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An Age of Gold, Not a Golden Age

Stocks in this article: JPM BCS SCBFF

Once again, in 2012, the N.Y. Fed denied the German request for an audit but after much political pressure, succumbed somewhat and allowed a German official to inspect one vault - but still no audit of the 1,536 tons of German gold that is supposed to be there. While all the Germans originally wanted was a basic audit, the lack of cooperation on the part of the N.Y. Fed has now caused the Bundesbank to demand that half of its reserves (768 tons) be transported back to Frankfurt.

Who could blame them? In an era in which we have seen the collateral of unsuspecting clients simply disappear (M.F.Global, Bernie Madoff), and in an era where gold is pledged to cover loans to large institutions and such loans are handed out willy-nilly, there should be cause for concern on the part of large central banks that hold gold in foreign vaults.

Too Much Debt, Paper Money

The signs are clear. The world's major reserve currency country, the U.S., is running a GAAP deficit six times larger than the "official" numbers, and that deficit represents nearly half of its economic output. That reserve currency country is making payment promises it can't ever hope to fulfill without either default or significant inflation.

The monetary authority, the Federal Reserve, enables such policies by running the money-printing presses and using the newly minted stuff to purchase much of the deficit. Because there are no real assets behind the unfunded liabilities, the cash deficit is destined to become larger and larger as the promises made turn into demands for payments.

Unfortunately, the U.S. is not the only bad actor on this stage. The central banks of the other industrial countries (Japan, Europe, the U.K.) have followed the Fed's lead.

International observers are warning of the implications of such policies, yet their warnings are ignored and the policies persist. Because there is no other country with a sound financial system that is capable of stepping up to reserve currency status, countries with significant monetary reserves are starting to look to hedge the value of those reserves against what is sure to be devaluing major currencies.

Japan has now, under the Abe government, openly espoused such devaluation. The policies of the other major central banks appear to be leading to currency wars and a "race to the bottom" as far as currency values are concerned.

Without a strong world reserve currency, the world's oldest traditional hedge, gold, is sure to play a major role. Central banks around the world with currency reserves are scrambling to hedge their hard-earned reserve stash. The actions of Venezuela and now the Bundesbank are just the beginning. The warning signs are as clear as the words you are reading.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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