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Prepare for a Massive Monetization of Debt

Gold Bullion could return to monetary role...

FAILURE to stabilize the Eurozone well lead to a 1930s-style depression in Europe.

Speaking to Geoff Candy on Mineweb.com's Gold Weekly podcast, Franco-Nevada Chair, Pierre Lassonde, said that he does not see the healthy countries in the region, like France and Germany allowing this to happen. Instead, they will find the resources to throw money at the problem and, in the process, "there will be massive monetization of debt."

According to Lassonde, the US, while in a healthier position economically than Europe, is also continuing to monetize its debt which will further add to inflation in that country.

All of this, he says, will be good for gold, as will the inflation that has been rearing its head in China.

But, it is not just the monetization of debt or the inflation that will give a further lift to prices of the yellow metal, it is also the continued expansion of gold's role as a financial asset.

Looking again at the European situation, Lassonde says, "Italy has the means to get themselves out of trouble, they're sitting on almost 2,500 tonnes of gold with which, even at today's price, assuming that they do for example a gold-backed bond with a 35% premium, they could easily raise $150bn and if not more."

He adds, "If you add it all up - in the European central banks - there is probably something like 7,000 to 8,000 tonnes of gold. They could raise $2 trillion and solve their problems."

This gold, he suggests could be sold to China, which is currently not getting much of a return on its three trillion odd in foreign exchange.

"The idea of using the gold that they have in their vaults is going to come to pass and that to my mind is going to be a very good thing for the industry," he adds.

Lassonde, who helped create the first gold ETF in 2004 with the World Gold council believes that the product became the vanguard for gold's campaign as a financial asset. A campaign that has since gone from strength to strength, moving from that to the situation where Europe's big clearing houses began to accept gold as collateral for banks.

"50% of all the gold sold last year went to the financial sector, and it may be even more in 2011 and 2012 as the public essentially decide to use gold as a currency versus putting their money in US Dollar or putting it in Euro," he says, adding that when you look at the total amount of wealth in the world, only 1% is represented by gold, which works out to about 30,000 tonnes of the yellow metal.

"When I look at it over the next 10 years, I think that that proportion could easily double and that will create demand for another 30,000 tonnes of gold over the next 10 years. When I look as well at the Asian central banks, they only started Buying Gold in the last few years, but now you look at the first six months of this year, the central banks have bought 200 tonnes of gold - annualise that, its 400 tonnes of gold - vis a vis even five years ago when central banks mostly European were selling 400 tonnes of gold - so that's like a huge reversal in the gold market."

As a result, Lassonde remains very positive on the long term growth in the gold.

"For the last 12 years, I've used a chart called the Dow Jones Industrial Average divided by the Gold Price chart which is really the relationship between financial assets and hard assets over 100 years."

This graph, he says, clearly shows that there are times to own financial assets - like from 1980 to 2000 when the ratio went from 1:1 to 42:1 and times when hard assets are in demand as from 1966 to 1980, at the top of which, the ratio was 1:1 - the Dow was 800 - Gold was $800.

Lassonde believes that the world is currently heading back to a 1:1 ratio between gold and the Dow. But, he does acknowledge that there are possible clouds on the horizon, at least in the short term.

"If you look back again at the 1966 - 1980 bull market there was one really severe pullback from 1974 to 1976 where the Gold Price went down by 50%."

But, he adds, "because of central bank purchasing, because of the very deep pockets waiting on the side lines for any retracement, I don't see 50% retracement in the Gold Price

However, he does say, "Pullbacks in the 15% to 25% maybe 30% range are not out of the question especially if China, which is the destination of 60% of all the commercial gold sold today has a hiccup."

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

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