Investing in Gold and Achieving Our Glory
The Swiss National Bank decided it was going to print unlimited amounts of francs to stem the rise of its currency against the euro (by pegging it to the euro). The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to "no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20."

Switzerland is the latest country that has decided to engage in massive amounts of money printing. The Swiss decision has bullish implications for gold and gold stocks. It is becoming more and more obvious that the only solution to the currency wars is a gold standard.

It should be noted that the Swiss National Bank previously implemented a fixed exchange rate regime in the 1970's. It was an epic failure because inflation surged to almost 8%. Similarly, this time around, there will be negative implications for most Swiss citizens. Yes, Swiss export companies and manufacturers might benefit from a lower Swiss franc. However, all of the Swiss people will have to pay for this temporary economic benefit via higher inflation. As we've noted before, inflation is particularly painful for the middle class who have little in the way of assets.

Over the past two years investors have flooded into the Swiss Franc as a safe haven. The only three asset classes that have performed well have been bonds, gold and the Swiss Franc. However, with the latest SNB intervention we can scratch the Swiss Franc off the list. This means that there is only true safe, one true reserve currency and that is gold.

Of course there are problems using gold as a financial instrument right now because one cannot easily settle transactions call. For example, if I were to order 1000 televisions from a Chinese manufacturer and I wanted to price the transaction in gold, the manufacturer would most likely look at me funny.

This is why we will eventually have to use gold to back a currency.

Most central banks have been irresponsible in the last decade. The fact that Swiss National Bank has started to behave in an equally reckless fashion means that there are no responsible central banks anymore that care about price stability. All investors are now living in environment where not a single paper currency can be trusted.

After this disastrous policy was implemented by the Swiss national Bank investors are only left with two remaining safe havens, the first being treasury bonds and the second being gold. Is my expectation that eventually there will be a funding crisis with major sovereign nations such as the United States and Japan. Investors will lose faith in their bonds as well. Subsequently sovereign bonds will be crossed off the list of safe havens. At that point in time the only game in town will be gold. After that point, I would expect that gold will return to its normal and historical place as a the backing of a sound currency.


Leave a Reply.