The True Gold Standard (Second Edition)
THE worse things get, the better it looks for gold. That’s been the pattern this summer.
Worried about Greece, the future of the euro, the debt ceiling in the United States, or maybe even about the entire global economy? Buy gold bullion.
Plenty of investors, at least, have been thinking that way, driving the price of gold to nominal, if not inflation-adjusted, highs.
Last week, as separate teams of high-level negotiators sought solutions to the Greek debt crisis and to the debt-ceiling morass in Washington, gold crossed $1,600 an ounce for the first time ever.
While the price fell on signs of progress on these nettlesome issues, gold ended the week at $1,602.60. (That’s well below its 1980 inflation-adjusted peak of $2,516, said Edward Yardeni, an independent economist.) Gold hasn’t been flying this high since the halcyon days of supply-side economics early in the Reagan administration.
Ben S. Bernanke, the chairman of the Federal Reserve, is hardly a gold bug, but he has taken notice. In response to brisk questioning by Representative Ron Paul — the Texas Republican who is running for president for the third time, and has advocated a return to the gold standard — Mr. Bernanke acknowledged that he is paying attention to gold prices.
“I think the reason people hold gold is as protection against what we call ‘tail risk’ — really, really bad outcomes,” Mr. Bernanke said at a Congressional hearing this month. “To the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”
In a recent column, I noted that some experts don’t consider gold an appropriate asset in a typical diversified investment portfolio, partly because it generates no earnings, yet holding it entails cost. Gold is, however, certainly a financial asset, held by many central banks and prized by many private investors around the world.
Jeffrey Sica, for example, president of SICA Wealth Management in Morristown, N.J., is bullish about gold and other commodities — and bearish about nearly every other asset class.
“Right now, I think gold looks better than ever,” he said. His reasoning mirrors Mr. Bernanke’s, at least in this way: Mr. Sica say that he sees a painfully high probability of unfortunate events occurring in the months ahead, and that he believes gold will provide some shelter.
He departs sharply from the central banker’s views, though, in saying that the Fed’s expansionary policy known as quantitative easing “just hasn’t worked.” Furthermore, he expects the economy to weaken further, and the European sovereign debt crisis “to be with us for some time, regardless of whatever is arranged short term, and it will end up hurting many banks.”
While there may be what he calls a “relief rally” if the immediate crises seem to be resolved, he says that there has been a “general loss of confidence in the ability of central banks and governments to manage the economy.”
“That will continue to give gold and other precious metals a boost,” he adds.
Even at central banks, gold’s standing has risen in some respects lately. In June, UBS held a gathering of managers of central bank reserves, multilateral institutions and sovereign wealth funds, and found that a plurality believed gold would be the best-performing asset class through the end of 2011.
WHAT’S more, said Larry Hatheway, chief economist for UBS Investment Bank, a majority said they expected that the dollar would no longer be the most important reserve currency in the world in 25 years. Instead, they expected that “a portfolio of currencies” would replace it. Less than 10 percent envisioned gold ascending to that role.
Still, the World Gold Council, which tracks gold stocks, says the world’s central banks already hold roughly 29,000 tons of gold. Only about 166,000 tons have been mined throughout world history, the council says, so the central banks hold a significant portion of it.
Why? Most of it is a legacy of the time when major currencies were pegged to gold — in the days before Aug. 15, 1971, when President Richard M. Nixon took the United States off the gold standard. With more than 8,000 tons, the United States has more official gold stocks than any other country, the council says.
The United States ought to use that hoard to return the dollar to a gold standard, says Jeffrey Bell, who is trying to make this an issue in the 2012 presidential campaign. Mr. Bell has advocated the gold standard for years — and did so as the Republican senatorial candidate in New Jersey in 1978.
He was defeated by Bill Bradley, sometimes known as Dollar Bill because of his solid performance as a basketball player for the New York Knicks.
Mr. Bell recalls ruefully: “I used to hold up a dollar bill at campaign rallies and say, there’s nothing behind this now, we have to put something solid behind it. History shows that I lost.”
Lewis E. Lehrman, a friend and ally of Mr. Bell’s, says a gold standard would require the government to balance its budget and its current account. He says that, among other things, it would have made it impossible to accumulate the enormous private-sector debt load that led to the financial crisis of 2007.
Mr. Lehrman, once the president of the Rite Aid Corporation and now a philanthropist and historian, ran for governor of New York in 1982 but was defeated in the general election by Mario Cuomo. In a telephone interview last week, Mr. Lehrman said, “The debts in the American banking system that were amassed simply would not have been feasible if you had direct convertibility of currency into gold.”
He acknowledges that returning to a gold standard won’t happen overnight. But, he says, it will happen, “because the failure of all of the other approaches will become evident to the American people.”
The last apex of the back-to-gold movement was perhaps in 1980. It may have been a signal that the price of gold was about to peak. Could we be approaching a turning point now? “You could make that argument,” Mr. Bell says. “The big question is whether the government and the Federal Reserve will be able to get the economy under control without a return to gold.”
John Maynard Keynes once remarked that statesmen, for all their surface practicality, were generally slaves to some defunct economist. He became the greatest slavemaster of them all.
Before the end of World War II, American presidents and their Treasury secretaries generally delivered budget surpluses except in times of war or economic depression. The discipline of the international gold standard and an unfavorable balance of payments required nothing less. The public debt grew gradually but did so apace with the growth of a wealthy and expanding nation.
World War I reversed the balance of payments situation, making the U.S. a net creditor. During the prosperous Roaring Twenties Presidents Harding and Coolidge actually reduced the national debt by about one-third. The Great Depression of the 1930s, however, all but required sharply unbalanced budgets, whether from Herbert Hoover or Franklin Roosevelt.
The economic dominance of the United States at least permitted monetary tinkering (including a 60 percent devaluation of the dollar in terms of gold) that would have been severe in most other nations. World War II forced huge deficit spending, financed almost entirely by bond issues sold to American citizens and corporations. Its end brought victory and unparalleled prosperity. By then, Keynes was achieving a position of dominance among academic economists, increasing numbers of whom were liberal in their politics and culturally prone to reject the pleasure/pain principle that had dominated their profession.
President McKinley Signs the Financial Bill
HE USES A NEW GOLD PEN
Secretary Gage at Once Prepares to Proceed Under the Bond Refunding Clause of the Act