Author: Gold News Club

Yahoo/Michael Nathanson/2-14-2020

“Along with the headline risks of recession, trade wars, political dysfunction, and more, there’s another risk, perhaps greater than all the others, that we used to talk about but don’t anymore. Remember the national debt and budget deficit? Well, those sums are far larger – and more dangerous – than in the ‘old’ days when we used to talk about them.”

USAGOLD note:  The forgotten crisis?  Forgotten, indeed.  Especially in an election year when both parties just as soon pretend it wasn’t so.  The post immediately below, however, alludes to knock-on effects that few are thinking about.

Bloomberg/Liz McCormick and Saleha Mosin/2-18-2020

“As the [Treasury] department copes with higher spending, large swings in the amount of money it has on deposit with the central bank have already undercut the Fed’s ability to keep bank reserves stable. Last year, one particularly big shift helped to drain so much liquidity from the banking system that it contributed to a spike in overnight lending rates.”

USAGOLD note:  One thing leads to another for the Treasury Department and central bank.  A bunch of little things pile up.  And then all of a sudden something big happens and you find out your sitting atop a genuine, full-out crisis.

Book Review

The Burning Stone
A novel by Jack Whyte

Inflation is a process rather than an event. One of the better-known examples of that axiom is the nearly two centuries-long debasement of Rome’s silver denarius – an inflationary episode Jack Whyte, a writer of historical fiction, skillfully addresses in his latest novel, The Burning Stone.

Set in Great Britain in the fourth century AD during the Roman occupation, The Burning Stone is a prequel to Whyte’s engaging, seven-book series on King Arthur – The Camulod Chronicles. Throughout the series, Whyte juxtaposes the rise of Arthur’s Camelot against Rome’s decline. This particular story is told through the lens of a young Roman from a wealthy family with banking, political and military interests who flees to Britain after his immediate family is murdered for reasons that remain a mystery for most of the novel.

After a series of fateful events involving his future wife, he becomes a blacksmith forging and fashioning the highest quality swords. Even as he assumes the life of tradesman-entrepreneur, he keeps contact with the Roman military in Britain and goes about the business of reordering his affairs as an expatriate Roman citizen albeit one who wishes to keep a low profile. The young blacksmith, Quintus Publius Varrus, one day receives a scroll from his uncle, an admiral in Rome’s navy, advising him to expect an important shipment from the continent in the near future.

This is where Whyte’s tale takes a turn toward monetary economics and an insightful commentary on Rome’s currency debasement (see graphic below) as a symptom of, if not catalyst for, the empire’s ultimate demise. The inflationary process extended over the reigns of several emperors and went on for more than two centuries. The Roman citizen who had the wisdom to hedge that process ended up preserving and building his or her wealth. Those who did not, at some point along the way, suffered the debilitating effects of the resulting inflation.

In Whyte’s telling, Varrus’ grandfather, an advisor to Emperor Diocletian and a member of the ultra-wealthy Seneca banking family through marriage, was among those who chose to accumulate gold coins as a hedge against the on-going debasement of the silver denarius.* When Varrus opens the shipment from his uncle, he finds it to contain a very large hoard of Roman imperial gold coins and a letter describing his grandfather’s rationale for forming the collection.

“His heroes,” the uncle writes, “included giants like Cincinnatus and Cato the Elder, both revered for their unswerving loyalty, integrity, and civic duty. More humorously, and with genuine irony, he distrusted banks and bankers – unsurprisingly, perhaps, given that he wed into the wealthiest banking family in Rome. . .In keeping with that distrust, he was assiduous in hoarding his money, keeping its whereabouts unknown.”

“There are five thousand aureii in the box,” he goes on, “the oldest of them dating from the time of Octavian, Caesar Augustus, and the newest of them, in the fourth level down, minted during the reign of Marcus Aurelius. After that time the value of the aureus declined from year to year as the intrinsic value was degraded by unscrupulous speculators, so your grandfather refused to deal in anything more recent than the mintings of Marcus Aurelius.”

“The bottom layer of coins, though,” he says concluding his description of the chest’s contents, “contains nothing but golden solidi minted during the lifetime of Diocletian. There can be no deception there. The solidus is minted of pure gold, and though few of them were issued, there can no doubt of there validity in real terms, and my father valued them highly. That layer contains one thousand Diocletian solidi. There is no more valuable coin in existence, and I know of no one other than yourself, among all the people I know, who can claim to have a thousand genuine Diocletian solidi in their possession. Any one of the other coins in the box could fetch ten times their nominal value from a sharp-eyed trader.”

And so it is, according to Whyte’s tale, that great wealth was transferred at the time of Rome’s decline from one generation to the next.

– Michael J. Kosares

* “Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.” – Inflation and the Fall of the Roman Empire, Joseph R. Peden (2017)

Image courtesy of Visual Capitalist
Click to enlarge

OPINION

In 1700 years, as you can see in the chart above, not much has changed.  Since 1971, when the United States detached the dollar from gold and ushered in the era of fiat money, the dollar has lost 84.5% of its purchasing power over the nearly fifty-year period.  The 1971 dollar is now worth 15.5¢.   Gold in the meanwhile has risen from $35/oz. then to roughly the $1600 level today (with a stop at $1900/oz in 2011.) Over the long run, gold in the modern era has maintained its purchasing power as it did in Roman times, while the dollar, like the denarius, has been steadily debased. So it is by the circuitous route just taken, you now know how Jack Whyte’s depiction of the Roman inflation in The Burning Stone reinforces the argument for gold ownership today, and why we went to the trouble of presenting a review of his book on this page.

We should not become desensitized to the prospects of future inflation as a result of the lull we have encountered in recent years.  The loss of purchasing power goes on undeterred with some economists arguing now that it could accelerate in the near future. Even though price inflation is relatively subdued at present, monetary inflation continues unabated with consequences yet to be determined. In the inflationary process, it should be remembered that the line between cause and effect is not always a straight one. History teaches us that when inflation does arrive, it comes suddenly, without notice, and with a vengeance.

We hasten to add that at any point along the way in the Roman inflationary period, the hoarder who had stashed away earlier silver coinage would have effectively hedged the intermittent bouts of runaway inflation, as White’s story suggests.  Though more volatile than gold, silver in the modern era has functioned effectively as a safe-haven asset in the portfolio. A chart like the one above could be drawn with silver as the overlay instead of gold.

– Michael J. Kosares

(USAGOLD – 2/19/2019) – Gold climbed in overnight markets and early U.S. trading as investors reacted to potentially widespread coronavirus repercussions for global business and signs of recession in Japan and Germany. In addition, the perception is gaining ground that central banks are likely to head off future financial uncertainty by turning up the monetary spigots. The yield differential between three-month bills and 10-year Treasuries, by the way, inverted again this morning – a sign in the past of impending recession. Gold is up another $5 this morning at $1606 after yesterday’s $17 gain.  Silver is up 20¢ at $18.36 – and up 67¢ over the past two days.

In an article titled The White Swans of 2020 published at Project Syndicate, Noriel Roubini, the controversial professor of economics at New York University, details a number of potential “seismic” events on the geopolitical horizon mostly centered around accelerating economic conflict among global players. He says China and Russia in this atmosphere are likely to continue stockpiling gold – a strategy that explains the 30% spike in gold prices since 2019. “So far,” he says, “China and Russia’s shift into gold has occurred slowly, leaving Treasury yields unaffected. But if this diversification strategy accelerates, as is likely, it could trigger a shock in the US Treasuries market, possibly leading to a sharp economic slowdown in the US.”  We would add that China and Russia are not alone among nation-states stockpiling gold to shore up their national reserves.

Chart of the Day

Chart courtesy of Hubert Moolman
Click to enlarge

Chart note:  “With the significant decline in the US Monetary Base since 2016,” says Elliot Wave analyst Hubert Moolman, “there are some serious threats facing the monetary system. These are setting up really favourable conditions for Silver prices and the position it has in the international monetary system. The expectation for much higher Silver prices are certainly reflected in the charts. I have previously presented this chart (now updated) to show how the current bottoming process (2015 to 2018) is similar to that of 2001 to 2003 . . .” He goes on to say that “this time we will likely see far greater price increases in a shorter period, especially given the serious threats facing the monetary system.” Though Moolman’s thesis is intriguing to say the least, we feel the necessity to caution once again that past performance is no guarantee of future results. His chart is reproduced with permission.