Thursday, 27 November 2008

They can't print gold

"Printing money" is a figure of speech for when a government just gives up on actually affording its spending, or even being able to sell bonds to finance holes in its budget, and decides that since it can create its currency out of nothing - it will.

This doesn't have to mean running the printing presses - although in Zimbabwe it does. Modern central banks can drop billions of created money into favoured accounts with a few keystrokes on a 'puter.

Of course sensible governments don't do this because they know that for every dollar (etc) they "print" the existing dollars will lose an equivalent amount of value; ie, there's nothing to be gained by printing. Or is there? Well, firstly if a government prints it is transferring wealth from the people who hold its currency, usually its citizens, although in the case of the USA also a lot of foreigners, to itself. It's a rather covert form of taxation which exhibits itself in the economy as inflation, or done to excess, hyper-inflation. Secondly, although printing is supposed to be "zero-sum" in practise it takes people a long time to notice during which period the government has "free" money without the inevitable reckoning in the form of devaluation (or inflation of prices.)

Since bearing down on inflation is usually a major on-going struggle, paper money really doesn't like holding its value, governments are a bit cautious about printing. But we live in deflationary times. Now, they could print and get away with it. So of course they will. They won't call it printing; they'll use some econo-jargon such as quantitative easing.

But it's printing really. This has just started in the US. There were major ructions a few weeks back when Hank Paulson wanted to spend $700bn on toxic waste (mortgage-backed securities actually) but earlier this week he spent $800bn with scarcely a whimper. This is because the £700bn was borrowed and hence painful to the taxpayers, and the $800bn is to be printed so pain-free, for now.

What should a person do if they don't fancy being fleeced in this backhand manner? Well, gold is the usual safe haven for savings when you don't trust your government, but gold doesn't earn you any interest.

There is another option: buy "underground" gold, ie, buy gold before it has been mined by buying into mining stocks. Unlike owning physical gold there's an element of risk here, but the rewards are potentially higher.

You'll want gold stock from companies which haven't already committed to selling their gold at a given price, for which you'll need to see the HUI index.


Anonymous said...

Interesting stuff. If the US is printing money and thus lowring the value of the dollar, could that not precipitate the sale of the $ by those countries who hold its currency?

Nationalist said...

Yes, big dollar holders may be tempted to sell, but the trouble is that if they do the dollar would lose even more value so they'd be hurting themselves. They're trapped really.

Anyway, this inflation takes time to work through the system from the "printing press" to the shops. It may be the middle of next year before the effect is seen (by which time the powers-that-be hope the world recession will have gone away.)