Lars Schall interviews Jan Nieuwenhuijs: The world is going back to gold

By Lars Schall
Thursday, April 23, 2020

Jan Nieuwenhuijs, formerly known under the nom-de-plume Koos Jansen, is a precious metals analyst from the Netherlands who, among other things, has been intensively involved with the Chinese gold market. He used to be known for his regular contributions to his BullionStar blog. Now he publishes articles on precious metals topics on the website of Voima Gold Ltd., a company headquartered in Helsinki, Finland, that deals with the acquisition, distribution, and storage of gold.

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Jan, you think that because of the new coronavirus we will end up in a deep global depression. Why?

Yes, because of the lockdowns in many countries large parts of the economy have ceased to operate, causing aggregate demand to collapse, which starts a domino effect of unemployment and bankruptcies all over the world. Obviously this is causing a depression.

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It's very important that gold has no counterparty risk. Debt levels relative to gross domestic product around the world are extremely high and unsustainable. The only way to lower the debt burden at this point is to default or generate inflation. Elevated inflation causes nominal debt to be cheaper to repay. Governments and central banks have spurred inflation many times before to get out of debt.

Because gold doesn't have any counterparty risk and can't be printed, it's a safe haven for investors and savers who don't want to hold bonds that can default, and instead want to hold an asset that is inflation-proof.

Since every other financial asset is subject to counterparty risk and gold is not, isn't that in this age a top condition that will make gold, to paraphrase George Soros, the "ultimate bubble"?

I wouldn't label gold as a bubble yet. In the short term the gold price can be volatile because initially there will be deflationary forces in this crisis. The gold price can react by going down. However, central banks will not tolerate deflation because it increases the overall debt burden, so they will print whatever is necessary to create inflation. When the gold price starts rising substantially, which I think will happen, it could happen that at some point it reaches "bubble territory." After all, markets always overshoot.

However, this would be based on what we know happened in normal recessions in the previous decades. The current crisis, though, will likely result in a change of the international monetary system. I think it's quite likely we will adopt a new gold standard. That doesn't mean the classical gold standard we had at the end of the 19th century, or the Bretton Woods system from 1944 until 1973. There are many ways to incorporate gold in the financial system. So we will see if gold enters bubble territory or of it will rise in price and establish a new role in the financial system.

Is the gold market at a crossroads?

I think so. Since 1971, when President Nixon "temporarily" suspended convertibility of dollars into gold (which of course became permanent), we have witnessed the biggest monetary experiment on a global scale. Loose monetary policy, endless bailouts, financial deregulation, and financialization have created a perverse system that is now reaching its end. Historically, a system based on gold -- although not perfect, since no system is -- at least ensured some discipline. I would be very surprised if we would start over with exactly the same system that got us in this mess in the first place.

Do you think Western central bank policy will be friendlier toward gold than in the past?

Definitely. I think that Europe has been preparing for a new gold standard since the late 1990s. I will write an article on this soon because I have proof for it. Things accelerated after the crisis of 2008. European central banks started repatriating gold. The German, Swedish, and French central bank (that we know of) have upgraded all their gold reserves to wholesale market standards, so all their metal is liquid. European central banks started communicating differently about gold, calling it "the bedrock of stability for the international monetary system" and "the ultimate store of value." The Dutch central bank has stated on its website since 2019, "If the system collapses, the gold stock can serve as a basis to build it up again." Other countries, in Asia but also in eastern Europe, have bought gold, and to an extent repatriated it.

Do you foresee a currency crisis both in the United States and in Euroland?

In the eurozone there will be a lot of tension between the North and the South, due to much higher debt levels in Italy, Spain, and France than in the Netherlands and Germany. Southern countries want to share their debt burden with the Netherlands and Germany, but I don't know if the electorate in northern Europe is willing to cooperate. It remains to be seen if the euro will survive this crisis.

If the euro survives, the debt of southern states will have to be restructured or inflated away, and the same applies for the United States. For many decades the whole world was willing to buy U.S. government bonds but that seems to have ended, which leaves the Federal Reserve as the buyer of last resort. The deficit being run by the U.S. government is breathtaking, and the Fed is already buying unprecedented amounts of government bonds and soon junk bonds as well. I have no idea how the Fed can ever unwind these positions in a controlled manner. Neither do I think these assets will ever start to perform. What the Fed can do is revalue gold, so that would make up for the losses on its balance sheet.

So, in short, yes, I'm expecting a currency crisis in the U.S. and Euroland.

With respect to European bailouts, where did the money sent to Greece really go? Who was actually rescued?

Most of the money went to Greece's creditors, mainly German and French banks that were holding Greek government bonds. Additionally, a large share went to Greek banks through the Hellenic Financial Stability Fund. Only 5 percent of in total E284 billion was used for the Greek fiscal budget.

Basically, the whole operation was meant to bail out the banks and transfer Greek debt from the private sector to public sector—institutions like the European Stability Mechanism. The bailouts have been a colossal failure. In 10 years Greece's GDP has contracted by 22 percent, from E238 billion in 2009 to E185 billion in 2018. In early 2009 Greece's debt-to-GDP ratio was 109 percent. Now it's 181 percent. The E244 billion Greece still owes to its European partners will never be repaid.

You are skeptical that the International Monetary Fund's Special Drawing Rights can replace the dollar as world reserve currency. Please explain.

It's because the SDR is not a currency and there is no free market for SDRs to be exchanged in. Many people think the SDR comprises a basket of currencies but this is not true. The SDR is a potential claim on "freely usable currencies" such as euros and dollars. The SDR is not backed by anything, nor is it a claim on the IMF.

Because SDRs can be held only by central banks and can't be used to buy anything, SDRs are not a medium of exchange. So creating more SDRs doesn't create liquidity. Furthermore, SDRs can be exchanged for usable currencies only at the IMF's SDR department, and only if there is another central bank willing to buy SDRs. Trading at the SDR department is very illiquid.

In 2009 the IMF created another 182.7 billion SDRs. But in the following 12 months only 3.2 billion SDRs were exchanged for usable currency. That is very little. I don't think that creating more SDRs in the current crisis will solve anything. The IMF will try, though.

When it comes to the question of acceptance of SDRs, would it help to back them with gold? The IMF is officially a large holder of gold, isn't it?

If gold would be added to the basket of currencies used to calculate the SDR daily value, that still wouldn't mean anyone can exchange SDRs for gold. Again, SDRs aren't backed by anything. Of course the IMF can change what an SDR is, as it has done many times, but that only underlines its weaknesses. Think about it: What monetary authority would want to hold substantial value in an asset that can be changed every five years and is highly illiquid? The IMF can add gold to the basket, but it would merely change the SDR's daily valuation.

Why did you start writing about gold? And why is this important now?

I started writing about gold because in 2013 I discovered that the Chinese were buying three times more physical gold than what was widely assumed in the West. I started a blog to write about these developments and inform the world. A year later journalists recognized I was right. At first no one believed me. Then I was offered a job as a gold analyst at a bullion dealer.

Former Bank of England Governor Mervyn King wrote a book in 2017 -- after he resigned, of course, since no central banker can be honest when in office -- titled "The End Of Alchemy." He wrote that every participant in the economy should always be aware of "radical uncertainty." Life in general, doing business, and investing involve risk. Politicians can control only so much, although to get your vote they like to tell you they have the solution for everything. Anyway, in my opinion in some periods there is more risk than in other periods, but in the current crisis "radical uncertainty" is at a peak. Gold has the longest track record of all currencies for preserving purchasing power, so I see it as an essential part of everyone's savings or investment portfolio.

Thank you for your time, Jan.

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Lars Schall is a financial journalist based in Germany.

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