Plummeting Faith in Central Banks Bodes Well for Gold

Written By Luke Burgess

Posted September 22, 2016

The price of gold had its biggest increase in two weeks yesterday following policy statements from the Bank of Japan and the Federal Reserve.

And after what’s been a two-month lull in prices following Brexit, gold is ready to once again begin the climb to $1,400 and beyond for one simple reason…

Faith in the world’s central banks is rapidly eroding.

More and more people are becoming aware that central bank policies simply don’t work as promised. This is clear in the rising number of mainstream financial publications questioning the abilities of the world’s central banks, with headlines like:

  • “A Clear Message That Central Banks are Not All-Powerful” (Financial Times, September 20, 2016)
  • “Central Bank Tools Are Losing Their Edge” (Wall Street Journal, September 21, 2016)
  • “Japan’s Central Bank Experiments At The Wrong Time” (Bloomberg, September 21, 2016)

The U.S. Federal Reserve itself has been dealing with a decline in public confidence for over 15 years now. A Gallup poll in April found 38% of Americans “had a great deal or fair amount of confidence” in Janet Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan exceeded 70%.

But what exactly is the relationship between declining faith in central banks and rising gold prices?

It’s actually pretty simple. The world’s central banks are in competition with each other. But they’re also all in competition with gold.

The world’s central banks essentially provide products and services like any other private business. Among their products is their unit of currency, and among their services is monetary policy. But, of course, they don’t provide these products or services for free — again, like any other private business.

Gold, on the other hand, is the product that provides the same service for free. And that service is simply labor storage, a.k.a. wealth storage.

What I’m getting at is something I’m sure you’ve heard countless times from gold bugs: gold is money.

Now, I want to take a minute to differentiate between money and currency. As we use them today, the words are interchangeable. But consider currency simply as the most commonly used medium of labor exchange. And consider money as more of an intangible idea of a medium’s ability to store labor.

In this sense, both currency and gold are money. Both currency and gold have the ability to store labor.

The advantage that paper currencies have over gold today is simply ease of transfer. But convenience comes at a cost.

As I mentioned, central banks don’t provide their products or services for free. Of course they pay themselves a salary. But regardless of whatever they say, as the head of their nations’ banking systems, central banks’ policies are always going to be favorably biased toward their member banks.

This central banking business is not limited to a single country. And as faith in the central banks’ monetary policies continues to decline, so too will the faith in their currencies. This will lead to more people seeking wealth storage elsewhere. And there’s really only one place to turn at that point: gold.

I continue to be a buyer of gold at current levels. I believe you should, too.

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Luke Burgess
Energy and Capital

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