Because the Chart Says So…

I attended a lecture last night entitled “Surviving the Global Panic.” I don’t really feel that there is much appreciation in this part of the world for the events that are transpiring. Were it not for the Bloomberg TV in my apartment and my intermittent DSL connection, I would be blissfully unaware of the slow-motion train wreck unfolding across the global economy. So I was looking forward to the event, if only to see what the local perception was. Our speaker was an ex-Goldman analyst/trader who moved back to Jordan several years ago to start his own securities firm. Given his white shoe background, I expected him to be a little more articulate (everything was “just nuts” or “crazy”) and his unwavering belief in prognosticating power of technical analysis was amusing; however, he was both knowledgeable and interested in the topic at hand. His predictions (prolonged global slump, S&P bottoming around 700, cash is king and invest in gold) all seemed quite reasonable to me, although they drew the ire of several Jordanians during the Q&A section for being too pessimistic. Most seemed to think that the local economy was insulated from the problems in the U.S. and Europe, although our speaker did not share that perspective.

In any event, the highlight of the session was when an audience member said that he has heard the phrase cash is kind quite frequently lately, and was wondering which currency to hold. I have often wondered this myself, and while the speaker didn’t really have much of a direct answer (not the dollar, not he Euro, and by implication not the dinar) he did raise the possibility of all currencies going back to the gold standard. This was a popular theme about a year-ago, when the dollar was dropping to multi-year lows and Ron Paul was out lambasting the Fed. I haven’t heard this thesis all that much lately, and admittedly I need to do a little research to understand the implications. However, it seems like it would be a disaster. I just have a hard time believing that the huge amount of liquidity still sloshing around the financial system (central banks are pumping it in, even if no one apart from distressed banks are taking it on) could have any meaningful peg to gold.

In theory, each dollar can currently be exchanged for about 1/750th ounce of gold just simply buying gold at current market prices. However, if the currency were explicitly backed by gold the exchange rate would invariably be higher due the tremendous demand pressures from central banks seeking to back their currencies. Only after a period of significant deflation does this scenario make sense and then at that point, anyone who invested in gold at or near current levels would likely be wiped out. Of course, this is just the opinion of one dilettante. If only I had taken that class on monetary theory then I would be able to model this in all sorts of esoteric math that would tell me…nothing.

Addendum: It seems that recent events have caused a renewed interest in the gold standard, which from a contrarian point of view does not bode well from the presenter’s thesis. However, a quick glance of the headlines on the right hand side of the screen shot suggests some operator error in using google trends effectively.