Ever heard the saying ”A butterfly flapping its wings in Africa can cause a hurricane in America”? This saying implies that a small event can trigger a bigger reaction. Today’s global economic crisis (GEC) which has hit hardest most developed countries, and whose economic experts are trying hard to rectify it, are results of the sub-prime financial debacle and the near collapse of the United States of America automotive industry. The governments of most affected countries managed to quickly and decisively avert an immediate global economic meltdown, by using stop-gap measures of huge financial bail-outs to avert an economic slow-down. But this was at the cost of the real effects of the GEC being felt in the near future. In essence, these governments took over the financial responsibilities of temporary funding economic growth.
The question that one should ask is where did the government get the massive funding to plug the black-holes in their economies? The answer is they went to the printing press and printed fresh currency which they used to inject into their economies, in order to fill up the black-holes.
These measures brought some form of short-term relief to these economies by averting massive industry closures, high unemployment and most importantly an economic depression. But it’s well known in economic circles that such measures always come with a hidden cost, printing currency to stimulate an economy can only bring short-term relief. Today the results of such measures are just starting to be felt, with a steady rise in unemployment, company closures, credit crunch and property fore-closures. In essence these economies are going through a period of economic slow-downs or stagnation, better known as recession.
These symptoms are just the beginning of what is still come, and that is inflation. At the moment those with a general understanding of economics have started to take precautious measures to ride the tide of tough times that are set to come, by hedging their wealth and or savings against inflation by investing in art or gold. That should explain why prices of art and gold have been achieving record prices.If one opens up the business section of any newspaper, one will read about record prices that gold is fetching in the markets , what is driving these record prices is the fact that many investors are liquidating their currency holdings and are investing in what has always been a safe-haven against inflation that being gold.
The reason why gold is regarded a safe hedge against inflation, is because of its scarcity, just like true art-works. The only known time that gold prices have been low was during the period when many central banks in developed countries opted to dispose the bulk of their gold reserves.
For one to fully understand the current events occurring in the global economy and to have reliable information to choose investment options in order to ring-fence themselves against the effects of the GEC soon to come, one must understand how the current currency system works.
Historically countries currencies were backed by what was known as “the gold standard,” this meant that the real value of every dollar printed by a central bank was backed by gold reserves held by the central bank. This meant that a central bank could not print currency above the value of gold held in their possession. In 1971 the then United States of America president Richard Nixon ended the international gold standard. The gold standard system is a monetary system where currency backed by gold, that is to say, the currency simply represents the gold that you own and can be converted into fixed quantities of gold freely.
From 1971 up to 1973 the Smithsonian agreement was passed pegging world currencies to the USA dollar rather than gold as a fixed exchange. In 1973 the Basel accord established the current floating exchange of currency rates we use today, called the fiat currency system. In Fiat currency system money is not backed by a physical commodity, instead its value is based on its relative scarcity and faith placed in it by people use it.
However, when people loose faith or confidence in the money, it irreversibly becomes worthless , regardless of its scarcity Initially a rapid growth in availability of credit is often mistaken for economic growth, as spending and business profits grow rapidly, and a rapid growth in equity prices. In essence as there are no real control measures to prevent the over-printing of currency in a Fiat system, a fake illusion of well-being and prosperity is created when in reality people are actually digging themselves a deep hole.
In the long run the economy tends to suffer much more by following contraction than it gained from the expansion in credit. In plain English, the economy starts shrinking. Hence the reason why some economies are now witnessing massive job losses, company closures and property fore-closures. When an economy reaches this stage, the next stage is the terminal effects of printing currency in Fiat system that of hyper-inflation.Hyper-inflation is the terminal stage of any Fiat currency, which occurs when money looses its value practically overnight. It is often the result of increasing regular inflation to the point where all confidence in money is lost, life savings are wiped out overnight and prices rise faster than people’s incomes.
Current financial instability has brought about lots of talk about international financial reform, and even return to the gold standard as proposed by some. The gold standard stands in contrast to Fiat currency which has no intrinsic value, but governments declare it to be legal tender, meaning it must be accepted as a means of exchange. One of the main benefits of the gold standard is that it protects citizens from hyper-inflation and debasing of the currency through excessive government spending. With a fiat currency, a government can print as much new money as it likes spending, which leads to a gradual decline in value of currency and citizens’ savings. Under the gold standard, a free banking system stands as protector of an economy stability and balanced growth.
In the absence of the gold standard there is no way to protect savings from confiscation through inflation. Russia and China have suggested the establishment of a super-sovereign currency, while Brazil and India have suggested substituting other assets for their dollar holdings. Currently the U.S.A and China are embroiled in a currency dispute over the value of the Yuan. The U.S.A is claiming that the Yuan is under-valued, giving China an advantage over the U.S.A in global trade markets, as Chinese exports are deemed to be cheaper than the U.S.A. The currency stand-off between China and the USA seems to have no end in sight as under a Fiat currency system, any powerful economic country can determine the value of their own currency to ensure no set system or measures can determine the value of their currency. What is inevitable is many countries are to go through a phase of hyper-inflation and the Fiat monetary system will eventually die a natural death, and be replaced by the gold standard system.
The question one must ask them self is, if the wealthy investors are hoarding onto gold bullion’s and if currencies will be backed by the gold standard in the near future, then how does art come into the equation as a safe hedge against inflation? Firstly before one considers investing in gold they must understand that they need deep pockets, as a kilo bullion bar is currently trading at $45 000. Even after parting with such a huge sum, one must realise they can’t keep a $45 000 gold bullion bar under their bed, so monthly storage charges must be taken into consideration. Historically art has always been the alternative to gold.
During the period of high hyper-inflation in Germany which occurred after the First World War those who had invested in art came through that period better off, as the return on their investment in art-works out-performed investments in options that were available during that period. Most importantly art managed to beat the extremely high inflation rate, which would explain why so many art-works were looted during the Second World War.
As an alternative investment to gold, art has over years proven to be a real solid investment. With these uncertain economic times that we are in, its time to seriously consider your future by taking prudent pre-cautions to ring yourself against the effects of the current economic upheavals and events that are soon to come. In times of economic instabilities you are better off investing in art or gold.