Rising Gold, Falling Paper Money, Bankrupt Pension Funds

Photograph by Filomena Scalise

The Financial Times makes interesting reading this morning. See page 34. Bottom.

Gold surges to record high. The explanation is – standard mainstream media logic – some crisis somewhere. Currently it is the Middle East situation. Then there is the fear of inflation. And what is the reason for inflation? The answer is a rising oil price.

What rubbish.

The political tension in the Middle East may be the trigger, it is not the reason for the rising gold price. Gold has been in a ten-year bull market. Last year’s high of 1,421 paper dollars per ounce was reached in November, long before the Middle East blew up. Inflation fears are growing and they are justified. But not because oil is going up. You cannot explain rising prices (inflation) with rising prices (oil). You are trying to explain a phenomenon with the same phenomenon. This is piffle.

Gold is not going up at all, paper money is going down.

Paper money everywhere is losing its purchasing power. Fast.

We are in the early stages of a major inflation, culminating in a paper money crisis. Rising commodity prices are the early warning signs of accelerating inflation. Smart people are buying gold (and silver, plus a few other REAL assets) to protect themselves.

The gold bull market started and then accelerated when it became increasingly apparent that the artificial boom created by three decades of paper-money inflation had come to an end but that nobody had the stomach to allow the cleansing recession to unfold. Balance sheets are overstretched, in particular those of banks, and asset prices are too high. There is too much debt. But in a desperate bid to create some resemblance of normalcy, central banks are now injecting even more money and the public sector is borrowing even more. The debasement of paper money not only continues, it is accelerating.

The central banks don’t have the guts to tighten. Should they? Of course. But they can’t. They won’t be allowed to. Trichet was going on about tightening at the last press conference but at the same time announced that unlimited emergency funding is still available to European banks. Don’t forget, the ECB has propped up the bonds of member governments for almost six months. The ECB is worried about inflation yet keeps bankrupt states and banks alive via the printing press. None of this makes sense.

As more and more states are sliding towards bankruptcy and as inflation fears mount, what is the UK’s pension fund industry doing with the money of the workers that has been entrusted to them?

They are buying more government bonds!

You can read this in the same issue of the FT. Right next to the gold article on page 34.

In fact, the pension fund managers in the UK are so desperate for more government bonds that the National Association of Pension Funds (NAPF) now asks the government to issue more long-dated and inflation-linked gilts.

That they have a particularly strong appetite for inflation-linked securities may indicate that there is at least one risk out there that they seem to understand. But even here their strategy in flawed. In this evolving, long-term depression most governments have increasingly only the choice between default and inflation. If they do not or cannot inflate the debt away – which, by the way, is a strategy that has only ever ‘worked’ (kind of) via complete currency destruction! – they will simply default.

The hedge against paper money collapse is not inflation-linked gilts (i.e. unfunded promises of politicians) but gold.

But what the pension fund managers learned back in pension-fund-manager school is that government bonds are ‘safe’ assets. That is their line and they are sticking to it. At a time when paper money is being debased and public sector debt explodes, and the smart money is rushing out of over-inflated paper assets into real assets, UK pension fund managers are asking for long-term gilts in order to, wait for this, ‘de-risk’.

In any case, government bonds should have no place in a pension fund. As we get older, more of us are likely to become dependent on the state, in particular in countries with a decaying welfare system, such as the UK. Chances are, when old, you will depend on the NHS, the state’s health-care system organized along socialist lines and constantly in need of more money. Public transport. Social services. All of this depends on state funds that will have long run out. None of these services are solidly funded. They are only backed by the empty promises of career politicians.

So when you are old, you hope to be able to turn to your pension fund to lessen the dependence on a bankrupt government. You will expect your pension fund manger to have diversified away from government risk by buying productive assets or real assets that protect wealth and purchasing power. But then you will be shocked to realize that your pension fund manger has ‘de-risked’ by giving more money to the state, and that you have even more exposure to the unfunded promises from politicians via the government bonds in your pension fund.