If there were something like an Austrian school hedge fund — perhaps there is one out there that I don’t know about — it’d be heavily long gold. And with today’s record close above US$1600 per ounce, that fund would be doing quite well.
If the portfolio were denominated in the world’s second most important currency, the performance would have been the same, as gold also ended up at an all-time high against the Euro. The yellow metal is also near record levels against the Japanese yen, British pound, and Canadian dollar. Â No matter how you cut it, the market is clearly voting against fiat currencies — or what James Grant recently referred to in a Wall Street Journal interview as faith based paper.
Why is this happening exactly? Were one to go by the news reports, it’s because investors are looking to gold as a safe haven. But that explanation is pretty vague. Things still remain hazy when journalists and analysts talk about fear of a breakdown in the financial system. What does this concretely entail? What, in other words, are people really so afraid of?
A December 2010 article in The EconomistÂ magazine gives us some sense of the horrors that are probably keeping savers and investors up at night. Entitled, “How to Resign from the Club”, Â the piece details the steps that a Euro zone country would have to take if it wanted to leave the common currency and return to its legacy money.
It wouldn’t be pretty. Because the mere hint of its occurring would lead to bank runs, the Euro departing government would have to do it suddenly without warning — Â say, over a weekend before the opening of Asian financial markets. All government payments — Â whether on cheques to public service employees, suppliers, social assistance recipients, or bondholders — would be shifted to the new currency. Commercial bank assets and liabilities would also need to be converted.
This would mean that anyone with money deposited in a bank would wake up one day with their savings in a different currency — and if the money happens to be in a Greek, Portuguese, or Irish bank (as opposed to a German one) Â then their holdings will surely depreciate in value as the currency markets subsequently assaulted the drachma, escudo, or punt, as the case would be.
The upshot would be that the ordinary person who didn’t have high priced financial advisors at their disposal arranging wire transfers to other countries and otherwise hedging their portfolios — that person would be stripped, nay robbed, of their savings. This is precisely what happened in Argentina in 2002 when it abandoned its 1-1 peg to the US dollar and mostly middle class depositors with US dollar accounts were forced to accept pesos that soon dropped to a rate of 4 per US dollar.
One suspects that a fair number of those buying gold these days are invested in Southern European banks and are trying to avoid the travesty that befell Argentina’s savers.