Think gold is high? Wait till dollar bonds are dumped, Davies says

http://www.gata.org/node/10237

"A paper currency system ultimately ends in insolvency," said Ben Davies, the chief executive of Hinde Capital in an interview with CNBC.com on Tuesday. "We have arrived at this point in the West. So why own worthless paper?"

Davies believes that the Federal Reserve got it wrong by attempting to pump cash into the system to avoid a liquidity crisis, as, he argues, they were not facing a liquidity crisis but a solvency crisis.

"Policymakers can't grasp the reality that allowing bondholders to default now, although horrendous for economies and employment," is a better option than defaulting later, said Davies.

"Individuals and private institutions are fleeing all fiat currencies into an asset that has no liabilities. This flight from insolvency is an exponential event," he said. "Gold is an inverse function of currency."

Fiat currencies are those a government has declared to be legal tender, without any intrinsic value or backing by reserves.

"Asset markets lost their funding when (the second round of quantitative easing) ended," said Davies. "Deleveraging has only just begun, but for now I am sure markets will bounce as QE3 arrives globally."

"If you think gold is high, wait until all and sundry exit dollar bonds," he said.