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It was
the Wall Street Journal that alerted the world to the fact that Federal Reserve
Chairman Ben Bernanke is puzzled by the gold price. Speaking to the Congress'
Committee on the Budget on June 9, the WSJ reported these remarks of Bernanke, claiming that the Fed head is "a bit
puzzled" by gold's price ascent:
Mr.
Bernanke notes that the inflation signal isn’t confirmed by movements
in other asset classes. Yields on Treasury bonds tend to rise when investors
worry about inflation, but those yields have been falling recently. Inflation
expectations as measured in Treasury Inflation Protected Securities (TIPS)
markets remain low. And other commodity prices are falling. Gold is breaking
records, but copper prices are down 17% so far this year.
"I don’t fully understand movements in the gold price,"
Mr. Bernanke admitted. But he suggested it might be another example of
investors fleeing risky assets and flocking to assets that are perceived as
less risky, not only Treasury bonds, but also ones like gold.
Keeping
in mind this is the same person that still denies that the global economic
downturn is a direct result of artificially low rates and a lack of financial
regulation the Fed chairman sets the stage for his next epic fail by
mistaking the only universally and voluntarily accepted form of money as a
commodity.
Gold is not a "commodity" and has never been since the Lydians
minted the first gold coin in the world about 600 BC. The specimen pictured here weighs 4.71 grams, has
a diameter of 13mm at its widest, and at 4mm, is thick as a nugget. It likely
consists of about 55 percent gold, 43 percent silver, 2 percent copper, and
trace amounts of lead and iron. It trades between $1,000 and $2,000 in
numismatic cercles and has never devalued to zero purchasing power.
Looking back in history reveals more clues that gold-backed money correlated
highly with the prosperity of nations. It is no coincidence that
"solid" is derived from the Solidus coin.
This coin was the standard in the Roman empire from the 4th to the 10th
century. According to Wikipedia the
coin was introduced by Emperor Constantin in 312 AD and was the accepted
medium of exchange for 700 years because it kept its gold weight at 4.5
grams. BTW, these coins too have never devalued and now trade at 5-figure
prices.
Ben
Bernanke may also have a look at the USA's own monetary history. America's
first genuine economic boom happened under a gold standard after the failings
of 2 central banks (who printed too much money.) A gold ounce was worth $20
in 1815 and still the same 100 years later. Not that it blocked robber
capitalism.
The depicted Eagle coin has the same purchasing power today as 150 years ago:
As $20 would buy you a Colt revolver then, today's Colt prices expressed in S
terms range around $1,250. I like this comparison because neither gold nor a
Colt has changed in the past.
The 19th century can either be described as a free market paradise or
"robber capitalism," depending whether your ancestors made it or
not.
Anyway, this was the time when the big fortunes of the
Carnegies, Rockfellers, Morgans et al were made. They were lucky in one way
denied to today's economy: They did not have to fear inflation as the
Treasury could not mint gold out of thin air.
The Fed chairman could also take a clue from the Treasury gold reserve position.
TABLE: At a ridicuolous book value of $42.22/oz gold or 3.5% of the current
market price of $1,235 gold is the biggest reserve position of the Treasury.
Following are explanations from the Treasury:
Deep
Storage: Deep-Storage gold is the portion of the U.S. government-owned Gold
Bullion Reserve that the U.S. Mint secures in sealed vaults, which are
examined annually by the Department of Treasury's Office of the Inspector
General. Deep-Storage gold comprises the vast majority of the Reserve and
consists primarily of gold bars. This portion was formerly called
"Bullion Reserve" or "Custodial Gold Bullion Reserve."
Working
Stock: Working-Stock gold is the portion of the U.S. government-owned Gold
Bullion Reserve that the U.S. Mint uses as the raw material for minting
congressionally authorized coins. Working-Stock gold comprises only about 1
percent of the Reserve and consists of bars, blanks, unsold coins, and
condemned coins. This portion was formerly listed as individual coins and
blanks or called "PEF Gold." Data: US Treasury
I cannot remember whether it was under Bernanke's time at the Fed or during
his excursion to Bush's White House as chairman of the Council of Economic
Advisers. But I am sure that Bernanke did not miss an exchange of Ron Paul
and former Fed chair Alan Greenspan in one of his last congressional
hearings. Asked why the US could not simply sell its gold reserves to pay
down foreign debts if gold was only a non-yielding asset, Greenspan answered
that in times of extreme stress or war gold is the only internationally
accepted currency.
This is 100% true.
Long-term inflation shows that Federal Reserve Notes began losing their value
as soon as the Fed was established.
GRAPH: US inflation was negligible and never lasted for longer periods until
the creation of the Federal Reserve in 1913. Click
to enlarge.
Paper stuff like this one
or this one
or this one
always
devalued to zero within a human's lifespan.
Ask
Greenspan. A young economist then, he wrote in 1967,
In the
absence of the gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal,
as was done in the case of gold. If everyone decided, for example, to convert
all his bank deposits to silver or copper or any other good, and thereafter
declined to accept checks as payment for goods, bank deposits would lose
their purchasing power and government-created bank credit would be worthless
as a claim on goods. The financial policy of the welfare state requires that
there be no way for the owners of wealth to protect themselves.
This is
the shabby secret of the welfare statists' tirades against gold. Deficit
spending is simply a scheme for the "hidden" confiscation of
wealth. Gold stands in the way of this insidious process. It stands as a
protector of property rights. If one grasps this, one has no difficulty in
understanding the statists' antagonism toward the gold standard.
As a
student of the Great Depression it may also help to follow Murray Rothbards
tedious work detailing that the Fed was first inflating money supply in the
1920s with all tricks off the book, laying the groundwork for the ensuing
deflation in the 1930s.
More information on the virtues of a gold standard can be found at the
who all share a desire for sound money as monetary base of the economy.
Recent opinion
pieces in the WSJ
underline
that gold is increasingly seen as money.
Record
gold prices in recent days only confirm what the public has been hearing from
clueless politicians: The Western world sits atop the biggest mountain of
paper assets that will see as much deflation as we will see inflation in
consumer prices as the final outcome of the biggest economic crisis in
history.
Not a
single fiat currency was able to hold its value in the last 3 centuries. Those
around today will be no exception to the rule. This is no puzzling news but
the continuation of a wrong monetary system with its mathematically
foreseeable end. Remembering this quote from G.B. Shaw it will nevertheless be inevitable that we progress to a voluntarily
accepted monetary standard. Gold has served that role well for almost three
millenia.
Toni
Straka
Editor, the Prudent Investor
Toni Straka is an INDEPENDENT Certified Financial Analyst (OeVFA, EFFAS) who worked as a
financial journalist for 15+ years and now evaluates global market trends.
Analyzing financial and political news permanently he wants to share his
insight with those who understand that we are in an era of global
redistribution of wealth. The US-European centric approach does not work
anymore. Five billion people in the developing countries now demand their
fair share of the world's resources.
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