Tuesday, January 22, 2013

Ambrose Evans-Pritchard — A new Gold Standard is being born

My guess is that any new Gold Standard will be sui generis, and better for it. Let gold will take its place as a third reserve currency, one that cannot be devalued, and one that holds the others to account, but not so dominant that it hitches our collective destinies to the inflationary ups (yes, gold was highly inflationary after the Conquista) and the deflationary downs of global mine supply. That would indeed be a return to a barbarous relic.
Hopefully, it will be nothing like the interwar system. That was a dollar peg that transmitted US deflation to the whole world when the Fed tightened too hard in 1928 and went berserk in 1930.
The Telegraph (UK)
A new Gold Standard is being born
Ambrose Evans-Pritchard
(h/t John Zelnicker via email)

Looks like a new global depression may be in the making. Not to mention that the global economy becomes all about "competitiveness" in accumulating gold reserves, aka mercantilism, which historically has led to war.


Matt Franko said...

I vote for PCS instead!

NeilW said...

The most amusing thing you can do with Gold Bugs is point out that somebody took the other side of the trade.

So what do they know that the Gold Bug didn't?

Tom Hickey said...

The issue is that it's central banks that are the gold bugs. :o

Tom Hickey said...

Central banks don't have a good record in buying gold though. They tend to buy at tops and sell at bottoms, opposite of what one would expect.

The Rombach Report said...

I think I know the answer to this, but just out of curiosity does anyone think that HR 77, a.k.a.
'Free Competition in Currency Act of 2013' would be compatible with MMT outlook of government as monopoly supplier of the currency?


PS: Matt - Does PCS = Platinum Coin Standard?

Matt Franko said...


I assumed Platinum Coin Seignorage...

ie deposit the $1T platinum coin into the Treasury's account the heck with gold...


Tom Hickey said...

Ron Paul’s Free Competition in Currency Act

A currency sovereign accepts only its own non-convertible floating rate liabilities at payment offices. Anything else limits sovereignty and policy space.

geerussell said...

Something I've wondered about... if you're a central bank with a legacy hoard of gold on your balance sheet, is there a practically useful alternative to letting it gather dust?

Swap it for FX as a store of dry powder in trade wars? Swap it for some other physical asset? Swap it for some non-currency financial asset? Gold leaf domes on federal buildings?

The Rombach Report said...

Here's a separate but related question. Warren's ELR program advertises full employment and price stability. If the ELR was enacted and it performed as advertised, do you think the price of gold would remain more or less stable?

Tom Hickey said...

When CBs sell gold for their currency they remove their currency from the market making it dearer, and they buy gold in exchange for their currency to put their currency into the market in order to devalue it. This is not considered currency manipulation, where trading in other currencies would be.

Tom Hickey said...

I suspect that the market would perceiveELR as inflationary, even though it would be only a one off effect.

Gold price correlates with cost of holding it (interest foregone, storage fee) v. expected gain in a period. Since the gain is in price appreciation, holding gold can be expensive, especially on margin. Unless one's timing is right, the trade can easily go bad.

The problem with gold price, like fx, is that there are multiple factors influencing it — cost of holding, cb gold policy, cb monetary policy, real interest rate, fiscal policy, market action based on expectations, and consumer demand. Consumer demand has increased greatly since Asia came on line. Asians really like gold and they tend to hoard as much as they can afford for complex cultural reasons.

It is difficult to prioritize these factors because the priorities are in flux.

The most difficult thing with gold price is that the return on it is completely based on expectations. There is no way to compute an approximate value based on financial analysis. So it s very difficult to say when gold is in a bubble if the momentum is not going wild.

I would say that if one is going to trade gold actively then, the best method would be to use relatively short term technical analysis to determine the changing balance of bullish and bearish sentiment.

As a portfolio issue, I would regard gold as highly defensive, with the gold ratio in the portfolio shifting with the economic climate.

The Rombach Report said...

"I suspect that the market would perceive ELR as inflationary"

Maybe, but if the ELR did indeed result in price stability more or less, I would not be surprised to see the price of gold stabilize, because I think that gold is more responsive to inflationary expectations than the other factors you enumerated.

In connection with this, I want to share a comment by Supply Side icon Jude Wanniski who died a few years ago. Wanniski was for the most part dismissive of Ron Paul back in the 1990s, despite similarities on several issues, but occasionally he would have something nice to say about him.

One example was not long before Wanniski died when he wrote an open editorial memo on his website to Ron Paul in July of 2005, “Ron Paul’s Great Question”. He commented on the question Paul asked of Alan Greenspan in Congressional testimony before the House Financial Services Committee, not long before Greenspan’s departure from the Fed.

Ron Paul wanted to know from Greenspan if he thought there would be some circumstances under which the Federal Reserve would reconsider backing the dollar with gold. After all there must be some reason why the Fed and other central banks still hold gold as a monetary asset. Greenspan’s reply was that he didn’t think it was necessary to go back to gold because the Fed was acting as if it was already back on gold.

I think Paul’s question, Greenspan’s response and Wanniski’s take on the exchange gets to the same question I asked about the ELR and the price of gold but from a different direction. Here is the link:


Andy Blatchford said...

@ Neil

No reasoning with some of those nutjobs on the DT now, its gone to shit... still got that prepper loon Truthdestroysworlds, he has a nice avatar now ;)

Tom Hickey said...

Gold Prices And The Fed Funds Rate

The Rombach Report said...

Gregory Hines said.....
"If gold is money, this relationship could be interpreted for investors seeking a form of protection during low nominal interest rate and possibly negative real interest rates. With Ben Bernanke promising to keep rates low until 2013, the bull market in gold doesn’t look to end any time soon."

This makes sense to me because negative interest rates are largely a function of QE and financial repression. Here is a video I recorded at Reuters on TIPS, inflation and gold.