As November drew to a close the European financial crisis grew more severe when the most prudent European government, Germany, could not sell more than about 65 percent of its public debt on offer at an auction. If investors refuse German bonds, then what hope is there for the traditionally more profligate European sovereigns, such as Greece, Spain, Italy, or even France? How would a bond issue fare if it were backed by Germany’s credit pooled with that of lower-credit sovereign nations?

An emerging European consensus (still opposed by Germany and other northern countries) favors the issuance of jointly guaranteed Eurobonds. Some ardent, free European spirits want Eurozone countries to pool their gold reserves to back any Eurobond issue aimed at rescuing the banking systems of the member countries. Passing over objections rooted in “mere legality,”
like constitutional and Maastricht Treaty prohibitions against having the member countries do such a thing, pooling European gold reserves is still a bad idea in the absence of political union. And political union itself also would be an unsustainable idea.

The Eurobond idea probably arises from the Rentenmark plan that ended the German hyperinflation in late 1923. Dr. Hjalmar Schacht, who became the head of the Reichsbank then, shepherded a new German bond issue indexed to the price of gold. The underlying taxes upporting the bonds were on land. The new currency remained comparatively stable.

The member central banks and treasuries of the Eurozone tend to hold comparatively large reserves of gold. Some countries, however, used the combination of large gold reserves and urozone membership as crutches enabling them to carry imprudently great quantities of public and banking system debt despite inadequate fiscal and tax policies. Investors who bought European sovereign debt because of its supposed AA or AAA ratings and ignored reality might be viewed as equally as crutch-dependent as those finance ministers.

The euro is unsustainable without economic and institutional convergence of the member countries. As in the 1923 German inflation, the real salvation for the
euro lies in linking Eurozone debt and currency issuance to sustainable and realistic fiscal and tax policies, regardless of quantities of gold reserves withheld from
the public and cross-guarantees by countries nearly all of whom are less credit worthy than Germany has been.

Regardless of what policies might emerge in Europe, these events substantiate gold’s importance in the international monetary system. The financial crisis that
began in 2007 has further validated gold’s standing as a form of portfolio insurance when capital markets are in distress. Investors should include it their portfolios at all times.

Inside This Issue
New Recommendation: International Bonds
A Reader Inquires
HYD and Bear Markets
October Fest
The High-yield Dow Investment Strategy
Recent Market Statistics
The DJIA Ranked by Yield
Recommended Investment Vehicles