It is a generation since corporate treasurers had to manage liquid funds in a high inflation environment. Many are too young to have experienced the era of the early seventies to early eighties. Today the ease  with which electronic money can be produced and the persistently high price of oil over the last few months appear to suggest the emergence of a new phenomenon : the first inflationary era of the information age. Indeed a lot has changed in the financial world since the last era. The amount of global liquidity combined with the speed of movement that the internet allows are of a different order of magnitude. Financial derivatives have gone from next to nothing to huge in economic terms and for virtually the entire period since the last inflationary era one man has been at the helm in the most important central banker's job of all : Alan Greenspan at the Federal Reserve, who is soon to depart.

So what is the same ? The answer is liquid capital preservation. This is straight forward in a low inflation environment. A well managed portfolio of various currency cash deposits and short term bonds does well. However this is not so easy in a high inflation environment. It can be done by smart currency transactions but the cards are stacked against you. An alternative hard currency is needed but most hard assets are no where nearly liquid enough for the job. In fact there is only one : gold. Barriers for using gold in the new era have recently been coming down due to the emergence of electronic gold. Pension funds can now invest in the new gold EFTs (exchange traded funds), the best known of these being the StreetTracks fund (US ticker is GLD). The total amount currently invested in this fund is a tiny 2.3 billion USD in global terms, and if you add on all the other EFTs in the world and other forms of electronic gold such as e-gold and goldmoney the number does not get much bigger. Compare this to the current US broad money supply of 9.5 trillion USD and the rapidly growing US government debt of 7.8 trillion USD. US private debt and the rapidly growing non US money supply, due to the increasing reluctance of many outside the US to hold the dollar, are bigger numbers still.

There are arguments against ' trusting ' all forms of gold EFTs in a crisis as not all the gold required to back the funds ' would be completely physically secure ' at every moment of time, and that EFTs are in fact soft paper and not real hard assets. For these arguments please see the GATA Yahoo group messages.

What does this all mean for corporate treasurers ? For even the most conservative ones to hold all your company's liquid funds in cash and bonds in inflationary times won't be an option. Gold appears to be the only alternative strategy, however the choices of how to back some of these liquid funds by gold will be many, so why put all your golden eggs in one basket ?

Stephen Ferrari

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