The policy of inflating everything, not only the price of gold
The politically dictated lockdown has made central banks adopt a war-time monetary policy all over the world. They have slashed market interest rates to zero, or even below zero, and pumped vast amounts of newly created credit and money into the financial system. The reason is self-evident: The lockdown crisis was about to cause the worldwide unbacked paper money system to collapse, causing a recession-depression on the grandest scale imaginable.
By providing a “safety net” to financial markets and keeping ailing debtors afloat, central banks are preventing a “credit event”: namely that overextended borrowers go belly up as they are unable to service their debt. The monetary market manipulation worked. Investors regained their confidence and their willingness to extend credit. For it is essentially credit that makes the unbacked paper money system go round and round.
The consequence of flooding financial markets with unprecedented amounts of credit and money, coupled with artificially suppressed interest rates, is overconsumption and malinvestment, for the lowered market interest rates tempt people to value present consumption ever higher than future consumption, and therefore to reduce savings to the benefit of consumption. People start living beyond their means.
Beyond that, artificially lowered market interest rates encourage new investment spending, which is not backed by real savings. Scarce resources are channelled into projects that would not have been attempted had central banks not manipulated market interest rates downward; they would have been used for other purposes. It is against this backdrop that the economy runs up economic disequilibria, sowing the seeds of the next crisis.
What is more, the injection of huge amounts of new money will drive up goods prices, be it consumer, producer or asset prices such as, say, stocks, housing, real estate. If we assume that people will not permanently keep higher cash balances going forward, the new money balances will be put to use sooner or later, meaning, they will be increasingly exchanged against vendible items, pushing up goods prices.
This kind of “theoretical economics” holds true even in the lockdown crisis. For output has contracted sharply, while monetary supply has gone up massively causing a colossal “monetary overhang”, which is most likely to translate into higher goods prices across the board. This, in turn, will erode the purchasing power of money. In other words: Central banks immensely expansionary monetary policy can be expected to cause price inflation for all kinds of goods and services.
The great victims of this monetary policy are official currencies: US dollar, Euro & Co. Especially so as market interest rates have been pushed to basically zero, implying negative real interest rates. In this environment – which is likely to remain in place for quite some time – holding gold and silver is one possibility to escape the losses resulting from monetary debasement. The purchasing power of gold and silver cannot be destroyed by central banks running the printing presses.
What is more, gold and silver do not carry a credit- or default risk as, say, time and savings deposits do. In that sense, gold and silver have a risk-return profile that is categorically different from the one that is associated with unbacked paper money. In other words: Gold and silver provide the savvy investor with insurance against the vagaries of the worldwide unbacked paper money regime that is increasingly getting out of control.
We have become witnesses of a monetary policy that is about to inflate everything, not only the price of gold. However, if monetary history is any guide, there is good reason to hold gold and silver. For these precious metals have, at least over the medium and long term, outperformed unbacked paper currencies in times of inflation again and again. There is no convincing argument why it should be different in the foreseeable future.