Saturday, February 20, 2010

Gold as a Global Real Store of Wealth

1. Alan Greenspan, 'Gold and Economic Freedom' (1966)
"In the absence of a gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good and thereafter decline to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as claims on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to be able to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

2. A Note on Government Gold Policies

"Governments can achieve a welfare gain roughly equal to that from an immediate sale through alternative policies. One such policy is specified in the bottom panel of Chart 5. Under this alternative policy, governments loan out all their remaining gold in each period. In the future when all gold now owned by private agents, whether above or below ground, has been used up, governments sell in every period whatever gold is necessary to make the price be what it would have been if they had sold all their gold immediately. The quantities of gold available for private uses are the same under the alternative policy as with an immediate sale. However, there is an important difference: under the alternative policy, governments relinquish title to their gold in the future and then only gradually. Therefore, to the extent that government uses can be satisfied by owning gold but not physically possessing it, most if not all of the gains associated with maximizing welfare from private uses can be obtained with little or no reduction in welfare from government uses until sometime in the future."

Please read the entire PDF for far more information. This is but one of quite a few government and Fed papers that may be quite revealing.3. More from the United States Federal Reserve:

4. Greenspan's admission is still posted at the Fed's Internet site:

5. Barrick's confession posted at GATA's Internet site:

6. Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.

There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." White's speech is posted at GATA's Internet site:

more at

7. The paper from University of Albany professors Faugère and Van Erlach "The price of gold: a global required yield theory" . The authors observe that gold is priced to yield a constant after-tax real return related to long-term productivity as defined by real long-term GDP/capita growth.

We construct a gold valuation theory based on viewing gold as a global real store of wealth. We show that the real price of gold varies inversely to the stock market P/E and thus is a direct function of a global yield required to achieve a constant real after-tax return equal to long-term global real GDP per-capita growth. We introduce a new exchange rate parity rule based on the equalization of inverse stock market P/Es (required yields) across nations. Foreign exchange affects the price of gold to the extent that required yields and Purchasing Power Parity equalizations do not take place across nations in the short run. A quarterly valuation model is constructed using concurrent economic data that is within 12% mean percentage tracking error from real U.S. gold prices from 1979– 2002. Several major world events have had a large but fleeting impact on gold prices.

In the long run, the gold mining industry’s real profit margin is constant and equals the real per capita productivity. The price of gold, on average, must be the average production cost plus a constant mark-up. Furthermore, in order for the real value of gold to be maintained on a per investor basis, the stock of gold has to grow at a rate that can be no greater than population growth in the long-term. If the supply of gold grew at a lesser rate than population growth for reasons other than depletion of the exhaustible ore, gold price would grow faster than inflation and the quantity demanded for gold would drop. Eventually the supply of mined gold will dwindle, which will drive prices up unless world population experiences zero growth in the foreseeable future. In that circumstance, far off in the future, a substitute medium of storing value may be discovered and used.

Another prediction of our theory of gold pricing is that the decrease in proportion of gold total value as compared to world wealth is explained by RYT in the fact that relative to financial assets, the long-term nominal value of gold must increase at the inflation rate, whereas the value of other assets rise with inflation plus real productivity
. Thus, the proportion of investable wealth declines at an annual rate equal to real per share earnings growth or GDP/capita growth.

Full paper by Faugère

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