Fight the Fed by owning gold

Americans may finally be waking up to the realization that their best defense against more than 20 years of Fed mismanagement is a shiny yellow metal.

By Bill_Fleckenstein Sep 28, 2012 2:01PM

Gold bars © Stockbyte/SuperStockThese days there is no shortage of chatter about the Federal Reserve's latest round of quantitative easing (aka QE3), and I detect there is a small, yet growing, level of dissatisfaction with the Fed's policies. It seems that savers have finally begun to find their voice -- somewhat in light of the fact that their money is slowly being stolen by the Fed's money printing.


From the stock bubble of the late 1990s, to the even bigger and more devastating housing bubble, to its recent policy of guaranteeing inflation and offering little reward to savers, the Fed has eviscerated the middle class and made poor people poorer.


Though it could be argued that people with wealth have benefited, that is not something that they necessarily asked for (excluding the Wall Street banksters).  In sum, the Fed is a devastatingly powerful organization, and it is hellbent on a path of continued destruction.


What brings up this rant is that a reader of my daily column (at; subscription required) recently asked me, where is the outrage about all of the above, and other unintended consequences I haven't mentioned?


That is a very good question. As noted, there seems to be a little bit of backlash brewing, but given the damage that has been inflicted on this country and on other places where central (planning) bankers loom large, it is damn little.


Time to stop turning the other check

I was incensed with the policies of Alan Greenspan, beginning in the mid-1990s, as readers of my columns can attest, and I would say my anger crested with the 2008 mania, when I wrote my book, "Greenspan's Bubbles: the Age of Ignorance at the Federal Reserve."


I had expected after the stock market bubble that the Fed would be forced to behave, but that was naïve and incorrect. Still, I felt certain after the second debilitating, debt-laced bubble that folks would demand more of the Fed (though I did know how it would respond, with stimulus, which is why I closed my short-only fund in early 2009). Thus, it has been disappointing to me that there hasn't been more outrage on the part of the masses.


Granted, the Fed may seem like an obscure subject, but it really isn't that hard to figure out who the main culprit is. Many others besides myself have written about it for many years now.


This is not to say that we have a functioning Congress; we don't. But had the policies of the Fed not been what they were for the past 20 years, we could never have gotten this far off the rails, nor could so many promises have been made that will be broken regarding prospective health care and retirement benefits.


To thine own wealth be true

I must admit I have become somewhat desensitized to the Fed's views, because I reached the point of outrage early on and exorcised my own demons to some degree with my book. But nonetheless, that is no excuse for those people who are being harmed. Americans need to stand up and insist that the Fed desist from its insane policies and demand sound money. (Thursday's Wall Street Journal op-ed by Sean Fieler, "Easy Money Is Punishing the Middle Class," was a fine step in that direction.)


Is that likely to happen soon? Unfortunately, no, since it would also require members of Congress to care about the country instead of their own careers. So in the near term at least, this is probably also a naïve hope on my part.


Thus, until the world's bond markets or average Americans demand sanity, all we can do is protect ourselves from the policies of the irresponsible, incompetent and, to some degree, egotistical madmen by owning gold.


GLD to world: You have a new friend request

On that subject, I think it is worth pointing out that the idea of gold as a currency or portfolio diversification asset may be in the process of going mainstream, with the catalyst being European Central Bank President Mario Draghi's ongoing transformation into Fed Chairman Ben Bernanke, even as the Fed goes nuts with money printing.


When people like Ray Dalio, the founder of Bridgewater Associates and someone who is probably listened to by every vanilla pension fund manager on the planet -- is willing to be more vocal in suggesting that everyone should own gold, more people are going to ask, "Why don't we?" (For those who don't know, he said in a CNBC interview last week that he owns gold and that he knows of no "sensible reason not to own gold.")


More and more people are also going to answer, well, we ought to get started, and I believe that process is under way.


However, to put how early we are in the gold accumulation phase into perspective, last week I also saw a clip of Frank Holmes, the chief investment officer at U.S. Global Investors, noting that the value of the SPDR Gold Shares (GLD) ETF, at around $75 billion, is roughly equivalent to the amount of market capitalization that Facebook (FB) has lost as it plunged from its opening high to its recent low. For some reason, thinking about this potentially overhyped "New Economy" concept losing the entire value of GLD really struck a note with me.


Little number bad, big number good

As for the reason one needs to own gold (i.e., that central planning central banks have gone wild), I read that Narayana Kocherlakota, the president of the Minneapolis Fed, said in a speech last week, "As long as the FOMC satisfies its price stability mandate, it should keep the Fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%."


Well, if that is what these guys really think, I have no idea what the inflation rate is going to be running at by the time that happens. But it's going to be well north of 5% for sure, and high enough that even the consumer price index might be able to capture some portion of it.


But don't expect high inflation to stop the Fed from trying to achieve its employment targets. It will initially view inflation as a sign that it is doing its job well. What is really going to matter is how the bond market reacts to all that, but that is a story we will just have to watch evolve.


At the time of publication, Bill Fleckenstein owned gold.


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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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