Figuring out the Real Importance of Gold

Gold remains in high demand among individual investors, hedge funds, and central banks all swapping cash for the yellow metal. This past weekend, an FT reportage looked into what the latest money flows into gold can tell us about it’s real importance.

Among others, the Financial Times spoke with Texas Republican Congressman Ron Paul:

“’We were in a financial crisis and inflation was high,’ Paul recalls. ‘But the Federal Reserve wasn’t interested. I remember Paul Volcker [then president of the Federal Reserve] walking into a room in 1980 – at the height of the financial crisis, when gold went up to more than $800 per ounce – and saying, “What’s the price of gold?”’ According to Paul, ‘Everyone knows a high gold price is a vote of no-confidence in paper. That is why governments will manipulate and try to give you an artificial price for gold.’

“In his book Gold, Peace and Prosperity, Paul decries the end of the gold standard – the practice of backing currencies with a fixed weighting in the metal, which took many forms through history. President Nixon brought an end to the gold standard in 1971, as part of his attempt to overcome the strain of funding the Vietnam war and the US’s mounting trade deficit. Paul thinks the system of fiat money facilitates ‘governments’ attempts to inflate, control the economy, run up deficits and fight senseless wars’. He worries, too, that both the supply of paper money and government debt levels are spiralling out of control.

“‘My beef is with the paper money,’ he says. ‘All the problems we’re having today were destined to happen. Gold plays an important role in the monetary system because it restrains government spending.’ Without it, Paul argues, central banks have the power to print money without pausing to consider the consequences, and more impetus to spend it.”

Also, according to the FT’s discussion with Ken Rogoff, Harvard professor and former head researcher at the IMF, “we are witnessing an international scramble for gold.” The shifts we’re beginning to see in central bank gold holdings could be one of the most clear signs of economic strength that China and India are displaying relative to the US and other developed nations.You can read more details in a Financial Times reportage on the true value of gold.


Rocky Vega,
The Daily Reckoning