Big investment money is on gold, cash

When a professional speculator says cash and gold are his No. 1 investments, you better listen.
Paul van Eeden, a self-confessed speculator in mining stocks, just told a national audience on BNN TV that he's buying gold bullion, and cash is his No. 1 holding.
Then he listed his remaining stock holdings. You could count them on the fingers of one hand.
Although he is a speculator, calculating the potential of mining pasture plays and betting mostly on the ability of management he knows, the former South African is a no-nonsense commentator.
When an interviewer asked him why he is so high on gold bullion and cash, van Eeden responded by saying the banking system is broken.
The fractional banking system allows banks to maintain reserves equal to only a fraction of the money they have on deposit. The rest is lent or invested.
Most banks aim for a 10 per cent cash reserve, although banking regulators need a shade less than that.
In a banking crisis, losing a fraction of that reserve can devastate the bank's ability to lend money and even stay in business.
A three per cent loss in assets equals a 30 per cent loss in reserves.
That kind of loss caused the Great Crash of 1929 and the 1930s depression. Not only were banks unable to make new loans, they called in the existing ones to try and build reserves.
Central banks lend funds to banks overnight that are
short of reserves at the end of the day.
During last fall's credit crunch in the U.S., banks borrowed 36 per cent of their reserves value overnight, said van Eeden.
That loan ratio was 45 per cent at the height of the Great Depression, he said.
When challenged by the interviewer, van Eeden said the data is public information, go figure it out for yourself.
He expects the U.S. recession will lead to slower economies around the world, and to inflation as central banks pump more new money into the system to keep it afloat.
Gold is a hedge against inflation, as the price usually increases with inflation.
But he cautioned against investing in gold mines and was especially sour on his usual mining pasture type picks.
The scenario painted by van Eeden tells us the only thing between us and economic disaster is the continual money flows from government-owned central banks to the commercial banks
We can only hope the central bankers know what they're doing and manage to avoid a real depression.

Ron Walter can be reached at 691-1264.