WHY GREENSPAN IS LONG GOLD AND DISSING FIAT CURRENCIES / SEEKING ALPHA

Why Greenspan Is Long Gold And Dissing Fiat Currencies

by: John Miller

Jan. 2, 2015 11:02 AM ET

Summary

• Greenspan says unwinding the Federal Reserve and ECB balance sheets will cause turmoil.
• Greenspan believes turmoil moves positively into the gold price because gold is the premiere currency.
• History points towards gold’s intrinsic monetary characteristics. Today’s central bankers share the belief that gold is money.

At the end of October, former Federal Reserve Chairman Alan Greenspan sat down for a breakfast debate at the Council on Foreign Relations. He spent considerable time describing the unprecedented size of central bank balance sheets and excess bank reserves. He argued maintaining these levels in the future would require the Federal Reserve to raise the interest paid on reserves. He somewhat ominously hinted that keeping these dollars out of circulation would be controlled by bank return demands rather than Fed policy initiative.

Greenspan also stressed the heightened and continuing fear level in the market. He described fear at its maximum and interest rate spreads at historic and unnatural levels during the crisis. This fear led investors to seek safety and shy away from longer-term investment. Taken as a whole, Greenspan seemed to imply that while QE was successful in flattening the risk curve, yields are now out of balance with actual risk premium preferences.

Taper Tantrum

Toward the end of the interview portion of the breakfast Greenspan was asked if central banks can normalize policy and unwind the unprecedented and unnatural situation described above. His answer was that it would be impossible without turmoil. As evidence for this turmoil he referenced the first tapering of QE. Laughing he said, "that first tapering discussion we got a very strong market response... remember tapering is still slowing the rate of increase, we are still increasing the balance sheets." Just the discussion of lowering the rate of increase of the balance sheet crashes the market.

Interesting, when the host asked about gold in this tumultuous environment Greenspan seemed happy she had opened this can of worms. He noted that turmoil always moved into the gold price and described gold as follows:

It is still by all evidences the premiere currency where no fiat currency, including the dollar, can match it.

and

But it's also got a monetary characteristic which is intrinsic. It's not inbred into human beings. I cannot conceive of any mechanism by which you could say that, but it behaves as though it is.

Greenspan shared a few anecdotal stories about gold's preeminence. He recounted how at the end of World War II, Germany could not import goods without payment in gold. "The person who shipped the goods in would accept the gold, and didn't care whether there was any credit standing -- associated with it. That is a very rare phenomenon."

With a rhetorical "why," Greenspan emphasized that we still see this rare phenomenon today. As evidence, he reflected on the recent passing of the fourth Central Bank Gold Agreement among the Europeans. The banks agreed: "Gold remains an important element of global monetary reserves; …they do not have any plans to sell significant amounts of gold."

As further proof of the value bankers place on gold, Greenspan gave the following take on Bretton Woods Conference: "…the ultimate test at the Mount Washington Hotel in 1944 of the real intellectual debate between the -- those who wanted to an international fiat currency which was embodied in John Maynard Keynes' construct of a banker, and he was there in 1944, holding forth with all of his prestige, but couldn't counter the fact that the United States dollar was convertible into gold and that was the major draw. Everyone wanted America's gold."

Take Advantage of the Turmoil Trade



To take advantage of the coming turmoil and its move into the gold price consider the SPDR Gold Trust ETF (NYSEARCA:GLD) and the Market Vectors Gold Miners (NGDX). Both offer diversification from more traditional equities, which are at historically elevated valuations. As a physically backed instrument, GLD offers direct exposure to movement in the gold price while removing the political, labor, and weather risks faced by the miners. The riskier GDX and its basket of miners, on the other hand, provides greater leverage to gold price moves; take for example a miner whose costs are $950 an ounce. A ten percent price move from $1000 to $1100 triples the miner's earnings. Both of these products are near multiyear lows providing an attractive entry point.