Former Fed chief weighs in on bullion’s “universal acceptability”
As if the geopolitical situation across the globe weren’t volatile enough, the massive demonstrations in Hong Kong have only added fuel to the fire.
“Make no mistake, if China starts to slide into chaos, the gold price will go wild,” ADVFN.com chief Clem Chambers wrote at Forbes.
There’s “a safe-haven play starting to develop, and obviously that stretches not just sort of what’s happening in the Middle East, in Russia, but also obviously what’s happening in Asia at the moment, particularly in Hong Kong,” agreed Ayers Alliance Securities exec Jonathan Barratt in a Sept. 29 Bloomberg interview.
In the short term, the Hong Kong unrest could dampen buying during this week’s gold-focused National Day holiday, but “the physical demand for the metal is still there,” Barratt argued.
Greenspan sings gold’s praises: And demand is apparently there at the sovereign level, so much so that Ayn Rand acolyte and former Federal Reserve chief Alan Greenspan weighed in on the issue in an article in Foreign Affairs, the main journal of the Council on Foreign Relations.
“If China were to convert a relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system,” he wrote. Greenspan sounded skeptical about how far China will go in implementing some form of a gold standard, but at least in the short term, “for the rest of the world, gold prices would certainly rise.”
Fiat cash pales versus gold: Despite Greenspan’s assumption that a new gold standard isn’t forthcoming, he acknowledged gold’s role as the ultimate currency. “Gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close. Today, the acceptance of fiat money -- currency not backed by an asset of intrinsic value -- rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold.
No barbarous relic: “If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute. … If, in the words of the British economist John Maynard Keynes, gold were a ‘barbarous relic,’ central banks around the world would not have so much.”
Greenspan downplayed the likelihood of China surpassing the U.S. as a dominant power, sayings its authoritarian nature would hamper the innovation needed to achieve technological superiority. But perhaps Greenspan hasn’t seen the numerous reports predicting that China is on course to top America, maybe even as early as 2024.
“More than the U.S.” is goal: And maybe Greenspan missed recent articles written by China Gold Association President Song Xin and published on Sina Finance. Koos Jansen, a writer for In Gold We Trust and Bullion Star, brought Song’s work to light.
“In this view, our gold reserves are very low, both in terms of a nominal level as well as a percentage of official reserves,” Song wrote. “That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the U.S.”
As strategic a resource as oil: And Song’s predecessor at the gold association, Sun Zhaoxue, wrote these words in 2012: “The state will need to elevate gold to an equal strategic resource as oil.
“Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the U.S., which stores 74% of global official gold reserves, to put down other currencies and maintain the U.S. dollar hegemony. … Individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security.”
Gold investors would be wise to keep watching the crisis in China unfold and what China is doing with its currency and gold reserves. Alan Greenspan certainly is, at least to some degree.
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