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Fiddling with the Thermometer

Blog by Toby Birch

As the author of The Final Crash: Addictive Debt and the Deformation of the World Economy (published 2007), one is often asked for further forecasts. Investors are swiftly directed to two specific chapters: ‘2020 Vision’ and inevitably one about precious metals. Instead of the usual hysterical titles like ‘Become a Bullion Billionaire’ the latter bears the more moderate heading of ‘Antidote’. Some seem disappointed with such conservatism with gold and silver as the best buy of the previous decade – and possibly the next – but they are missing the point. An antidote’s role is a remedy against a poison; not the cure for the underlying cause of toxicity.
Gold’s appreciation is simply a measure of the malaise of money, like mercury in a thermometer. Other than boosting the profitability of mining companies and bullion dealers, there is little benefit to humankind, let alone the environment. Commodity price rises are feeding a frenzy of resource depletion and subsequent pollution that we will later regret. Swathes of capital are being allocated to passive bars of metal locked underground rather than funding industries starved of finance.

Many call for a return to financial discipline by way of a Gold Standard given that fiat currencies have inflated house prices, food and energy beyond affordability. The evidence favours such an approach as the greatest debt over-hangs in history (post-Napoleonic and WWII) were countered by the resumption of gold-backed currencies. These periods brought about prosperity as a natural by-product of competition and efficiency in a sound money environment.

Nevertheless, it is easy to be rose-tinted when promoting precious metals as money; after all every Gold Standard has eventually buckled thanks to war-related expenditure. Likewise the constraints or surplus of mining supply in the Victorian era triggered several boom and bust episodes. It ultimately comes down to stewardship, a commodity that is sadly lacking in this modern era. The institutions designed to protect the public are riddled with lobbyists determined to protect the status quo. This can be seen with recent moves to raise margin requirements for precious metal futures contracts designed to contain prices. Artificial manipulation seldom works, especially when trends reflect reality. Rather than curing the disease, we see how the symptoms are suppressed by fiddling with the thermometer. Only when gold forms parabolic chart patterns and taxi drivers are telling you to buy, will it be time to exit.

Toby Birch is Managing Director of Guernsey Gold Limited, a wholly owned subsidiary of Oppenheim & Co Limited, a boutique asset management company regulated by the Guernsey Financial Services Commission. E-mail t.birch@oppenheim.gg or telephone +44 (0) 1481 721 981.

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