Interview with Alasdair Macleod (Part II)
“I don’t see bitcoin as an alternative to gold, but as another way for the ordinary citizen to protect him or herself from monetary inflation of fiat currencies.”
Claudio Grass (CG): After the massive crypto- and blockchain- related advances of 2016-2017 that shone a spotlight on the idea of alternative or private money, what do you think the potential of such concepts is in the future of currencies and payment methods? In this context, what do you expect gold’s role to be?
Alasdair Macleod (AM): In answer to this question I think there is only one cryptocurrency to discuss: bitcoin. To varying degrees, the others are flawed, but bitcoin has a fully distributed ledger and a reward system for miners which cannot be corrupted. So, we are considering bitcoin only.
Bitcoin has the potential to be taken up by the millennial generation as their primary hedge against loss of purchasing power of fiat currencies. They see the relative rates of monetary expansion and fully understand the implications. Furthermore, the process of understanding bitcoin has educated them to the risks of owning bank deposits in state-issued currencies. This is important, because fiat currencies only exist as long as people don’t understand money. There are increasing numbers of people who now see through the fraud.
I’m also told by my contacts that while the Chinese do buy gold as a monetary hedge, if the yuan begins to slide, they will probably buy bitcoin in preference to gold. Obviously, that is yet to be tested.
I don’t see bitcoin as an alternative to gold, but as another way for the ordinary citizen to protect him or herself from monetary inflation of fiat currencies.
CG: Turning our attention to Europe and specifically to the Brexit saga, how do you think this “divorce” will finally be resolved? Will the result of the original referendum be honored, or do you expect a compromise, or even a second referendum?
AM: With the appointment of Boris Johnson as Prime Minister, it is clear that Britain will leave on 31 October. There is not time to do a deal with the EU before that date, so it is likely that the EU and UK will agree to negotiate after Brexit under the terms of GATT Article XXIV. What this means is that if there is a reason for a change in a trade treaty and if they are in agreement, the parties involved can continue to trade on existing terms while the new terms are negotiated.
The new government will not compromise, that much is clear. The Remainers in Parliament are trying everything to stop Brexit, but that is a measure of their desperation. The fact is the laws have been passed.
In the next few months, I expect this reality to force the EU to come to terms with the new situation. Independent estimates suggest the effect on employment in the UK of a so-called “no deal” Brexit will be relatively minor, yet some 400,000 jobs are likely to be lost in the EU, particularly in Germany and France. Since that estimate was made, Ireland’s central bank has estimated a further 100,000 job losses in Ireland alone. The EU negotiators are likely to come to terms with the reality of their weak position.
CG: The Eurozone economy has long been flashing warning signs of a slowdown, which now are impossible to ignore, especially as Germany continues to lose steam. Given the fact that the ECB has already gone to extremes to support the economy, what tools do you think the central bank has left to fight the next recession?
AM: Central banks, including the ECB, only have two tools at their disposal: interest rates and monetary expansion. Clearly, Germany is sliding into a slump and with the phasing out of the internal combustion engine, the Mittelstand is going to have a very tough time. Furthermore, the premier bank in the strongest EU economy, Deutsche Bank, appears to be in deep trouble. This is a very serious situation that tells us the Eurozone faces the worst combination of economic and systemic risk, particularly given the levels of government debt in the Club Med countries.
Unless it takes the unlikely view it has done everything and it must just stand back and let the whole system collapse, the ECB will have no choice but to impose deeper negative rates, primarily to ensure higher prices for the government bonds every Eurozone bank owns. It will also have to do more asset purchases to keep the Eurozone economy from tanking. The appointment of Christine Lagarde seals the inflationary deal, which is whatever it takes, however extreme.
CG: Given the current geopolitical tensions and economic landscape, what are your expectations for the Euro and the USD in the next 6-12 months?
AM: I don’t make currency forecasts for what measured in gold terms is a race to the bottom.
CG: As economic pressures and geopolitical challenges continue to intensify on a global scale, what are your expectations for gold’s performance in the next 2-3 years?
AM: This is a question always asked by investors who do not understand that gold is not an investment, but money. There are gold-related investments, such as mining stocks, which is a different matter.
It is not a question of gold rising, but of state-issued currencies losing purchasing power. It will be clear from my earlier answers I do not see a positive future for state money.
That said, in real terms the purchasing power of gold can be expected to rise in a deep recession, just as it did in the 1930s Great Depression. In that case, we think of slumping prices in dollar terms, but before January 1934 the dollar was fixed at $20.67 to the ounce. The dollar was then devalued to $35. For this reason, dollar prices were in fact prices in gold before the dollar’s devaluation, and then subsequently in gold at the new dollar rate.
CG: And what of silver? Today, the gold-to-silver ratio hovers near 90, at historically extremely high levels not seen in 26 years. Do you see a buying opportunity at this moment?
AM: Silver is interesting. It was last priced as money in the final quarter of the nineteenth century, when nearly all countries moved from a silver or dual standard to gold. It still has monetary characteristics, which are just not reflected in the price. This is why it has moved from the gold/silver relationship of 15.5:1, which had approximately held for over two centuries since Isaac Newton fixed the exchange standard at the Royal Mint.
Today, it is about 88:1. As fiat currencies lose their credibility, the likelihood of a monetary role for silver increases. This is why when the gold price rises, being the consequence of falling currency, the silver price rises at about double the rate. While it is far too early to think in terms of silver regaining an official monetary role, clearly there will be much catching up to do with silver rising relative to gold as fiat currencies sink.
Claudio Grass, Hünenberg See, Switzerland
Bildrechte: makingmilly auf Pixabay