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Meltdown drives new gold rush
By Garry Sheeran

Gold bulls are having their day in the sun. And it's not difficult to understand why.

The fine metal has long been seen as a safe haven in times of trouble. What with carnage on credit markets, banks on the bail-out and sundry financial failures, no wonder people are buying gold bars and hiding them in the back bedrooms.

An article titled Apocalypse Now on a website originating from the United States reports that people there "genuine, honest, normal people, grandmothers, teamsters, blue collars and restaurant workers" are "going long on the Second Coming".

Folks are working 50-hour weeks to scrape together scant savings and invest in one-ounce rounds. "Why? Because they want to barter in the breadline, obviously."

If God and Armageddon have a long association, so too does gold and Armageddon.
Gold is also getting a good run in the more rarefied atmosphere of some corners of academia. Like George Soros, Professor Antal Fekete hails from Hungary, now lives in Canada, and has become a high priest for those who see the return of the world financial system to the gold standard as the panacea for current ills.

"There is no other way to stop the haemorrhage ... the battle cry should be: put gold back into circulation and save our civilisation and save the world!" says the professor of mathematics at Memorial University of Newfoundland and self-styled "monetary scientist" in a recent missive.
Don't think all this is not happening at home. Peter Wilson, a retired North Island farmer, added to his collection of gold bars not long before Christmas. He now owns 20 which he keeps under lock and key.

Wilson says each gold bar about 1 1/2 inches long and half an inch wide is worth around $3600.
"My motivation is not so much investing, although I hope I will make a return," Wilson told the Sunday Star-Times.

"But I believe there are huge problems ahead for our world, the whole monetary system could collapse and money would be worth absolutely nothing. Having something physical in the safe is one way of countering that, and buying a few groceries."

Besides gold, Wilson has invested in debentures and finance companies. He lost $50,000 when his Babcock & Brown investment crashed. So far his gold investments are slightly ahead, but that's not the reason he's into gold.

"I'm a Christian and I believe in the physical return of Jesus Christ to Earth," he said. "The Bible teaches before that there will be a meltdown of systems when all forms of money will be worthless."

Louis Boulanger's conversion to gold is of a very different order. His last job in 2003 as chief executive of Mercer Investment Consulting was to provide advice to the guardians of the NZ Super Fund.
Boulanger then decided to step back from 30 years of investment consulting to global firms to take time out to travel and read more widely on money.

"That naturally led me to start questioning much of the typical explanations of what money really was and test the truth behind what we readily accept as sound central and commercial banking," he said.

Since 2006 he had been strongly advising clients to take at least some of their money out of traditional financial securities and buy gold instead, because "those able to create money from thin air have been doing so with increasing impunity and, to put it bluntly, money is dying!"
No one disputes that too much credit and easy money are among the biggest culprits behind the financial crisis. But Boulanger now believes the root cause of current financial problems is the abandonment nearly 40 years ago of a monetary system which, in its extreme form, would require governments to hold sufficient gold to back all circulating money.

Roger Bowden, professor of finance and economics at Victoria University, is "astonished that anyone would seriously contemplate returning to the gold standard".

"It would not only solve nothing, but would make matters worse," he said. "A too high a gold price was one reason why Britain fell into recession in the 1920s."

Bowden said the expansion of credit had nothing to do with the lack of a gold, or any other standard, against which to measure money. "Expansion of credit and money supply are two quite different things. You could have a rhubarb standard, but it won't make a lot of difference. In fact, I could see an almost infinite creation of credit on zero money supply."

But, said Bowden, the global financial system certainly needed monetary discipline, "and I believe we are going to see that in the next year or two, sufficient to make the world safe for bureaucrats for life".

Brent Layton, recently retired chief executive of the NZ Institute of Economic Research, was likewise dismissive of calls for a return to any version of the gold standard as a way of regulating money supply.

"The Bretton Woods agreement [which helped re-establish the gold standard in post-war years] was not a particularly good idea even in its day, and we have moved a long way past that in terms of economic policy setting," he said. It would mean money supply would fluctuate with the discoveries of gold.

"I would very much prefer to have Alan Bollard running policy within set parameters than be subject to the whims and discoveries of geologists, and the fluctuations in the price of gold as industrial demand changes," he said.

The lure of gold as an elixir of life and solver of humanity's most fundamental problems has a long history. In another age, alchemists sought to create liquid gold from base metals, in the belief that would somehow allow people to live for ever.

"Perhaps it has something to do with how gold looks, how it feels in the hand," said Bowden. "It is a lovely metal, but it is no quick fix for a modern financial system."

Boulanger admits he was himself "totally surprised" by the changes in his own thinking as he read widely during 2004-05 on monetary systems and the history of money. "I was saying to myself, `but this is just conspiracy stuff'.

"I knew that advising people to `buy gold' was, in effect, a protest vote against the currency. And it does repel the mind to think of gold as a good investment rather than mainstream financial securities. In one sense gold is not an investment at all. It pays no interest or dividend, and provides no income in that sense."

But he took most of his money out of assets such as shares and fixed interest when he decided the financial system was facing serious systemic risk.

And as much as he believes it is now unwise for investors not to own gold, "very few of my clients have in fact done that. It is too hard for them to accept, and I understand that because it took me almost two years to come from where I was at Mercer, to where I am now".

As for a return to the gold standard, Boulanger said he was not sure whether gold should be the new measure of redeemability for currencies. "What I know with a fair degree of certainty now, not just a belief, is that there is something profoundly wrong with our monetary system."

If critics find it easy to dismiss Boulanger's belief that gold is an answer to current financial problems, they are not so dismissive of concerns that the global financial system is in crisis, even danger of meltdown.

And while new controls on credit creation might help prevent a repeat of the excesses of the past, there is still the problem of huge amount of risky debt in world markets now.

Bowden said there were two options facing finance leaders. They could sell bad debt for a minimal amount and take the loss. "That will mean a lot more people will go broke, more banks will go under and financial meltdown will spread."

But the prospect now of a global depression meant the risk that some quite sound banks could go under as well.

The other option was for governments to act as a guarantor in the last resort, and undertake the kind of rescue packages that were being put in place around the world.

Their failure would be another nightmare situation. "But we have a long way to go yet, and we have to figure our what is going to happen even when things improve," said Bowden.

Governments did not yet have exit strategies in place to deal with policy measures such as guarantees on bank and other deposits.

"There will still be many problems to work through, but I don't see them arising from money supply."

Bowden said concerns for a return to a gold or other standard to place limits on new credit creation were probably fuelled by the US government selling bonds to the US Federal Reserve, which paid for it by crediting government books.

"That is, in effect, creating new money which the US government is spending," he said. That would be a worry if inflation was a concern. But that was not the situation now.


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