PrintOctober 21, 2009
Gold's no-confidence vote on Obama
Five peace-loving Norwegians have recently expressed their belief that Barack Obama holds great promise as a global leader. Much of the rest of the world is not nearly as sanguine, and the world is expressing its opinion openly, albeit quietly, by retreating from the dollar and embracing gold. Unfortunately, the flight from the dollar to gold has more ominous implications than does being jettisoned from sponsoring the Olympic Games.
Two decades before Alan Greenspan became Federal Reserve Chairman, eventually ending his reign as the American economy's "maestro", he was widely regarded as a leading gold bug. Even today, many who hold up the gold standard as the model for monetary restraint, cite his 1966 essay written for Ayn Rand's The Objectivist, entitled "Gold and Economic Freedom", as one of the most coherent defenses of the metal's core role in establishing a stable, non-inflationary financial system.
The Greenspan in this essay is government-wary in the extreme, a far cry from the chairman pilloried by Thomas E. Woods, Jr. and Peter Schiff, both of whom point out the disasters that ensued when Greenspan's Fed flooded the world with cheap dollars in 2001 and beyond. Ironically, the Greenspan of 1966 argued passionately for a gold standard so that a future Chairman Greenspan (or Chairman Ben Bernanke) would be unable to unleash the monetary torrents that are now drowning us all.
Gold's current reputation among most investment elite continues to be much less lustrous than its physical appearance. No less éminences grises of Wall Street than Warren Buffet and Wilbur Ross find gold's allure weirdly mystical and irrational, and its hoarding inexplicable given gold's scant productive, industrial uses. Buffet holds it strange that the world would pay money to mine ore from the ground, extract its gold in a toxic chemical process, then cast it into ingots and coins, only to pay again for it to buried in the ground and guarded in vaults.
Still, gold continues to confound. It has been one of best performing financial assets in recent years having risen in value every year since 2001. Even the banking and financial debacle beginning in September 2008 left gold 4 % positive for that entire frightening year, compared to the 33.8% loss for the Dow Industrials over the same period.
Gold has recently reached an all-time high of $1,060 per ounce. And far from showing signs of speculative exhaustion most market experts believe that prices are destined to move dramatically higher in the weeks, months and years ahead.
Why such dramatic moves in what Buffet and others rightly view as a fundamentally unproductive asset? Ultimately, gold is a stable, store of value, largely immune from manipulation, in sharp contrast to fiat currencies that can be printed away into oblivion by politicians and central bankers. Most people who invest in gold, including America's creditors, are growing weary of our current government's fiscal irresponsibility, and they neither trust our currency nor believe that we will be able to pay back our debts.
It's not that horrific deficits did not exist under George Bush, but Barack Obama has decided to quadruple them. It's not as if new entitlement programs were not launched under Bush, but under Obama they all have near-trillion dollar price tags, and show no sign of abating.
As Greenspan pointed out in 1966 when free of gold's discipline, central bankers are able to supply unconstrained credit to the markets, incurring debt that can be paid back only through higher taxes and higher inflation. Between these choices politicians will always view inflation as the more palatable, since the short-term detrimental effects are easier to hide, and only long-term do they lead to utter catastrophe.
Investors of all stripes, foreign and domestic, see inflation as an inevitable disease, and see gold as the only cure and protection against a flawed, if not terminally ill, currency. Gold investors are not looking for a high rate of return. They are looking for safety and protection, and gold historically has provided both.
One of the most disturbing market-moving stories to emerge recently was a report by Robert Frisk in The Independent that a secret cabal comprising the Arab petroleum exporting countries, China, Russia, Japan and France were working through details of a new oil trading settlement scheme that included a basket of their currencies along with gold, but excluded the dollar completely. The countries purportedly involved furiously denied the story.
But in economic end times there are financial wars and rumors of financial wars. Independently, the Chinese are apparently encouraging their citizens to diversify their holdings into gold and silver. I wish our government were looking out for its citizens as dotingly as the Chinese government seems to be looking out for theirs.
The world is always eager to flatter for its own advantage, and is ready to offer baubles like the Nobel Peace Prize or the Chair of the U.N. Security Council to the easily swayed. But if you want to know what the world really believes, ask gold its opinion. And right now the dense, glittering, virtually indestructible yellow metal, with a few uses in electronics and medicine is saying to Barack Obama and his economic team in no uncertain terms: We don't think much of you.
Claude can be reached at csandroff@gmail.com
