You can imagine that what happens overseas is going to matter to Aussie stocks just as much as company earnings. The US election is in its final two weeks. And Europe's interminable political restructuring toward a fiscal super state is grinding along in its plodding pace. Surprises are to be expected.
One big surprise, for example, is that in a real deflationary financial crisis — the kind where central bank asset purchases don't prevent falling asset prices — your claim or ownership of assets is only as good as your possession of them. In other words, if you don't have it, it's not really yours.
We made the point by referring to John Exter's inverse pyramid. You can see it below. Look for more on it next week. We'll give you a version of the same presentation we made at the Gold Symposium on Tuesday.
Gold is at the base of Exter's pyramid because it's the only assets in the financial system that cannot default. Everything above it — and in a more complex version of the pyramid which we'll show you next week, there's A LOT above it — is either a promise to pay or someone else's obligation — or, in some cases, a lot less liquid than physical gold (diamonds, real estate).
In a deflationary collapse, creditors and savers move down the pyramid into 'safer' and more liquid assets. You move down the pyramid when trust disappears in counter parties, in paper money, and the entire financial system itself. It's not a pretty sight.
But the flight to trust makes sense if you live in a world where no one is particularly trustworthy. For example, Germany's Federal Auditor's Office says that Germany's central bank needs to a do a better job of verifying that German gold held in foreign vaults actually exists. The report, cited in a Washington Post article, shows you that cracks may be forming in the façade of the global brotherhood of central banks.
The German problem began with the Soviet Empire. German gold was held in American, French, and British vaults throughout the Cold War. You can't transfer physical gold from one account to another with a few keystrokes, at least not when you're talking over 3,000 tonnes of gold (official German gold reserves).
The trouble is, according to the Auditor, the Bundesbank hasn't actually seen, touched, or tasted the gold in years. It says the reserves, 'Have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight.' The Bundesbank relies on 'written confirmations by the storage sites.'
If somebody tells you your cheeseburger order will be right up, it's okay to take their word for it. If somebody tells you your nation's gold reserves are all present and accounted for, but refuses to show you said gold, it is not okay to take their word for it.
The Bundesbank says it's not worried about the gold at all. It has full confidence that it's all there. And in any event, it might be logistically complicated to actually view the gold because, you know, there aren't any viewing rooms at the Bank of England. Really.
Central banks own gold because they know it's real money. They also know that it's at the bottom of the pyramid, which is why the Basel III banking regulations are likely to classify gold as a Tier-1 asset in the banking system. Tier-1 is the most liquid, highest quality asset a bank can hold.
But the whole conversation is one the central bankers would rather not have. If we're talking about gold and who owns it, it means that confidence in paper money — the main product of central banks — is waning. Gold should be seen (pretty and shiny) but not heard from, and certainly not weighed or assayed to vouch for its authenticity.
Good luck to the Germans. They will probably need it. Holding unelected officials accountable to democratic processes is getting pretty difficult in the world we live in. It will be a miracle if they get their gold back.
for The Daily Reckoning Australia
From the Archives...
China's GDP Growth Ponzi Scheme
19-10-2012 - Greg Canavan
An Australian Property Boom and Bust all at Once
18-10-2012 - Greg Canavan
The Fed's New Stooge
17-10-2012 - Bill Bonner
Discordian Religious Advice for the Investor
16-10-2012 - Nick Hubble
Electric Cars and Platinum Mines
15-10-2012 - Dan Denning
If you already subscribe to The Daily Reckoning, or if you simply found what you read here interesting, then feel free to share our views and insights by posting them to your favourite network, blog or news feed:
- Why a Bitcoin is as Good as Gold
- German Bonds – Just Like a Lead Zeppelin
- Gold Is Money: Central Bank Actions Send Clear Message
- Gold ETFs Aren’t Looking as Good as They Used to Be
- Why Spain’s Economic Crisis Will Be Good for Gold
About the Author
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.