[Editor’s Note: I’ve asked a fund managing Brexiteer friend to take over today’s Fortune & Freedom as I tackle other matters related to the upcoming Gold Summit. If you haven’t had the chance to sign up for free yet, click here. And now, on to Tim Price’s prospects for gold… N.H.]

About one hundred years ago, John Ruskin told the story of a man who boarded a ship carrying his entire wealth in a large bag of gold coins. A terrible storm came up a few days into the voyage and the alarm went off to abandon ship. Strapping the bag around his waist, the man went up on deck, jumped overboard, and promptly sank to the bottom of the sea. Asks Ruskin: ‘Now, as he was sinking, had he the gold? Or had the gold him?’

– Peter L. Bernstein, The Power of Gold: The History of an Obsession

I have not always been a gold bug. I began my career in the City in September 1991 as a bond specialist, selling government and corporate debt to institutional clients across the UK. The seminal experience of my career came soon afterwards, in the form of the Exchange Rate Mechanism (ERM) crisis of Autumn 1992.

With the violent europhobe Mrs Thatcher having recently been replaced as prime minister by the treacherous europhile John Major, the pound sterling had been crowbarred into the ERM – but at the wrong rate. The ERM’s member countries “enjoyed” a common interest rate policy, but the reality was that a resurgent and newly reunified Germany, experiencing an inflationary boom, sat awkwardly with a Britain suffering from economic recession. Germany’s interest rates, in other words, were simply too high for the UK.

George Soros was one of the earliest and most notorious investors to appreciate this fact. The pound sterling would end up being removed from the mechanism – a good thing for the British economy, because it meant that a) we could cut rates and get our economy moving again, and b) we would never join the euro. Every cloud…

So I learnt a few things from this otherwise dismal geopolitical debacle:

  • Never believe something until a government official has denied it
  • While governments and central banks can kick the bond and stock markets around to their heart’s content, there is one market that is too big even for them. That market is the foreign exchange market – the deepest and most liquid market in the world, where billions if not trillions of dollars, euros, pounds and yen are traded every single day.

I mention this crisis because I fear that we will soon be experiencing something akin to ERM crisis-to-the-power-of-ten.

Why?

Because the global governmental overreaction to Covid-19 has accelerated us years into a dysfunctional economic future that we were bound to wash up against at some point in any event.

Global government debt levels were unpayable even before a new, highly infectious flu variant emerged in Wuhan at the end of 2019 and then spread internationally.

Particularly among Western governments, the pandemic response has been hysterical in every sense of the word. Lockdowns never made either medical or economic sense in my opinion, but the damage has now been done – and if anything, beleaguered governments are doubling down on prior economic policy errors. New debt is being created at a rate that boggles the mind. Money is being printed as if it’s going out of fashion – which, in a sense, it genuinely is.

The inflationary pump is being primed.

Governments will attempt to suppress bond yields. They may even succeed. But the one market that is too big for them to manipulate is the currency market. Investors concerned about ever-rising inflation will see it manifest via the one escape valve left to the free market, namely widespread currency collapse.

The logical investment response to these trends, of course, is to own gold. Within my own business, we take pains to own both the monetary metals, gold and silver, so-called because throughout modern human history, they have been money. We also take pains to own sensibly priced and unindebted gold and silver miners, because we like diversification, and we would prefer to own a process rather than a product.

It is in the nature of monetary systems that they change over time. Typically, a monetary system lasts for roughly 30 years before the wheels fall off. What passes for our current monetary system – unbacked fiat with the US dollar as global reserve currency – was born chaotically after the Nixon gold shock of 1971, when the dollar was untethered from gold.

When Robert Mundell received his Nobel Laureate in Economics in 1999, he observed that “the absence of gold as an intrinsic part of our monetary system today makes our century, the one that has just passed, unique in several thousand years.” Mundell predicted that “gold will be part of the international monetary system in the twenty-first century”. He may well be right.

The author George Bernard Shaw would likely have agreed:

You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.

While I also see merit in value stocks and trend-following funds, I have to concede that the secular tailwind behind the likes of gold and silver (and real assets more generally) is as strong as I have seen in my lifetime.

Governments have lost control of their debts, and a new monetary system is coming, whether we (and they) like it or not. The go-to asset that all investors should hold in this environment is gold. I fear that the great Austrian economist Ludwig von Mises may well be right in that the terminal phase of a credit expansion involves “a final and total catastrophe of the currency system”.

Given the geopolitical and macro-economic situation, now might not be the worst time to engage with gold experts, which you can do at the forthcoming Gold Summit. 

Tim Price

Tim Price is co-manager of the VT Price Value Portfolio and author of Investing Through the Looking Glass: a rational guide to irrational financial markets.