Building wealth involves uncertainty

I have personally found that building wealth for life’s major long-term events is always accompanied by significant uncertainty.  Historically, the powers that are charged to frame those uncertainties have largely produced disappointing results.

Novelist Ayn Rand has told us that as individuals, we have “innate nobility,” and that our highest duty is to “flourish by realizing our potential.”   She also told us that we can develop and join a culture that may be different and be able to create material wealth in profoundly different ways.

In 1974, Alan Greenspan, a follower of Ayn Rand who was yet to become the central banker for the U.S., told us that: “In business, inflation creates uncertainty and risk, which makes planning more difficult and discourages managers from hiring or building factories or, indeed, doing any kind of investing for growth.”

Both Alan Greenspan and Ayn Rand were “crazy gold bugs” in their younger days.

The basic fact is that the U.S. dollar
has had zero backing since 1971.  Notwithstanding, the dollar has become accepted as the world’s reserve currency.

The idea of returning to the classical gold standard has moved today from being a fringe concept as suggested by those “crazy gold bugs” to that of political discussion amongst some important mainstream players.

The proposal that is currently floating around is that a new Basel III accord will move gold to a Tier 1 banking asset from its current Tier 3 position.  Tier 1 assets can be issued as banking collateral from 100% of their value.  Tier 3 as at present, only allows 50% of gold’s value as collateral for banking purposes.

We are living through a period of time when all of the world’s paper currencies are almost in disrepute as to their value.  The unpredictability of the current global monetary and financial systems needs desperate repair.

We are enjoying the positive aspects of extremely low interest rates as created by central bankers in order to service the increasing debt loads being faced by almost all global economies.  Money printing is going on in the U.S., Europe and almost everywhere else, including China.

The very intense unpredictability of the fate of paper currencies and monetary exchange is actually inhibiting those of us who think long term in our investment process.

Recently, the famed Warren Buffet has criticized gold as a standard of currency measurement.  He told us, in his Annual Report, that all of the gold ever produced can be fitted into two Olympic swimming pools. On this, he was not quite correct in that the facts are that only 85% of the gold ever produced can still be found above ground.  But, yes, what is there can fit into two swimming pools.  His joking manner may get him press reviews but does not really make much sense because to suggest that all of the gold that can even be found above ground can fit into two small containers is actually wonderful evidence of why gold serves the purpose as a backing for paper currency – it is scarce.

Gold is scarce, it is hard to find, and it is very difficult to extract from its geological trappings.

American economist Ben Bernanke, who should know better, likewise continues to throw a bunch of so-called reasons why the gold standard would not work.  His main point is not the swimming pool answer, but he says we do not have enough gold to go around.  He goes on to also say that it costs too much to get it out of the ground.  Both can be corrected by a higher gold price.  Ben says these things with a straight and serious face but it’s hard for me to accept this when one considers that he is the one that can push the electronic buttons that can create trillions of paper dollars over the course of a week or two on a cost-free basis.  That is precisely why we need a gold standard to back our world currency.

Financial writer Jim Grant puts it easier to understand and frankly with better academic clarity and common sense.  He says that we should not confuse the classical gold standard with that of the Bretton Woods Agreement which President Nixon killed in 1971.  The true gold standard was in place for many years prior to World War I.

My personal understanding about the role that gold has played throughout history says that we cannot comprehend how to look at the future without remembering and deliberating the past.

It has not been the classical gold standard that creates the constant rise and fall of the value of money.  Money that was supposed to be “sound” in value according to central bankers.  Even historically, it has been politicians and their bankers who have controlled the rules about our money.

If you can ever believe like I can, that money could be gold or that in fact, gold is money, then you can determine that the value of our paper money rises with deflation, and falls with inflation.  When gold can exist in a free market, then it too, would decline with deflation and rise in value with inflation.

The fact is that gold is not necessarily a hedge against inflation, but as Martin Armstrong Economics says: “Gold is a hedge against political mismanagement.”  I agree with Martin, and personally work on the basis that the price of gold comes from a free market, through which those of us who care about “political mismanagement” and its uncertainty and unpredictability that gets into the way of future wealth creation, can actually vote on our confidence about the future promise of our success and how we feel those in authority are handling the affairs of state. 

A new gold standard is what the world needs in order to provide us with a true, positive outlook for the world’s investment climate which today is in severe disorder.  Its ability to create monetary stability – predictability and investment objectivity – would be a “boon and a blessing” says Jim Grant.  We could have a monetary system whose exchange rate would be fixed and business could be conducted on a global basis without concern and guessing about what the politicians and money mavens are going to do with the value of our money.