Did the AFR just admit gold was money?
Gold goes on a wee little run, and suddenly mainstream rags are giving the previous metal airtime.
This time last year, you’d be hard-pressed to find an article on gold in any of Australia’s major financial newspapers.
And if did they drop the four-letter word, chances are it was followed by the word ‘miner’.
Yet in the past two weeks, I’ve seen prominent articles in the mainstream media talking about the value of the yellow metal.
Yes. I said the ‘value’ of gold.
Turns out the yellow metal is becoming a mainstream story.
Are the mainstream rags just looking for pages to fill?
Or are they trying to snaffle my job out from under me?
Either way, they aren’t the only ones talking about gold right now…
From theory to practice
No one saw zero interest rates coming.
It wasn’t something we were taught. In fact, it was damn near laughable…
But then, Japan went and did it.
On 12 February 1999, the Bank of Japan lowered the cash rate to zero.
Japan’s actions at the time were drastic. So much so that former Federal Reserve chairman Ben Bernanke — then a professor at Princeton University — loudly criticised the move. In fact, he formally denounced the zero rate policy in a report called ‘A Case of Self-Induced Paralysis?’.
Bernanke suggested that zero interest rates were not necessary and that ‘to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan’.
Yet nine years later — as the US stock markets tumbled and ‘too big to fail’ banks went hat in hand to the government for help — Bernanke did a 180 and lowered the US funds rate to zero.
A couple of years later, major central banks followed suit.
By 2012, the European Central bank had a 0% cash rate.
The Swiss National Bank hit 0% in 2011 and has been negative ever since.
The Bank of England got pretty close with 0.25% in 2016.
The unthinkable happened.
A select few destroyed the value of money by turning a laughable economic theory into our reality.
Destroying the value of cash
Compared to international banks, Aussies have enjoyed a much higher interest rate since the financial crisis.
Although that is quickly changing.
Our own central bank has now dropped the cash rate to 1%. Sure, it’s not the zero rate policy we’ve seen overseas.
But it’s getting dangerously close.
So much so that the Australian Securities Exchange is trialling the trade of interest rate products with a zero or negative interest rate. The trial covers all products that use interest rates, including options, futures and the ASX’s own internal systems.
This unprecedented path of monetary policy has taken investors to a point we never thought we’d reach.
A decade ago, cash at the bank earned interest.
We treated it as a ‘safe’ alternative to stocks.
Then central bankers waded in and uprooted our safe haven.
This year, our own central bank joined the wealth disruption party.
While we don’t have zero or minus rates yet, the fact that the ASX is trialling the concept means it is preparing for the worst…
Which means you should be too.
Treating gold as money
Ray Dalio calls it the ‘coming paradigm shift’.
That’s just a fancy headline to describe our stark reality — that zero or negative rates have created an unrepayable US$13 trillion (AU$18.5 trillion) pile of debt.
Yet that wasn’t what caught my attention this morning.
It was the top listed article from The Australian Financial Review, boldly announcing: ‘Ray Dalio says gold may be key amid monetary policy shift’.
When Dalio speaks, people tend to listen.
However, it wasn’t what Dalio said that I found interesting. It was the AFR’s admission that perhaps gold might not be a bad idea for investors after all.
Overnight, Dalio released a detailed analysis of all the bubbles and busts since 1920s. The AFR shared a glimpse of it, with Dalio stating:
‘In such a world, storing one’s money in cash and bonds will no longer be safe.
‘It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system.’
He then goes on to suggest gold.
Central bank policies have destroyed the faith we had in cash at the bank.
Not only that, but low rates and possible negative rates mean that that cash is earning less and less income. Tomorrow, I’ll show you exactly how gold acts as a store of wealth.