Over the past decade or so, central banks around the world – beginning with the European Central Bank – have faced multiple crises, large and small, which seem to be a harbinger of an end to the well-oiled financial model on which they had relied for more than half a century now.
By 2008, the whole world had understood that traditional safeguards did nothing more than exacerbate the crisis. Innovation became necessary, as did what were discreetly referred to as “unconventional” monetary policies. “Unconventional” here meaning both novel and completely counter-intuitive, because not only were they outside the normal framework of the remit of a central bank (as was the case with the ECB in particular), but they also seemed to be contrary to their supposedly stabilizing role.
For example, when it drastically lowered its policy rates, that dropped all the way to 0% just two years ago, in March 2016, the ECB simply made the States and the banks believe that their debt had been reduced, while at the same time abandoning the only instrument which is truly effective in the event of inflation. Likewise, the ECB managed the extraordinary feat of increasing the size of its balance sheet by nearly 50% in just four short months, simply by creating more money against debt for banks already on the brink.
A risky arrangement whose survival continues to depend on the trust placed in it. But too much money can be overkill and, with interest rates that are still so anaemic, albeit slightly higher at present, it can be difficult to offer sufficient returns other than by means of tricks which will eventually show how hollow they are.
Within this context, gold has suddenly regained its purpose, its primary role as a safe asset. This is all the more true since, with traditional investments offering interest rates of zero or even negative rates, gold is becoming particularly competitive.
Of course, unconventional monetary policies undoubtedly averted the implosion of the European Monetary Union and fostered an end to the crisis (although not on a strong note). But when interest rates truly swing upwards again, that is when the States will see the cost of their debt rising sharply, as well. And they will need to come up with that money somehow. Some countries, like France, already plan to dip into private savings held by banks, if they should feel the need.
In that respect, gold is once again a crucial security for anyone who wants to preserve the value of their capital and avoid its potential despoliation, be it through taxes or the “requisition” allowed by the European order dated 1 January 2016 to save the Union’s banks.