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'Everybody knows U.S. gold reserves are leased and shorted'

Section: Daily Dispatches

A Rock-Solid Case for Gold Reserves

By Fabrice Taylor
The Globe and Mail, Toronto
Wednesday, November 11, 2009

There's one mention of the word gold in the Bank of Canada's latest annual report. There are no mentions of bullion.

Canadians once owned 30 million ounces. Now we own none, preferring to back our currency with rock-solid things such as U.S. dollars and other pieces of paper worth something only as long as we all agree they're worth something.

Meanwhile, India is buying gold. So are other countries, especially those not in the sphere of U.S. influence. Latvia and Honduras, have more than we have, which isn't saying much, but seems to emphasize the point.

Things are getting better for the Indians. Time was if they wanted to buy, say, a barrel of oil they had to make a bunch of T-shirts and trade them offshore for dollars or some other exchangeable currency. No one wanted rupees, so they couldn't just print a bunch of them to buy oil. They had to work for it. This system imposed a certain discipline on them. Look at them now.

Americans, in contrast, have had it good for a long time because they own the reserve currency so when they want to consume they can just create dollars in one way or another. They don't necessarily have to work for it.

When the U.S. dollar was linked to gold, at US$35 an ounce, they had to be rigorous. If they printed more money they had to buy more gold, making it hard to be reckless. But they abandoned that peg 40 or so years ago. You can start to understand, then, why it is U.S. policy, however unofficially or quietly, to deprecate gold and tout the dollar. It's a huge advantage to be the reserve currency.

It's also a huge problem if you consume with vengeance and produce relatively less. And look at them now.

Meanwhile, there's Canada. We're pretty cocky. Our banks didn't blow up. We have commodities. Our dollar is strong. Who cares about gold? Who needs it?

Not so fast. Our dollar is strong against the greenback, which is sinking fast. It's not exactly a contender against other currencies. And it's speculators who are driving the loonie higher, not intrinsic value. Ontario is practically broke. Even Alberta is running U.S.-style deficits on a per capita basis. We don't invent a Google, Microsoft, Pfizer, or IBM every few years. The U.S. looks like a better bet than Canada by some yardsticks, although again, that's not saying much.

Investors follow certain basic rules when it comes to their money. They diversify, they prepare for the unexpected, they see inflation as the enemy. Why not central banks? Gold diversifies in that it's a hard asset whose price is set by supply and demand; it's not an obligation of some government whose value is theoretical.

It also maintains its value while paper currencies only lose theirs over time because of inflation. And you can't touch it for security when things really get bad, such as when currencies fail, which happens more often than we realize. Many of us keep gold bars or coins in the safe or under the mattress just in case, or wish we did. Why not a central bank? Unforeseen calamities happen, as we learned.

As for the argument that U.S. dollars are backed by the biggest gold reserves in the world, so holding them in reserve is relatively safe, that's rubbish. True, the U.S. has a lot of gold, 8,100 tonnes of it officially, or 77 per cent of its reserves. But it's well known in bullion circles that a lot or most of it has been lent out to banks and whatnot that sell it short, depressing its value.

And anyway, even if it is all there and not lent, all that gold is worth only about a tiny fraction of the U.S.'s rapidly growing debt. So holding U.S. dollars in reserve isn't exactly comforting.

It may be that the only reason for our central bank not to have gold in its vaults is because our American friends don't like us supporting bullion even though the mining industry employs a lot of people and produces big payrolls.

When it comes to managing a currency, we can find better role models.


Fabrice Taylor is a chartered financial analyst and a financial columnist for The Globe and Mail.

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