Gold and the euro paradigm

The development of the euro paradigm was intended to preserve value and competiveness. EU economic growth has come to be procured by price stability and not by the flow of cheap credit as in the US.

A paradigm is a model or pattern which has the added purpose of spelling out the nature of the philosophy behind the endeavour within which a given activity is undertaken. European Central Bank president Jean Claude Trichet's philosophy of money has been hammered out by the old continent's history. It is underpinned by the bitter inflation experience of France and Germany.

Once again, Europe is a light among nations. There is more than John Keynes behind the euro. That great thinker did not supply a long-term solution to the world's economic blizzard in the 1930s. He provided no theory of inflation, and he had no ambition to do so. He stated expressly: "In the long run we are all dead".

Keynesianism has saved the world during these past 18 months, ever since the credit crunch has been biting. It has been a policy which once again has been proven excellent in an emergency. Gordon Brown prevented world financial disaster with his Keynesian bank bailouts in October. His speech to the American Congress this week was nonsense. US President Barack Obama is openly protectionist and inflationary.

Keynes should be pondered carefully, and not be made to provide economic solutions which he would have never considered. The idea that inflation has been repeatedly proven to be the cancer of any civilisation, against which gold can be an important - but only partly - a safeguard, fitted well into his theories. Keynes did not dismantle gold as a monetary instrument. He tried to develop his own gold, which he called 'bancor'. It was a sort of phoney gold, and the world has treated it contemptuously as such.

In the 1960s, the US tried to destroy the power of gold as a currency through International Monetary Fund auctions of the metal. Its attempt was a downright and humiliating failure.

Gold has now returned as an important currency. The trouble is that the universal character of its paradigm is vitiated hopelessly by the fact that if the world were again to adopt a full gold standard, it would become completely dependent on fresh gold discoveries for its economic expansion. These are becoming increasingly rare.

Gold can be an auxiliary to help us face a depression which in the words of an ex-US Treasury Secretary is proving to be worse than that of the 1930s. In the early 1980s, gold reached the astronomical level of $2,500 per ounce in today's money. So it is obvious that the present price of gold at less than $1,000 per ounce has some way to go.

Over the past few years, the EU has not been a deficit organisation like the US and the UK. Trichet never shared the idea that the printing of money under the guise of "quantitive easing" or "credit easing" could possibly make up for profligacy in economic management. A case in point is the $78 an hour which was being paid to General Motors workers.

Inflation in Anglo-Saxon countries had been masked by the flow of cheap goods from China. It is now biting with a vengeance, and obeying well-known historical behaviour precedents. It is eating into the vitals of economic activity through marked falls in productivity. There is every danger that the world will end in the deflationary spiral of the 1930s with competitive devaluations, resulting in the utter destruction of the credibility of paper money which is, by definition, prone to inflation. World stock exchanges are shooting downwards at a far faster rate than productivity.

A further upward movement in the price of gold seems inevitable to a majority of currency analysts, chief among whom is ECU Group head of investments Philip Manduca, who seems to be increasingly courted both by Bloomberg and CNBC. He deserves to be, because of the accuracy of his forecasts delivered in a stentorian voice and with the glint of a financial lion.

The ECB's economic policy is a highly tutored version of Keynes. In it, there is no monetarist element, no trace of the now doomed Chicago school of economic thinking.

It is not fighting the crisis by excess liquidity and debt accumulation. The result is that it has achieved a strong euro, which at the moment is even outshining the Swiss franc. The proof of this is the Roche issue of a bond denominated in euro.

It is definitely the moment of the euro's might: saving all Europe from utter economic disruption which would come inevitably from autarchic economic policies. This is a moment of great danger, which is also seriously engulfing HSBC. Barclays now faces a Lehman liquidator quiz on the $3.3 billion which was earmarked for bonuses and liabilities.

All this news should make investors ponder the gold and euro paradigm. It might not be all that bad. It is a buying opportunity to be seized.

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P.

johnazzopardivella@hotmail.com