Monday, May 2, 2016

"The New Case for Gold" by James Rickards

Review by Robert Wenzel

James Rickards is the most intense, most focused watcher of the Federal Reserve on the planet, so it is always exciting to see a new Rickards book out.

The New Case for Gold does not disappoint. He fills it with information and inside scoops that any investor, economist or policy wonk will appreciate.

For starters, he points out that John Maynard Keynes did not say that gold is a barbarous relic as he has often been quoted as saying. Rickards informs that Keynes in his book A Tract on Monetary Reform actually wrote, "In truth the gold standard is already a barbarous relic." (My emphasis).

To those who hold the view that there isn't any gold in Fort Knox and that it was sold off a long time ago, Rickards makes the argument that when the U.S. Treasury leased out its gold, it was a paper transaction and that, thus, the U.S Treasury gold remains in the possession of the U.S. Treasury---with most of it at, yes, Fort Knox.

Although it is mostly a technical issue, Rickards also reveals that the Federal Reserve is nowhere near being insolvent. He was made aware of this fact during a private dinner in Manhattan with a Fed official. If you mark-to-market the Fed's gold holdings they are far from insolvent, Rickards informs.

The gold certificates the Fed holds represent 261.4 million ounces of gold. At a current market price that's $315 billion worth of gold, The Fed has that gold on its balance sheet at $11 billion---or only $42.222 per ounce.

Rickards calls the $300 plus billion difference between the book price and the market price, the Fed's hidden asset. And it is why the Fed is far from insolvent,

My favorite part of the book is the first page where Rickards does some great slaying of anti-gold establishment economists and commentators:
The antigold reflex is intergenerational. Among the older generation are PhDs who came of age in the wake of the famous gold bashers such as Milton Friedman, This generation includes Paul Krugman, Barry Eichengreen, Nouriel Roubini, Martin Feldstein and others who cover the ideological spectrum from left to right, Friedman's other theoretical contributions are mostly obsolete (it turns out floating exchange rates are suboptimal, and money velocity is not stable), yet that has done nothing to tarnish how his acolytes perceive gold.

The antigold giants are now joined by a younger generation educated (or miseducated) to believe that gold has no place in a monetary system. This group includes prominent bloggers and commentators such as Barry Ritholz, Matt O'Brien, Dagoen McDowell and Joe Weisenthal....they show their fangs at the mere mention of a gold standard.
All this said it should be remembered that Rickards is a Fed watcher and not an economist.

When he wanders into the area of economic theory, he does not display the same degree of understanding that he does when discussing monetary policy.

He argues, for example, that interest rates solely rise because of risk factors and does not seem to be aware of the time preference element at the foundation of interest rates.

There is also a significant historical fact not reported properly. In the book, Rickards discusses the gold price during the early part of the Great Depression in a manner that leaves the impression that the gold price on the free market stayed strong on its own during the 1929 to 1933 period.

He writes:
Consider the situation in the Great Depression. The most daunting economic problem was deflation, Commodity prices and industrial prices dropped precipitously. Yet from 1929 to 1933 the U.S. dollar price of gold was not deflating; it remained fixed at $20.67 per ounce. Gold was performing a monetray role, not a commodity role.

Never mind the theoretical weakness of deflation being a problem, the only reason the gold price wasn't falling like other commodities at that time was because the Treasury was propping the gold price up at $20.67. Without that manipulation by the Treasury, gold would have collapsed just like the other metals, whether it had a monetary role or not.

Bottom line, in a Rickards book, you are going to get a lot of insights and inside scoops on the Federal Reserve, and international banking organization operations. These are insights and scoops that you will not find anywhere else. Because of this, The New Case for Gold, which actually turns out to be the old case for gold--government money can't be trusted---it's an important valuable resource, just don't try to learn your economic theory from what is written in the book.

Order the book here:

Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

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