Posts Tagged gold
One, perpetrated famously two years ago by Federal Reserve Chairman Ben Bernanke, is that central banks hold gold not because it’s money but because it is just an “asset” and “tradition”:
Bernanke must dearly wish that it were so. But the Bank for International Settlements confirms otherwise, that gold is “a financial instrument”:
Another disastrously false premise is that gold doesn’t pay interest. But gold pays interest just as money does — when it is lent:
In commentary posted today at Resource Investor, the financial letter writer Przemyslaw Radomski repeats another disastrously false premise — that “gold cannot be printed or manufactured.”
In fact, of course, gold can be printed to infinity thanks to “paper gold,” the issuance of claims to gold that doesn’t exist, claims against bullion banks that are never exercised and probably cannot be honored without supportive dishoarding and leasing from central bank gold reserves:
Working from this false premise, Radomski proceeds to try to answer the question “Have gold and silver stopped responding to the dollar’s price action?” without ever considering the likely price-suppressive effect of “paper gold”:
Indeed, this is the longstanding disparagement about gold in recent years — that even with its great appreciation over the last decade, the gold price has not kept pace with inflation, even as other tangibles have kept pace and even as there has been no substantial increase in gold mine production.
But somehow Radomski has managed to write a long commentary about the prospects for gold, complete with charts, without ever mentioning the involvement of the gold market’s largest participants, central banks, and their agent, the Bank for International Settlements, which appears to be trading gold, gold options, and gold derivatives on their behalf every day —
— and which even advertises secret gold market interventions as being among its services to its members:
Given such surreptitious trading and intervention, if gold, as Radomski wonders, has stopped responding to variations in the value of the U.S. dollar, the explanation is not likely to be found in his or anyone’s price charts, which are mere holograms being projected onto what only used to be markets, interpreted by what only used to be financial journalists, writers whose first principle seems to have become: Never put a critical question to the primary source.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
I feel sure that most of the predictions I read are based on facts, and ought to scare the living daylights out of all readers.
What I fail to see is an explanation of the causes of this terrible, atrocious situation in which the US economy finds itself.
Let me cut through all the dire warnings and offer readers a solution. However difficult it may be to get a solution in place, it is absolutely necessary to understand that there is a solution; if you want it badly enough, it is there waiting to be implemented.
HOW TO GET THE US ECONOMY GOING AGAIN.
In order to re-invigorate the US economy the following policy must be put in place:
The United States will only accept just as much imports from foreign countries, as foreign countries are willing to purchase from the US. (But the US will not resort to high Tariffs to restrict imports and protect local production.)
Question: Then you are saying, Mr. Salinas, that the US should not just import what it wants from foreign countries, and pay in dollars for those imports?
Answer: That is just what I am saying. Because, you see, if you pay in dollars, there is no need for local industries in the US. They are not needed – and in fact they have disappeared – because imports can be paid with dollars. What do you want: lots of Asian imports available at Walmart, but no jobs, and what jobs there are – at tattoo parlors and restaurants – paying miserable wages? Or do you want industries which will employ workers, pay higher wages and pay taxes to your government as well?
You see, what happened to your country, the USA, is that since 1971 the US has no need to pay for imports with EXPORTS – and exports require local industries to feed the export trade. Since 1971, the US has been paying for everything under the Sun, with dollars. And the result has been that US industries just dried up. They were unnecessary. The jobs disappeared. Detroit shriveled up, and the whole US is shriveling up, without industries. All this has happened because US imports can be paid with dollars, and exports are not really necessary.
This was great for China and Asia in general. It was party-time there! They sold everything they could make, and received dollars in exchange. The US had a party – for a while; until the industries died out and unemployment took over. All because dollars can pay for imports. Exports – forget it! The exports which sustained the industrial base – and the employment base – of the US are not needed anymore. And so the heart of the US has been rotting away – bringing with it unemployment and 47 millions on food stamps.
That’s where you are today.
So how do you solve the problem?
Very simple! I won’t say it won’t be painful, at first. But it’s the only solution:
GOLD MUST RETURN TO THE MONETARY SYSTEM OF THE US.
The US must declare that as of now:
- The US will pay for all imports either with goods and services or with gold.
- The US will provisionally initiate the re-industrialization of the USA with a gold price of $10,000 an ounce of gold.
- Exporters to the US will have their choice:
- Take their payment in US-made goods and services, or
- Take their payment in gold at $10,000 dollars an ounce.
- The US will not attempt to reduce the flow of imports by means of Tariffs. Tariffs offer no solution; in fact, Tariffs derail the only solution.
The definitive price of gold will be determined this way:
- As long as gold continues to leave the country, instead of goods and services, then the gold price must be hiked further, until the outflow of gold is stemmed and no gold leaves the country (because foreigners find American products more attractive than high-priced gold).
- If gold pours into the country, then the price of gold in dollars is too high and American exports are too cheap. The price of gold will be trimmed down, until the movement of gold is practically nil, with exports paying for the mass of imports.
The result of this measure will be an immediate rebirth of manufacturing in the US, with a return to full employment and prosperity.
The only solution for the dire circumstances of the US is a return to gold as the international money on the part of the US.
Let me make it perfectly clear: This solution – which is the only solution – will absolutely wreck the whole financial system of the US, without a doubt.
What is more important:
The recovery of the US as a productive powerhouse, employing millions of Americans in reborn industries?
Or keeping alive a rotten, insolvent, bankrupt and corrupt financial system?
Do you want an America that is alive, working and prospering at work?
Or do you want to continue in the present situation of decay and eventual collapse, which is inevitable if the solution is not applied?
Yes, the financial system has to go down the tubes. The National Debt and its 16.8 Trillions will be cut to about 1/7 of its present weight.
In exchange, Americans get life and opportunity; a way out of this miserable situation, which will become impossible sooner or later anyway.
This is the meaning of gold at $10,000 dollars per ounce for the average American:
A reborn US, bursting with opportunity and jobs for everyone.
Understanding today’s convoluted domestic and international fiat monetary system frankly requires a great deal of time and study. One must understand fractional reserve banking, and the way this system affects the money supply. One must understand the multi-step process by which banks create money out of thin air.
One must understand central bank open market operations. Internationally, one must try to understand floating exchange rates, how they are manipulated by central banks, and the resulting impact on national economies. For example, is it best for a country to drive down its exchange rate in relation to other currencies or do the opposite?
These issues are never understood by policymakers, who appear to be among the most illiterate in economic matters, so monetary policy swings to-and-fro according to which economic group has temporary control over the levers of the government, and particularly of central banks.
So Simple Even a Child Can Understand It
In a sound money environment, on the other hand, there is little confusion or controversy. Under sound money—in which money is a commodity (for discussion purposes let us assume it to be gold)—everyone, to some extent, understands monetary theory. Whether it be an individual, a family, a corporation, or a nation, either one has money or one does not. It really is as simple as that. Even children learn the nature of money. A child quickly learns that the things he wants cost money and either he has it or he does not. If he does not, he quickly grasps that there are ways to get it. He can ask his parents for an increase in his allowance. Or, he can earn the money he needs by doing chores around the house or for friends and neighbors. He might be able to borrow the money for large purchases, promising to pay back his parents either from his future allowance or from anticipated future earnings from doing extra chores. His parents can evaluate this loan request simply by considering the likelihood that his allowance and chore income are sufficient.
How is this any different when applied to adults, companies, or governments? In a sound money environment, they are the same. Individuals earn what they spend on the family and may borrow from the bank to buy a home or a new car. The lender will examine whether the person’s income is sufficient to pay back the loan. If the family hits hard times, they may ask for assistance from relatives or a charity. Companies have more means with which to fund their operations. Stockholders provide the company with its initial capital. Thereafter, when normal earnings are insufficient to fund desired expansion, the company can borrow against accounts receivables and inventories, both of which provide varying degrees of security for the lender.
So Simple Even a Politician Can Understand It
A national government’s finances, under a sound money system, are little different from either a household’s or a company’s. It needs to collect in taxes what it spends. If it suffers a budget deficit, it can cut back spending, attempt to raise taxes, or borrow in the open market. In a sound money environment, there is a limit to the amount of debt that even a government can incur, due to the need to pay back the loan from future tax revenue. If the market believes that this may not be forthcoming, the nation’s credit rating may suffer and its borrowing costs will rise, perhaps to the point that the nation is completely shut out of the credit market. But this is a good thing! The market instills practical discipline that even a politician can understand! Under sound money, one does not need a special education to understand the monetary system.
Taking the process one step further, anyone can understand international monetary theory in a sound money environment. The national currency is simply shorthand for a quantity of gold. A US dollar may be defined as one thirty-fifth of an ounce of gold, and a British pound defined as roughly one seventh of an ounce of gold. Exchange rates become mathematical ratios that do not vary. So an American purchasing English goods would exchange his dollars for pounds at a ratio of five dollars per British pound; i.e., one seventh of an ounce of gold (a pound) divided by one thirty-fifth of an ounce of gold (a dollar) equals five dollars to a pound. Through the banking system, the English exporter would demand gold from the issuer of dollars, whether it be from a central bank or private bank, at thirty-five dollars per ounce. When a currency is simply a substitute for gold, either the issuer has gold with which to redeem its currency or it does not.
Money Issuers Subject to Normal Commercial and Criminal Law
When a nation overspends internationally, its gold reserves start to dwindle. Money, which is backed one hundred percent by gold, becomes scarce domestically. Domestic prices fall, triggering a rise in foreign demand for the nation’s goods. The process of gold depletion is halted and then reversed. This is the classical “Currency School” of international monetary theory. Commercial banks present checks drawn on one another every day and the same process would exist for gold-backed currencies. If a bank issues more scrip than it can redeem for gold at the promised price, it is guilty of fraud. Its officers and directors can be sued in court for any loss incurred by those who accepted the bank’s scrip. Furthermore, the officers and director could be prosecuted for the crime of fraud. In other words, banking would be subject to normal commercial laws and bank officers and directors would be subject to normal criminal laws.
Good Money Drives Out Bad
The free market monetary system would drive bad money issuers out of the market. Plus, bad money issuers would suffer the loss of both their personal finances and, in the case of outright fraud, loss of their personal freedom. This would be a sobering incentive to deter criminals and attract only legitimate money issuers. Money would be a bailment; i.e., property held for the benefit of another, which must be surrendered upon demand for redemption. All around us exist analogous bailment examples of entrusting valuable goods to complete strangers. We leave our cars with valets at parking garages, our clothing at neighborhood cleaners, our overcoats at coat checks, our luggage to the airlines, valuable merchandise with shippers. In these cases, we fully expect that our property will be returned to us. And it almost always is! If it is not, public trust in the fraudulent outfits evaporates, and they quickly go out of business. Likewise, money issuers would thrive only when the public trusts their integrity, which would be enhanced by regular outside audits by respected firms of the existence of one-hundred-percent reserves to back the money issuer’s scrip. How different this would be from our present system in which the Fed will not allow an audit of its gold reserves even when held for the benefit of other central banks! It is clear that in a free market monetary system such a policy would drive Federal Reserve Notes out of the market through lack of demand. Even were the Fed to back its notes with its gold reserves, in a totally free market in which private banks could issue their own gold-backed scrip, the Fed would suffer from its past history of blatant money debasement and secrecy in its operations. The market would prefer the money issued by a well-respected private bank whose operations are transparent and subject to outside audit by respected accounting firms.
In a sound money environment everyone understands monetary theory. Money is like any other desired commodity, except it is not consumed. It is a medium of indirect exchange, which traders accept in order to exchange for something else at a later time. This is easily understood, whether the trader is a child, a parent, a company, or a nation. One either has money or one does not. The money can be a money substitute, a bailment, with which one can demand the redemption of the real money—gold. Money issuers must keep one-hundred-percent reserves against their money substitutes in order to abide by normal commercial and criminal law. No special agencies or monetary authorities are necessary to make the system work. The system emerges naturally and is regulated via the normal commercial and criminal legal system.
This is the system that government does not want us to have, because it provides no special favors for enhancing state power. Sound money shackles the government to the will of the people and not vice versa. As Ludwig von Mises stated in The Theory of Money and Credit:
“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”
“Earlier during this Congress,” Paul writes, “I introduced the Free Competition in Currency Act (H.R. 1098) to permit people to use gold as money again. By eliminating taxes on gold and other precious metals and repealing legal tender laws, people are given the option between using good money or fiat money. If the government persists in debasing the dollar — as money monopolists have always done — then the people would be able to protect themselves by using alternatives such as gold that are both sound and stable.”
Paul’s commentary is headlined “Gold Is Good Money” and it’s posted at the congressional Internet site here:
Buy the book “Money, Sound & Unsound” by Joe Salerno
The US Republican Party recently announced its intention to set up a “gold commission”, to examine the feasibility or not of returning to a gold standard. This raises important questions, cutting across the neoclassical economic consensus, so is bound to be controversial. If the commission is appointed, its members will have to re-learn how gold works as money, take on board the consequences of its reintroduction, and understand the reasons why mixing un-backed paper and gold is a flawed compromise.
Gold as money is fundamentally different from the paper-money environment we operate in today. Gold cannot be manipulated by government, while fiat money gives governments the flexibility in monetary policy they are accustomed to. To ditch flexibility for inflexibility is hard to justify, whatever the economic case. To do away with the option of easy money will also make many businesses judged to be not over-geared in a flexible monetary environment potentially insolvent.
For this reason, it is likely that any proposal for a gold standard is unlikely to go the whole hog. There is also the question of how much gold the central banks actually own, given decades of denying its monetary role, and of intervention by releasing bullion to discourage any thoughts that it is money.The road to hell is paved with good intentions. The reality is that any attempt to go back to a gold standard is an uncomfortable rewinding of the clock. This is not to decry the benefits of sound money: if we had stuck to sound money in the first place we would not be facing the economic crisis we have today.
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By Felix Moreno de la Cova
Bloomberg recently published an illustrative slideshow titled “The Real Cost of Owning Gold”. As usual when dealing with precious metals, in an attitude that is widespread among the mainstream financial press, the tone is dismissive, disdainful and almost mocking of those that advocate ownership of hard assets – and especially gold.
The reasons for this hostility are fairly obvious. First, ignorance: precious metals have been out of fashion for over 30 years, and financial analysts (average age 35) know little about them. Most would have came of age, professionally and intellectually speaking, during the early part of the last decade – at a time when gold investors were the crazy-old uncles of the investment world: deemed irrelevant and backward-looking by fashionable opinion.
A large majority of these analysts will have Economics degrees from well-respected universities, where they will have been taught that gold has no role in modern economics. They will then have likely received masters and further financial and accounting qualifications that promote “Modern Portfolio Theory”, and the idea that the investment world starts and ends at splitting money between stocks and bonds – with young investors encouraged to sink most of their capital into stocks, while older wealthier individuals are pushed into the “safety” of bonds.
The second and perhaps most important reason for the press’s antipathy towards gold and precious metals are their advertising incentives. Financial institutions, brokers and the financial press simply do not know how to make money from selling, buying or trading gold. In fact funds spent on gold have little turnover and earn few commissions, especially compared to banks’ favored products. Gold is just too simple. It does not require a PhD to understand, it doesn’t respond to complex valuation models, and it doesn’t generate juicy IPO flow. It just sits there, making portfolio managers and financial advisers almost obsolete.
Thirdly, and it is difficult to gauge how significant this factor really is, there is a positive and fierce dislike of gold for ideological reasons. As Alan Greenspan himself recognized in his famous essay Gold and Economic Freedom, those with a disposition towards deficit spending and Keynesian economics find gold a huge obstacle in pursuing their agenda of wealth redistribution and central planning. This antagonism, even if not always conscious, permeates much mainstream economic opinion on gold and is made explicit in the writings of some prominent opinion leaders.
A common accusation and one that is repeated in the aforementioned slideshow is that gold investors (or savers) are some kind of cult or religion. The juxtaposition is always between “faith” or “belief” in gold, versus “reasonable” investments. Gold owners are said to suffer from paranoia, or misguided and superstitious “gold fever”.
I would contend that the opposite is true. Knowledge of economic history, understanding of counter-party risk, experience of inflation, awareness of systemic risk and how it affects our interconnected global financial systems and a rational desire to protect wealth from all these factors is what eventually leads many investors to gold. The irrational faith is that placed in central banks and fiat currency in spite of overwhelming historical precedent. As James Turk once wrote, it is central banks that are the real barbarous relic, not gold.
The Bloomberg presentation does mention some aspects worth considering, such as insurance, transport, storage and appraisal. A gold buyer must consider all of these aspects carefully, but no more than the buyer of any other “hard” asset such as a house or a valuable portrait must. Unlike financial products that are often no more than annotations in an electronic ledger, real stuff needs looking after. Gold is, however, quite a bit easier to store, transport, assay and insure than most real estate or fine art, and companies like GoldMoney make it even simpler and cheaper.
Other objections are so ridiculous as to hardly warrant a mention, but I do find it comical that Bloomberg should worry about gold holders suffering from “anxiety” any more than holders of any stock. Continue to read.
Yesterday, for the second time in less than a year, I was
invited to Washington to testify in front of a Congressional
Committee that was contemplating regulatory moves to aid the
struggling economy. This time around it was the House
Subcommittee on Insurance, Housing and Community Opportunity
that asked for my views on Federal Housing Administration’s
(FHA) policy in the apartment lending market. Although this
is a fairly narrow issue, I told them the same thing I did
last year when I testified about job creation.
Government programs don’t solve problems, they just create new ones. While I
thank the Committee for inviting me, I believe the congressmen may have gotten
more than they bargained for. I can apologize for shaking up what would have
otherwise been a sleepy and forgettable proceeding, but I won’t apologize for
trying to inject respect for the Constitution and free market capitalism into a
venue that has been doing its best to destroy both.
I have edited down the more than 2 hour hearing into a package of slightly more
than 30 minutes. This includes all of my testimony and some of the more
noteworthy exchanges I had with the congressmen. The seven other people who
testified besides me all represented the many interest groups who benefit from
FHA loans. I represented only the interests of U.S. taxpayers, a group that
congressmen usually don’t hear from when considering legislation.
This video should give all Americans a better idea of how insulated Congress
is from the American taxpayers who are being asked to pay for the government’s
spending and borrowing. If you share my concerns, share this video with a friend.
Viral videos have a singular power to influence the national conversation. Let’s
get it started.