- The Degussa Chief Economist, Thorsten PolleitThe report points to low interest rates, high debt, political instability and "the safety net of central banks" as the main dangers to the European economy.
Low interest rates, high debt, political instability, "not to mention the safety net of central banks", are the main dangers facing the European economy, according to Professor Thorsten Polleit, chief economist at Degussa, Europe's leading investment gold trading company. The German professor gave a lecture yesterday morning on The gold value proposition at his company's headquarters in Madrid and in the afternoon before a group of businessmen in Barcelona.
Polleit began his lecture by referring to Warren E. Buffett's speech at the Berkshire Hathaway Inc. annual shareholder meeting in early May. In his introductory remarks, Buffett pointed out how important the long-term view is to investment success and compared the performance of corporate equities (productive assets) with that of gold (which represents unproductive assets). 10,000 invested in gold in 1942 would have appreciated only to $400,000, according to Buffett, considerably less than an investment in equities. This is an approach that Degussa's chief economist disagrees with, believing that "... the value of gold is not as high as the value of gold.We must first understand what gold is from an investor's point of view. Gold can be classified as an asset, a commodity or money. If an investor considers gold to be an asset or a commodity, he may consider whether he should hold the yellow metal in his investment portfolio".
The German professor points out that, when gold is seen as a form of money, Buffett's comparison does not hold water: "Each investor has to make the following decisions: (1) I have investible funds, and I have to decide how much to invest (e.g. in stocks, bonds, houses, etc.) and how much to keep in liquid assets (cash). (2) Once I have decided to keep X percent in cash, I have to determine which currency to choose: US dollar, euro, Japanese yen, Swiss franc, or gold. On the contrary, he believes that a comparison between the purchasing power of the US dollar and the precious metal would be necessary. Such an exercise would show that the latter, "in stark contrast to the US currency, has not only preserved its purchasing power in recent decades, but has even increased it".
He explained that the international fiat money system is getting "into increasingly difficult waters, mainly because the world's already dizzyingly high level of debt continues to rise".He said that this exposes investors to risks that have not existed in previous decades. On the contrary, he stressed that gold can help to deal with these risks. And he cited several qualities of the precious metal that have become increasingly important to investors: "it cannot be devalued by central bank monetary policy, it is immune to the printing of ever-increasing amounts of money, it does not carry default risk or counterparty risk, whereas bank deposits and short-term debt securities can be destroyed by bankruptcies or debt restructuring". In short, "their market value cannot fall to zero".
On the other hand, he pointed out that fiat money fuels a relentless expansion of the state to the detriment of civil liberties, the increase in military interventions and wars around the world, the economic and financial crises with their adverse effects on the living conditions of many people and, "last but not least, the socially unjust distribution of income and wealth".
Supported by data and charts from Thomson Financial, he posed the question of how long the recovery will last, analysed the trend towards lower and lower interest rates and how these support the global debt burden and increase asset prices. In this regard, He warned that credit default concerns have been put to one side and addressed the situation of the European currency, which he believes is at risk of being affected by the Italian crisis.The ECB will do whatever it has to do, including buying Italian government debt, which would degrade the euro".
In addition, he noted that people also want to have liquid means in the form of cash as a back-up for unforeseen events. "Money is the most liquid, the most marketable commodity. Anyone who has money can exchange it at any time, and thus take advantage of investment opportunities that arise along the way," he explained.
And in the face of risks to the banking system, he argued that gold can be seen as a form of money that may even deserve to be called "the ultimate means of payment". Gold has proven to be the best money, it has proven to be a better store of value than the US dollar or other fiat currencies, and it is relatively cheap.
Thorsten Polleit is also Honorary Professor of Economics at the University of Bayreuth since 2014, as well as Adjunct Professor at the Ludwig von Mises Institute (Auburn, Alabama USA) and President of the Ludwig von Mises Institut Deutschland. In 2012, he was awarded the O.P. Alford III Prize in Political Economy. He has also worked for international investment banks and is co-founder and macroeconomic advisor of the P&R REAL VALUE fund. He writes frequently for newspapers and magazines and is the author of several books.