Monetary Disorder and the Role of Gold (New Delhi)

A talk by Mr. Louis Boulanger, CFA, titled “Monetary Disorder and the Role of Gold” was organised by the Delhi chapter of the IAIP on the 31st of August this year. The event was held at the India Habitat Center in Delhi and was attended by 22 people.

Louis Boulanger is the founder of LB Now Limited, Auckland, an independent financial advisory firm. A strong believer in a return to a gold-backed monetary system, Louis believes it is important to spread out the message. In the talk, one that has been delivered in over 12 countries now, Louis took the audience on a historic tour of the monetary system and its evolution. He spoke of how a true gold standard hasn’t really existed since the end of World War I, even though the Bretton-Woods system did exist until 1971. In a startling comparison of the US Dollar bill as it was in 1947 and the one in circulation today, he showed how its nature has changed fundamentally from being a “Silver Certificate” to a “Federal Reserve Note”. He also pointed out how paper money (specifically the US Dollar) has not lived up to one of the 3 criteria to qualify as money – that of being a store of value.

On the flip side, Louis explained how even the chairman of the most powerful Central Bank in the world, Alan Greenspan believes that “Gold still represents the ultimate form of payment in the world.” He pointed out how US Government debt has continuously risen for the last 50 years – effectively meaning that none of it has ever been repaid, just rolled over. In such a scenario, it is in the interest of Governments to supress interest rates – if only to keep their cost of financing low. However, this leads to negative real interest rates. It turns out, he showed, that periods of negative real interest rates in the past have coincided with periods of rising gold prices, most prominently in the decade following the breakdown of the Bretton-Woods agreement.

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Importantly, though, Louis believes that the current crisis is not a credit crisis or a banking crisis, or even a sovereign debt crisis as many would think. It is, in fact, a Global Monetary Crisis. The fiat money system and the financial advancements of the Western World in recent decades rests on shaky foundations and it is only a matter of time before it collapses under the weight of the unsustainable credit super-structure. While many believe that this collapse would be chaotic and traumatic, he believes that given the steady (almost managed) rise in the price of gold indicates that there is possibly some acceptance of the inevitable by the return of gold (as a monetary standard). He is hopeful that a more planned return to a gold standard would happen, albeit in multiple iterations as the world tries to figure out how to make it work.

Towards the end, Louis talked about the mechanisms available to investors for gaining exposure to gold (he refrained from calling it an investment). Between the extremes of holding physical gold coins, etc and that of holding unsecured paper claims to gold (ETFs, gold derivatives, etc), he spoke of “near physical” holdings. Within the Near Physical category, he explained the difference between Allocated Accounts versus Unallocated Accounts, the difference bein that in the former case, you hold legal title to a specific bars of gold and hence you “own” the gold. By comparison, in an unallocated account, you don’t hold legal title and you are “owed” the gold. In a monetary crisis, he says, that can make a world of difference.

Louis ended on a light but telling note. We have a tendency to behave like sheep sometimes, believing something for no other reason than everyone else believes in it. In such a scenario, someone saying otherwise ends up being labeled a conspiracy theorist. But he believes that in this case, the trend is unmistakable and as investment professionals, we ought to wrap our heads around this idea and take appropriate action.

About the speaker:  

Louis Boulanger, CFA, is the founder and director of LB Now Ltd. in Auckland, New Zealand. His firm specializes in private wealth management and also helps investment firms in the Asia Pacific region come into compliance with the Global Investment Performance Standards (GIPS). Previously he was an Executive Director of Mercer Investment Consulting, where he was responsible for the strategic asset allocation advice given to institutional clients.

Louis is the founding President of the CFA Society of New Zealand. He has participated actively in the ongoing development of GIPS and is currently serving a two year term as  GIPS Council Chair. He holds a BSc from Laval University in Canada and is a fellow of both the Canadian Institute of Actuaries and the New Zealand Society of Actuaries.

Contributions by: Parijat Garg, CFA, a IAIP volunteer

Photographs from: Parijat Garg, CFA