Presentation Golden Revolution by John Butler

8/13/2019 Presentation Golden Revolution by John Butler

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ROLLOVER 1981)Moneycapitalhas a life of its

own. Its a force of nature, likegravity. Like the oceans, it flows

where it wants to flow. This whole

thing with gold is inevitable, were

just going with the tide. The only

question is whether you want to let it

go like an

unguided missile and raise hell, or

whether you want to keep it in the

hands of responsible people.Maxwell Emery, fictional financier,Rollover, 1981


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WHAT IS A DOLLAR?

THAT WAS THEN:

Three-hundred and seventy-one

grains of four sixteenth parts of

pure, or four hundred and sixteen

grains of standard silver.Original definition of a US dollar,

1792 US Coinage Act


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WHAT IS A DOLLAR?

THIS IS NOW:

This note is legal tender for all debts, public or private.

Current definition of a US dollar, as stated on each Federal Reserve note


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WHAT IS A GOLD STANDARD?

See the fine print?


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WHY DID THE WORLD ABANDON GOLD?

Perhaps never before had a chief

of state launched such an open

assault on the monetary power of afriendly nation.

TIME, 1965

Any workable and acceptable

international monetary system must notbear the stamp or control of any one

country in particular. Truly, it is hard to

imagine any standard other than gold.

Yes, gold, whose nature does not

alterCharles De Gaulle, 1965


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WHY DID NIXON TEMPORARILY CLOSE THE GOLD WINDOW?

In the past seven years, there has been

an average of one international monetary

crisis every year. Now who gains from

these crises? The international money

speculators. Therefore, I have directed

Treasury Secretary Connolly to suspendtemporarilythe convertibility of the

dollar into gold or other reserve assets.

(Emphasis added)President Richard M. Nixon, August 15, 1971,

speech suspending (temporarily) the dollars

gold convertibility


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FIAT DOLLAR RESERVE GROWTH IS INFLATIONARY

The fiat dollar provides the reserve for the bulk ofthe global monetary base, in particular for the US,China, other Asian and Latin American economies

Global dollar reserves are now in excess of 20%of US GDP and growing rapidly. This is highlyinflationary for the global economy as a whole

While the price inflation may not be showing up inthe US, it has already become a problem in muchof Asia and most of Africa and Latin America

The US Fed continues to grow the USmonetary base at a rapid pace, in response toprotracted US economic weakness

Source: IMF; Federal Reserve

8%

10%

12%

14%

16%

18%

20%

22%

24%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1995 1997 1999 2001 2003 2005 2007 2009

World Dollar Reserves (mn) Dollar Reserves to US GDP (rhs)

DOLLAR FX RESERVE GROWTH

Source: IMF


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SIGNS THE FIAT DOLLAR STANDARD IS BREAKING DOWN

The rise of gold!


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SIGNS THE FIAT DOLLAR STANDARD IS BREAKING DOWN

Recognizing that the international

financial crisis has exposed theinadequacies and deficiencies of the

existing international monetary and

financial system, we support the

reform and improvement of the

international monetary system, witha broad-based international reserve

currency system providing stability

and certainty.

BRIC+SA Summit Sanya

Declaration, Hainan, China,

April 2011


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A BRIC ULTIMATUM?

We are concerned about the

situation that is emerging aroundIrans nuclear issue. We recognize

Irans right to peaceful uses of

nuclear energy and support

resolution of the issues involved

through political and diplomaticmeans and dialogue between the

parties concerned.

BRIC+SA Summit Delhi

Declaration, New Delhi, India,

April 2012


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THE END OF USD MONETARY HEGEMONY?

Ever since 2009 all four of the BRICs havesought to reduce their dependence on the USD:

- Bilateral currency agreements

- Diversification out of USD reserves (currencies, gold)

This move away from the USD has acceleratedrecently, due in part to geopolitical considerations

- Growing inter-BRIC vs. extra-BRIC trade

- BRIC dependence on Iranian/Venezuelan oil

The USD is now at serious risk, even in thenear-term, of losing its pre-eminent reservecurrency status around the world

But amid global deleveraging, monetaryinstability, geopolitical tensions and general lackof global cooperation, what currency can possiblyreplace it?

Source: IMF

0

5,000

10,000

15,000

20,000

25,000

2000 2003 2006 2009 2012 2015

US GDP (bn) BRICS GDP (bn)

BRIC SHARE OF GLOBAL GDP SURPASSES THE US


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GOLD IS THE RESERVE FOR A MULTIPOLAR WORLD

We can look upon the period of the

gold standard as being a period that

was unique in history, when there was a

balance among the powers and no single

superpower dominated.Mundell, March 1997

The seven problems of the present

international monetary system are allrelated to the change in the role of the

dollar.Nobel laureate Robert Mundell, presentation to

the China G-20 Seminar, March 31, 2011


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GOLD IS THE RESERVE FOR A MULTIPOLAR WORLD

[T]he gold standard showed very little

cooperation among national governments

in the process of formal regime building.

The rise of the gold standard can be seen

more as a case of a regime emerging from

thefailure to cooperate.Professor Giulio Gallarotti, 1997

To the extent that they fail to correct

for the negative effects of power,governments choose foreign policy

strategies that are ultimately self-

defeating.Professor Giulio Gallarotti, 2010


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A BEAUTIFUL MIND 2002)Stability is crucial in practical

applications of Nash equilibria [U]nstable equilibria are very unlikely

to arise in practice, since any minute

change in the proportions of each

strategy seen will lead to a change in

strategy and the breakdown of theequilibrium.Wikipedia article on the Nash equilibrium

No one goes for the blonde... Its the

only way we all win.A fictional John Nash in the film

A Beautiful Mind, 2002


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THE RISE OF A DE FACTO GLOBAL GOLD STANDARD

What we are witnessing is a sea change in which market forces aredriving a de facto return to the gold standard. All that is missing for this to

be a de jure gold standard is some regulatory and legal recognition and

one has been proposed. The Basel Committee for Bank Supervision, the

maker of global capital requirements is studying making gold a bank

capital Tier 1 asset.Financial Times, 23 April 2012


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WHAT PRICE FOR GOLD?

US financial leverage grew at an accelerating ratein the late 1990s and 2000s

The protracted global financial crisis of 2008-present indicates that the limits of leverage havebeen reached

While global financial leverage is no longerincreasing, it has yet to decline materially.

There is a long, long way yet to go

Given that central banks are printing money toprevent the economic deleveraging frombecoming deflationary, the price of gold must riseto a level that makes the debt serviceable

Otherwise, interest rates will eventually rise to

punishing levels, collapsing the financial systemSource: Federal Reserve

1.5

2

2.5

3

3.5

4

0

10

20

30

40

50

Debt (tn) GDP (tn) Debt/GDP (rhs)

US TOTAL ECONOMY DEBT AND DEBT/GDP


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Source: Federal Reserve

LOW BOND YIELDS PROPEL GOLD HIGHER

$25

$250

$2,500

0

2

4

6

8

10

12

14

16

18

10 Yr Treasury Rate Gold Price (rhs)


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To return to gold requires the currency authoritiesto determine what gold exchange ratio would be

credible

Otherwise, the currency would come underspeculative attack and any accumulated goldreserve would be drained

Ideally, countries would re-peg to gold at a

price that did not impose further deflationarypressure on the global financial system

That requires a far higher gold price than today,as at current prices (~$1,600/oz), the marketcapitalisation of the global gold stock is only asmall fraction of the global money supply

Great Britain made precisely this mistake in1925, re-pegging to gold at the pre-WWI parity,thereby contributing to the Great Depression

Source: Federal Reserve; Amphora Capital LLP estimates

THEORETICAL IMPUTED GOLD PRICES

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Imputed Gold Price - M0 Imputed Gold Price - M1

Imputed Gold Price - M2


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WHAT LEVELS FOR EXCHANGE RATES?

The key factors determining which currencieswould strengthen and weaken (in relative terms) in

a global move back toward a gold standard arethe following:

- Export/resource competitiveness (positive)

- Size of accumulated debt burden (negative)

- Accumulated gold reserves (positive)

Once back on a gold standard, with currenciesfixed to gold rather than floating, relative interestrates will adjust according to

- Relative growth rates (or expectations thereof)

- Economic shocks

- Accumulating imbalances

With FX rates fixed, as in the euro-area today,relative interest rates can fluctuate dramatically.The same will be true under a gold standard

Source: IMF data; Amphora Capital LLP estimates

PRIMARY FACTORS DETERMINING INITIAL

GOLD EXCHANGE RATIOS

CurrencyPotential

growth rate

Domestic

debt to GDP

Net foreign

assets/GDP

Gold

reserves

USD - - - - - + +

EUR - - - +/- + +

GBP - - - - - +/-

CHF +/- + + + + + +

SEK +/- + + +

CAD + +/- + +

AUD + +/- + +

JPY - - - - + + -

CNY + + + + +

RUR +/- + + +

INR + +/- - +

BRL + + +/- -


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WHAT LEVELS FOR INTEREST RATES?

Absent monetary inflation, interest rates may stillbe set by central banks, but they will reflect a

market-determined supply/demand for money

If rates are set artificially low, the gold reserve willflow out. If artificially high, the gold reserve willgrow, but at the expense of growth

In practice, under a gold standard, central banks

could leave interest rates to the market entirely

Indeed, under a gold standard, as with a so-calledcurrency-board, central banking becomesoptional, rather than required

- The market determines interest rates

- The market determines the money supply

- Bank regulation and reserve requirements can be

determined by the government directly, rather than by a

central bank


REAL AND NOMINAL RATES TO CONVERGE

-5.0

-

5.0

10.0

15.0

20.0

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Real 10y UST yield (%) 10y UST yield (%) CPI (y/y, %)


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WHAT LEVELS FOR RISK PREMIA/SPREADS?

With no central bank able to hold rates artificiallylow to artificially stimulate demand, business

cycles will be shorter and more volatile

This will increase the risk of corporate bankruptcy,as will the fact that, under a gold standard, bail-outs will be more costly to implement

Other factors equal, risk premia and spreads will

be higher under a gold standard. This, however,will reflect a fair market pricing of risk

Absent an implied bail-out, economic and financialrisk will be easier to observe and to estimate,leading to more efficient investment decisions anda higher sustainable rate of economic growth

While corporates or even financial institutions mayfail from time to time, systemic crises shouldbecome considerably less frequent as there islikely to be less leverage in the system


RISK PREMIA LIKELY TO INCREASE

0

1

2

3

4

5

6

7

0

2

4

6

8

10

12

14

16

18

20

Moody's Baa corp yield (%) US10y yield (%)

Corp spread (%, rhs)


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WHAT IMPLICATIONS FOR EQUITY MARKETS?

Risk premium expansion implies higher equity riskpremia and hence lower equity valuations

P/E ratios are likely to decline to levels that weremore common under Bretton-Woods and undergold standards generally

Taking the US stock market as a benchmark, P/Eratios in a range of 10-15 are more likely than the

20+ that was common in the 1990s-2000s

As for sectors, the ones that will suffer the most inrelative terms are those that:

- Are highly dependent on financial activities, in particular

the financial system itself

- Are uncompetitive internationally and rely on various forms

of public sector support, including low interest rates- Have the least flexibility to downsize/restructure operations

that are exposed as uneconomic by a return to sound

money and withdrawal of public support

Source: Case-Schiller, Standard and Poors

EQUITY VALUATIONS LIKELY TO COME

UNDER DOWNWARD PRESSURE


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John Butler provides much illuminating detail on how the world's

monetary system got into its present mess. And if you're wondering

what comes next, this is the book to read. Bill Bonner

John Butler has written an indispensable reference on the subject of

gold as money. His book is a combination of history, analysis and

economics which the reader will find useful in understanding the use and

misuse of gold standards over the past century. He breaks the book into a

long series of essays on particular aspects of gold which the reader can

take as a whole or in small bites. It is technical yet accessible at the same

time. The Golden Revolution is a useful and timely contribution to thegrowing literature on gold and gold standards in monetary systems. I

highly recommend it. James Rickards, author of Currency Wars

In The Golden RevolutionJohn Butler makes a powerful case for a

return to the gold standard and offers a plausible path for our nation to

get there. Enlightened investors who blaze the trail will likely reap the

greatest reward. For those still wandering in the dark, this book

provides necessary light to keep you headed in the right direction.

Peter Schiff , CEO of Euro Pacific Precious Metals

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Presentation Golden Revolution by John Butler