Saturday, July 21, 2012

This Is Why Central Banks Continue To Scramble For Gold
In the end we will have a new monetary system.  What emerges will probably be very unlike the system currently in place.  Instead of a global reserve currency and a single, powerful central bank, it will most likely devolve back to the country or trading bloc levels.

The wealth harvesters we described earlier in the week will have a rough go of it.  Now that more people understand their scheme and how extraordinarily profitable it can be, each country or bloc will likely want to run their own version for their own benefit.  This could be why central banks continue to scramble for gold.  If you are going to run your own fractional banking system, you need to start out by seeding it with something of unquestionable value such as gold, as they did centuries ago.

We do not wish to underestimate the wealth harvesters.  They have lasted kings, governments and countries for centuries.  However, in the Internet age, we wonder whether or not the old way of doing business can be maintained.  We will see.  It should be an epic struggle.

In our view, it is important to keep in mind that expanding commerce relies on the perception of sound money.  Sound money enables the division of labor and competitive advantage concepts that are a prerequisite for sustainable prosperity. 

The world has long since left the ancestral world of direct exchange of goods.  Returning to it will result in a dramatically lower standard of living for everyone.  We need some sort of system that encourages and does not impede commerce.  Paper and electronic money are not inherently evil, just the abuse of it.

History tells us that the current status of corruption, greed, unrealistic expectations and monetary abuse is coming to an end.  What kind of resolution lies ahead is impossible to handicap.  We do not know whether we will see a secular move up in inflation, hyper-inflation or even deflation.  It depends upon the choices that our leaders and our societies make.  What we do know is that real assets will survive and that paper and electrons will not.

As investors, the only path to safety is the transition to something that cannot be inflated away, such as solid companies, energy, collectibles and precious metals.”

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