Why Wall Street and Governments Hate Gold

Michael Pento, of Pento Portfolio Strategies shares his opposing viewpoint on gold than that expressed in recent quotes by Citigroup’s chief economist, Willem Buiter.

Gold is hated more than ever by both governments and the financial services community. This is because it has now become imperative to keep the illusion of confidence in sovereign debt and paper currencies. To that end, a gentleman by the name of Willem Buiter, Citigroup's chief economist, shot into the media spotlight by writing a note on the day before Thanksgiving stating his belief that gold is in a six thousand year-old bubble.

Citi's chief economist penned this "brilliant" commentary in the days just prior to the Swiss referendum on increasing the percentage of gold reserves held by its central bank. In a clear attempt to influence the gold vote, Mr. Buiter also stated on November 26th that, "The Swiss vote is ridiculous and no self-respecting central bank should ever be putting a large chunk in a single commodity."

This hatred for gold spurs from his belief that gold has no intrinsic value. But how can one individual have the hubris to believe he can erase thousands of years of human experience and knowledge that has maintained gold's intrinsic value stems from the fact it is the perfect store of wealth?

Mr. Buiter went on to exclaim that, "Gold has become a fiat commodity or a fiat commodity currency, just as the US dollar, the euro, and the yen." He continued, "The main differences between them [fiat currencies] are that gold is very costly to produce, while the production of additional paper money has an extremely low marginal cost." So, here we have this paragon of the Wall Street and banking community saying that gold is no different from fiat currencies.

Since his body of work clearly shows he is aware of the definition of the word fiat, the only conclusion one can reach is that Mr. Buiter is being brazenly disingenuous. The word fiat means by decree or edict, from the Latin "let it be done." In reference to currencies, it means that governments and banks can create money at virtually no cost and at will. Gold is the exact opposite of a fiat currency. Mr. Buiter admits this in the very same commentary by stating gold is costly to produce.

Our collective human conscious has—for millennia—deemed gold to be valuable because it is; portable, divisible, beautiful, extremely rare, and virtually indestructible. How many things on this planet fit those criteria? The answer is nothing else except precious metals; fiat currencies fail miserably when it comes to the rare and virtually indestructible part. This is what gives gold intrinsic value and what makes it so vastly different than fiat currencies.

NEXT PAGE: What’s Next for These Haters of Gold?

In the near future, I believe Citi's chief economist will be embarrassed by his remarks, especially when comparing gold to pet rocks. He also claims that gold, since it is just another fiat currency, can reach zero value just as paper money can lose all its worth.

But contrary to what this gentleman thinks, the value of gold is about to soar because central banks and governments have become trapped. These market manipulators need to keep asset bubbles inflated in order to keep the wealth effect in place and sustain whatever anemic economic growth they have been able to achieve. Most importantly, they need to keep sovereign debt out of public hands in order to keep debt service payments remaining low. This means governments have no escape from their massive and unprecedented money printing campaigns. Therefore, the value of fiat currencies is set to plummet when compared to precious metals.

These haters of gold are becoming more bold and desperate in their attempt to maintain confidence in government issued debt and currencies as asset bubbles have reached dizzying heights and debt levels have exploded into record territory.

Inflation has become the goal of every central bank on earth. This makes the mean reversion of interest rates inevitable, which will lead to a global sovereign debt crisis. To illustrate this point, the US national debt officially eclipsed $18 trillion last week. This equates to a trillion dollars + per year just on interest payments once the Treasury is forced to pay a more normal rate on all that debt. Economic chaos and soaring inflation will then follow, which should send US Investors flocking to gold en masse.

Buiter's concludes his inane commentary by stating that gold, "has had positive value for nigh-on 6000 years." "That must make it the longest-lasting bubble in human history." But history has proven the real bubbles have manifested in sovereign-issued debt and currencies; never in gold. Since the rate of debt accumulation and government money creation is exponentially greater than at any other time in human history, I can state with confidence the ‘bubble’ in gold has only just begun.

By Michael Pento,President and Founder, Pento Portfolio Strategies