply
  2. If anyone has seen him speak I am sure you will agree that Taleb is a bit of a crackpot zealot. If he didn’t choose his current profession I am sure he would have been a terrorist.

    But the man does speak sense and is quite insightful at times. Not to mention I think his black swan based strategies made bucket loads of cash for his believers.

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  3. IMF’s sale of gold to India could have been vetoed by the US, but it wasn’t. Perhaps it was a dowry.

    Reply

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