Gold Befuddles Bernanke as Central Banks’ Losses at $545 Billion
Posted: October 7, 2013 Filed under: Bernanke, Central Banks, Forecasts, Gold, Inflation | Tags: Ben Bernanke, Bernanke, Central bank, Central Banks, Golb, Inflation 1 CommentBen Bernanke, the world’s most-powerful central banker, says he doesn’t understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011.
Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.”
Ben S. Bernanke, the world’s most- powerful central banker, says he doesn’t understand gold prices.If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011. Photographer: Dario Pignatelli/Bloomberg
Central banks, which own 18 percent of all the gold ever mined, will add as much as 350 tons valued at about $15 billion this year, the London-based World Gold Council estimates. Photographer: Scott Eells/Bloomberg
Central banks, which own 18 percent of all the gold ever mined, will add as much as 350 tons valued at about $15 billion this year, the London-based World Gold Council estimates. They purchased 535 tons in 2012, the most since 1964. Russia is the biggest buyer, expanding reserves by 20 percent since prices reached a record $1,921.15 an ounce in September 2011. Gold slumped 31 percent since then.
As policy makers were buying, investors were losing faith in the metal as a store of value. The value of exchange-traded products dropped by $60.4 billion, or 43 percent, this year, saddling hedge fund manager John Paulson with losses, according to data compiled by Bloomberg. Billionaire investorGeorge Soros sold his holdings in the biggest gold-backed ETP this year and mining companies wrote down the values of their assets by at least $26 billion.
Worst Drop
Gold, which entered a bear market in April, slid 21 percent to $1,316.28 in London this year on Oct. 4, set for the biggest drop since 1981. It rose sixfold as it rallied for 12 successive years through 2012, beating a 17 percent gain in the MSCI All-Country World Index of equities as the Standard & Poor’s GSCI gauge of commodities more than doubled. It’s this year’s third-worst performing raw material, after corn and silver. Gold today fell to $1,310.33 an ounce.
Policy makers, who are responsible for shielding their economies from inflation, often mistime gold investment decisions, buying high and selling low. They were reducing holdings when bullion reached a 20-year low in 1999 and as prices as much as quadrupled in the next nine years. Central bankers became net buyers just before the peak in 2011.
“Central bankers have typically bought when you probably should be selling and selling when you probably should be buying,” said Michael Strauss, who helps oversee about $25 billion of assets as chief investment strategist and chief economist at Commonfund Group in Wilton, Connecticut. “It’s going to be a difficult market and sometimes the price of gold is driven by emotions rather than fundamental factors. Central banks have been bad traders of gold.”
Policy Makers
Holdings were little changed from the start of 2008 through early 2009. Then, policy makers increased gold reserves as prices doubled and they have purchased a net 884 tons since the 2011 peak, International Monetary Fund data show. Russia was the biggest buyer, adding about 171 tons. Kazakhstan bought 67.2 tons and South Korea purchased 65 tons. Turkey’s reserves swelled about 371 tons in the past two years as it accepted bullion in reserve requirements from commercial banks.
In addition to buying when prices rose, central banks sold into slumping markets, disposing of about 5,899 tons in the two decades from 1988, equal to about two years of current mine supply.
The U.K. auctioned about 395 tons from July 1999, a month before prices reached a two-decade low, through March 2002. Gold averaged about $277 as the country was selling. The Bank of England’s hoard of ingots and coins, including a bar smelted in New York in 1916, now totals 310.3 tons, or 13 percent of the nation’s total reserves.
Gold Standard
Warren Buffett, the fourth-richest person in the Bloomberg Billionaires Index and the world’s most successful investor, has said the metal has no utility because it moves to vaults once mined. While countries from the U.S. to the U.K. adopted a gold standard by the 19th century to limit inflation, no central bank or government institution links currencies directly to the metal anymore. The Fed, created a century ago, cut the dollar’s ties to gold four decades ago.
Bernanke, when asked to explain gold’s volatility and the long-term impact of reducing economic stimulus, told the Senate Banking Committee July 18 that investors see a reduced need for “disaster insurance.” In a Congressional hearing two years ago, he described the commodity as an asset rather than money and said central banks own bullion as a “long-term tradition.”
Following that tradition has proved a poor investment decision. Kazakhstan almost doubled reserves the past two years and South Korea expanded them sevenfold since mid-2011.
“Bernanke was suggesting in his own way that too much importance is given to gold, it’s too hyped,” said Nouriel Roubini, professor of economics and international business at New York University. “Gold is not a currency.”
Inflation Hedge
Bullion rose 70 percent from December 2008 to June 2011 as the Fed debased the dollar by pumping more than $2 trillion into the financial system, spurring demand for a hedge against inflation. That protection hasn’t been needed, because U.S. consumer prices have risen at an
average annual pace of 1.7 percent in the past five years, compared with a four-decade average of 4.3 percent, Bureau of Labor Statistics data show.
After taking inflation into account, gold is worth almost half of what it was in 1980. It reached a then-record $850 that year after U.S. political and financial turmoil in the late 1970s caused a surge in consumer prices. The metal is valued at $464 in 1980 dollars, according to a calculator on the website of the Fed Bank of Minneapolis.
Price Forecasts
The most accurate analysts say the bear market will deepen. Goldman Sachs Group Inc. andSociete Generale SA correctly forecast this year’s rout. New York-based Goldman says prices will drop to $1,110 in 12 months and Societe Generale, in Paris, sees an average of $1,125 in 2014. Prices will average $1,300 in the fourth quarter, the lowest in three years, according to the median of 12 analyst estimates compiled by Bloomberg.
Central banks bought metal as the Fed’s balance sheet swelled fourfold since 2008 and policy makers around the world lowered interest rates to record low levels. Greece, Ireland, Portugal, Spain and Cyprus needed bailouts since the European debt crisis erupted four years ago, sparking concern that nations would be forced out of the euro.
“There was a widely-circulated belief that the euro as a currency will cease existing,” said Michael Aronstein, the president of Marketfield Asset Management LLC in New York, whose MainStay Marketfield Fund beat 97 percent of its peers in the past five years. “A lot of foreign central banks thought they cannot keep the euro and did not want to increase dollars. It was desperation and fear that drove the surge in demand.”
Bernanke The Return Of The U.S. To The Gold Standard
Posted: April 1, 2013 Filed under: Bernanke, Central Banks, Forecasts, Gold | Tags: April Fools Day, Ben Bernanke, Bernanke, Chairman, Federal Reserve System, Gold Standard, Great Depression, United States 1 Commenthere is the headline for Gold Bugs and Conspiracy Advocates –
it is not the position of THE AMP
Bernanke Announces Return To Gold Standard
For years, investors and analysts have heavily criticized the actions of Federal Reserve Chairman Ben Bernanke. Bernanke has earned himself a slew of nicknames for his money printing, with the most popular being “Helicopter Ben.” After studying the Great Depression for many years, Bernanke felt that the reason the U.S. slipped into such a rough patch was because of the lack of money supply in the economy. This is one of the main reasons that he has maintained his quantitative easing programs that have involved exorbitant money printing.
But after pumping trillions into the system, Bernanke seems to have found himself cornered. National debt is at an all time high, and the Chairman has decided that a bold and abrupt change is needed if the U.S. wants to continue on the path to prosperity. Late yesterday, Bernanke made the shocking announcement of the return to the gold standard, which was abandoned decades ago. “The safest way for the economy to proceed is through a new system that holds more accountability for the U.S. dollar and its value in the global markets,” Bernanke said in his statement [for more gold news and analysis subscribe to our free newsletter].
The Gold Standard
In something of a mea culpa moment, the Chairman admitted that while his increased money supply has done well to prop up markets for the time being, it is not a sustainable solution. The reversion to the gold standard, he hopes, will allow the economy to march forward in a more stable manner. “The flexibility of a fiat currency has guided the U.S. through the toughest era since the Great Depression, but the time has come for a change,” said Bernanke.
The move comes after a wave of fears sparked by the Cyrpus banking scare. At a time when investors have little to no confidence in their local bank, the Chairman wanted to ensure that savings and investments will always be safe on American soil, hopefully giving citizens peace of mind to continue to trust local financial entities [see also 50 Ways To Invest In Gold].
One important thing to note is that the timeline for the return will be relatively drawn out and smooth. The Fed mandates that by 2015 all currency must be backed by at least 30% of its value in gold. That figure will increase to 50% by 2017 and to 100% by 2020. The move brings up a number of big questions, like whether or not the Fed will audit For Knox or other institutions that conspiracy theorists have been attacking for years. For now, we will have to wait for more specifics, but investors can already begin preparing.
Prepping for a Gold Standard
With a hard seven-year timeline, investors can already begin allocating to gold as this move will surely spark interest in the commodity. Some may choose to utilize stocks and ETFs, but physical bullion will likely be the most popular, as this will likely spark fears of a gold confiscation in order for the Fed to have enough bullion to justify the move. While a confiscation is extremely unlikely, there are those who still fear such a move.
The final question that remains to be seen is what happens in 2014 when Bernanke’s term ends. The Chairman has already hinted that another term is likely not in the books for him, so what will happen when someone else takes the reigns? Hopefully the change will be relatively seamless, but it will be worth keeping an eye on [see also Investing In Gold: The Definitive Guide].
The Bottom Line
With such monumental news coming seemingly out of nowhere, there is something that investors need to keep in mind. Today is April 1st April Fools day. Let’s be honest, Bernanke is going to print money until the U.S. runs out of ink. But for a few paragraphs, it was fun to live in the fantasy world of a gold standard reversion. Happy April Fools Day to all, feel free to get your friends and co-workers with this article!
A More Rational Way to Profit From Gold: