The time will come when governments of the world realize, by force in some cases, that more value and confidence can be gained from using gold as the last resort bailout mechanism rather than paper or digital money. However, the gold option is very much the financial equivalent of the nuclear option. No nation wants to actually resort to this feature first because as one nation dips its toes in the water all subsequent nations will follow in its path at ever higher gold prices. It is only the last nation in the pool, with sizable gold reserves, that benefits the most from using gold as collateral. The first nation in the pool becomes the sacrificial lamb. Unfortunately, desperate times call for desperate measures.
As an example, in 1974 the official rate of gold was at $42.22 an ounce. However, the free market price of gold reached $180 an ounce. The free market price of gold increased the borrowing power of bankrupt Italy, which had 2,500 tonnes of gold, from $3.7 billion to $15.8 billion. On September 1 1974, West Germany lent Italy enough money to stave off complete collapse of the nation using the free market price of their gold holdings as collateral. Most interesting in this deal is that West Germany never collected on the gold. It was accepted on faith that if the loan could not be repaid then the gold would be shipped to West Germany. However, as long as Italy was able to make their payments on the loan then there would be no question of whether or not they would ship the gold in the event of default. This gave every incentive for both West Germany and Italy to hope for the rise in the price of gold.
We often hear about how governments would rather not have gold compete with their currency or that gold has no master. Then why are central banks filled with the stuff? The case of Italy in 1974 provides a perfect example of the reason why.
Gold acts as the last resort to combat the global competitive protectionist policies of coordinated rate reductions and domestic stimulus packages that we're seeing today. When a nation is on the brink and there is talk if a loan agreement based on the value of gold then, and only then, can we be assured of the turn in the tide for inflation, interest rates, stocks and the price of gold. Touc.
Sources:
As an example, in 1974 the official rate of gold was at $42.22 an ounce. However, the free market price of gold reached $180 an ounce. The free market price of gold increased the borrowing power of bankrupt Italy, which had 2,500 tonnes of gold, from $3.7 billion to $15.8 billion. On September 1 1974, West Germany lent Italy enough money to stave off complete collapse of the nation using the free market price of their gold holdings as collateral. Most interesting in this deal is that West Germany never collected on the gold. It was accepted on faith that if the loan could not be repaid then the gold would be shipped to West Germany. However, as long as Italy was able to make their payments on the loan then there would be no question of whether or not they would ship the gold in the event of default. This gave every incentive for both West Germany and Italy to hope for the rise in the price of gold.
We often hear about how governments would rather not have gold compete with their currency or that gold has no master. Then why are central banks filled with the stuff? The case of Italy in 1974 provides a perfect example of the reason why.
Gold acts as the last resort to combat the global competitive protectionist policies of coordinated rate reductions and domestic stimulus packages that we're seeing today. When a nation is on the brink and there is talk if a loan agreement based on the value of gold then, and only then, can we be assured of the turn in the tide for inflation, interest rates, stocks and the price of gold. Touc.
Sources:
- Lee, John. "German-Italian Deal ignores U.S. Policy." New York Times. Sept. 2, 1974. p.21.
- Hofmann, Paul. "Bonn to give Rome A $2 Billion Loan in Financial Crisis." New York Times. Sept. 1, 1974. p.1.
- Russell, Richard. Dow Theory Letters. June 26, 1974. Letter 601. p. 4.
