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Gold: worth its weight?

4th December 2014

A decade ago, when Alan Greenspan was chairman of the mighty Federal Reserve, he was infamous for delivering ambiguous, Delphic speeches that nobody could understand. No longer. I recently had a chance to interview Greenspan, 88, at the Council of Foreign Relations, regarding an updated version of his latest book.
These days the retired Greenspan speaks so clearly that some of his words are still ricocheting around the blogosphere. For what he revealed on the CFR platform was that he harbours considerable doubts about whether recent western monetary policy experiments have actually helped economic growth. He also fears that such experiments have been so wild that it will be very hard to exit from these policies in the future – in the US or anywhere else – without sparking huge market volatility. Indeed, Greenspan is so worried about future turbulence that he apparently sympathises with investors (and central banks) who are currently stocking up on gold.
‘Why do central banks put money into an asset which has no rate of return, but (has) cost of storage and insurance and everything else like that? Why are they doing that?’ he asked rhetorically – before offering his own explanation. ‘Gold is a currency. It is still, by all evidence, a premier currency. No fait currency, including the dollar, can match it.’
Now, by many standards, this is a remarkable comment. In his youth Greenspan was fascinated by gold (not least because he also liked the writings of Ayn Rand, the libertarian). But for much of his career as chairman of the Fed, he was charged with defending the value of fiat currencies (to use the technical word for money backed by promises from a central bank, rather than a gold standard). So it is striking – if not counter-intuitive – that he now considers gold a viable currency, let alone an attractive investment bet. This is a bit like a (retired) turkey giving a treatise on the value of Christmas.
Unsurprisingly, Greenspan’s comments have sparked considerable scorn from some of his former and current colleagues in the western central bank world. As one pointed out to me this week, Greenspan did not actually cover himself in glory during the great financial crisis. ’If you had followed Greenspan’s advice, you would have lost money this year,’ another tartly remarked, pointing out that if you look at recent gold price trends there doesn’t not seem to be a crisis of confidence in fiat currency at all. (The gold price has tumbled sharply this year, even as the Federal Reserve has rowed back from quantitative easing.)
But though Greenspan’s comments might make other central bankers wince, it would be foolish to ignore them. For whatever you think of his track record, I suspect that his current views on monetary policy – and gold – capture the sentiments of many ordinary investors pretty accurately; indeed more accurately than any of the official statements emanating from the current crop of central bank governors.
Take a look, for example, at Switzerland. Later this month the Swiss are due to vote on a referendum about whether the country’s central bank should repatriate all of its overseas gold holdings and significantly increase its ownership of the commodity. Until recently, it was widely assumed that the idea would be shot down (not least because the Swiss National Bank is vehemently opposed). But recent polls indicate that almost half the population supports the idea, suggesting it could possibly be passed.
Meanwhile, on the other side of the Atlantic, the recent midterm elections have strengthened the Republican party and cast a new spotlight on key figures such as Rand Paul, the Republican senator. Paul has made it clear that he favours greater use of gold; and this – coupled with the looming Swiss vote – has set the community of gold bugs buzzing with new vigour.
Why? Economics undoubtedly explains some of the allure. As Greenspan himself points out, the sheer scale of recent monetary policy experiments has raised concerns about a future outbreak of inflation (which typically raises the relative value of gold). Politics is also important: the right wing in America (and, to a lesser extent, Europe) is so vehemently distrustful of government that they want to break any bureaucratic control over currency.
But there is a third, more subtle psychological issue as well. Most ordinary people have no idea what central banks are really doing, with their trillion-dollar experiments. They are unnerved about how money works in a bottomless cyber space. But the beauty of gold is that it seems tangible, clear and finite. It also seems timeless, creating an impression of permanent, intrinsic value.
Of course, this image is – ironically – also an illusion. You cannot actually do anything practical with gold (as you can, say, with a lump of coal). Its value, like that of fiat currency, depends on social convention. But culture, as Greenspan now recognises, is a very powerful thing – especially in a world of finance that is rushing more deeply into ethereal cyber space every day.

Written by Gillian Tett, Columnist of the year on behalf of FT.COM/MAGAZINE

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