Wednesday, January 30, 2008

The Fed and the Four-Letter Word: GOLD-2

"I strongly object to the idea that 'gold is an investment'. Gold is better described as a non-investment, more precisely a place where you park your savings when you cannot find satisfactory investment outlets either because interest rates are too low, or because the risk of holding equities is too high. ... [Anatole] Kaletsky, like everyone before him preaching the Anti-Gold-Gospel, studiously avoids the question why the Treasury and the [Fed] should have the privilege of issuing obligations that they have neither the means nor the intention to honor. If anyone else tried to run a business on that basis, he would land in jail like Charles Ponzi did in the 1920s. ... The rising gold price and its implications have been largely ignored by the financial press and the investing public so far. The proposition that gold is still a monetary metal and still has a monetary role to play is ridiculed, while some central banks around the globe (e.g., that of Russia, China, India, Argentina, Brazil, to mention but the most important ones) are quietly remonetizing gold as they diversify out of dollars and build gold reserves from scratch. They keep this activity under cover as much as possible since it is not their intention to upset the golden apple-cart", my emphasis. Antal Fekete (AF) at, 26 January 2008.

"The other great casualty of the Fed's blunder has been the global dollar bloc. ... The collapse of the dollar bloc, if it continues, will add to this exchange-rate volatility and in the worst case make it easier for beggar-thy-neighbor currency manipulation. ... As the world's most important central bank, the Fed must take the lead. And the way to start is by sending a message that its monetary decisions will be based on a renewed determination to protect the value of the dollar and its role as a reserve currency", Editorial, WSJ, 26 January 2008.

"In recent months, the noisiest criticism of the Fed has come from Wall Street. ... Of course, the Fed doesn't think it was surrendering to critics. Instead, it was trying to avert a financial stampede. ... The Fed's first responsibility is to keep inflation at low levels because, without that, its other goals of maximum economic growth and low unemployment become impossible", Robert Samuelson (RS) at, 29 January 2008.

Amen, AF, well-said. Anyone who doubts gold is money should ask: why did Nixon "close the gold window" in 1971? Why does Uncle Sam hold 261.5 million ounces of gold? What is gold? MONEY! In "capital market line" terms, GOLD, not Treasury Bills, is the: least risky asset. Least risky asset, not riskless asset, there ain't no such animal! As Americans we are conditioned to believe there is a "riskless asset", but that is because like Pavlov's dogs we were brought up to think in dollar terms, not gold ounces. See also my my 24 December 2007 post.

How would the WSJ have the Fed send "a message"? By Helicopter Ben's saying so? That ain't gonna cut it no more. Either the banks fail or the dollar fails.

The Fed has some game going, that 75 years after its formation, RS can still write its, "first responsibility is to keep inflation at low levels".

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