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Is Gold Money?… Don't Ask Ben Bernanke, Examine the Federal Reserve
If you really care about your financial future, here's something you need to know.
It's about a story that received almost zero coverage from the mainstream press. I can't say that I am surprised.
It involves gold.
Thanks to requests by Bloomberg News under the Freedom of Information Act, the Federal Reserve has revealed unprecedented details concerning the personal holdings of its regional bank presidents.
What they found is nothing short of stunning …
Ben Bernanke on Gold
But let me back up a little.
There's an exchange between Fed Chairman Ben Bernanke and Congressmen Ron Paul you need to hear first.
During a monetary policy report delivered to Congress last summer, Congressman Ron Paul asked Bernanke if he thought gold is money.
After a clearly uncomfortable pause Ben said, "No. It's a precious metal." [By the way, if you haven't seen Ron Paul questioning Bernanke about gold, click here. It's already had over half a million views.]
Paul went on to ask Bernanke why it is then that central banks hold so much gold. Bernanke answered that it was simply a tradition.
Well, congrats Ben, you did get that one right, just for the wrong reasons. (Deep down, you surely know the true reasons).
The fact is gold has been a monetary tradition for millennia.
Nearly 2,000 years ago Aristotle laid out what characteristics make for good money. According to Aristotle:
- It must be durable.
- It must be portable.
- It must be divisible.
- It must be consistent.
- It must have intrinsic value.
So it's no accident that the most common basis for money – in all of human history – has been gold.
You might want to reread that: the most common basis for money – in all of human history – has been gold. It's no accident.
After all, only gold meets all five of those requirements for sound money.
It is only in the past century that fiat money has supplanted gold or gold-backed currencies on a worldwide basis.
What makes today's central bankers and their system of printing fiat currencies and setting interest rates so special? It is hubris and nothing more.
Fiat currencies are just a relatively recent, and failing, experiment in economics. So much so, it's become exceedingly dangerous to hold them of late.
Here's why.
Ben Bernanke is Every Gold Bug's Best Friend
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday … a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
To continue reading, please click here…
Jim Grant and the GOP Joining Forces to Bring Back the Gold Standard
With two GOP presidential candidates saying they'd add legendary Wall Street pundit Jim Grant to their administrations, bringing back the gold standard clearly has moved up on the Republican agenda.
Ron Paul, for whom returning to the gold standard has been a decades-long crusade, has said he would name Grant chairman of the U.S. Federal Reserve. In his case, that would be a compromise – Paul has often called for the Fed to be abolished altogether.
Meanwhile, Newt Gingrich has promised to appoint Jim Grant to head a commission to study the possibility of going back to the gold standard.
Grant, who publishes Grant's Interest Rate Observer, is a well-known gold bug and critic of the Fed.
His ideas have attracted increasing favor in a party that blames the Fed's easy money policy for the country's economic problems.
Grant calls the current system of fiat currency an "anachronism" and questioned the "command and control, top-down system of having a handful of people at the Fed dictate interest rates."
He's worried that the Fed's quantitative easing policies have created a bubble in Treasury bonds.
And make no mistake: If a Republican president gives him the opportunity, Grant already has a plan, starting with making a public case for the gold standard.
"I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers," Grant told MarketWatch.
Grant said he believes a dollar should be fixed "like a foot, or a pound."
Such a policy would arrest the steep decline in value the dollar has suffered since the United States abandoned the gold standard in 1971 – a point Paul often raises on the campaign trail.
"Since 1971, since we lost our link to gold, the dollar has lost 85%," Paul recently told NPR. "So if you were a saver and wanted to take care of your kid's education, even if you made a little interest, you're going to lose money."
Middle-class worries like that have helped make a return to the gold standard a major issue in the 2012 Republican primary battle.
The other two remaining GOP contenders, Mitt Romney and Rick Santorum, are believed to be against a return to the gold standard, though both refrain from talking about it.
Of course, Republican proponents of the gold standard may not need Paul or Gingrich to win the nomination to move the issue forward.
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The Madness of Crowds: How to Play Bonds, China, and Gold in 2012
Yes, I know that markets are irrational.
I read Charles Mackay's 1841 classic, "Extraordinary Popular Delusions and the Madness of Crowds" long before it ever became fashionable.
Even so, when you think about it, 2011 must set some kind of record.
As investors, that means we need to decide whether this madness will continue in 2012 and which direction to take.
Take the madness in the bond world, for instance.
Long-term bonds of a country with an out-of-control budget deficit and a worrying trade deficit are currently yielding 1.6% below inflation.
In other words, year after year, investors are willing to pay 1.6% of their capital to hold them. On top of that, investors have been so keen on this miserable asset in 2011 they have bid up its price by no less than 26%.
Conversely, China is revolutionizing the world economy.
Year after year, China puts up growth rates of 8% or more, and the latest data suggest that will continue throughout 2012.
What's more, Chinese stocks stand on a bargain-basement price-to-earnings (P/E) ratio of less than 8-times earnings. Yet, in 2011, investors shunned these bargains, giving the Chinese market a pathetic return of minus-22%.
It is Madness I Tell You
Do you see what I mean when I talk about irrational?
To a Martian, these statistics would be proof that earthly markets had lost their collective minds. That's not just a random walk – it's a deliberate stroll that will destroy your wealth.
For investors, it raises the question of how long this irrationality is going to last. Will this extreme irrationality persist in 2012, or will it reverse?
The first conclusion to be drawn is that current markets…
Buy, Sell or Hold: Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is a Mining Play with a Major Upside
Sometimes the market offers investors a rare chance to buy shares of a great company on a dip. That's precisely the opportunity we're getting right now with Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX).
The current market volatility is giving investors with an eye toward long-term investments a great chance to buy shares in a world-class company.
FCX is one of the best-run global mining companies and a great way to gain exposure to gold and copper. So it's time to "Buy" Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) (**).
And if scooping up a top-notch commodities play on a pullback isn't reason enough, here are six other reasons to buy FCX.
Money Morning's Gilani Analyzes Silver, Stocks and Gold During FoxBusiness Interview
Money Morning's Shah Gilani acquitted himself so well on the popular Varney & Co. show on Fox Business early yesterday (Thursday) that program host Stuart Varney invited Gilani back – before the interview was even over.
U.S. Stock Market Forecast: Tech, Energy, Commodities and Gold Are Top Plays For 2011
[Editor's Note: This special report on the stock-market environment that U.S. investors will face in the New Year is part of Money Morning's annual "Outlook" series, which is reviewing prospects for the U.S. economy, world currencies, oil, gold and other top profit opportunities in 2011.]
The outlook for the U.S. stock market in the New Year figures to be an exasperating mixture of promise and peril. Positive momentum is building going into 2011, but so are dangerous bubbles.
The high-tech, energy, materials and commodities sectors will be hot in the New Year. And the U.S. stock market will get an added boost from the fact that U.S. Treasuries, municipal bonds (munis) and euro-based investments will not.
Here's what's in store for the U.S. stock market in 2011.
For the most complete stock-market strategy you'll find anywhere, please read on…
Money Morning Mailbag: Soaring Gold and Silver Prices Point to Profits in Equipment & Drilling Industries
[Editor's Note: We want to hear from you! Do you have a comment, suggestion, story idea or a question? Let us know at mailbag@moneymappress.com. (**) And be sure to check back for responses to reader questions and comments.]
Gold yesterday (Thursday) continued a four-day rise soaring as high as $1,399.70 an ounce as the dollar fell for a second consecutive day.
"Gold is up primarily on dollar weakness and economic optimism," Adam Klopfenstein, a senior market strategist for Lind-Waldock, told Bloomberg. "This is very positive for gold on the future inflation front."
This week Money Morning Contributing Editor Peter Krauth showed why gold and silver are still headed for gains in the New Year, following a 2010 surge.
Chinese Investors Drive Gold Imports Five Times Higher on Inflation Fears
The gold rush in China accelerated during the first 10 months of 2010 as investors seeking protection from looming inflation drove imports of the yellow metal up nearly five times more than the amount brought in all of last year.
Gold imports rose to 209 metric tons compared with 45 tons for all of 2009, Shen Xiangrong, chairman of the Shanghai Gold Exchange told a conference held in Shanghai yesterday (Thursday).
"The government hasn't officially said that China is encouraging private gold investments, but we in the industry suspect it. And you can see the big jump in the delivered gold imports through the exchange has to be approved by them," Albert Cheng, managing director of the World Gold Council's Far East department, told Bloomberg News in an interview.
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