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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WHAT PRICE FOR GOLD?
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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WHAT PRICE FOR GOLD?
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
Source: Federal Reserve
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
Source: Federal Reserve
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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