Alasdair Macleod: All Roads in Europe Lead to Gold

This week we bring back Alasdair Macleod, publisher of, because, as he puts it, "every horror that we discussed last time we spoke is coming about." This is especially scary since our previous conversation with Alasdair was less than three weeks ago...

Today's interview continues building on his excellent synopsis from last month that detailed the origins of the Eurozone crisis. The fundamental shortcomings warned of at the euro's creation in 1997, combined with the excessive sovereign debts run up since then, have finally expressed themselves at a scale too large to be contained any longer.

Today, Alasdair details in depth the huge and serious challenges facing Greece and the major Eurozone countries and the likely impacts of the fast-dwindling options left remaining.

He sees no happy ending to this story, no outcome in which serious pain and permanent behavior change can be avoided. And for those looking for shelter from the unfolding economic storm, he sees few options besides the precious metals (which he believes are severely underpriced at the moment): 


The Greek situation is entirely predictable: when you force enormous pressures on an economy and try and raise taxes from the private sector -- a private sector which isn’t used to paying taxes because usually they find away around it -- you start cutting pensions, you start cutting this, cutting that, and the people revolt. They haven’t a clue what they are doing, but we get the revolt nonetheless. It looks like nobody there can form a government; and it looks like there will be another election probably in June. That won’t resolve anything unless by some miracle, some sense gets knocked into people’s heads.

The other thing, which nobody has mentioned, is that there are about 90 billion dollars in derivative contracts involved in the Greek economy. This is not just government, but also local governments and towns and cities and all the rest of it. The counterparties to this $90 billion must be getting a bit worried about that, I would think because that looks as if it will default.

The people who have been most active in getting these derivative contracts going over time have been people like Deutsche Bank, Goldman Sachs and I suppose JP Morgan -- so you can see the problems aren’t just limited to the government and some unfortunate Greek citizens who are caught in the middle of this. 

We are looking at potentially up to ninety billion dollars worth of derivatives which one side of those transactions is going to default. One side: it is not a balanced figure is it? I don’t know that it is necessarily as bad as that, but it is a problem that needs to be dealt with, addressed and contained. I think what they have to do as much as possible, is to try to work for a sensible outcome in this, which probably will involve Greece leaving the Eurozone, but maybe obtaining help from the ECB to set up a currency board. The reason I say that is that I think for Greece to return to the drachma would be complete destruction. You would have a situation where people who owe money in Euros would still owe money in Euros. If the Greek government tried to change that by law, for starts, that could only apply to loans taken out in Euros in Greece; whereas a lot of these have been taken out in Euros elsewhere in the European Union. In any event, I think if they tried to do a law on this, it would be a retroactive, which would be open to legal challenge. 

Meanwhile, if you have deposits in a Greek bank, you can be sure the Greek government would say we are going to re-designate those into New Drachmas, which would impoverish the depositors. When it comes to trade, I think everybody would just stay well clear. To go back to a New Drachma, I think is the most destructive path Greece can have. Now, they could do that on the basis that, if the European Union wanted to make an example of Greece, then this is a way in which they could just let them go hang. The importance of that would be that the situation for Greece should be so bad that no other member of the Eurozone would contemplate leaving the Eurozone. That is a possibility. But I think that is less likely than coming to terms in such a way to give Greece an exit. But if they do get an exit, again, they’ve got to have an exit in such a way that it hurts enough and anybody else who wants to take that exit would see, well it is actually probably more painful than staying where we are. It is a very difficult balance to achieve.

The people who will do this, I don’t believe are the politicians. It would have to be the sensible people in the ECB and perhaps some of the more backroom boys who could put together some sort of face-saving mechanism without this becoming too much of a political hot potato. It is very, very tricky, it really is, and quite honestly, the way political governance has been going in Europe, the chances of them getting some sort of orderly withdraw in the interest of continuing relationships, et cetera, I think are actually probably slim. That is what we are up against: this is not easy. There is no precedence for this at all and I know that lots and lots of people are saying it has got to return to the Drachma; I just think that a New Drachma would collapse almost immediately. I think that a currency board in the Euro is actually a more sensible result given where we are.  

France is a mess. They have outstanding debt of 1.3 Trillion Euros, something like that. Their debt/GDP is around about 85-90% going on a hundred quite rapidly. That is a very liquid and nasty situation. Unemployment is running close to ten percent.

It is almost impossible to employ anyone in France because the taxes are so high. Do you know the total tax that you pay as an employer, more than doubles the salary that you pay an individual? This is absolute craziness, but it is been like that in France forever and a day. The result is an awful lot of the market is black market.
Spain & Italy

Spain is a worse situation. Government debt alone is just under a trillion. A trillion dollars equivalent, I should say, and that is a lot of money. That is a lot of money. Italy is over two trillion dollars. That really is a very, very big one, so this contagion must not be allowed to happen. 


Their economy is performing reasonably well, but it is not performing well because they are doing well for Europe; they are doing well because they are selling the most cars, machine tools and everything else to China, to Brazil, to Russia. Africa’s a great growth area. Europe, as far as Germany is concerned is dead. Which of course brings us on another question; that is why should Germany continue to support all these bust Europeans? There is a sort of conscience if you like about the last two world wars, but there is going to come a point where that wears pretty thin I would have thought. The trouble is that it is all very well, everyone turning around and saying, Germany has to help. Actually, what they are saying is that Germany’s citizens should give up their savings, their hard won savings to rescue a project, which is obviously dead or deceased. I think Germany really should bust out as soon as possible and I am sure that there are an increasing number of businessmen and bankers in Germany who are beginning to feel that way. 

On Gold

People who have gold or silver, I think actually had a very rough ride over the last couple of months. A lot of them are wondering what on Earth is going on because every time you get good news, gold seems to rally along with equities, but every time there’s bad news and gold actually should be giving you some protection, it goes down the swanny.

I think the problem there is that the whole system is run by people who went to college and were taught keynesian economics. In my day, when I first went into the stock market and I enjoyed that first bull market in gold when it went from thirty-five bucks to eight-fifty, the traders and investment managers were all practical people. They all cut their teeth, all learned their trade the hard way. Some of them had degrees in college, but generally it would have been something like classics or history or something like that. If they got a degree in economics, they probably would have left because they never would have understood it in those days. But now it has changed. Everybody who is employed has a degree and if they are anything to do with investment strategy, or the investment business, it is all economics degrees. So they have been brainwashed in the keynesian thing. This sort of neoclassical approach where gold is yesterday’s story, paper money is the future. They really do believe it and it is the opinions of these people who drive the markets in the short term.

The result is that gold and silver have become very, very seriously mispriced. I don’t think I have seen a stretch like this as I can remember; by stretch, the difference between perhaps where it should be. We must be careful not to tell the market what the price should be, but it is so underpriced at a time of enormous systemic stress, that I think when gold and silver snap back into a more sensible, logical valuation relationship with the markets, the move actually could be very, very sharp and quite large. If gold ran up through the $2,000 level very quickly, which I think is a very strong possibility, because it is been held down so much, that could bring other problems. The central banks, who might have sold gold and not told us about it will find that they are embarrassed. I think also the bullion banks in London who operate a fractional reserve system with gold, exactly the same way as to do with any paper currency, will be hurt very, very badly on the run. Any shorts in the futures market equally could be hurt very, very badly. We have a situation, where there is a potential for a huge run in gold and I personally wouldn’t be surprised to see it.  

Click the play button below to listen to Chris' interview with Alasdair Macleod (48m:07s):

This is a companion discussion topic for the original entry at

I picked SUCH a good summer to spend in Spain, France, Italy and Germany…

 Chris.  Please try to get an interview with Butler–fascinating book and ideas.

Boy, I’ll say.  You can be our embedded reporter over there.  If you find time between visits to some of the truly great places in our world, keep us posted on what the citizens, business people and insiders are saying.

 To summarise the interview :
liquidity crisis…Greece…dodgy debts…derivatives…bailout…austerity…horror…revolt…the Germans…savings…yields…bad as America…bank runs…mismatch…recapitalise…exit plan…balance sheets…badly skewed…"poof"…very real…sensible outcome…complete destruction…legal challenge…impoverish…the politicians…sensible people…face saving…run it properly…I don’t know anyone…contagion fear…must not be allowed…can’t see where the exit is…problem…printing presses…compliant Fed…political desire…nub of it…easy money…serious arguments…Euro going down…joke…extremely serious…unfold…accelerate…dead cat…face up to the facts…face up to reality…chuck them out…hope for the best…instantly inflationary…worst nightmare…debt deflationary collapsing spiral…theoretical solution…no solution at all…Keynesian experiment…credit spreads…clearest indication…bear market…nasty surprises…very limited…curtains…France…taxes…black market…uncertain…spectator…rock the boat…

Did I miss anything up to this point?

From this point the commentary appears to forget everything that has been said and returns to the popular idea of themoment. The idea that gold is a refuge and a safe store of wealth. It is certainly safer than most things but fairly useless compared to a reliable source of energy. All of the preceding argument pointed towards a deflation as being the most likely outcome. This makes complete sense. It might be very painful but writing off losses and removing debt is the only way the world can move forward. It will be far worse for the bankers and asset holders than it will be for the ordinary population who will simply operate a black market like the French.

 Gold is not an investment, it is a speculation. Given that it has been rising for a decade along with equities and commodities and it is far closer to its high than its low, there is a very real element of risk in this speculation. The confusion over gold lies in the fact that gold has ended the decade much higher than it started, whereas equities are only a little higher. Nevertheless, gold and stockmarkets have been quite closely following each other or to be more accurate, they, along with the commodities, have been tracking the growth of the money supply which now appears to have peaked. The willingness of bankers and politicians to play merry with other people’s money will either run out of balls or they will be removed by irate populations. The game is up.

You make some good observations… but your conclusion is wrong;

Gold is not an investment, it is a speculation. Given that it has been rising for a decade along with equities and commodities and it is far closer to its high than its low, there is a very real element of risk in this speculation. The confusion over gold lies in the fact that gold has ended the decade much higher than it started, whereas equities are only a little higher. Nevertheless, gold and stockmarkets have been quite closely following each other or to be more accurate, they, along with the commodities, have been tracking the growth of the money supply which now appears to have peaked. The willingness of bankers and politicians to play merry with other people's money will either run out of balls or they will be removed by irate populations. The game is up.
Gold is not a speculation.. it is simply another form of money.. a form whose scarcity integrity cannot be gamed by man, no matter how hard they (bankers) try by creating paper representations, or derivatives, thereof.  It is the form of money that will survive when paper loses it's value.   

Gold’s price has indeed tracked the increasing money supply.  You think this growth has peaked?  Please explain why you think that the central bankers of the world are now going to give up the battle and allow deflation to occur?  The game is not up by any means… you must be living in some kind of bubble, because most people I know still have no idea at all how fiat money works… and they believe all the mass media propaganda that is force fed down their throats.  The only reason populations will become irate is if the bread and circuses end.  

While investing in energy independence is great… your advice for people who have savings… to avoid Gold because it is peaking and risky… goes against all of the truth gathering I have done since 2008… and I can’t let your words stand without challenging them.  You seem to have bought the mass media propaganda line that Gold is a risk asset.  It is not… it is simply money that has no counterparty risk.   

was posted today by Dave from Denver;
What do my insights on the Facebook Ponzi scheme have to do with gold?  I’ll let Ayn Rand explain, through the voice of Francisco D’Anconia in "Atlas Shrugged:"

Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims.
Read the whole piece here;

Note:  I am not saying that Gold can’t go down… or that it will skyrocket tomorrow.  There will come a time though, maybe as soon as QEIII comes around, where the next phase of the bull will begin… and it will likely be violent to the upside.  Most folks who don’t have a deep understanding of what is happening - if not already invested in Gold when this next phase starts, will never get in because they won’t have the "balls"… thinking that Gold has moved too much… and they have missed the move.   

 Jim, I agree with you that Gold has more intrinsic value than a greenback or any other currency note and in that sense is a more "real" money than paper. The same could be said of copper, iron, a bag of rice etc. However, its value is just as subject to variation relative to any commodity or currency just as a currency is subject to variation against another currency. I agree that a currency has more chance of going to zero value than a raw material, a precious metal or a food commodity. But purchasing any one of these is a speculation if purchased in the hope of a capital gain rather than for immediate consumption or use. One interesting point about gold is that it rose almost 7.7 times its low value from $255 (Feb 2001) but plain old iron ore rose from a price that only varied from $11-$15 between 1982-2002 to a high of $187 or more than 12 times and is still around 9 times. Gold, on the other hand, is about 6.5 times its low. A great return certainly but if you believe that gold is going up and away from here, do you also believe that the stockmarket and commodities are headed up? I may be wrong about this but it seems to me that they have all been driven by the same money creation phenomenon. Despite an extraordinary $2 trillion+ of quantitive "easing" , very little of that money has "escaped" the confines of the Federal Reserve and the major banks. It is mostly tied up on deposit. Perhaps there will be a little more QE but I can hardly see how a little more will drive gold, the stockmarket or commodities to the stratosphere. For example, the S&P500 has had 8 up years and 4 down years but is still more than 200 points below the March 2000 high. That is why gold is not doing what so many people expect it to do. My best guess is that trillions of perceived value will be wiped out over the next few years as book values and real values are brought into line. The central bankers have already failed but hope springs eternal and perhaps Mr Bernanke or Mr Draghi will have another go. I doubt it because they too are subject to the herd instinct that is driving everyone to tighten their belts, spend less and borrow less. Until that social phenomenon has run its course there is little chance of growing our way out of trouble as the bankers and politicians hope.

Too me these seem to have tracked pretty well.  Both maintain relatively close value ratios - meaning gold held it’s purchasing power pretty well over the time frame you mentioned, note I eyeballed as estimate on gold for the years - looking at a year and guessing what the average was (I’m sure it’s close enough for this example, for 1980 I looked at 1979-1981 to get a less spiky guess):

  Iron Gold Ratio
1980 34.5 350 10.14
1990 30.9 390 12.62
2000 25.8 275 10.66
2010 100.9 1200 11.89
2012 147.65 1600 10.84

It looks like the ratio has stayed pretty consistent of (10-12:1). I would say gold held it’s purchasing power very well over that time, whereas the dollar lost about 75% of it’s purchasing power.

People don’t buy gold expecting to get rich, unless you think gold is substantially underpriced, then you are speculating. People buy gold to save their wealth.  While you could buy iron, oil, or other things they are bulky and difficult to store if you have significant wealth to protect.