As the world celebrates the 40th anniversary of the dollar falling off the gold standard, the subject of holding gold as a means for surviving the simultaneous devaluations of the U.S. dollar is growing in intensity once again.
But for now, it’s the European monetary experiment with the euro that’s overshadowing profound dollar woes, driving Europeans of 23 nations across the eurozone into hard currencies such as the Swiss franc and gold.
If Germany’s resolve to step in to bailout the eurozone periphery of Portugal, Ireland, Italy and Spain (PIIGS) falters, “all hell could break loose in the [euro] next couple of weeks or months,” Felix Zulauf told Financial Sense Newshour over the weekend.
The 40-year veteran of the financial markets from Switzerland said intra-bank lending is freezing up in Europe in a similar way to the banking system in the U.S. post Lehman Brothers. Germany, now, is about to face the same dilemma as U.S. policymakers had faced in the wake of a simultaneous collapse of Fannie, Freddie, Lehman and AIG in early 2009.
“The final decision is coming up this year,” Zulauf said, referring to the German government’s response to the crisis. Europe is experiencing a “slow motion bank run in Italy.” And that is no small matter, he said, as Italy’s debt market is the third-largest of the world, behind No. 2 Japan, and the U.S. Treasury market.
In the end, Zulauf estimates support of the PIIGS will cost Germany more than 1 trillion euros ($1.4 trillion)—a staggering amount when compared with Germany’s $3.3 trillion GDP, which, in his opinion, is too much money given the outrage expressed by the German people already regarding the bailout package for tiny Greece. An equivalent proposal made in the U.S. to, say, bailout troubled states, would cost approximately $6 trillion against an American economy of $14 trillion.
“Either the EC [with Germany as the lynchpin] bails out the PIIGS, or these countries must revert back to its former national currencies,” said Zulauf, which means the respective currencies of the PIIGS would have to be “devalued 30%, 40%, 50%, or so.”
And if Germany expects help from France’s second-largest economy of $2.7 trillion to maintain the integrity of the euro in its present form, Zulauf isn’t sanguine on that likelihood, either, stating, “France will become a problem later on.”
“It’s an ugly situation,” he said.
“For a limited time,” gold, and to a lesser-extent, U.S. Treasuries,” are the vehicles investors have been fleeing Europe’s euro as the crisis drags on month after month, starting with the initial meltdown of Greece during the first quarter of 2010—which ultimately led the Greek government to seek a EU/IMF bailout on April 23, 2010.
“The old models have broken down, and do not work anymore,” Zulauf said of central banking policies on both sides of the Atlantic.
“QE by central banks is working well on financial assets and commodities . . . but it’s not working well to stimulate final demand in the economy,” he added.
Financial markets used to lead the economy, but not today, due to central bankers expanding balance sheets to fight insolvencies of both public and private balance sheets, Zulauf explained, fooling many economists into believing that an elevated stock market is the key leading economic indicator for eventual economic growth on main street.
As more and more investors realize that the economy is in much worse shape in Europe and the U.S. than well-regarded economists now believe, the run to gold will push the price of the world’s ultimate store of value to successive all-time highs.
“It [serial central bank devaluations] will push gold to much higher highs, because people’s mistrust of governments, central banks, and the value of money, of our major currencies will continue to decline, and a rising gold price is just a reflection of that,” Zulauf stated.