Gold looks even better if U.S. prints more money
Speech by governor of federal reserve deserves attention
Michael Campbell
Vancouver Sun
Tuesday, December 17, 2002
It should have been front-page news in every business section in the world, but it wasn't. Every investment adviser should have called their clients and revisited their investment strategy, but they didn't.
I have no idea why so few of us took notice of Federal Reserve governor Ben Bernanke's declaration, in an official speech to the Economist Club in Washington, D.C., that the U.S. was prepared to turn the printing presses on to ward off deflation. It's a long quote, but worth reading, as it is arguably the most important economic statement of the year.
Specifically Bernanke declared that, "U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press [or, today, its electronic equivalent] that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
There are many implications to this statement, but I will only focus on two of them. First, while the Fed says the possibility is remote, it recognizes that deflation is a possibility, which is why they are prepared to drop interest rates so aggressively. It also hints that rate rises are not on the horizon because that would certainly force overextended consumers and businesses into bankruptcy, thereby enhancing the possibility of deflation.
Perhaps more importantly is the direct acknowledgement that the Fed is prepared to flood the system with dollars in order to stimulate demand, which unless other countries are printing even more of their own currency, would devalue the currency.
A year ago I wrote that the U.S. dollar had topped out versus other major currencies. I still believe that to be the case, but the wild card is that central banks all over the world are prepared to act to keep their own currencies from rising against the U.S. dollar in order to make their exports attractive to American consumers.
The big question is: If the money that came to the U.S. in search of safety over the past seven years gets spooked at the prospect of a lower dollar, where will it go? Fifteen years ago the choice was between the Japanese yen, the German mark and the Swiss franc. Since that time, Japan has become a basket case, the German mark has given way to the bureaucracy-laden euro and the Swiss have removed the gold backing from their currency.
So what now? Two years ago, in stating that gold stocks were my favourite growth opportunity in the market, I said that any major move would be powered by a loss of confidence in paper currencies. Mr. Bernanke's statement gives me no reason to change the view that gold will be a long-term beneficiary of this trend as investors seek to hedge their currency risks.
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