Gold in 2012

The financial crisis imperiling the globe for the past several years has not been solved. Until it is, we can expect more of the same – specifically, serial bailouts of governments and banks that, if not already insolvent are bordering on insolvency. It is a distressing prospect.

Perhaps the outlook for the months ahead can be best summarised by the Governor of the Bank of England, Sir Mervyn King. In a recent interview on British television, Sir Mervyn in a rare candid moment made a remarkably bold statement: “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances.”

It is somewhat odd that Sir Mervyn chose the word “unusual” to describe the present situation. After all, banking crises and defaults on their debts by sovereigns – princes and kings as well as countries – have been a recurring feature of monetary history even before the founding of the Bank of England in 1694. So there is only one reasonable conclusion from his comment. He was obviously referring to the severity of the today’s circumstances, meaning that the depth and long duration of this present crisis have few parallels.

Sir Mervyn went on to add that it is necessary for central bankers “to act calmly to [these circumstances] and to do the right thing.” While his comment reads well, and may even extract a sympathetic response from some people, do his actions confirm his words? More generally, are central bankers doing the “right thing”? For the answer, we only need to look at the price of gold.

Gold is a barometer of the ill winds stirred by monetary problems. It is as reliable as a canary in a coalmine. The rising price of gold flashes for everyone a clear warning signal. And a rising gold price is what we can expect in 2012, for the same reasons that it has been rising for a decade.

First, central bank money printing continues unabated. It is the repeated answer that central bankers offer to address all of today’s financial problems, with the only outcome being the continual erosion of the purchasing power of national currencies – what is usually referred to as inflation.

Second, people everywhere are increasingly worried about the safety of the bank in which they have money deposited. Ever since the collapse of Northern Rock in the UK four years ago, confidence in banks has been diminishing. The failure of Bear Stearns, Lehman Brothers, MF Global in the United States and the near collapse of Dexia, the Belgian-French bank, have only provided more evidence that there is real reason to worry. These failures also illustrate that the problem of insolvent banks is a global phenomenon.

Third, the interest income one can earn on a bank deposit is not sufficient compensation for the counterparty risk being taken. Even worse, the interest income is less than the rate of inflation, with the consequence that bank deposits result in the loss of one’s purchasing power.

I could go on, but these observations made my point. To all of these problems, and indeed, all the problems that plague national currencies, gold provides a safe refuge.

To end as I began, the future is unknowable. Consequently, we do not have solutions for today’s problems; we only have choices. For 5,000 years, gold has been the world’s preferred money. Being tested time and again over the millennia, gold’s proven record continues to make it the preferred choice for a future that is always uncertain.