Mass Monetary Confusion... An Odd Tradition
In 2011, Texas Congressman Ron Paul had the gall to ask then Federal Reserve Chairman Ben Bernanke: “Do you think gold is money?”
Bernanke had even more gall to answer, “No” – prompting Paul to ask: “Why do central banks hold it?”
Bernanke’s answer of course was not very impressive. He claimed that banks hold gold out of tradition.
That’s odd… Tradition?
At last count, the New York Federal Reserve held 500,000+ gold bars, weighing over 6,000 tonnes. This vault sits 80 feet below street level in Manhattan. That makes it some of the most valuable real estate on the planet, guarded 24/7 by armed men, and arguably the most impenetrable banks ever constructed.
Bernanke would have us believe the Federal Reserve goes to all of this trouble out of tradition?
The real answer is that central banks hold gold for the same reasons anyone might want to: it’s one of the few highly liquid financial assets with no counterparty risk. Even US Treasury securities have counterparty risk.
And ironically, at the same time Bernanke claimed “tradition” as the reason gold is held by central banks, the very same central banks were ironing out the details of Basel III – a set of new international banking rules that center gold as a tier 1 asset.
Basel III is supposed to be 100% finalized this July (though that deadline may slide a bit) – and basically ever since Bernanke dissembled to Ron Paul back in 2011, central banks have been gobbling up gold.
It’s a good reminder to pay attention not to what politicians, bankers or celebrities say – but rather to focus on what they do.
Central bankers know that if they come right out and announce that gold is money and that you should probably own some, that they’ll send the price soaring much faster than they prefer, shaking the confidence in their fiat currencies.
They’re not buying gold out of tradition, anymore than you and I put gasoline in our cars out of tradition. They’re buying it because they know gold is real money and that only gold is the base of any monetary system. Anything else is obfuscation.
It's every man for themselves now. Central banks are still buying gold hand over fist.
And while we’ve seen gold stocks start to pick up speed, they’re still lagging far behind.
It’s a great time to be a gold investor…
Best,
Garrett Goggin, CFA
Chief Analyst & Founder, Golden Portfolio