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Governments may consider restricting the private ownership of gold forbid if inflation gets out of control. That's what hedge fund manager Crispin Odey writes in an update for his clients. He warns that countries can even nationalize gold. "They will only do this if they feel the need to create a stable currency for global trade," So writes the hedge fund manager.
Odey expects a major economic crisis and therefore invests a large part of the assets it manages in gold. In April, he increased his position in gold futures from 15.9% to 39.9% of the total investment portfolio.
"It's no surprise that people buy gold, but the authorities may decide to demonetize gold at some point," Odey said. This means that as a private individual, you are no longer allowed to buy or own gold. His fund is now fully invested in gold, because in addition to a position in futures, he also has a share in Barrick Gold, one of the largest mining companies in the world.
The question of confiscation is on the minds of many gold investors, because that is what happened in the United States in 1933. Americans then had to exchange their gold bars and gold coins at a fixed rate of $20.67 per troy ounce. After that, the government raised the official price of gold to $35 per troy ounce, effectively devaluing the dollar. The currency had suddenly lost about 40% of its value when you measure its purchasing power in gold.
The chance that governments will confiscate gold again is not that great, because it is no longer linked to money. In the 1930s, the government tried to fight deflation, but it was difficult because everyone was hoarding gold. As a result, prices continued to fall, resulting in a great depression. With the abandonment of the gold standard, governments and central banks are no longer limited by their gold reserves. As a result, there is no immediate need to confiscate gold today.
"History is filled with examples of governments that eroded the value of money in times of crisis," Odey writes. This started with the rulers of the Roman Empire, who reduced the silver content of the coins over the years. Later, kingdoms and governments adopted other ways to erode the value of money. In addition to lowering the content of precious metals, they also periodically reduced the weight of the coins. At the time of the gold standard, the peg between gold and money was also adjusted from time to time, such as with the devaluation of the dollar in 1934.
Today, all countries have let go of the anchor of the gold standard. In doing so, they have created almost unlimited space to borrow or print extra money. This does not mean that the problem of currency depreciation has disappeared, because the Gold price has risen from $35 to more than $1,700 per troy ounce since 1971. That is a price increase of the equivalent of 8% on an annual basis.
According to Odey, we have to take into account a period of high inflation. He foresees that the price level will rise by 5 to 15 percent in the next 15 months. "I expect the authorities to fight this trend at all costs, but I also think they will lose that battle."
It remains to be seen whether inflation will come in the short term, because for the time being all the figures point to deflation. The effect of debt deflation on the economy is far greater than the effect of all the stimulus measures taken by central banks and governments. The natural response in a crisis is that of debt deflation, where people borrow less and pay off more debt.
The relationship between the gold price and inflation is not always clear over the long term. What is clear, however, is that gold benefits from currency depreciation, because the global supply is relatively constant. Gold cannot be reprinted and has unique properties that make it very suitable as an alternative store of value. It is precisely in times of crisis, when confidence in assets such as shares and bonds is falling, that savers and investors seek refuge in precious metals.
This contribution was made from Geotrendlines
