Assuming that we've read some of our previous "big picture" posts (for example here and here), you probably know that gold has a "special role" to play in today's situation - it is no accident that it's exchange rate vs the dollar and all the other fiat currencies of the world has been rising for the last 10 years or so.
Some may say that "gold is a bubble", but this is not true. The only "bubblish" about gold is the "paper gold" market, that the capitalists have created (this is a subject that we shall discuss in a few days). But physical gold is humanity's "truest" form of money. Ever since private property and trade appeared, people have being exchanging goods and services, and they soon realized that they needed to replace the barter system with a new system, which would employ a new invention, money. Money is a "super-product" that is used as a "benchmark" for all other products: All other goods have a value that can now be expressed through it.
Mankind has used many different forms of money, but gold (and secondarily silver) is the form that dominated over all the other forms. The reason is that gold is durable, easily transferable from one place to another and rare. Many other forms of money where tried, but nothing could beat gold's advantages as money.
However, ever since Nixon took us off the gold standard, people's perceptions changed a lot: In recent years, gold has been considered somewhat of a "fringe investment", and despite the fact that the world's central banks still keep tonnes of gold (and only gold, not diamonds, nor any other precious metal or commodity) in their vaults, people have almost stopped thinking of gold as money.
"Although gold and silver are not by nature money, money is by nature gold and silver."
-Karl Marx
"Gold is Money. Everything Else is Credit."
-J.P. Morgan
It is true that gold has other uses (for example, it is used in industry and in making jewelry), but it is also used as money - so, the value of everything else can be expressed through gold.
Everything else is credit, as JP Morgan famously declared almost a century ago.
So, in today's world, where everything's value is expressed in dollars (or euros, etc.), we are in fact using a leveraged form of "money": currency.
We have already explained how and why we got here in previous posts. Now it's time to also make "an educated guess" about where we are going next - here are some thoughts on the subject:
1) Capitalism is based on the exploitation of the workers by the capitalists.
2) After the collapse of the former USSR, all the workers of the Soviet block + the Chinese workers were intergraded into the labor marker that truly became global.
3) Capitalists off-shored production to Asia, as the workers of those countries could be exploited much more so than the workers of the West (as the Western workers had achieved some important victories through a century of labor struggles, that inhibited the capitalists ability to exploit them).
4) As the industrial base of the West was diminishing, capitalism became more "leveraged" and credit-based, as it needed more and more "banking loans" to keep the system going:
-If a factory was closed down, either because the owner off-shored production to Asia or because it just couldn't compete against the cheaper goods that were made in China, the workers of that factory could still get a job, or start a business themselves, by getting a loan from the banks.
-The workers wages have stagnated for a long time (link), but they could still "afford" a new house, by getting a mortgage. And they could also afford rising tuition fees for their children's education, by getting a student loan. And they could even a new plasma TV set, by getting another "consumer's loan". And the list goes on and on.
-This meant that the construction workers could find a job (thanks to all these mortgages), and the companies that produce this plasma TV set and the merchants who sell this TV would make a profit. So, there would be a job for those who make these TV sets, or sell them.
5) The problem with all this is that the houses that the people live in are not "their" houses, they belong to the bank. And if you can't make your payment on your mortgage, then the bank kicks you out. Can all these debts be repaid? No, of course not.
6) So, the Western workers earn relatively low wages, and are deeply in debt, as they had to keep the system going by "overconsuming" for a very long time. And it's not just the workers, entire states are heavily indebted and cannot possibly repay their debts.
7) As the people cannot get any more loans, capitalism can't keep growing. No jobs for the construction workers, factories close down as noone can consume all the good that they produce, etc.
8) But as these debts cannot be repaid, the banks are also in trouble, as they have to write down heavy losses. This is a very heavy blow for them, as they are ALL bankrupt, just like Lehman Brothers.
9) The difference is that, unlike Lehman (and a lot of smaller banks), the rest of the banks were saves through endless bailouts. Let's not forget that the banks have become bigger than ever, as capitalism needed more and more credit. So, the bankers have the politicians in their pockets, and they managed to get the money they needed (from us). After all, they are "too big to fail", whereas we are not, we are "replaceable". So, all the wealth of our societies is being redirected to the banks, in order to cover their losses, leaving the rest of us to starve.
10) But the banks need a lot of dollars. Trillions and trillions of them. So, this "money" is being "created out of thin air" (quantitative easing - money printing). This process of money printing has being going on for many decades now, ever since Nixon abolished the gold standard. The system needed more credit, and so it became more leveraged. The gold standard was interfering with capitalism's need for increased leverage, so they abolished it. And now that the banks have to be bailed out, they are printing even more money than before - here's a great chart:
11) All this newly created "money" (currency) goes to the banks, so that they won't have to face another "Lehman-type" moment, or even a global collapse of the entire banking sector. But this newly created 'money' isn't based on newly created wealth (new products/services), nor on wealth's"monetary counterpart", gold (gold, as we have already explained, is the "monetary representation" of wealth, as capitalism has a tendency to monetize everything, and so all goods and services have a value that can now be expressed through gold, in order for the people to be able to exchange them in the market (buying/selling).
12) As all this newly created "money" is not based on new wealth/gold, it is simply a way to debase the currency and redistribute wealth:
The banks get bailed out, by getting all the newly created "money", and the workers get paid less (as the value of the currency in which they are getting paid is being diminished). This is necessary for the capitalists, who get to save the banks, and improve the "competitiveness" of the working class. The destruction the currencies is a sacrifice that they have to make, in order to save the banking sector from collapsing, and at the same time to reduce the wages of the wokers, so that they become "more competitive", thus attracting capital investments.
13) One of the greatest "side-effects" of this process of "money printing" is that fewer and fewer people want to own/use the various currencies, as they can easily understand that these currencies will lose a lot of their current value in the future. More and more capitalists turn to gold for protection of their wealth, as they realize that gold is the one thing that will always remain constant. So, China, Russia, the oil states (and many other rich "players") are buying gold, and they are trying to dump the dollar when they trade with each other. The oil states have a "special role" to play in all this, because if and when they reject the dollar as a means of payment, the world will experience a great "oil crisis", much bigger than the 1973 oil crisis (which was the first time the oil states publickly rejected the dollar and demanded to be paid in gold, as they obviously didn't like America's decision to abolish the gold standard in order to print as many dollars as the USA wanted).
13) The West is obviously caught between a rock and a hard place. But saving the banks and impoverishing the workers are the top priorities, so this process of "money-printing" will continue, despite the various obstacles, twists and turns. Money printing is today a "systemic necessity" for capitalism, and there is not much point in putting the blame solely on Bernanke, Obama, Bush, the FED or their English/Japanese/European counterparts (The Europeans are also printing money, although Germany does not need the same amounts of "money-printing" as the rest of Europe, as the German workers are already very competitive, thanks to their high productivity. But Germany also accepts the need for money-printing, as it is the only way to save the banks from their "toxic loan situation". And they are VERY WELL PREPARED for the coming destruction of the dollar (hyperinflation), as the euro-system has combined the European nation's gold, making it the "least bad" option in a world of fiat currencies that are being massively debased).
14) But gold is not just an inflation hedge or a deflation hedge - it is a measure of trust in the system: The reason why gold was considered to be a "fringe investment", or even "a thing of the past" is because there was a lot of trust the system's ability to grow. The capitalists don't really like gold's stability, because capitalism wants to constantly expand. So, the capitalists prefer investments that return a profit for them, like starting a business, or investing in stocks, etc.. If and when the economy is doing well, then businesses make profits, investing on stocks is also profitable, etc. So why buy gold? Why would anyone want to save his capital for another day, when he can invest his capital today, and make a lot of money?
15) Things change however, and today the capitalists are not very confident that the economy will grow in the future (there is no trust in the system). There is enough capital concentrated in the hands of a few oligarchs, and there are many cheap workers in Asia - and yet the capitalists are NOT willing to make a lot of investments (especially in the West, where the workers are "too expensive"). As the workers lack the necessary "purchasing power" to buy things, it is obvious that a lot of products will not be consumed (because the people are too poor to buy them).
16) But the capitalists prefer to let the workers starve to death, even if this aggrevates the crisis on the short-term. The more desperate the workers become, the more inclined they will be to accept serfdom (or "increased competitiveness", as the capitalists see it). So even if a few capitalists get killed in the process ("coladeral damage"), the end result will be great for the rulling class, as they will have created an "ultra-competitive" world, where a few oligarchs own almost everything, and the workers work for scraps (->more profits for the capitalists). It is only then that they will start investing again (especially in the West). Until thw workers accept working for scraps, the capitalists will not invest.
17) In order to achieve this goal, the capitalists need a safe place to store their capital: GOLD. Once the workers have become "desperate enough" to accept serfdom, the "business cycle" can start again, and they will invest some of their gold in productive investments. But until they feel confident that they will make a profit, they choose to save their capital for the future - and gold is the only thing that will not lose value when everything else is collapsing.
Here is a great piece written almost a year ago by James Saft on Reuters - he really seems to be on to something:
Triumph of gold, the anti-investment
Rather than being an anti-currency, gold is really an anti-investment, not because it can’t pay off, but because it is the one asset that not only protects you against the bad actions of others but actually rewards you for them.
If central bankers and politicians bring on massive inflation, gold goes up. If the U.S. threatens to slouch or leap towards default, gold goes up.
The opposite of buying gold perhaps is to buy equities, because you are betting on creating products, jobs and wealth rather than just protecting yourself. On the other hand, a bar of gold has no executives that can loot the company or accountants that can aid in fraud. Really the world in which an investment in gold makes you rich is not a very appealing place.
[...]
Gold, then, is a profoundly pessimistic and depressing investment. In current circumstances it also, unfortunately, has a heck of an elevator pitch.
[...]
In investing, extreme behavior is becoming more mainstream every day.
How else can we interpret the extraordinary moves by the University of Texas’ endowment fund to not only buy nearly $1 billion of gold, equal to about 5 percent of its assets, but to insist on taking physical delivery of the precious metal.
It is really hard to say which is more remarkable; that people are behaving in ways that might have been labeled as paranoid a few years ago or the rise of things that plausibly might make them worried.
Garbage - Only Happy When It Rains
I'm only happy when it rains
I'm only happy when it's complicated
And though I know you can't appreciate it
I'm only happy when it rains
You know I love it when the news is bad
And why it feels so good to feel so sad
I'm only happy when it rains
Pour your misery down, pour your misery down on me
Pour your misery down, pour your misery down on me
I'm only happy when it rains
I feel good when things are going wrong
I only listen to the sad sad songs
I'm only happy when it rains
I only smile in the dark
My only comfort is the night gone black
I didn't accidentally tell you that
I'm only happy when it rains
You'll get the message by the time I'm through
When I complain about me and you
I'm only happy when it rains
Pour your misery down,
(pour your misery down on me)
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(pour your misery down on me)
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You can keep me company as long as you don't care
I'm only happy when it rains
You wanna hear about my new obsession
I'm riding high upon a deep depression
I'm only happy when it rains
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
(Pour some misery down on me)
(Pour some misery down on me)
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
I'm only happy when it rains
(Pour some misery down on me)
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