Self Bailout (as the rich see it)

If we are to believe a story that Javier Blas filed today for the Financial Times, then the rich may have developed a bailout strategy of their own:

Investors in gold are demanding “unprecedented” physical levels of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.

Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.

“There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,” said Jeremy Charles, chairman of the LBMA. “The gold refineries cannot produce enough bars.”

The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.

Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. “It is a flight into gold because it is a physical asset,” he said.

“Vault staff are also doing overtime,” another banker at the LBMA meeting said, adding that investors in some countries were paying premiums of up to $25 an ounce above the London spot price to secure scarce gold bars.

Spot gold prices in London on Tuesday traded at about $900 an ounce, more than 25 per cent above the level before Lehman Brothers’ collapse. Although some traders said the rush into physical gold could boost prices, others cautioned that prices were depressing jewellery demand, capping any price gain. Industry executives said gold refineries and government mints were working at full throttle to keep up with investor demand, but acknowledged they were suffering from shortages, particularly on coins.

So, while we keep hearing our own elected representatives talking at great length about avoiding golden parachutes, it would appear that those with enough money to do so have decided that "bailout" means bailing out of the financial system as it currently stands and trading in the whole farm for gold coins. However, the stakes have gotten so high that we now seem to be facing a situation where the supply cannot keep up with the demand, which is likely to mean that these guys will only be interested in tangible stuff, rather than any flimsy certificates of ownership. We may yet see the outmoded epithet, "Mister Moneybags," recover its original semantics!

Where will that leave the rest of us? I suppose once the seriously rich have all secured their position in specie, none of them will have any qualms about letting the cat out of the bag and revealing that no currency has inherent value but is only worth what people want it to be worth. Put another way, the value of any currency is determined by those with the strongest buying power and their ability to set prices. The rest of us just have to go along for the ride; and, as I have previously suggested, that ride is likely to lead down Friedrich Hayek's "road to serfdom!"