Golden Fetters? More Like Parachute! — The Gold Stocks Standard
Today’s Daily Reckoning Australia begins with a meditation on the past words of ‘El Maestro’.
If you’re interested in gold stocks, you’ll want to hear what he said.
Now…I am not referring to an Italian football player as they bask in their glory over a vanquished England.
I’m referring to Alan Greenspan…of course! What…you don’t remember this guy??
OK. OK. Not everyone is a finance tragic like me. Alan Greenspan was the Chairman of the US Federal Reserve from 1987 to 2006.
At one point the mainstream media dubbed him ‘The Maestro’.
Hindsight suggests Greenspan’s skill was lucky timing.
The development of the computer industry and later the internet happened on his watch.
The explosion of wealth and productivity made for a booming US economy mostly.
He got a lot of credit for mostly being a bystander to all this.
World events revealed the emperor had no clothes when 2008 blew down the cosy consensus that the US and the West were in a ‘Great Moderation’.
Why do we care what he said? You’ll see!
We’re going back to 1967 before Alan Greenspan joined the elite of American society.
As a younger man he ran a consultancy business on the US economy.
He was also a devoted free market libertarian who espoused the gold standard.
You have to know a bit about market history to see the irony of a rabid libertarian into gold going on to become the second longest-serving Fed Chairman.
That’s because the Fed Chairman is a bureaucrat whose credit machine cannot function freely with the constraints imposed by gold.
Some say Greenspan sold out his personal ideology for the kudos, power, and money of the Fed Chairmanship.
That’s not our beef for today.
Here’s why we care. There’s no doubt Alan Greenspan knew finance and market history.
That’s all we care about right now. And here’s Greenspan writing on gold in 1967:
‘The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.
‘They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold.
‘The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset.
‘But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise.
‘Thus the earnings saved by the productive members of the society lose value in terms of goods.
‘When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
‘In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.’
Now, don’t you think he could be writing about the world today?
We know the central banks are pumping out huge amounts of credit to buy bonds in the market. There is no fixed limit on how much they can do this.
Their cost of funds is zero.
This liquidity seeps out into the world of properties and equities. Asset markets inflate. The rich get richer.
But it’s when this money starts hitting the consumer economy that things will heat up.
We’re not quite there yet…but it’s coming, at least in my view.
That’s why I have an allocation to gold stocks now.
Gold is, for now at least, still a warning bell when the powers that be get too loose with the printing press.
We can’t be certain they aren’t fiddling with the paper market.
The Federal Reserve of New York is the trading arm of the Fed.
They can step into markets anytime they like…and do so in a very opaque way.
But real gold demand can’t be hidden…in coins and bullion going out the door and into vaults, safes, and shoeboxes the world over.
Holding your money in cash is a ticket to having your wealth fleeced as central banks conspire to pin down interest rates.
Greenspan knew it 1967. Here’s what he also wrote in 2017…long after retiring from the Fed…
‘I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value.’
Indeed. Got some?
Editor, The Daily Reckoning Australia
PS: I’ve been stepping in lately. Gold in Aussie dollars is around $2,400. That’s great margins on offer for the producers. How to Survive Australia’s Biggest Recession in 90 Years. Download your free report and learn more.