Monday, June 4, 2012

Jim Rickards and a Gold Audit

Jim Rickards has written a column about the benefits (and lack thereof) of performing an audit of the U.S. gold reserves.  I will begin with one of his conclusions:

Gold remains the 8,000 ton gorilla in the room; the thing that is too big to ignore but that no one wants to discuss. The international monetary system and the role of the dollar are in dire straits even if all of the gold is where it is supposed to be. It is not necessary to fantasize about phantom gold in order to see that a monetary crisis is imminent.

I agree with this.  Whether or not the United States has possession (both physically and contractually) of the gold it claims to have is somewhat irrelevant to the economic mess that the elite have driven the world into.  With or without this gold, there is continued difficulty ahead, and no lasting recovery without first a settling of the debt bubbles that have been created globally.  But this is somewhat beside the point, and Rickards throws out several strawman arguments and irrelevant points to convince the reader that there is no point to an audit.

Rickards points out that the critics of the Fed and U.S. Treasury use as evidence that the gold isn’t there the fact that these entities do not perform an audit.  What is there to fear of an audit if the gold is where it is supposed to be and legal documents support public claims.

He compares an audit of gold to the audit of acorns in the U.S. National Parks:

Gold was officially demonetized by the International Monetary Fund in 1973 not long after President Nixon ended the convertibility of dollars into gold in 1971. Since then gold has been continually disparaged as a monetary asset, most recently in the remarks of Federal Reserve Chairman Ben Bernanke that the possession of gold by the United States was a mere "tradition." If that were so, why would the United States audit something so unimportant? An audit suggests that gold is somehow meaningful and deserving of respect. The official position is that gold is a legacy asset of no particular importance. In this context, refusing an audit makes sense. An audit would give gold too much credit and start to erode the official propaganda that gold is not a monetary asset. After all, no one audits the number of acorns in the national parks--they are too unimportant.

In other words, auditing the gold would give gold “credibility,” and as we all know the money elite want the common people to believe that  gold is not credible as an asset – as Bernanke says, held merely for tradition.

This does not hold, and it does not hold based on Rickards’ own words.  He identifies the locations where the gold is stored:

Officially the U.S. Treasury is in possession of 8,133 metric tons of gold stored mostly in two large depositories--Ft. Knox, Ky. and West Point, N.Y.--with smaller amounts on deposit at the Denver Mint and the Federal Reserve Bank of New York.

The two main locations are military installations – seemingly a proper location to store such a valuable asset.  Not a proper location for storing acorns.  Someone in power must feel gold is a valuable thing to store.

He gives a second reason not to conduct an audit:

Another reason has to do with not calling attention to a host of ancillary questions. Assume the audit were conducted and everything was in good order, that the United States had the right number of ingots of 99.99 percent purity and everything was numbered and in its place. This would immediately lead to other questions. Is the gold leased? To whom? On what terms?

Again, this doesn’t hold water.  Aren’t these questions part and parcel to conduct an audit of ownership of assets?  Individuals conduct title searches when buying a home – it is not enough that the home exists at the claimed address; title must also be understood.

Some naively assume that if the gold is leased to commercial banks such as J.P. Morgan that the leasing bank backs up a truck and takes it away. That is not true. The gold can be leased in paper transactions without ever leaving Ft. Knox or West Point. The leased gold can then be rehypothecated by J.P. Morgan to other banks and so on until multiple parties all claim some title to the same physical gold. That gold goes on to support an even larger inverted pyramid of "paper gold" transactions in futures, options, forwards, swaps, and so-called unallocated storage. One reason not to do an audit is to avoid all of the awkward legal title questions that would arise once the physical existence issue was settled. The Treasury would rather ignore gold than open Pandora's Box.

What Rickards is describing here, almost in passing, is fraction reserve gold backed by the power of the Federal Reserve and U.S. Treasury.  The same system that has caused an unstable financial system is possibly being used with gold.  And this is treated almost as a non-event.

I have not heard anyone “naively assume” that J.P. Morgan backed up a truck and took away the gold.  If people “naively assume” this, why would they ever ask the question of conducting a title search on the ownership of the bars?

Of course, the Treasury wouldn’t want to open a Pandora’s box – but this suggests there is a Pandora’s box to open.  It is precisely for those nagging “awkward legal title questions” that one audits not just the physical asset, but also the paper trail.

Rickards’ final conclusion is also off the mark:

The Fed and Treasury refusal to audit gold is part of their painstaking effort to deny that gold is still at the heart of the system. No more elaborate explanation is required.

But even Rickards has made a more elaborate explanation – his concern that an audit would lead to questions about title – and that this nuisance would be too much bother for the Treasury.

Rickards has some purpose in writing this editorial.  He has gained some credibility in the gold crowd and the conspiracy theory crowd.  He regularly appears on King World News, alongside advocates for gold and sound money, and critics of the current monetary schemes.  Perhaps one of his roles is to move the dialogue of these groups in a certain manner.   I believe all he will achieve is losing the credibility he has built with these groups.

However, I revert to the first part of Rickards’ conclusion, cited above.  Whether the gold is there or not is somewhat secondary.  The world generally and the U.S. specifically is in deep trouble economically.  That the gold is or isn’t physically and legally where the Treasury says it is will not change this fact. 

Where Rickards’ is wrong is that he doesn’t look beyond this.  Rickards himself claims that the replacement for the current dollar-based global monetary standard will include some component of gold.  To the extent he believes this, it would be beneficial if the gold was where the Treasury said it was.  Then again, as long as the gold is physically at Fort Knox and West Point…well, possession is nine-tenths, and all that.

It would be far more beneficial if the gold was in the pockets of average Americans, but I am quite certain that J.P. Morgan didn’t pull up their truck full of U.S. Government gold into my driveway.

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