Gold makes folks crazy

Considering the world has been on a de facto oil standard since 1973 and Venezuela now seems to have more oil than even Saudi Arabia, one wonders why Hugo Chavez wants to play with his country's rather large pile of gold.  I suppose he has seen what has happened to the stores of wealth held by Iraq and now Libya and does not want something like that to happen to him.

In any case, he sure is driving the gold bugs crazy.

What is so interesting about the gold market is that folks who believe that "fiat currencies" are essentially worthless so want at least some of their portfolio in gold, have not always taken possession of the gold but have settled for paper promises that the gold in some bank vault is theirs.  Now these suckers are discovering that the folks who sold them the paper don't actually have the gold either--or not as much as they have claimed.

Chavez to nationalize Venezuelan gold industry

By Louise Egan
CARACAS | Wed Aug 17, 2011 2:38pm EDT
(Reuters) - Venezuelan President Hugo Chavez said on Wednesday he will nationalize the gold industry, including extraction and processing, and use its output to boost the country's international reserves. 

The move follows a dispute between his government and foreign miners who say the rules limiting the amount of gold that can be exported from the South American nation hurt their efforts to secure financing and create jobs. 

Toronto-listed Rusoro, owned by Russia's Agapov family, is the only large gold miner operating in Venezuela. It produced 100,000 ounces last year. 

The gold industry will be just the latest part of the economy to be put under state control by the socialist leader, who said he would issue the necessary decree in the coming days and called on the military to help control the sector. 

"I have here the laws allowing the state to exploit gold and all related activities ... we are going to nationalize the gold and we are going to convert it, among other things, into international reserves because gold continues to increase in value," Chavez said in a phone call to state television. more

Venezuelan President Hugo Chavez Sends Precious Metal ETFs A Wakeup Call 
August 17th, 2011 

OK. Let the fun begin! Today Venezuelan President Hugo Chavez announced that it planned to nationalize his countries gold mining industry in an attempt to increase its international reserves. This is not an unprecedented move. He has already nationalized the banking industry, telecommunication companies, the oil fields, the producers of power for the country and millions of acres of farm land. President Chavez said that the nationalization of the gold industry was to protect the people of Venezuela from having their gold fall into the hands of the mafia and smugglers. 

It was reported in The Wall Street Journal that Mr. Chavez said “we don’t only have oil wealth; we also have one of the largest reserves of gold in the world so we might as well convert it into our international reserves because gold is increasing in value.” 

President Chavez also released documents showing that he plans to transfer billions of dollars in cash reserves held abroad to banks in China, Russia and Brazil. The documents also showed that he planned to move 211 tons of gold it has stored abroad and values at 11 billion to the Central bank in Caracas, where the government keeps its remaining 154 tons of bullion. 

While Venezuela is a relatively minor player on the world stage, this could be a big game changer here in the United States because one of the banks that holds 10.6 tons of Venezuela’s gold is none other than JP Morgan. In a recent audit of JP Morgan’s holdings it was reported that they held 338,303 ounces of gold or roughly 10.6 tons. While this is a modest size deposit it is sure to cause some jitters at JP Morgan as they scramble to find the replacement gold which has already been pledged about 100 times across various paper markets to ETF’s like the SPDR Gold ETF (NYSE:GLD). Oddly I had a conversation with one of my readers yesterday about his concerns of holding ETF’s that “lease” the gold that he purports to own. I will certainly be keeping an eye on gold in the illiquid after market and pre market. The long overdue scramble for delivery may be about to begin. “What you do in the Dark, You See in the Light.” more

I am not a big fan of Simon Johnson because anyone who was ever considered "reliable" by the IMF (and he once worked for them) should probably be treated with great suspicion by the rest of us.  However, Johnson makes an interesting point that the current economic mess has more in common with the various catastrophes of the late 19th century than with the Great Depression.

The triggering event of those economic disasters was the move in 1873 to put the USA back on the gold standard following the Civil War monetary policies that gave us Lincoln's Greenbacks.  It was called "The Crime of 73" here in the Midwest and the effects on agriculture were staggering.  I have spent much of my adult life chasing this topic.  I have written twice about it on this blog (here and here) and because these economic conditions heavily influenced the thinking of my favorite political economist Thorstein Veblen, I'd like to think have this topic pretty much covered.

So do I agree with Johnson?  Of course, there were many differences between the Crime of 1873, and the oil shocks and resulting economic changes of 1973.  So the economic outcomes are dissimilar but Johnson is right about something very important--in both cases the economic catastrophes were triggered by stupid levels of greed in the money centers and the pain was mostly felt in the periphery.  Here in the Midwest, Wall Street was considered a colonial master and we were living in the "internal empire."

Johnson gets a few things wrong.  For example he writes that "the rising populists are from the right of the political spectrum" are insisting on hard monetary policies if not the outright return to the gold standard.  Fact: the historical Populists were members of the People's Party that was organized in 1892 and they were most definitely against the gold standard.  It was their top issue.  So calling someone in favor of the gold standard a "populist" is a taxonomic error at best.  (I hate when people do that and Johnson is not alone.)

A Second Great Depression, or Worse? 

By SIMON JOHNSON   August 18, 2011, 5:00 AM 

With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?

The easy answer is “no” — the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction. 

The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007. 

[snip] 

But the experience at the end of the 19th century was also quite different from the 1930s — not as horrendous, yet very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but rather agriculture — a different play on real estate. 

There were booming new technologies in that day, including the stories we know well about the rapid development of transportation, telephones, electricity and steel. But falling agricultural prices kept getting in the way for many Americans. With large debt burdens, farmers were vulnerable to deflation (a lower price level in general or just for their products). And before the big migration into cities, farmers were a mainstay of consumption. 

According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record, according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than five years of economic decline. 

In this context, it is quite striking — and deeply alarming — to hear a prominent Republican presidential candidate attack Ben Bernanke, the Federal Reserve chairman, for his efforts to prevent deflation. 

Specifically, Gov. Rick Perry of Texas said earlier this week, referring to Mr. Bernanke: “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — er, treasonous, in my opinion.” 

In the 19th century the agricultural sector, particularly in the West, favored higher prices and effectively looser monetary policy. This was the background for William Jennings Bryan’s famous “Cross of Gold” speech in 1896; the “gold” to which he referred was the gold standard, the bastion of hard money — and tendency toward deflation — favored by the East Coast financial establishment. 

Populism in the 19th century was, broadly speaking, from the left. But now the rising populists are from the right of the political spectrum, and they seem intent on intimidating monetary policy makers into inaction. We see this push both on the campaign trail and on Capitol Hill — for example, in interactions between the House Financial Services Committee, where Representative Ron Paul of Texas is chairman of the monetary policy subcommittee, and the Federal Reserve. more