We like gold theories here on FT Alphaville and this one’s a cracker.
If you think this weekend’s G-20 meetings in Washington are only about designing short-term fixes to the financial system and regulatory reforms for banks, hedge funds, brokers, mortgage companies and investment banks … think again.
Behind the scenes, a far more fundamental fix is being discussed – the possible revaluation of gold and the birth of an entirely new monetary system.
I’ve been studying this issue in great depth, all my life. And given the speed at which the financial crisis is unfolding, I would be very surprised if what I’m about to tell you now is not on the G-20 table this weekend.
Furthermore, I believe the end result will make my $2,270 price target for gold look conservative, to say the least. You’ll see why in a minute.
Well, you might if you click this link, to the article by Larry Edelson at Money and Markets. His basic premise is that if the G20 countries can’t print money fast enough to fend off a deflationary Great Depression, they could simply change the value of money. For instance:
They cease all gold sales and instead, raise the current official central bank price of gold from its booked value of $42.22 an ounce – to a price that monetizes a large enough portion of the world’s outstanding debts. That way, just like in 1933, the debts become a fraction of re-inflated asset prices (led higher by the gold price). And this time, instead of staying with the dollar as a reserve currency, the G-20 issues three new monetary units of exchange, each with equal reserve status.
Monetising the entirety of public and private sector debt in the US would lead to an official price of gold of about $53,000 an ounce, he says. Monetising just 10 per cent would have it at about $5,300 an ounce. His best guess is that the G-20 would monetise at least 20 per cent of the US debt markets, leaving gold at over $10,000 an ounce. That’s some return!
Of course, this is a variation of the arguments put forth by Martin Wolf and George Soros, and discussed on FT Alphaville last week. And, as Edler notes, something similar was done in the 1930s, when then-President Franklin Roosevelt issued Executive Order 6102, confiscating gold from private citizens and devaluing the USD by about 41 per cent.
But the idea is being discredited, most notably by the markets.
Gold continued its declines (from the lofty $1,032 reached in March) yesterday, falling to about $725 an ounce.
Meanwhile, even gold bugs like Jon Nadler at Kitco are sceptical:
What is on the menu of crisis-solving offerings [at the G20 summit this weekend]? Well, a bit more of…more of the same. Except, of course, if you happen to subscribe to the lunatic fringe view that the G-20 is about to set the gold price at $10K (not a typo) and exchange your current paper money for 1/12th of a new/improved version. Probably on the same day they finally reveal the body of the aliens collected in Roswell…
Anyway, more mainstream theories about what will get done at the upcoming G-20 summit — Tony Crescenzi at Miller Tabak, for instance, is speculating the following (emphasis our own):
Tomorrow the Group of 20 meets in Washington to discuss the financial crisis, a prospect that could be leading to short covering in advance of the meeting, as it is difficult to imagine the heads of state getting together on the worst financial crisis since the Depression and announcing only baby steps.
One action might be to indicate that the establishment of a clearinghouse for credit default swaps is imminent. Another step might be a new arm within the IMF and or World Bank whereby creditor nations such as Japan, China, and the Middle East infuse new capital for investment in debtor countries or emerging markets countries in need of funds.
Bloomberg, however, is predicting baby steps:
‘The most realistic outcome is an agreement to start putting in place principles for reforms, and then agree to meet again,’ said Brad Setser, an economist at the Council on Foreign Relations and former U.S. Treasury official…
The G-20 leaders will consider pushing common standards for accounting and improved oversight of financial-markets, Bush said. That might include centralized clearing houses for financial instruments such as credit default swaps. He said ways will be sought to give developing nations more power within the International Monetary Fund and World Bank.
Anyway, we wait with bated breathe for the outcome of this weekend’s meeting. In the meantime perhaps we should start calculating the gold content of our as yet unimpressive collection of jewellery and watches?
Related links:
The G-20′s Secret Debt Solution - Larry Edelson
A ‘paper gold’ reserve system? – FT Alphaville
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