Keep calm, buy gold, and get out of bonds, says John Butler - Wealth Managers

February 01,2013

Bullion is "ultimate insurance policy against inflation, deflation, devaluation, currency and trade wars, financial crises, monetary collapse"

Keep calm, buy gold, and get out of bonds, says John Butler - Wealth Managers

The following text is an excerpt from an essay titled "Countdown to Collapse" by John Butler, chief investment officer at Amphora and the author of "The Golden Revolution: How to Prepare for the Coming Global Gold Standard":

If the recommendation to accumulate gold in advance of its remonetization for use as an international money seems obvious, perhaps less obvious is to reduce holdings of bonds. Why should a remonetization of gold lead to higher bond yields/falling bond prices? After all, the economic dislocations associated with international monetary regime change could well tip the world into yet another recession as the associated economic rebalancing takes place.

While we have come to associate rising yields with economic recoveries and falling yields with recessions, in fact, on a sound money foundation this relationship does not hold. Back when the world was on the gold standard, for example, yields sometimes rose in recessions and declined in recoveries. This is because the central bank was unable to manipulate the bond market with monetary policy.

Take the euro-area today as a contemporary case in point. As Greece, Portugal and Spain have tipped into deep recessions, their bond yields have risen as they lack national central banks which can buy their bonds with printed money. And investors have a choice whether to hold these bonds, or to hold the bonds of sounder euro-area governments, such as Germany, hence the wide spreads that investors demand in compensation.

A return to gold-backed international money will have much the same effect but at the global level. US Treasuries and other bonds will need to compete more directly with gold itself as a store of value or as official reserves. Interest rates will therefore need to rise to compensate investors for the very real possibility that the supply of bonds will just keep on growing to finance endless government deficits while the supply of gold remains essentially fixed.

Now I am under no illusions here. If the US, euro-area, UK and Japan face sharply higher borrowing costs in future, they are going to have debt crises similar to those faced by Greece, Portugal and Spain today. Indeed, with no one willing or able to bail them out, the associated crises may be more severe. The US and other indebted countries may resort to capital controls and even to selective default on their debt, such as that held by foreigners abroad.

If so, this will be another major escalation in the currency wars, one that will begin to resemble the 1920s and 1930s in its intensity. Those were sad decades, to be sure, in which much of the global middle class saw its savings wiped out at least once and, in some cases, twice. They didn't care whether this occurred via inflation/devaluation or via deflation/default. Investors today shouldn't care either. They should accumulate gold and certain other real assets in limited supply. These are the ultimate insurance policy against inflation, deflation, devaluation, currency and trade wars, financial crises, monetary collapse ... you name it. The time to do so is running out.

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