In The Lead – Standard Fare

by Jon Nadler, Kitco Metals Inc. on August 27, 2012 · 0 comments

Precious Metals CommentaryThe new trading week started with small losses in the precious metals complex despite a 0.14% drop in the US dollar and a near $1 advance in crude oil. Small-scale profit-taking was cited after gold market players attempted a test at the $1,680 resistance area but failed to deliver a victory just yet.

A larger than expected decline in Germany’s Ifo index and continued wrangling over what exactly to do about Eurozone bonds and such added to indecision patterns in the early part of Monday’s session.

Spot gold traded at $,1670 on the bid-side while silver remained very close to the $30.75 mark in the minutes following the New York opening. The four principal precious metals are flashing the "overbought" signal in the wake of last week’s "Fedphoria-induced" rallies — their Relative Strength Indicators are all above the 70-mark (historically a level at which taking profit has proven the wiser course of action).

Platinum slipped $3 to $1,542 and palladium fell $1 to $648 per ounce. Rhodium was quoted unchanged at $1,150 per ounce. There is plenty of "meaty" data on tap for the week, including Wednesday’s US GDP reading and the survey of US consumer confidence slated to be released tomorrow.

The above notwithstanding, the upcoming Fed symposium in Jackson Hole, Wyoming is taking the front row-center seat among market players’ preoccupations this week. Some have dubbed the gathering as "Action [in] Jackson" time and are expecting it to yield the unveiling of the much-anticipated (make that: much-demanded by speculators) QE Fed gesture. This is not to say that the also imminent Fed FOMC meeting is not being factored into the equation — certainly not when viewed within the context of the parsing of and the conclusions that were drawn about the FOMC meeting minutes that were released last week. This, despite some analysts who still see the Fed acting on some type of QE (if any at all) only in October or perhaps early next year in order to avoid potential political shading of its actions.

Background factors surrounding the European situation have become more muted as Fedspectations rule the trading day. However, even with the euro managing to tread water above the $1.25 level there are certain news items that bear watching before taking the plunge on the long-side in the common currency. To wit, the President of the German central bank — Jens Weidmann — said yesterday that he is categorically against the ECB buying government bonds and that doing so could make saving the euro more difficult down the road. Mr. Weidmann said "central bank financing can be as addictive as a drug."

Meanwhile, physical demand in the world’s largest gold-consuming nation — India — continues to be weak, at best. The Daily Bhaskar reports that at 31,100 rupees per 10grams, gold is "losing its sheen and rubs buyers the wrong way." Locals are taking their existing gold ornamental pieces and are asking tradesmen to remake them into upgraded new designs. Net new gold purchases = not many at all. Sources in Jaipur indicate that the regional gold demand has collapsed by about 50%. Pakistan’s Daily Times relays that India’s second-quarter gold imports have fallen by more than 56%. A London-based bullion banker in attendance at Hyderabad’s International Gold Convention said that "for the gold price rally to continue, someone else would have to step in to replace India."

Now that hurricane Isaac no longer seriously threatens Tampa Bay, the US Republican Party is set to fully start its national convention tomorrow. Some of the policy items to be talked about include a constitutional amendment to grant personhood to embryonic cells and a total ban on abortions, without exceptions. However, reports that the GOP also plans to adopt a platform that calls or an audit of the Fed and — wait for it — the appointment of a committee to study the feasibility of a return to the gold standard by the US have really set many Internet forums ablaze with chatter over the weekend.

The vast majority of such audiences view the GOP gold standard study committee proposal not as some kind of farewell tribute to retiring Rep. Ron Paul and his efforts to educate the masses about "honest" money but more like a done-deal and are expecting to have the greenback pegged to gold sooner rather than later (provided, of course that Messrs. Romney and Ryan prevail in November’s elections). This writer has spent several hours reading the emotionally-laden conversations on such sites by folks who are convinced that a ‘second coming’ is at hand for gold in America. At any price. Literally and figuratively.

Unfortunately, it appears that the participants in these numerous — and mainly gold-bullish by virtue of extrapolation- discussions have not spent any time reading the veritable explosion of media articles, op-eds, commentaries, etc. that have sprung up on the subject matter during the past 72 hours. In fact, we have rarely, if ever, seen such an immediate and widespread response to an idea (politically-motivated or not) as we have just witnessed with this GOP proposition.

Evidently, when it comes to the possible reestablishment of a gold standard, there are just as many voices that wish to be heard as being in opposition to it. Here now, is the roundup of such statements, in no particular order. We dedicate the remainder of today’s commentary to them not because sound money is a bad idea (it never was) but because what the proponents of this particular set of measures are advocating bears very close scrutiny by all of us who are not in possession of the credentials of the folks who wrote and/or spoke the following observations:

  • Reuters News cited Capital Economics analysts as opining that "it is hard to conceive of the circumstances under which no one would want to hold dollars" in the event the full backing of US debt leads to instant $10,000 per ounce gold. The news agency also cited the World Gold Council, which noted that such a revival of the Tea Party’s favorite metal is "unlikely."
  • NY Times columnist and Nobel Prize-winning economist Paul Krugman remarked that "returning to the gold standard is an almost comically (and cosmically) bad idea. Mr. Krugman points to a chart that reveals that, since 1968, gold’s so-called "stable purchasing power" has been anything but stable. Rep. Ron Paul has his followers all but convinced that the gold standard is the key to stable prices.
  • The Atlantic’s Matthew O’Brien calls the gold standard the "world’s worst economic idea" and uses only two charts to drive that point home. He uses only two charts to make that point; one showing CPI inflation under the gold standard from 1919 to 1933, and the other depicting CPI inflation since the Fed’s QEs have been with us. Mr. O’Brien remarks that in the period since the Fed began quantitative easing, there has been 23 times less variance in prices than there was under the gold standard. The tally of economists wishing to bring back gold backing for the US dollar was… zero during a recent poll.
  • NYU professor "Dr. Doom" Nouriel Roubini tweeted on Friday last week that "Republicans eye return to gold standard & to another Great Depression as the gold standard contributed to the first one."
  • Law professor and best-selling author Susan Estrich says of the GOP’s "extremist" platform that includes the gold standard and audit the Fed propositions that it is one that does not reflect the candidate’s views and that it is thus a sign of weakness. Ms. Estrich notes that the passage of a platform that "throws federalism to the wind, forces rape and incest victims into maternity wards, and reads like a complete pucker-up to libertarian Ron Paul rather than the Wall Street-savvy nominee" indicates that Mr. Romney was not strong enough to stand up to the ideologues, or that he did not dare try.
  • The Washington Post’s Ezra Klein reminds us that former President Reagan created a Gold Commission back in 1981 — one with similar purposes as the one being proposed in the GOP convention platform. The conclusion of that Commission? "That’s a clown idea, bro." The Reagan exploratory team concluded that "restoring a gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation." Mr. Klein believes that the GOP picked the wrong time to "rediscover" gold. Rep. Ron Paul admitted himself to CNBC that the propositions were part of the GOP platform in an effort to appease him ahead of the convention.
  • Noted economist and UC Berkeley Prof. Barry Eichengreen (we have mentioned his seminal "A Critique of Pure Gold" here many times) cautions that under a gold standard "the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster." Unlike 1981, in other words, when the gold standard made a kind of superficial sense as a response to our problems, 2012 is a moment when a gold standard would clearly have worsened our problems. Dramatically, the idea’s "proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite."
  • The Financial Times posted a reader’s letter to the editors in which the sender argues that the GOP’s move to try to re-adopt the gold standard shows their "increasingly tenuous relationship with reality." One Mr. David Beffert of Portland Oregon, remarks that the euro is in fact a kind of a gold standard under which members are being robbed of independent monetary policy and he asks the Republican gold bugs if they have ever heard of the euro crisis.
  • Speaking on CNBC, Ralph Silva, Director at Silva Research and Moorad Choudhry, Head of Treasury at Royal Bank of Scotland described the GOP idea as "nonsensical and ludicrous." The analysts said that the key goal for the US should be fiscal discipline and that the answer is not the gold standard but perhaps not fighting certain wars and spending trillions on them.
  • Project Syndicate’s Christopher Mahoney points out in great detail why the gold standard would not be workable today (just as it became unworkable several decades ago) and that implementing it would require either a dictatorship or a "Finnish-like national cohesion" — something that America completely lacks. In addition, in order to build the [gold] "standard’s credibility, the country must be able to demonstrate that it won’t cut and run at the first sign of distress." The peg to gold must in fact be done within the scope of a constitutional amendment. There would be no Fed chairman, no employment level mandate, and the required flexible nominal wages and incomes are the stuff of "fantasyland." Mr. Mahoney dubs gold "the Republican Death Wish."
  • Edelman Financial Group’s Ric Edelman says that "certain fiscal hawks like the idea because it’s rigid and would help prevent runaway government spending. But it’s a radical solution whose time has come and gone. Maybe we should move to a sand standard. There’s plenty of sand. How about this for a solution: Tell Congress to stop authorizing spending bills."
  • Stanford University Prof. John Taylor, a supporter of GOP candidate Romney, notes that the return to the gold standard is not the best way for the US to try to increase economic stability. Prof. Taylor also advises that the Fed should hold off on a third round of QE as the benefits from such a move would be "minimal." Mr. Taylor would prefer that the US dollar be pegged to a "broad price index" as it is more robust.
  • The normally very much pro-gold Daily Reckoning admits that "you can’t link anything to anything and expect it to remain that way in the long-run. It points to the 1700s and the gold and silver 15:1 ratio as the cause for periodic shortages and oversupply of the metals as arbitrage took its toll. Much later, Winston Churchill’s decision to return the British pound to the pre-WWI gold standard proved to be the worst decision of his career as it unleashed disastrous deflation and joblessness.

Thus, GOP convention and rhetoric aside, we come back to the Fed (which is still in business) and to Ben Bernanke (who still has a job). Long-time market observer Martin Murenbeeld of Dundee Wealth notes that "the driving force now [in gold] is the constant theme of stimulus. When we do monetary stimulus, all kinds of risky assets tend to correlate." What’s this, a long-time fan of gold including the yellow metal into the "risky asset" category? Well, stranger things can (and do) happen.

To wit: Professor Mehmet Dicle (Loyola University New Orleans) notes that a) there is little evidence that gold prices have provided protection against inflation in the 1999-2007 period and that b) gold’s reputation as a stock market hedge is largely undeserved. Between 2002 and 2009 the average sixty-day gold-S&P500 correlation was close to zero and this year that relationship is a positive 0.3 implying that gold and stocks have moved largely in tandem. There is your risk asset connotation. But, at the end of the day, one asset manager at MFS Investment Management concludes that he "cannot find a persistent pattern for how gold behaves." We could, of course, add humans to that puzzling question of behavior patterns.

Perhaps the best course of action is to ignore the equally convincing noises coming from these highly polarized camps and continue to keep that prudent, insurance policy-flavored, long-term ten percent "solution" in your own basket of hard-earned assets. Perhaps the sky will remain firmly in place. So what? Bequeath the stack to the kids. Or your favorite charity.

Until Friday,

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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