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U.S. Gold Reserves Too Precious To Pay Debt

Release Date: 
Friday, October 4, 2013

Gold and Silver Prices:

Gold and silver prices were volatile this week as Congress and the President remained deadlocked on legislation that would reopen the federal government. Both gold and silver ended the week lower, with gold closing at $1,312.20, down $25.00. Silver prices were down $0.04, closing at $21.84.

U.S. Gold Reserves Too Precious To Pay For Government Debt

MarketWatch columnist Brett Arend contacted the U.S. Treasury Department to determine if the United States would sell a portion of its gold’s reserves to pay government debt. The answer was a resounding “no.”

“The Treasury’s position is, in a word, extraordinary. We hear all this skepticism these days about gold. Yet the Treasury itself considers U.S. gold holdings to be a key element in maintaining confidence in the country’s soundness—and the stability of the international financial system... Josh Strauss, co-manager of the Appleseed mutual fund (and a gold fan), calls the Treasury’s admission extraordinary. ‘With gold on the ropes this year, investors are increasingly questioning the intrinsic value of gold,” he says. “Given the craziness in D.C., it seems to me that investors should really be questioning the intrinsic value of paper dollars backed by feckless promises.” confidence in the country’s soundness—and the stability of the international financial system…’ The Treasury suspects that if the government just sold its gold, all those ‘gold skeptics’ who run the financial markets would panic. What does that tell you?” (“Why Uncle Sam is hoarding gold,” MarketWatch, 10/4/13.)

U.S. Default Could Lead to Great Recession

The U.S. Treasury Department issued a report warning that a government default on its debt obligations could devastate the economy. “The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the center of the international financial system. A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse…. In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth—with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression.” (“THE POTENTIAL MACROECONOMIC EFFECT OF DEBT CEILING BRINKMANSHIP,” U.S. Dept. of Treasury, 10/13, emphasis added.)

Gold Reserves Are Key to Central Banks’ Independence: Banca d’Italia

At the London Bullion Market Association conference this week, the General Director for Italy’s central bank told attendees that gold reserves were “a key support to central banks' independence…” “Not only does [gold] have the vital characteristic of allowing diversification, in particular when financial markets are highly integrated, in addition it is unique among assets in that it is not issued by any government or central bank, so its value cannot be influenced by political decisions or by the solvency of any institution… These features, coupled with historic ... and psychological reasons, stand in favour of gold's importance as a component of central bank reserves," he said. "Gold underpins the independence of central banks in their ability to (act) as the ultimate bearer of domestic financial stability…” (“Central Banks Favour Gold As Diversification – LBMA,” GoldSeek, 10/1/13.)

Hyperinflation is “Around the Corner”

Adjunct professor and author David Buckner appeared on The Glenn Beck Program to explain why he believes hyperinflation may be “just around the corner.”* “[E]verybody says, well you’re not seeing hyperinflation [but that’s because] the interest rates are so low, nobody’s putting that cash back into investments in the United States.  But they are putting it into desperate countries in Europe. They’re putting it into other investments. And the money’s going out there, so the second Bernanke raises the interest rates, all of the sudden the money sucks back into the United States and we have hyperinflation.”

Mr. Buckner stated the U.S. could begin the process leading to hyperinflation as soon as October 2014. “When Bernanke announced that there would be a tapering, the markets just dropped because they knew that even if the interest rates changed one infinitesimal amount, it was the beginning of the domino…You listen to many of the economists — within three months. And it’s going to be perception more than real price. You’re going to see hoarding, you’re going to see fear. It’s not the actuality. So if they can put a glaze over everybody…it’s may slow it down. That's the problem, is we’re dealing with an illusion.  It’s an illusion of what is real.  We don’t have the money. So the interest rates go up, you’re going to see a domino.” (“How Long Do We Have Before Seeing Hyperinflation? One Expert’s Answer May Frighten You,” The Blaze, 10/2/13.)

Fed Reserve Bank President: QE May Continue For Years

The Federal Reserved surprised many analysts two weeks ago when it chose to delay any tapering of its $85 billion bond buying program. Now a Federal Reserve Bank President believes it may be years before the Fed can end its quantitative easing. “If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years - and that should only occur when the data ratify our forecast for an improvement in real GDP and employment,” said Boston Federal Reserve Bank President Eric Rosengren. (“Fed's Rosengren: trimming bond-buying would be 'premature',” Reuters, 10/2/13.)

Two other Fed Bank Presidents said the current budget battle and government shutdown confirmed the Fed’s decision not to commence tapering. Atlanta Federal Reserve Bank President Dennis Lockhart said, “"I think we avoided a potentially very awkward situation of reducing stimulus just on the eve of what now has developed…” Dallas Federal Reserve President Richard Fisher warned, "The unthinkable will have become real, and the 'full faith and credit' of the United States will be a mirage rather than an accepted fact…” (“Loose monetary policy needed to counter Washington gridlock: Fed officials,” Reuters, 10/4/13.)

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* Goldline is a sponsor of The Glenn Beck Program.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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