The last time the world as we knew it seemed likely to end, Dan Tapiero thought about buying gold.
He didn’t tell his wife; they didn’t talk about things like that. In fact he didn’t tell anyone for a while. He just tried to figure out how he was going to buy physical gold as the financial markets collapsed at the end of 2008.
Mining stocks were not for him, and neither was buying gold on the futures exchange. That was financial gold, meaning it existed on account statements but was not tangible. He wanted the real thing, gold in the form of bullion that he could hold in his palms, smudge with his thumbs.
But Mr. Tapiero, a portfolio manager at several hedge funds over the last two decades, realized quite quickly that it was harder to fulfill his desire than he had thought. When he called up one bank he patronized in his day job, he learned it had a minimum purchase amount of $20 million worth of physical gold. Even at that amount, he could not have access to it; it would have to stay at the bank.
He didn’t want to buy that much, but he wanted to buy more than a bag of gold coins, or a bar or two. Most of all, he wanted to know that it would be stored someplace safe where he could get to it even if all of the banks suddenly closed for a while. “There was concern at that time that the system was frozen and you didn’t really know whether you were going to be able to have access to your money or to your assets,” Mr. Tapiero said. “And I started thinking, O.K., well, I’d like to own something that isn’t a number on a flashing screen.”
Investing in physical gold has had an image problem of late. After the financial crisis, it was seen by many mainstream advisers as something that crackpots coveted. They would buy it, store in their basements and know that their wealth was secure if the world — or at least the prevailing financial and political systems — ended.
During the panic of 1792, the Bank of North America tried to stave off a run by having employees “carry its specie busily to and from the cellar in order to give a magnified notion of what it had,” historian Bray Hammond wrote. Bank managers “ostentatiously brought in deposits of gold and silver that had unostentatiously been carried out a little while before.”
The show of specie reassured jittery customers, saving the bank from failure. As a young clerk in Iowa during the panic of 1907, Hammond recalled employing exactly the same dodge: heaping impressively large sacks of low-value coin in plain view and ostentatiously counting it to give the impression of overflowing vaults.
Roosevelt took the U.S. off the domestic gold standard in 1934. Although the nation remained on the standard in international exchange, the Gold Reserve Act made it illegal for private citizens to hold “monetary gold” -- that is, coins or bullion. Banks had to transfer to the U.S. government any title to gold reserves they held, in return for dollars. Individuals could still own gold jewelry and keep their gold dental fillings, but anyone owning monetary gold had to sell it to the government.
In recent years, the price of gold has been on an unprecedented northbound movement. It is not only the gold bugs who are advocating increased gold holdings by central banks, but also a number of responsible policymakers and opinion makers.
Excessive Printed Money
Since 2008, the received doctrine is that recovery of the major industrial economies requires opening up the spigots of printing presses. While the world economy continues to remain in the doldrums, critics of the present policies attribute the absence of recovery to insufficient pump priming.
For instance, Paul Krugman, the internationally acclaimed economist, is critical of the half-hearted measures of the Obama Administration in the US and he refers to the attempts in Europe for austerity as sheer madness.
Ralph Benko, Senior Adviser, American Principles Project and adviser to the Editor, Lerhman Institute, calls such advocacy as "monetary promiscuity".
Is the slowdown in the industrial economies akin to the 1930s when there was an excess of savings over investment opportunities? It is clear that in the present situation savings have been on the decline and the Keynesian pump priming solution is not appropriate. Yet, country after country in the industrial world, as also the emerging market economies, has gone in for unabashed printing of money.
It is an article of faith that excessive printing of money will not ultimately result in inflation.
This is a rare moment when the entire global economy is captivated by totally absurd policies and little is being done to rein in irresponsible governments.
Since the onset of the recession when many investment portfolios took a hit, there has been a lot of talk about the value of investing in gold as one way for investors to protect against market volatility and preserve wealth. Now, as policy makers both here and in Europe take steps to stimulate economic growth, there is a group of investors quietly adding gold to their own portfolios: the world's central banks.
As a legacy of the gold standard that backed many of the world's currencies prior to 1972, Western central banks such as the United States of America, Italy, France and Germany, hold large quantities of gold. In contrast, many of today's emerging economies including China, Russia, Mexico and India have until recently held little to none. While the 8,133 tonnes of gold held by the U.S. Government in Fort Knox (and other locations) no longer directly backs our currency, it has returned over 8 percent a year over the past 30 years for the long term wealth of the country.
For years, the Western central banks were net sellers of gold, to the tune of 400-500 tonnes per year, in large part because they saw the need to diversify away from gold. But that trend began to shift in the second half of 2009 as Western market central banks all but halted their gold sales while emerging market central banks increased the pace of adding gold to their monetary reserves. Globally, central banks bought 77 tonnes in 2010, and for all of 2011 bought an astonishing 456 tonnes of gold.
For decades, the U.S. government has stashed gold five stories beneath Manhattan in a vault under the Federal Reserve's fortress near Wall Street.
Or has it?
Some conspiracy theorists suspect that the billions of dollars' worth of bullion might have been looted in a dramatic heist, a la the movie "Die Hard: With a Vengeance." Others claim that the gold has been used in a shadowy government transaction, or swapped with gold-painted bars. It's even caught the attention of politicians like Rep. Ron Paul and members of Germany's Parliament.
Now all of us may finally get some answers.
The federal government has quietly been completing an audit of U.S. gold stored at the New York Fed. The effort included drilling small holes in the bars to test their purity.
The Treasury Department has refused to disclose what the audit has revealed so far, saying the results will be announced by year's end. But as one former top Fed official said recently, the testing may finally prove that "Goldfinger didn't sneak in at night" and take the gold.
"The calls for audits are saying, 'We don't trust the government for the last 200 years,'" said Ted Truman, a former assistant Treasury secretary and Fed official. He called perennial questions about the country's reserves "the gold bug equivalent of the birther movement."
The Treasury's auditing operation, including drilling, is a first for the New York Fed. The department's inspector general previously audited and tested only gold it keeps under heavy guard at Ft. Knox, West Point and the U.S. Mint in Denver. These three locations hold 95% of the country's bullion.