[maester_miller]

I watched this video today from Bob Murphy and it got me thinking. Assuming he’s right, what does this mean for gold? He seems to present a historical narrative that after the recession, the fed reduced interest rates to zero in order to motivate people to spend rather than save. As interest rates go down, people desire to reduce their cash holdings and inrease their consumption (or so the fed thought). However, this did not come to pass. Uncertainly regarding the future outweighed the low interest rates, and people continued to save anyway, even though rates were near-zero.

So now, the fed continues QE, with (assuming Murphy’s analysis is correct here) the added “feature” of trying to scare people into believing massive inflation is on the horizon. However, isn’t the fed overlooking something here? People have more options than simply consume or save in dollars. For the past decade, Austrians, libertarians, and conservatives have been touting gold as an effective investment in the environment of an out of control fed. The liberals and keynesians have laughed this off by assuring us that the inflation we expect is absolutely not going to happen.

But now, it seems, they WANT people to believe that inflation will happen (in order to get them to spend more). But if the time preferences of consumers are unchanged, and their uncertainty of the future (which motivates their saving) remains, wouldn’t they seek a third option, and invest in gold? Gold allows you to save without putting you at the whims of an inflationist fed.

So my question is, what happens when people figure this out? Isn’t this *incredibly* bullish for gold? And if enough people figure it out to the extent that consumption *still* doesn’t rise, what do the central bankers and the politicians do next? Is gold confiscation once again considered a possibility? So long as sound money (gold) exists, it seems to me that the fed cannot possibly *force* us to consume when most of us would prefer to save.

Any thoughts on this would be greatly appreciated.

[lrcammarosano]

You are correct the current environment is bullish for gold. BUT, gold and silver are underowned assets.

The policy is aimed at main street and wall street-neither of which own gold. Wall street will pour into equities to get higher returns as a result of the low interest policy and main street will borrow money at low interest rates to buy houses and other goods and they will buy stuff before it rises in price.

Silver and gold are smart hedges but most people have little or no economic smarts.

[lrcammarosano]

When Rooselvelt confiscated gold it was done because at the time gold was money-it was in some of the coins of the US. Also at the time the us owned the vast percentage of the gold in the world
It would seem impractible in today’s global market to confiscate gold of us citizens and would be of no real impact as there are tons of gold outside the us.

[cboyack]

I’m not sure that the government or the federal reserve has to worry about us abandoning the dollar. Legal tender laws limit our ability to abandon the dollar and use commodity money such as gold or silver instead.

[maester_miller]

RealMises,

My point was more that so long as QE3 fails to magically fix the economy (which will cause consumers and businesses to remain uncertain and desire to save) and as it starts to raise the expectations of inflation (whether it actually materializes or not) that will increase the appeal of gold, even to the common man. I agree that most people have no economic smarts, but basically everyone understands the argument that gold protects against inflation, many just disagree that inflation is a serious concern.

So once the fed successfully convinces them that inflation is a serious concern, perhaps these people will start buying gold. Confiscation would be impractical, true, but maybe something else like just making it illegal to own or purchase any gold. Many would do so anyway, but many would also be scared off by the threat of running afoul of the government.

If the fed wants us to spend more on consumption, it will have to do something to stop us from buying gold, right? So long as we desire to save (which we do because of a low time preference and uncertainty about the future) and we desire to avoid inflation (which QE3 is designed to make us believe will actually happen), we won’t simply cash out our 0.05% APY savings account and buy a house or a car or a vacation, we’ll simply convert our cash savings into gold savings. They’ll have to do something about that, won’t they?

[jmherbener]

This is why the state hates gold. It provides an (imperfect) escape from being victimized by its policies. If we don’t behave the way they want us to their schemes won’t work. States also crack down on the use of other escape hatches from their inflation, like foreign currencies and commodities. Of course, states don’t have to escalate their interventions just because they don’t work. But they have a tendency to do so.

[jim]

The US government is very active in discouraging escape from their inflation scheme. They did seize all of Bernard von NotHaus gold and silver. Much of the metal was not owned by NotHaus but was being held for third parties that were using paper money he minted. Mr. NotHaus was motivated by the idea that the USA was on a course that would ultimately destroy the dollar. If you open a foreign bank account their are special forms and reporting required, especially if your balance reaches $10,000. Police, TSA, etc. have seize coins with a metal content worth more than $3,000. Foreign securities are monitored and regulated to prevent US citizens from moving assets out of the country. The US and other governments make tax haven countries provide information about their (US, etc.) citizens accounts in violation of the tax haven countries laws. Some countries therefor will not open accounts for US citizens.

Would the US outlaw gold ownership by private citizens and require that they surrender their gold for less than it is worth? That was done in 1933. At the time US money was gold and silver. It was assumed any one could go to their bank and withdraw their money in gold or silver coins. In actual practice most US citizens in the country operated with paper money and bank accounts. The silver coins were not seized or outlawed. The silver was removed from US coins in the 1960s. The silver coins were not outlawed and still exist, but disappeared from circulation, since the silver is worth more than the face value of the coin. It is a crime to melt down these coins, but the are traded as “junk silver” in bags by weight. The dimes, quarters and half dollars contain 90% silver and 10% copper. in the 1970s the laws against personal gold ownership was repealed. The US Mint now mints silver, gold and platinum coins (100%). A very short list of dealers are allowed buy from the mint and sell for profit. In all cases the face value is a small fraction of going price of the metal. A person pays about 3% over the metal value of the coin.

When the US government seized the gold coins in 1933, I think a very high percentage of the coins were held by the banks. So their was no effort to search homes and people for contraband coins. People have been in legal difficulty over gold coins that were not surrendered.

Buying gold coins or investing in other gold investing avenues (mining stocks, ETF stocks which buy and store gold) is definitely a good way to hedge against inflation but all may come under attack buy future politicians.

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