The Great Debate

In August 2011, while undergoing cancer treatments that ultimately failed him, Venezuela’s President Hugo Chávez began withdrawing 160 tons of gold from U.S., European and Canadian banks. “It’s coming to the place it never should have left. … The vaults of the central bank of Venezuela, not the bank of London or the bank of the United States. It’s our gold,” he said on national television as crowds cheered armored trucks carrying an initial bullion shipment to the central bank.

While Chávez suggested the gold repatriation might forestall a Libya-style seizure of Venezuela’s assets by Western powers he had antagonized, IHS Global Insight analyst Diego Moya-Ocampos told Reuters it might stymie potential claims by foreign corporations seeking compensation for nationalizations they had endured. Central Bank of Venezuela President Nelson Merentes said it was “an act of financial prudence and sovereignty” intended to guard against problems in the international markets.

The shipments, conducted by air after much talk of alternate delivery modes, concluded five months later in a celebratory caravan. (Germany’s doing it, too: Berlin has ordered repatriation of 674 metric tons of gold, worth $34 billion, from Paris and New York.)

The Caracas hoard would today be valued at around $9 billion, were it not for the fact that Venezuela has been selling it — about $550 million worth in the first eight months of 2012, according to the International Monetary Fund. Did further sales follow over the past six months, with proceeds partly paying for the public largesse that helped fuel Chávez’s victorious up-from-the-sickbed presidential run?

Hint: Even with the additional cash from gold sales, Venezuela’s foreign exchange reserves hit a five-year low in September, three weeks before Chávez won a narrower-than-customary victory over Henrique Capriles, who will represent the opposition in a presidential election to be held on April 14.

Economist Douglas Irwin of Dartmouth College has stirred up a bit of a fuss by concluding in some academic research that it was France, not the United States, that was most to blame for The Great Depression.

Irwin's theory, in a paper posted here by the National Bureau of Economic Research, is that France created an artificial shortage of gold reserves when it increased its share from 7 percent to 27 percent between 1927 and 1932.  Because major currencies at the time were backed by gold under the Gold Standard, this put other countries under enormous deflationary pressure.

To prove his point, Irwin ran a model looking at what would have happened without the French move. The results:

Billionaire financier George Soros this month repeated his warning gold is locked in the “ultimate bubble”, and told investors bluntly it was “certainly not safe” in troubled times.

Soros was simply repeating a warning he issued at the World Economic Forum (WEF) back in February. At the time gold was trading at less than $1,150 per ounce. It has since risen to touch $1,300 this week, and is up more than 400 percent from its low of $252 in 1999. There is no end in sight for the bull run. Anyone who shorted gold back in February would be sitting on huge losses.

But while Soros himself warned gold was in a bubble, his hedge fund, Soros Fund Management LLC was one of the biggest gold bulls of the year, doubling its holding of shares in the SPDR Gold Trust at about the same time he was issuing his warning at the WEF in Davos.

Deflation could be the biggest threat to the economy, but gold -- usually an inflation hedge -- is reaching new highs. That's because smart investors aren't playing the inflation trade, they're buying currency crisis insurance.

With the amount being spent by the public sector, with the huge amounts of leverage still in the system, there's a palpable fear that America won't be able to meet its obligations. Relative to GDP, the amount we're borrowing to finance deficits makes us look irresponsible.

When such economies hit a wall, investors make a run on the currency, typically moving their assets to a stronger currency, like the dollar.

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Before the credit crunch, we had what I called a Prozac market. Investors on both sides of the Atlantic seemed to be in denial, as irrational as the people who end up in the bankruptcy court because for years they have kept on smiling while the bills piled up unopened.

Last Fall, reality caught up in the shape of the worst banking crisis in history, and we have now had to mortgage our earnings for decades to come in order to bail out the banks. Not surprisingly, by mid-March this year, the Dow had fallen by well over 50 percent from its peak level at the start of October 2007, and the FTSE by nearly as much. In the last three months, however, the FTSE has risen by 20 percent and the Dow by nearly 30 percent. What has happened to justify the recovery?

- Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. -

Is the crisis over yet?

In the last 3 months, the Dow and the FTSE have each risen by about 25 percent, the Standard & Poor's 500 by a third. House prices appear to be stabilising in the UK. Stress-tested and backed by seemingly unlimited government funding, the banks are lending again (if only to each other), so that 1-month libor is down to only 0.3 percent.

In the Far East, the Chinese economy may be growing again, and even Japan may have pulled out of its nosedive. The oil price has recovered from its lows.