Historically, the Only Reserve a Central Bank Can Trust is Gold

After spending a week trying to figure out how to run a wilderness ranch here in Argentina…and a few days with our old cowboy friends, Doug Casey, Rick Rule and Porter Stansberry…we’re back in Buenos Aires.

We’re back in civilization… Wait…you call this civilization? Looks more like Bubble Land again!

Gold is headed towards $1,100…

Bonds are soft…so is the dollar…

Speaking of old friends, Marc Faber says he’s long the dollar. Faber thinks the buck is over-sold. It could rise 10% in this last quarter.

But the Fed says it will keep interest rates low for an “extended period.” So there is still no sign of the kind of policy turnaround that might send the greenback back up.

Instead, we’ll have to wait until the bubble pops!

Oil is over $80…

Republicans are winning elections…

Hey, party like it was 2006…

The Dow is moving back up, too…and so are all the world’s markets…led by Asian stocks. China is booming…with its stocks up 4 days in a row…

The rise in gold comes as India’s central bank does the smart thing. Central banks need reserves. And historically, the only reserve a central bank can trust is gold. Putting US dollars in your vault – instead of gold – is a little like laying in a supply of lettuce to tide you over in a bad harvest year. Imagine what would have happened if pharaoh had stocked up on radicchio instead of grain? Those 7 lean years would have been a lot leaner than they were.

The Chinese have seen what happens when you rely on dollars for a reserve. You’re stuck. Because your reserves can wilt fast.

The Indians have a better idea – they’re buying gold.

The metal has outperformed stocks and bonds this year as it heads for the ninth straight annual gain. The Standard & Poor’s 500 Index has risen 15 percent in 2009 through yesterday while returns on the benchmark 10-year US Treasury note are down 5.7 percent.

Gold may average $1,125 in 2010, “with strong investment demand anchored by a negative real-interest-rate environment and probable central bank purchases,” analysts at Toronto-based Desjardins Securities Inc. said in a report.

And here’s another interesting item we found when we got back to an Internet connection: “Companies that become too big, complicated and debt-ridden should be allowed to ‘creatively destruct,'” says our friend Nassim Taleb, author of The Black Swan.

Taleb likens the process to natural selection. “Why is it that there are no land animals bigger than an elephant?” he asks. “Because nature doesn’t permit it. Bigger animals die off. Likewise, the market system disposes of companies that are ‘too big to fail.’ It gets rid of them.”

Unfortunately, says Taleb, the US government is impeding this natural process. The government is preventing the bankruptcies of large corporations that would clear the way for a new generation of healthier, more nimble, corporate organisms. Furthermore, these trillion-dollar bailouts are polluting the financial ecosystem with toxic piles of debt.

“We’re not destroying debt,” Taleb complains. “When you move it into the government, it stays in the government and that’s a problem.”

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

3 Comments on "Historically, the Only Reserve a Central Bank Can Trust is Gold"

Notify of
Sort by:   newest | oldest | most voted
Samuel E.
After I did some Internet searching to discover dozens of amazingly innovative companies and prototype ideas for very efficient road vehicles from complete outsiders to the large scale car manufacturing business, ideas many of which easily deserved to win in a fair market, GM creaks and lurches from the dead weight of its many fruitless branches. Now picture an old dying tree in the jungle, a tree that has branches in the uppermost canopy layer, about 200 feet up. Many seeds wait in the ground for the day when unfiltered sunlight comes streaming down through the clearing left if such… Read more »

If anyone has seen him speak I am sure you will agree that Taleb is a bit of a crackpot zealot. If he didn’t choose his current profession I am sure he would have been a terrorist.

But the man does speak sense and is quite insightful at times. Not to mention I think his black swan based strategies made bucket loads of cash for his believers.


IMF’s sale of gold to India could have been vetoed by the US, but it wasn’t. Perhaps it was a dowry.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au