Eurozone leaders have bought some time but more radical solutions such as gold backed bonds are needed

According to Harvard University Professor Ken Rogoff, the latest eurozone bailout plan has probably bought “a little bit of time” but it’s not a solution to the on going crisis.

Speaking in an interview on Bloomberg Television, Rogoff, who was co-author with Carmen Reinhart of the excellent book This Time Is Different: Eight Centuries of Financial Folly, stated that eurozone leaders “are going to continue to do more and more radical measures to stand still… We’re very, very far from a long-term vision. It’s a long difficult path. We’re a long way from stabilization.”

Gold backed bonds

The reality is that eurozone leaders need to begin considering more radical solutions such as gold backed bonds.

Originally suggested by Don Coxe, Global Portfolio Strategist at BMO Financial Group, gold backed bonds could be issued by some of the eurozone countries to attract capital at sustainable low-levels of interest. According to Mr. Coxe, Italy has about $120 billion worth of gold, which they could use to back a 30 year bond which had a fixed price for gold of around $2,300 an ounce.

In a recent interview Mr. Coxe commented that he doesn’t “see any solutions being proposed by anybody that can write a cheque that won’t bounce.” In explaining his strategy he said, “If you [investors] had a chance to get a 30 year bond with a fixed price for gold then you might say well that’s a pretty good investment, particularly if the gold is placed outside Italian boarders.”

He went on to say that, “if they announced this, they could head off something like the next 9 to 12 months of bond refunding, and if they do that they automatically reduce their projected deficit.”

Data from the World Gold Council suggests that Italy and France, who both have around 2,400 tons of gold, could benefit from this scheme, which would help prevent the debt crisis spreading to the core of the eurozone.

Officially reported gold holdings by country/ organisation

Officially reported gold holdings by country/ organisation

Source: World Gold Council. Amount of gold in tonnes. Data from December 2010.

The bottom line

Political leaders and finance chiefs in the eurozone and beyond will continue to fight fire with fire and in doing so they will continue to destroy the value of paper money.

When we get to the end game those left standing will be the investors who moved their wealth out of paper assets and into hard assets, chiefly gold. One way or another, gold will be part of the solution to this crisis.

To quote Robert Fitzwilson, founder of The Portola Group, “The system is addicted to creating “wealth” with electrons and paper. There is no example in recorded history of an attempt to debase the currency which ends well. Every culture that has tried such a scheme has brought destruction and despair upon themselves. The Mongols, Chinese, Hungarians, French, Germans, and Romans have all tried. None succeeded. The current path of debased currency will collapse, as before, and gold and silver will regain the role of preserving wealth as it has done for thousands of years.”

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