Opinion

The Great Debate

Fed audit push gives impetus to gold rally

November 24, 2009

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

Auditing the Federal Reserve may or may not be a good idea, but one thing seems pretty sure: just discussing it seriously will tend to drive the price of gold higher.

The U.S. House of Representatives Financial Services Committee last week voted to approve an amendment that would bring about an audit of the Fed, its monetary policy and lending programs, since when gold has gone its merry way higher, hitting an all-time high of $1,174 per ounce on Monday.

The amendment, a provision to a broader financial services reform bill that is still under consideration, was co-sponsored by Republican Representative Ron Paul, author of the book “End the Fed,” and the man least likely to be found chairing a panel at Jackson Hole or Davos.

The Fed, understandably, hates the idea, saying it will compromise its hard-won independence, the administration loathes it, and really it will almost certainly never become effective in a recognizable form.

Even so, and even interpreting the vote as a populist cry of the heart against Washington and Wall Street, the fact that it has gotten this far will cause some serious people without an ideological dog in the Federal Reserve fight to buy a bit of gold, which is really a sort of anti-currency, as a hedge against increased political influence in the process of making monetary policy.

Undoubtedly many people who think keeping the Fed on a short leash attached to an elected body is a good thing also think the Federal Reserve should have been much less aggressive in creating money and risking inflation. History shows that the risks are actually skewed the other way: tighter political control of central banks more often means more inflation and a higher risk of a debased currency.

In other words, the people who support this because they think the Fed shouldn’t debase the currency are probably raising the risk that the currency is debased. This just adds to the bid for gold, which is already being supported by concerns that current monetary policy and deficits put inflation and the dollar at risk. These risks are not high, they are tiny, but they are disturbingly more worth discussing now than two years ago.

Thus we are in the bizarre situation of watching the price of gold being driven higher both by people who don’t trust the Federal Reserve and people who don’t trust the people who don’t trust the Federal Reserve.

HOW HIGH IS HIGH?

It has to be said; the very idea of buying gold, which adds nothing to the creation of wealth or innovation and is only conceivably a hedge against bad actions of other people, is dispiriting. If you buy gold you cannot tell yourself that you are doing well by doing good, as perhaps you can with a biotech or fertilizer company. You are simply limiting the damage that can be done to you, and then only in very particular circumstances. What’s more many of the people who advocate it as an asset show a disconcerting monomania; the type who if they sit next to you on a commuter train makes you consider pretending the next stop is yours.

Gold’s real virtue is negative. It is not used for much industrially but there is limited supply and real physical constraint on producing more. Unlike, say dollars, you can’t simply flip a switch and make more.

Dylan Grice, strategist at Societe Generale in London (who, by the way, I’d happily sit next to on a train) points out that the value of the gold held by the Fed only equals 15 percent of the U.S. monetary base and that the price would have torise to $6,300 per ounce to make the currency fully backed by gold reserves.

Of course, gold is not just going up against the dollar, it is going up against an array of major and minor currencies, indicating that the worries are not simply about the Federal Reserve or U.S. policy but about the interplay between fiat currencies and policy around the world. A tremendous amount of debt has been created and socialized and a lot of money has been created.

Which brings us back to the Federal Reserve and the politics of monetary policy, or as perhaps we will begin to see it the politics of politics. The betting has to be that the Federal Reserve emerges with its independence intact, if not its power as a regulator. From a markets point of view the Senate confirmation hearings for Ben Bernanke’s second four-year term as chairman kick off next week and offer the next opportunity for populist fireworks.

I am looking forward to having fewer conversations about gold, but I am not expecting it.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

Comments
10 comments so far | RSS Comments RSS

The biggest driver for the price of gold is the imminent demise of the U.S. Dollar and everything denominated in Dollars. How else can we save our wealth? The American government is doing everything it can to artificially drive down and disparage the price of gold as compared to the Dollar.The price of gold took off when the World Bank tried to drive it down by dumping gold on the world market. India immediately snapped up half the gold and China may have snapped up the other half. The rest of the world is out of reach by the propaganda in the American media.As James Saft said, we can’t just start cranking out more gold on demand. Gold can’t form a bubble that can be sated & crash. It will take years for new mines to get in production. Most of the gold in this planet is below the Mohole layer.The American government can declare gold ownership by citizens to be illegal to discourage its subjects back to the Dollar. But the borders are still open to get gold out to a hungry world. If millions of Mexicans and drugees can do it, so can we.

 

Why should anyone trust the Federal Reserve? Independence should not be synonymous with secrecy. We have a secret PRIVATE bank creating trillions of $$ out of thin air and we shouldn’t be able to audit them?? The dollar since the creation of the Fed in 1913, read The Creature From Jekyll Island, has lost more than 95% of its purchasing power. The puzzling assertion made by the Fed and its supporters is that the Federal Reserve has some sort of independence from the government and independence in undertaking monetary policy. Nothing could be further from the truth. The Federal Reserve is a government-created banking monopoly, and its top decision makers are appointed by the president and confirmed by the Senate. If they do not perform satisfactorily in the eyes of politicians, they will not be renominated. Someone please explain why we should not audit the Fed.

 

As I have always said, economic journalists are exactly that…’journalists’. You really have no idea why gold is going up as can plainly been seen in your article. You report what you think and certainly not what you know. If you really are open minded enough to learn then you should contact Mr Paul and he will lead you in the right direction as to what you should be reading yourself. On top of this you have a very unhealthy trust in bankers. These men are a curse on society.

Posted by Ash | Report as abusive
 

Isn’t the problem with holding gold that it doesn’t pay interest? It pays no dividends and, almost by definition, you can only get back what you pay for it in devalued currency. It is a very primitive form of currency. It should come as no surprise that India and China value it. Their emerging middle class and wealthy buyers of gold are doing something that is culturally ingrained and not necessarily a sensible investment.Since so many are buying it as a hedge against inflation or shaky currencies – it is almost a self fulfilling prophecy.It’s just another way of putting money under a mattress.And there is an enormous appetite for gold in industrial applications. Just a quick online search revealed that 80% of the yearly production – several hundred tons – is used by the jewelry business. Another 12% is used in industrial applications like printed circuit boards (it is apparently the old good conductor for PC boards because it can be used in such thin deposits). It will have an application in supercooled conductors.But if you buy gold as jewelery you are paying for the labor to make the jewelry and not necessarily for the metal content.And for gold to be useful as a means of exchange, there has to be some other means of exchange stable enough to covert it to in order to calculate its relative value. If the holders of gold found themselves in a world of collapsing currencies, would they dare spend it at all? They could find that they were both rich and poor at the same time.I also noticed in that brief search that there was a period where the price of gold spiked very high above its normal value and than collapsed again. But the graph was too small to read the dates.If everyone goes into it because of fear driven mania – than the price will go far too high. We are forever blowing bubbles it seems.And the writer who suggested hat it will take years to add to the gold supply is wrong. Hundreds of tons are extracted every year and the higher price means the more marginal deposits will be exploited. Just the rapidity with which so many wind and solar projects were – are – still being constructed due to the spike in oil prices, should suggest to them that industrial capacity seems to increase very quickly on demand.And if you are having a hard time believing in the integrity of bankers why would you believe in the integrity of gold brokers?

Posted by Paul Rosa | Report as abusive
 

It is absurd and inconceivable to me that the Federal Reserve banks have not been audited even once in almost 100 years, even when it was revealed they were basically the cause of The Great Depression!Audits of financial institutions wouldn’t be needed if people were inherently honest and wouldn’t be corrupted by huge sums of money and power.How in the world can anyone be expected to be ethical and honest in proximity to not only the biggest pile of cash on Earth, but also with the ability to print money at will?

Posted by J | Report as abusive
 

The problem with holding Dollar denominated paper is that it is declining in value despite whatever interest you can get. If you have paper Dollars, savings bonds, drawing rights, state bonds or municipal bonds, they will dive off given any unexpected emergency.CD’s aren’t owned by the depositor. When the bank or savings & loan go down in a crash, CD’s will be used to pay off the bond and sock holders in the bank.Stocks and funds held in the brokerage aren’t owned by the investor. When the brokerage goes down in a crash, those stocks and bonds will be used to pay off the stockholders and bondholders in the defunct brokerage. If you don’t have the paper certificate, you aint got jack.There are vastly too many U.S. Dollars around the world. It is a gigantic balloon. The foreign governments are fed up with taking U.S. Dollars to keep the U.S. economy going. And the Fed is cranking out Dollars faster and faster.If we have a disaster that could stop us from paying back even a token of the debt, there will be a panic buying of everything of value in this country as the Dollar hyperinflates. First countries will buy gold, silver, diamonds and tanzanite. Then countries will buy copper, machine tools, emeralds, citrines and rubies. Then countries will buy industrial machines, fishing boats, lumber and aluminum. The last countries will have to buy our basic industries — fishing, farming, mining and logging.In an unexpected emergency you won’t be able to reach your bank or your brokerage. Communications will be overloaded. All you can do is watch your wealth disappear on television.

 

Standardized, limited, liquid, and maintenance free makes gold the vehicle of choice for hedging against an anticipated devaluation of currency. Diamonds, art, collectibles of all sorts can play the same role, none thought have the attractiveness of gold. Over the last five years, its value has increased 5 times. A distinguished professor in business was vehement in rejecting the idea of investing in gold or hedging with gold, instead recommending natural gas. It was in 2004. I hope he reads this now.However, from the 2004 perspective, the US was engaged in two wars, and the armament industry was flourishing. For some, the question of paying the mounting national debt was not so challenging. Until the end of Bush’s administration, almost anyone I know was expecting the printing to start. It started all right. Those investing in gold five years ago are happy. Those thinking in investing in gold now should take a step back. How do you see the world in five years from now?

Posted by M | Report as abusive
 

Is the Gold price being manipulated for the IMF realize better price on its sale of the same?There are also rumours that:-1.Gold is being “salted” with cheap Tungsten,as the densities of both are almost same.2.Germany has asked the USA to return her Gold,so also UAE of the UK.3.A particular nation has accumulated huge amounts of Tungsten.

 

Not necessarily a sensible investment?? Gold has tripled in value since 2001 – hows your 401k doing? Due to the controlled demolition of the economy the only sensible investments are Canadian and Swiss treasuries and precious metals. As for gold being a primitive form of currency – since all gold backing was removed from the dollar its been 38 years and the end is near, gold has held strong for 6000 years. You keep your paper and I’ll hold my gold, freeze dried food, water filters and guns.

 

The Dollar has to stabilise sooner or later, otherwise the asset bubbles in Asia countries and the “gold bubble” will get bigger. Once the Dollar appreciates, the bubbles will burst and hurt the economy of these countries.Those who invest in Gold will lose heavily too.China is trying very hard to control the bubble in stock market and real estate. If USD does not stop the decline, it’s very hard for China to succeed.

 

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