Fed Should Sell Some Gold To Prevent ‘Run On The Bank’

Discussion in 'Metal Futures' started by Robert A. Green, Aug 3, 2011.

  1. My Forbes blog today: http://blogs.forbes.com/greatspecul...ld-sell-some-gold-to-prevent-run-on-the-bank/

    How about the U.S. Federal Reserve sells some of its huge gold reserves? The U.S. sold off some oil from the Strategic Petroleum Reserve, in order to slow down speculation and price hikes in oil and gas. That intervention may have worked.

    I think the Fed should consider selling some of its gold to dissuade a ‘run on the bank’ mentality that is spreading too fast this week. Investors are selling financial assets – which had a good run since the last meltdown buttressed by Fed QE1 and 2 – and seeking refuge in gold and silver. Storing investment capital in precious metals is bad for our economy, as those funds are not put to work in companies and working capital.

    I don’t think a Fed QE3 program is a good idea. In my view, it would be outrageous to bailout Wall Street and financial asset investors again with more quantitative easing. We don’t have a liquidity crisis, but a demand slow down and structural problems that need honest solutions. QE3 would involve more Fed printing of money which begets even more speculation in hard assets – that’s a vicious cycle of bad decision making.

    The Fed selling gold reserves would be a form of currency intervention, and therefore it should be in their tool chest. Although gold is not currency, emerging market central bankers and investors are losing faith in the U.S. dollar standard, and the fledging Euro, which aspires to be another currency reserve too. Emerging market central bankers may perceive gold bullion as a back-up reserve.

    The gold standard caused great havoc in the last century and it’s obsolete for global monetary policy now. There simply isn’t enough gold in the world to back currencies and reserves. Should our monetary policy and economic systems be based on how fast mining companies can explore, extract and produce gold bullion? That’s lunacy.

    In the last century, the U.S. gained control of most of the world’s gold reserves, which threw gold-backed currencies balance of power out of whack. Historically, the country with the most gold reserves got to use its own paper currency as a standard of reserve. In WWI, the U.S. sold arms and materials, and financed the European powers, while they squandered their gold, economies and people. Before the war, gold was evenly distributed, and after the war, the U.S. held most of the gold reserves. UK Chancellor of the Exchequer Winston Churchill went back on the gold standard too soon, not listening to John Maynard Keynes, and the UK never recovered its pound sterling standard. Before the war, many governments held reserves in the UK pound sterling.

    Let’s not repeat mistakes from central bankers and government officials from the 1920s and 1930s. We should try something different this time. In this new century, it’s been the U.S. that’s been wasting its blood and treasure on war spending, and the U.S. has run up a huge stock pile of debt. It’s doubtful, that the Chinese government and central bank will bail out the U.S., as the U.S. bailed out Europe in WWI. Isn’t it fairer that the U.S. settle some of its outrageous debt balances with gold?

    Better yet, the Fed should sell some gold into the markets in order to intervene, and reverse the run-away price of gold and silver. Even the prospect of suggesting this tool could serve to check the irrational speculation in gold by retail investors. Some late-stage gold investors could get very hurt in a correction, so it’s better to act sooner than later. Are there bubble-type conditions building in the gold market? You don’t want to raise interest rates to check that market, it’s better to just sell some gold to intervene.

    Selling a huge amount of gold to settle U.S. debts is fairer than asking U.S. taxpayers to pay higher taxes during a slow down or perhaps double-dip recession. It’s also fairer than asking seniors to suffer under austerity measures. All the while, the Fed kingpin sits high on his Fort Knox gold-platted throne.

    For gold reserves held by different countries, see http://en.wikipedia.org/wiki/Gold_reserve. Why does the U.S. have the highest gold reserves of any country, and also the highest debt and deficit too? That doesn’t make sense. Sell some of that gold!