Saturday, October 5, 2013
One news item for the weekend, with commentary
Marketwatch - why Uncle Sam is hoarding gold.
The fellow has a point. If gold is little more than a barbarous relic, why does the US want to maintain a gold reserve of 8100 tons?
Now, the US can't sell all its gold to meet government debt obligations for the simple reason that even the threat of 8100 tons hitting the market would crater the price to $500 or less. Entire industries would collapse: there'd be several thousand Nevada miners out of work, not to mention several tens of thousands of jewellers in Thailand and India. You don't dump even a couple hundred tons into the market unless you have no alternative.
And yes, it's probably all been lent out to JP Morgan. I mean, why wouldn't it have been?
But the point of a gold reserve is to allow a nation to continue to conduct international trade for necessities at precisely those times when the international system of modern trade has broken down. That's why the US has a gold reserve, and why other countries want to build up gold reserves.
If they don't have any reserves at all, they become like Greece, or Egypt, or Iran: utterly broke due to collapsed internal economies with no way to be able to afford imports of wheat, or diesel, or medicine.
If their reserve is mainly one currency whose country then enters a crisis, then they essentially have no reserve at all - imagine having a massive USD reserve and hearing that Yellowstone has started erupting, for example.
If their reserve is made up of two or three currencies, there's less risk, but it's still there - euro yen and USD are all of no use to a country under international sanctions that's been cut off from SWIFT. Plus, a big enough crisis in the US would also collapse the euro and yen, no?
Gold is insurance against existential risk. The duty of a reserve bank is to protect its citizens from existential risk by holding enough reserves to ensure survival through crisis.
Of course the clowns on Wall Street don't understand that - they misconstrued it as a hedge (it's not) against portfolio risk (it's not), and figured buying GLD was the same as buying gold (it's not).
Gold isn't a currency and gold doesn't back currencies and gold never will back currencies. Economies have grown too large for the gold market.
But it still serves a purpose.