Jim Grant, on gold and money:
When money becomes a confidence trick
The flipside of investors' persistent lack of interest in gold is an unquestioning faith in money
Published: July 9 2000 21:27GMT | Last Updated: July 9 2000 21:32GMT
If all goes according to plan, the Bank of England will hammer down about 25 tonnes of gold on behalf of Her Majesty's Treasury on Wednesday, the second such auction in a scheduled series of six set for 2000/01.
And if all goes according to form, the average citizen of the world of finance will not care enough even to open a newspaper to check the results. Gold has been in a bear market since before the birth of Britney Spears. If it is not the most unpopular investment asset on the face of the earth, it is only because so many people have stopped paying attention to it - though, as the owner of some mining stocks, I still do.
Yet there is a related, and disturbing, claim to be made on behalf of the ancient monetary medium: it is a prospectively volatile asset. A perceived sure thing is always potentially explosive. Banking on certainty, people inevitably overtrade and overborrow, as Long-Term Capital Management did on such an impressive scale a couple of years ago. And few markets have become so apparently predictable as the gold market. The bear market has become institutionalised.
A lucrative and highly evolved branch of the finance industry exists today only to sell gold short, and forward - mining companies sell gold they have not mined; central banks and commercial banks facilitate the practice.
The gold bear market matters most of all because it represents the crystallisation of complacency toward money. Can a managed currency hold its value over the long run with nothing behind it but the good intentions of a central bank? History furnishes no ready examples. In 1980, with inflation raging, only the faithful believed the US Federal Reserve could ever stop it cold. Today, the theorists of the so-called new economy doubt the Fed could start a proper inflation, even if it tried.
The gold price is therefore the reciprocal of confidence: confidence in money, which governments print, and confidence in credit, which is the promise to pay money.
About credit, there are growing and well-founded concerns. Even so, Deutsche Telekom recently performed the remarkable feat of - to quote the Chicago-based research service "Gimme Credit" - selling "the biggest corporate bond deal ever while both its ratings were under negative review, offering only a minor sop in the way of event-risk protection."
Who, in 2000, is worried about the shelf-life of paper money? Not the majority of the world's creditors. True, at the margin, allegiances periodically shift from one monetary brand to another, from dollars to euros to yen and back. But there are few doubts about the institution of managed currencies. Unqualified belief is unwarranted, however, and is likely to prove unprofitable. More and more, the art of central banking resembles the witchcraft of central planning. What is the Fed's mission? The better question is: what is not the Fed's mission?
Of course, it must enforce strict "price stability". But, equally, it should allow no recession, no capital-market dislocations, no stock-market crash and no banking panic. If it should fail to forestall a crisis, or accidentally cause a slump, it must create enough credit to restore prosperity. In other words, it should resort to inflation.
When there were more central banks pursuing a wider assortment of monetary policies, the monetary consumer had more choice. But with the advent of a pan-European central bank, the world's central-banking business has become cartelised.
The Fed, the European Central Bank and the Bank of Japan together set monetary policy for a zone that accounts for 80 per cent of the world's industrialised economic activity, as the Goldman Sachs economics team points out: "Rarely, if ever, can so much power have been wielded by such a small number of institutions sitting outside the direct democratic process."
Yes, it will be said, but the G3 central banks are today collectively tightening policy, a sound and responsible action. Yet, the reply will quickly be made, the tightening may be too little, too late - or, for that matter, too much, too soon. We cannot know and neither can the well-meaning but fallible public servants - until it is too late.
So, there is no certainty, neither about money nor about credit.
"The Stock Market is the Economy," said the arresting headline over an analysis produced the other day by New York-based International Strategy & Investment. "Starting in 1996," the firm elaborated, "swings in the economy have become dominated by swings in the stock market... swings in our weekly survey of home builders have almost a perfect correlation with swings in the stock market."
If the stock market is the economy, and the economy is the stock market, then the US dollar exchange rate is a kind of derivative of the stock market. And it further follows that a non-US holder of any dollar-denominated asset - Treasury securities, for example - is a stock-market investor, too, even if he or she does not know it yet.
Twenty years ago, US government bonds were impugned as "certificates of confiscation", even though the government would not default and interest rates were the highest ever seen; gold changed hands at more than double today's price. Nowadays, the global bond industry is flourishing despite lower interest rates and thus greater principal risk to the creditors.
The structure of speculative forces calls to mind the new Millennium Bridge over the Thames in the centre of London, which was closed three days after it opened because of an unexpected wobble. When the bridge started to sway, pedestrians fell into step with the swing, as one report put it, "exacerbating the lateral movement". As on a bridge, so in the markets.
James Grant is the editor of Grant's Interest Rate Observer. |
