A few weeks ago, an opinion piece by Alan Greenspan, former Chair of the Board of Governors of the Federal Reserve System, appeared on ForeignAffairs.com. The piece is entitled, “Golden Rule – Why Beijing Is Buying,” and, while the title disguises it as a short essay on China’s relationship with gold, in reality, there are other, more important considerations worth pointing out.
Alan Greenspan says the following [emphasis added]:
“Yet gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party . . . Today, the acceptance of fiat money — currency not backed by an asset of intrinsic value — rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold.
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If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute. Of the 30 advanced countries that report to the International Monetary Fund, only four hold no gold as part of their reserve balances . . . If, in the words of the British economist John Maynard Keynes, gold were a “barbarous relic,” central banks around the world would not have so much of an asset whose rate of return, including storage costs, is negative.”
I’d like to apologize to any Keynesians reading this commentary, for not forewarning them of the modern-day economic heresy they just read. It, too, surprised me that a man whose easy-money policies many believe contributed to one of the greatest global financial crises in recorded history could utter such an endorsement for gold. He sounded like the younger version of himself, prior to his days as the most powerful monetary figure in the world. And make no mistake about it. What Greenspan wrote is absolutely an endorsement for gold. It never ceases to amaze me the truths that former Washington insiders will speak when they no longer hold office.
So what does all this have to do with bond investors?
History is very clear regarding the following: Fiat currencies do not last forever.
Let that historical fact soak in.
If you invest in fixed-income securities, you are relying on the currency in which the financial instrument’s distributions are denominated to maintain stability over your holding period. Investors might define “stability” in different ways. At a minimum, however, most investors would likely agree that “stability” refers to the currency in question surviving.
Greenspan’s reminding investors of gold’s time-tested role as an accepted form of payment, and his mentioning that currencies “are not a universal substitute” for gold, should open fixed income investors’ eyes to the importance of holding gold in their portfolios. History tells us that it is only a matter of time before fiat currencies fail. Of course, countless investors alive today will scoff at the notion of the U.S. dollar ever failing. Rather than attempting to prognosticate or taking the chance that the dollar will outlive me, I find it much easier to do what central banks around the world do—allocate some of my portfolio to gold. As an avid fixed-income investor, it only seems appropriate.
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