For some reason, there is a push-pull relationship about not letting gold run it's course vis a vie as a late market cyclical completing the commodity phase of the business cycle.
Jim,
One of the reasons there is that push-pull is the psychological role gold retains in warning investors of inflation or deflation. The Fed really wants neither of these economic states to gain credibiliy.
They don't want inflation obviously because if there is no inflation (as there evidently isn't right now) and gold rises to challenge the value of the global reserve currency, then the Fed is forced to hike rates to defend the currency which further slows the economy through higer costs of capital. This would slow demand further, lowering prices even further and throwing the economy into recession. All this could happen at a time, like now, when prices continue to suffer.
Now deflation obviously frightens the Fed juat as much as inflation. Deflation signifies a lack of consumer confidence and concern for the future that causes them to not to consume, but save every available penny. No consumers, no economy (as we know it), and everyone winds up spending money only on basic staples and necessities.
So although Bill claims that the Fed is trying to manipulate gold downward, I say they don't want it to go down (too fact anyway), nor do they want it to go up (to fast, if at all). From my perspective the Fed wants to use gold as a psychological indicator (I would were I them and I held the gold reserves they hold combined with other CBs).
Contrary to AGs mouthing, the Fed probably doesn't mind a little bit of inflation manifesting itself in the economy in order to counteract the overall price declines in commodities. A little inflation would be good for the broader economy as it would signal a return of pricing power, and thus, higher earnings for more companies.
Finally, with the Y2K fearmongering (justified or not), people are taking delivery of more and more gold, completely removing it from the market. There are large reserves of gold held by CBs that could help to alleviate this demand, but then they might trigger a collapse of gold through the fear they would inflict were they to publicly sell physical gold to meet demand for the metal.
The Fed obviously wants to control the gold market, especially when event driven circumstances like Y2K fears, could create the circumstances that might undermine confidence in the financial system as a whole. Were we on a gold standard as previously existed where only a percentage of money was backed by gold, we would face a similar confidence crisis.
The bank holidays of the early depression occurred under a gold standard. The crash itself was partially exarcerbated by the inflexibility gold provided to add liquidity to the financial system, thus forcing the currency to become even "harder".
IMO, a Y2K crisis of confidence would affect ANY proxy monetary system, whether gold backed or Fiat. There just isn't enough gold in the world to back up the current money supply. And if we don't use gold, then there is silver which is more plentiful. But a silver standard would be bad for gold as well. So why have either?
Regards,
Ron |
