Expect Gold-Backed Currencies in Next Few Years

from Grams Gold In an interview with Tekoa Da Silva and Eric Sprott, Chairman of Sprott Inc., said:  

“I’m kind of shocked that the most volatile sector of the financial market right now is the currencies… it really should be bonds or stocks, but it now seems to be currencies.”

Commenting on the root cause of growing currency gyrations, Eric noted that, “The whole precept that printing money is good…that somehow zero interest rates and negative interest rates are good, is totally fallacious…

It’s so unimaginable and yet somehow the investment public has bought into it…Things are unstable here…So I imagine probably in less than 10 years we will see physical assets backing currency. Of course, the most likely physical asset is gold.”  This bodes for…

 “An awesome outlook for gold,” Eric added. “Last year, 84% of the world’s population would have made money owning gold because of various currency moves—even though gold in US dollars was down approximately 1%.”

Sprott: As we sit here this year, I think it’s [gold] now the strongest currency on the planet and you can see that the volatility of the currencies is causing stronger interest in gold, and we’ve seen that manifest in a number of ways. One, the GLD (SPDR Gold Trust) added something like 40 tons last month, which is a stunning number when you realize it’s only a 4000-ton market.

If you ever did 40 tons consecutively for 12 months, you would have an extra 500 tons of demand in a 4000-ton market. You can also see interest in the gold stocks picking up. 

So we’re seeing money going into the gold trust. We see the coin sales; the mints are strong. We see the money coming into the stocks – all the technical signs are there like breaking through the 200-day moving average, and the HUI index breaking out. 

I think the reasons to own gold with the kind of volatility we’ve had just could not be better than they are right now.
In 2008, we had banks levered at 30 to 1, which by definition means if your assets decline by three and a third percent, 
you’ve lost all your equity. 
That’s exactly what happened in 2008 and the banks 
effectively all went broke. 
We have the same situation again today.

TD: Eric, what are your thoughts on the financial institutions and money-center banks, and their impact on the economy, amid the currency turmoil we’re seeing?

I’ve read that leverage can be taken out at 100-200 times the amount of capital that you have on board in some forex markets. Based on your experience in running financial organizations, what are your thoughts on that?

ES: Well, Tekoa, one of the reasons I got into gold way back in 2000 was  the realization that the financial system was way over-levered. I mean, we had banks levered at 30 to 1, which by definition means if your assets decline by three and a third percent, you’ve lost all your equity. That’s exactly what happened in 2008 and the banks effectively all went broke, and the various central banks and governments came in to rescue them via TARPs, TALFs, QEs and so on.

We have the same situation again today. Most of the banks have had very poor results. We hear stories about Citigroup reportedly losing $150 million when the Franc was revalued and some of these hedge funds that went broke overnight.

There’s a lot of carnage going on out there. I’m always fascinated when I think about the quadrillion of derivatives on who-knows-what; oil, the ruble, the yen, the Canadian dollar–or something going the wrong way against the US dollar.

It’s hard to imagine that somebody is not losing a lot of money here because 1% of a quadrillion is ten trillion. The volatility in these currency markets is way beyond 1% per day, so goodness knows what’s going on behind the scenes, but it can’t be pretty.

TD: Continuing on the idea of currencies, do you feel what we’ve seen so far in the Russian Ruble and the Swiss Franc is going to roll from one country to the next, over the next 10 to 15 years?

ES: Well, it certainly looks that way. Just this week the Canadian dollar was down 2.5%. I believe (and I haven’t seen it yet because I’ve been tied up in meetings) but I believe the euro was down 1.5% today.

The Danes had to go to negative interest rates to protect their currency. That was a week or two ago. So the currency wars are in full bloom, and maybe the central bankers have finally lost control. A lot of money can slosh around asking the question, “What’s the next weak currency going to be or what’s the next strong currency going to be?”

So the countries with strong currencies have to worry about their currencies getting pushed up and the weak ones have to worry that speculators might push it down. So it’s hard to protect your wealth in an environment where your own currency is more volatile than any other measurable financial instrument and that’s what we’re going through right now.

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