English: Crystaline Gold (Photo credit: Wikipedia)
I just wanted to repost a commentary I wrote about this time last year and sent to a couple of Canadian media outlets (Toronto Star, Globe and Mail, National Post) for ‘publication.’ It was not published by any but it seems as relevant today, if not more so, as it did last summer:
Whither Canadian Financial Oversight?
I’ve spent a lot of time over the past couple of months following and reading what I can regarding global economic issues. Not having been educated or trained in this field, I have engaged in trying to make sense of the various opinions and schools of thought.
What I have learned is that economics is an exceedingly complex system with non-linear relationships between stocks, flows, and feedback loops (that vary in timing and impact). I’ve found weather forecasting within the field of meteorology to reflect the complexity of such a system fairly well, but as a ‘simpler’ example.
Most of us realize that the further out in time from the present, the less certain a meteorological forecast is. There is a lot of uncertainty in the forecast ten days in the future. The forecast for 10 hours in the future, however, is far less uncertain. And, there is virtually no uncertainty when one considers the forecast for 10 seconds in the future.
It seems to me that this is true for the economic system and its predictive models as well. However, we are not just dealing with ‘simple’ variables that can be measured (e.g. wind speed, ocean temperature, etc.) when we are looking at the economic system. Economics is also a social phenomenon involving the actions of many individual players and groups (not to mention government intervention and general malfeasance). Add human behaviour, particularly emotions, to the mix and the system becomes so complex there is no model that could ever capture all the various relationships and feedback loops; let alone the unintended consequences and ‘black swan’ events. Making any kind of prediction in this kind of world is like predicting the weather months or years in advance.
Accepting this, I have a question for those amongst the-powers-that-be with regard to Canadian financial reserves: given an uncertain future and the fragile nature of global politics and finances, why do we have virtually no gold in our central bank reserves, and are basically ‘all in’ with a small number of sovereign nation’s currencies?
99.73% of Canadian reserves are invested in 4 areas, the: U.S. dollar (49.87%); Euro (29.69%); Yen (0.67%); and, the International Monetary Fund (IMF) (19.5%; 13. 6% in Special Drawing Rights and 5.89% in IMF reserves). Although, for all intents and purposes, the reserves held at the IMF are also fiat currency in nature, being a ‘claim’ to IMF currency reserves of the U.S. dollar, Yen, or British Sterling. Only 0.25% of Canadian reserves is held in gold.
In an uncertain world whose history is checkered with global political instability and a tendency for those in charge of currencies to devalue them, responsible oversight would seem to me to call for the building of reserves in the most certain of financial instruments. Thousands of years of history would point to precious metals over fiat currencies every time. In fact, it is of importance to note that many, if not most, central banks in the world hold far more gold in their reserves than Canada.
The U.S. holds 75.1%, Germany 71.9%, Venezuela 74.8%, Portugal 89.9%, Netherlands 60.2%. Even the IMF holds more than 2800 tonnes, or $144 Billion at today’s rounded price of $1600 per troy ounce. Canada, holds just 0.25% or slightly over 5 tonnes of its reserves in gold.
I’ve played enough poker to know that going ‘all in’ on a weak hand usually ends badly. Even going all in on a strong hand risks losing everything. But I would think we don’t want to go ‘all in’ with our reserves; that we would want to spread our risk, given the uncertainty of the future. The one thing we’ve been advised by the financial industry through their investment propaganda is to spread risk over several asset classes. So why hasn’t Canada? Three particular phenomena worry me with regard to being completely invested in 3 fiat currencies.
First, major central banks have been involved in monetary ‘easing’ policies that have greatly devalued their currencies, serving to crush the market value of Canadian currency reserves.
Second, knowing that all central banks engage in policies to increase inflation, especially should a deflation risk appear, then it is a given that fiat currencies continually lose their ‘worth’ over time. Looking at how purchasing power has been lost over time reflects this. The volume of $20 worth of gas today (15.4 L at $1.30/L) compared to twenty years ago should demonstrate this point (34.8 L at $0.575/L, Ontario’s average gas price in 1992)—not to mention the amount of silver that was in our coins prior to 1968. Congressman Ron Paul in the U.S. is one of the few politicians I’ve seen truly understand this aspect of economics and watching him question the U.S. Federal Reserve’s chair, BenBernanke, is worth the time.
Third, given the rising chorus of voices pointing to the Ponzi nature of today’s fiat currencies, going all in, as Canada has done with these financial instruments, is as risky as one could get—apart from purchasing Greek government bonds or municipal bonds out of California where municipalities are lining up to declare bankruptcy.
Gold, however, has a long-term record as both a store of and holder of wealth. History and prehistory point to the importance of gold and other precious metals as a hedge against both economic and political uncertainty. Or as Kyle Bass, founder of Hayman Capital Investment and one of numerous peripheral voices who predicted both the sub-prime mortgage and Euro crises, has stated, “buying gold is just buying a put against the idiocy of the political cycle, it’s that simple.”
So, I am both confused by and concerned for Canada in this regard. We could find ourselves in a precarious economic situation with no warning at all and have little or no reserves to speak of.
As is so often the case, the-powers-that-be will claim, after the fact, that it was impossible to have foreseen any crisis. But, they know right now that we have no gold in our reserves and have not spread risk adequately in an uncertain world. The Euro is set to implode, the Yen is a ‘bug looking for a windshield’, and the U.S. dollar will likely continue to be devalued so as to inflate away their debts, or worse yet for the Americans, their reserve dollar status could be lost to a gold-backed Chinese renminbi.
Canada, one of the globe’s ‘current’ darlings amongst financial systems, could find itself far worse off than those nations that have been building their gold reserves should a greater economic crisis sweep the globe—which appears more and more likely.
This concerned citizen would like to know, whither Canadian financial oversight?
If you do invest in some gold, Canada, please make sure you get physical delivery. Rumour has it that gold stock has been re-hypothecated so many times that there is literally dozens more times ‘paper’ gold than there is actual physical gold in existence.