Gold Market on U.S. Elections: 'So What?'
For those of us who recognize the complicity of both Republicans and Democrats in our economic calamity, it has been satisfying to see the party establishments of each pummeled this election season. But as far as averting the currency crisis I describe in The Dollar Meltdown, the gold market says it's too little, too late.
It's no surprise that politicians hear only what they want to hear, but the Democrats take a new world indoor record for tone-deafness into the election. As the year opened with real unemployment at double-digit levels, all the President and the Democrat establishment could think about was passing Obamacare. They may be proud that they stayed on message, never mind that for most people a health care plan starts with a job and some savings.
With polls suggesting Republicans are set to re-take the House, it looks like the Democrats have a glass jaw to go along with that tin ear. And while scattered tea party victories gave the Republican establishment the thrashing it so richly deserved, the bad news is that none of it matters to our financial prospects. At least that's the message from the gold market.
Who can disagree? Unless you think that Republicans will want to go into the next election cycle having taken on Social Security, Medicare, Medicaid and other entitlements, there is not much hope that they will do anything meaningful about fiscal policy. Announced on September 23, the Republican Pledge to America promised to save "at least $100 billion in the first year alone." $100 billion a year? They can't be serious. By the end of September, just a week later, the federal debt had already grown by another $100 billion. Of course Republicans will tinker with the hated Obamacare just enough to deliver up some form of Boehner-care. Sorry, but the chance to earn lobbyist affection and future campaign contributions trumps any thoughts about simply facing up to federal insolvency and getting government out of health care.
Some real money could be saved rolling back the American empire. Congressman Ron Paul and others calculate total war and foreign spending at about $1 trillion a year. In this context, a return of the Republicans reminds us of Talleyrand's comment on the Bourbon dynasty that returned to the throne of France after the abdication of Napoleon: They "had learned nothing and forgotten nothing." Republicans seemed to have learned nothing and forgotten everything. Betraying a hubris not seen since Bush set off to "rid the world of evil," the pledge from November's likely winners includes "bringing certainty to an uncertain world." Republicans do take their military Keynesianism seriously. Just months ago Republican congressmen came together to support President Obama's surge in Afghanistan with a $59 billion emergency spending bill. Now they are campaigning about a "robust defense," one category of spending that even the new members from the tea parties aren't inclined to resist.
On the monetary front, Federal Reserve officials, having forgotten at least the French Revolution and probably the 1970's as well, are counting on inflation to kick start economic growth. Money printing is the Fed's old-time religion, but at least they are going to the trouble of bottling it under new names: liquidity operations, deficit accommodating, and quantitative easing. When chairman Bernanke said something euphemistic last week about "additional purchases," gold shot up again, joined by silver and oil. And the dollar moved decisively lower. It's now down 12 percent since June, resuming its long-term slide. Markets are said to be pretty good at discounting future events. Haven't they heard that the fiscal conservatives will re-take Washington?
It is clear that the rest of the world is similarly unimpressed by Fed euphemisms or the dollar's prospects, no matter who wins. Like the picnic ramada at the park where people take cover for a while when it begins to rain, investors take cover with the dollar briefly during a crisis. They did so in the 2008 mortgage meltdown and again during the Euro debt crisis. But like a ramada, nobody wants to live there. Or wait out a really bad storm.
Where does one weather a currency crisis? Take a look around. Reuters reported this week on a Swiss private banker who handles clients with at least $50 million to invest that they are buying gold, sometimes by the ton, and moving it out of the financial system. According to the Financial Times, JPMorgan, having recently built a vault in Singapore, has reopened an underground gold vault in New York, while Deutsche Bank and Barclays may be opening new vaults in London. India illustrates the trend: investment demand in India has grown to 92.5 tons in the first six months of this year, compared to 25.4 tons a year earlier; this time last year India's central bank lightened its dollar reserves substantially, taking down 200 tons of gold in one move. They aren't alone. Central banks around the world, long net sellers of gold reserves, have become buyers, among them China and Russia. Gold keeps making new all-time highs. And it doesn't seem to care about the Republican's prospects this fall.
October 16, 2010
Charles Goyette [send him mail] is the author of the New York Times bestseller The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments.
Copyright © 2010 Charles Goyette