Gold News

That Old "Gold vs. Roman Debasement" Pitch

Veni, vedi, inflationi – or something like that as Dollar debauchery rolls on...
 
MULTI-billion fund manager Jeff Gundlach of DoubleLine Capital reckons the gold price could reach $1500 by year's end, writes Adrian Ash at BullionVault.
 
His reason? Besides a snap-back from last year's gold price drop, he points to ongoing debasement of the world's No.1 currency, the US Dollar. 
 
DoubleLine's founder isn't the first big-name money manager to compare the Dollar's shrinking value with what Ancient Rome did to its silver coinage. (You can see his charts here.) But Gundlach is certainly the most "mainstream" gold fan we've seen in a long time. 
 
That bodes well for broader interest in precious metals. The industry...and longer-term holders...could do with fresh investment flows. 
 
As a short-term play however, DoubleLine's view risks the same mistake every other "inflation!" worrier made in 2009-2012. Because there's a lot of ruin in the No.1 reserve currency. And what one analyst, ex-SocGen strategist Dylan Grice, in late 2012 called "the largest credit inflation in financial history, a credit hyperinflation" still hasn't been matched by anything like record-high inflation in consumer prices. 
 
That doesn't make buying gold wrong. But the hindsight of today's 25% loss certainly makes October 2012's buyers look early. Because a long-term trend doesn't guarantee a short-term outcome. And even when debasement does start showing up as inflation, that will be "neither sufficient nor necessary for gold prices to go higher," as another name, ex-Mitsui and UBS analyst Andy Smith said in late 2013, also comparing the modern US with Ancient Rome.
"All I see is more of the same," Grice wrote in October 2012. "More money debasement, more unintended consequences and more social disorder. I remain very bullish on safe havens."
Gold is plainly one of those safe havens. Yet it has dropped more than 25% since Grice wrote that note on how currency debasement would lead to "social debasement". World stockmarkets, in contrast, have risen by 45%. US home prices have recovered almost half of their crash, rising back to 2004 levels. Weaker Eurozone debt has soared in price, driving interest rates ever lower.
"I am more worried than I have ever been about the clouds gathering today," Grice said 20 months ago. "Which may be the most wonderful contrary indicator you could hope for..."
So is Gundlach wrong today? Grice wasn't necessarily wrong in 2012. What he called "the largest credit inflation in financial history, a credit hyperinflation" has instead rolled on...taking asset prices higher and crushing interest rates. But it hasn't, as yet, hit the value of money itself.
 
Few analysts or investors now expect Weimar-style inflation or Dark Age social collapse just yet. Gentle winks and nods from central bankers about maybe, one day...you know...raising interest rates, is adding to the broad consensus that we got away with Quantitative Easing scot-free, no harm done. As for the Dollar dropping its No.1 reserve currency status...the privilege (and burden) which enables Uncle Sam to borrow all he wants and needs with a printing press ready to pay it back...it took two world wars to knock the British Pound off that perch a century ago. Plus, of course, a willingness to accept that role from the United States and its Dollar.
 
China isn't, as yet, stepping into America's shoes. But Beijing has at least let its currency recover from this spring's sharp drop to the Dollar. Ahead of Wednesday's "no change" vote on US rates from the Fed, plus another paltry $10 billion trimmed from its monthly QE money creation, the Yuan hit 2-month highs this week.
 
Back in big-picture history meantime, the real dash for gold...when currency collapse feeds societal breakdown...will be "about psychology" said Andy Smith in his Roman comparison last fall. Smith's bleak depressionary wipe-out had 'em rolling in the aisles at first, but then gasping , then silent. Gundlach's more mainstream take is a good start, however to re-awakening gold-friendly psychology, encouraging investors to take another look at gold investment while the idea that currency debasement might ever lead to currency collapse is dismissed as just so much "history".
 
We're so much smarter, and safer, than the Ancient Romans. Right?

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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