"Political, Economic Potholes Along the Yellow Brick Road"

MarketWatch has a piece today on the recent headline making noise out of the GOP about a return to the gold standard.

GOP's Gold Standard Idea Isn't Likely to Shine

"The gold standard, it is argued, would foster economic stability and prosperity, primarily by creating price stability, fixed exchange rates and placing limits government deficit spending as well as trade imbalances. It would also limit credit-driven boom/bust cycles through constraints on the supply of money."

Yes, absolutely.

"Opponents argue that the gold standard would limit the flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets and exchange rates. Opponents also point to the inflexibility of the gold standard, which may have contributed to the severity and length of the Great Depression."

In other words, a gold standard would limit monetary authorities' ability to "manage" economies by manipulating money supplies.  As a knock on effect, it would also limit their ability to provide welfare to favored constituents like the first users and abusers of newly created money, e.g. the big investment banks.

The article then goes on to make several points about why a return to the gold standard is unlikely (I agree that it is unlikely any time soon).  Here is the most telling reason, however:

"Money is now a matter of pure trust. American dollars still [bear] the words: “In God We Trust”. But God is not directly responsible for control of money; governments and central banks are. Politicians and policy makers are unlikely to willingly cede the power that a paper money system provides"

The article goes on to some silly stuff about a Tuscan spa, wealthy clients and the covering of these clients in 24k gold.   So, we'll leave the article now except to note that it also has a link to the ever clear headed Mark Hulbert and his Bullishness rising faster than gold.  Read it.  Gold is not the risk/reward proposition it was a few weeks ago as it has raced to over bought levels in quick time.  But that's how the barbarous relic rolls when it breaks out.  From Hulbert:

"Unfortunately, there’s some bad news to accompany the good: Gold timers have reacted to bullion’s recent strength by eagerly and enthusiastically jumping on the bullish bandwagon."

We anticipated this in the newsletter, gave parameters for over bought upside and for a potential reaction to correct the over eagerness.  A downside reaction, if indeed it comes about could be an ideal spot for traders of the metal to initiate new positions.  Holders of the metal should have taken long term positions long ago and should calmly sleep through any near term turbulence.

Back on theme, while there is talk about the gold standard by the Republicans, they are just blowing hot air and taking advantage of a hot button issue and relevant topic.  Don't hold your breath on a gold standard even if Romney/Ryan gain the White House.  You and I, as lowly market participants and economic survivalists need to read between the lines in a functional way.

Gold is fine, as a standard or not.  As long as it remains an asset class as opposed to official money, it will be subject to market forces and the macro manipulations of current power holders.  These manipulations can constrain the metal as Operation Twist has played a roll in doing for a year now.  They can also launch the metal to higher levels, when the manipulation is toward increased money supply.

Sign up for Notes From the Rabbit Hole (NFTRH) to effectively manage the process if you would like an effective source of market intelligence to track the progress of gold as well as the bigger picture macro landscape.  Or simply watch the blog and/or check out the free eLetter for a lighter and less formal version of the analysis.


Gary Tanashian

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2 thoughts on “"Political, Economic Potholes Along the Yellow Brick Road"

  1. Ron Paul said in his book, "The Case For Gold," With a gold standard, the Fed could disappear. The banking industry would become an industry like any other, subject to the profit and loss test and given no guaranteed bailouts at taxpayer expense.
    The financial industry would be forced to surrender its love of socialism and become honest again. We would all start living within our means and thriving off private wealth rather than depending on the public sector to save us."

    1. The financial industry has been the first beneficiary of created money for over 40 years now. What has that gotten us but $200 trillion in debt and hugely bloated zombie banks that won't lend. Let the free markets decide where the money goes for a change. I bet that our economy becomes more diversified and efficient. dThe greatest period of growth in our history was before the fed was enacted. The ups/downs of credit are a function of the fractional reserve system more than any restraints place on it by gold. With a gold standard the manipulations are not stopped but sure as hell restrained more so than no standard at all.

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