Wednesday, July 13, 2011

OT: Gold on the Move, Again (Thanks Ben, and Gold Is Money)

(These days, OT - other topic - means anything other than Fukushima... But this blog WAS once a financial blog..)

Gold jumped to a record high near $1,590 as the Federal Reserve chairman Ben "Black Hawk Helicopter" Bernanke indicated a further stimulus (digital printing of the Federal Reserve notes, fiat money) to create more inflation. (Remember, to him and the like-minded Fed economists who despise anyone without a PhD in (Keynesian) economics, inflation is growth, and a rising stock market is the economy.)

From Reuters (7/13/2011):

(Reuters) - Gold surged to a record near $1,590 an ounce on Wednesday as the possibility of more Federal Reserve stimulus coupled with Europe's deepening debt crisis fueled bullion's longest winning streak in five years.

Bullion's gains accelerated after Federal Reserve Chairman Ben Bernanke said the Fed is ready to ease monetary policy further if economic growth and inflation slow much more. Silver rallied nearly 6 percent, moving in tandem with commodities, U.S. stock markets and risk assets.

....Gold option volatility rose sharply on Wednesday, as bullion investors bet that underlying future contract prices could extend a record rally on signs of more Federal Reserve stimulus coupled with Europe's worsening debt crisis.

COMEX gold options floor trader Jonathan Jossen said one investor sold a huge position in $1,600 December call options and then bought twice as much in $1,750 December calls. Heavy call purchases suggest buyers expect underlying gold futures to rise further.

That option strategy is called "call backspread". Someone's expecting a very big and volatile move and wants to profit very handsomely.

In the meantime, the Fed chairman was put in a very uncomfortable position trying to deny gold is money but say totally fiat Treasury bills are financial assets.

From Forbes blog (Agustino Fontevecchia, 7/13/2011):

Chairman Ben Bernanke faced-off with Fed-hating Representative Ron Paul during his monetary policy report to Congress on Wednesday. The head of the Fed was forced to respond to accusations of enriching already rich corporations while failing to help Main Street, while he was pushed on his views on gold. When asked whether gold is money, Bernanke flatly responded “No.”

...As Bernanke began to sermon Rep. Paul on the history of the Fed (“we are here to provide liquidity [in abnormal situations],” the Chairman said), he was interrupted.

“When you wake up in the morning, do you think about the price of gold,” Rep. Paul asked. After pausing for a second, Bernanke responded, clearly uncomfortable. that he paid much attention to the price of gold, only to be interrupted once again.

“Gold’s at about $1,580 [an ounce] this morning, what do you think of the price of gold?” asked Rep. Paul. A stern-faced Bernanke responded people bought it for protection and was once again cut-off, with Ron Paul once again on the offensive.

“Is gold money?” he asked. Clearly bothered, Bernanke told the representative, “No. It’s a precious metal.”

After Paul interrupted him to note the long history of gold being used as money, Bernanke continued,”It’s an asset. Would you say Treasury bills are money? I don’t think they’re money either but they’re a financial asset.”

...The interesting exchange served as one of the few times Bernanke has been publicly pushed off his comfort zone by an elected official. Rep. Ron Paul brought up the issues that he’s famous for, namely, a sort of allegiance between the Fed and the nation’s most powerful institutions, the illusion of fiat money, and the gold standard. Bernanke, angered and bothered, had no option but to respond.


FranSix said...

I'm with Chairman B. Gold is a liquid item, but does not function as money as treasuries do not function as money. But it has one foot in the forex trade.

Anonymous said...

I have to agree with Ben - Gold is NOT money - although it can be a medium of exchange. I took this opportunity today to cash in my gold. I'm not greedy. It was the medium of exchange between Kings and Nations - it will have no place in the peak oil future.

arevamirpal::laprimavera said...

A medium of exchange, by definition, is money.

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