Nov. 14 (Bloomberg) -- As the price of gold hit new highs following the 2008 financial crisis, Republicans saw the yellow metal’s steady ascent as a sign of trouble ahead.
To Representative Paul Ryan of Wisconsin, record gold prices in 2010 heralded “a lower standard of living for many Americans.” Representative Ted Poe of Texas foresaw “a blast of inflation that will crush the middle class” adding: “Where gold prices go, other prices follow.” Fellow Texas Representative Ron Paul, a perennial critic of the Federal Reserve, warned that “confidence is being lost in the entire fiat monetary system,” a reference to money created by central banks.
The Republicans’ confidence in gold as an economic and financial barometer proved ill-founded. Five years after the crisis, the dollar’s value measured against the currencies of major U.S. trading partners is little changed. Prices have risen at an annual 1.4 percent rate, less than half the 50-year average and lower than the Fed’s 2 percent target.
By July, gold had slid 36 percent from its September 2011 high of more than $1,900 an ounce, the steepest percentage decline since prices plunged by 58 percent over 21 months ending in June 1982.
While many Wall Street analysts, including Jeffrey Currie at Goldman Sachs Group Inc., say gold will continue to decline as the economy grows, some leading Republicans continue to urge a special role for bullion.
So far this year, 52 lawmakers lined up to cosponsor Texas Representative Kevin Brady’s “Sound Dollar Act,” which would require the Fed to keep prices stable by monitoring a variety of assets, including gold, and by tracking “the value of the United States dollar relative to gold.”
Republican Senator Mike Lee of Utah introduced similar legislation in February. Neither bill has been acted upon.
“It’s a stupid idea,” Joseph Gagnon, a former Fed economist, said in an interview. “It’s pretty clear the Fed thinks so, too, since they do the opposite. They go out of their way to exclude commodities.”
Gagnon, now with the Peterson Institute for International Economics in Washington, says the Fed tracks most closely “core” inflation readings that exclude often-volatile commodities.
Ryan, chairman of the House Budget Committee, also has been among Republicans who’ve suggested the Fed should peg the dollar to a “basket of commodities” that would include gold.
In April, three days after gold completed its worst two-day decline in more than 30 years, Lee, joined by Senators Ted Cruz of Texas and Rand Paul of Kentucky, proposed legislation to eliminate taxes on gold and silver currency declared legal tender by federal or state governments. The measure would effectively allow the metals, now taxed at sale as collectibles, to serve as alternative currencies.
Spokesmen for Brady, Ryan, Lee, Cruz and Paul declined to comment. Poe’s office didn’t respond to requests for comment.
Rich Danker, director of economics for the American Principles Project, a Washington-based organization that advocates smaller government and free markets, calls legislation such as Lee’s a “prerequisite” for a return to the gold standard, which his group supports.
Danker dismissed gold’s recent decline. “The gold standard has never been about the floating price of gold,” he said. “Gold’s long-term value has always been steady. There’s no reason to think that would change over hundreds of years.”
The idea of anchoring U.S. currency to a precious metal dominated economic debates in the late 19th century with factions dueling over the use of gold, silver or both. Since the Democratic Party split in 1896 between the pro-gold incumbent President Grover Cleveland and his intra-party rival William Jennings Bryan, gold has been almost entirely a Republican obsession.
“I can’t think of any Democrat who’s for it,” said Richard Grossman, economics professor at Wesleyan University in Middletown, Connecticut, and author of the book “Wrong: Nine Economic Policy Disasters and What We Can Learn From Them.”
President Franklin D. Roosevelt, a Democrat, took the dollar off the gold standard in one of his first moves to combat the Great Depression in 1933. President Richard Nixon, a Republican, broke the last link to gold in August 1971, ending the ability of foreign central banks to convert dollars into a fixed quantity of the metal.
In a November 2012 speech to an APP conference, Cruz, a Tea Party favorite, assailed the Fed’s $85 billion in monthly asset purchases -- an economic stimulus program known as quantitative easing -- which he says puts the dollar at risk.
“We’re in the middle of QE infinity right now,” he said. “And when you see the currency debased, it is a cruel tax on everyone working and struggling and saving. As we’ve seen gold skyrocket, and we’ve seen oil skyrocket, we’ve seen food skyrocket, we’ve seen the cost of living for those struggling to climb the economic ladder get higher and higher and higher.”
Gold fans bemoan the dollar’s loss of purchasing power in terms of how much gold it will buy, though that hasn’t affected the cost of living. Since December 2008, the consumer price index has risen at an annual rate of 1.6 percent, compared with 2.8 percent during the 2001-2009 Bush administration.
The meaning of gold price movements remains a subject of dispute among economists. In July, Republican Senator Dean Heller of Nevada asked Fed Chairman Ben S. Bernanke to explain gold’s rollercoaster rise and fall.
“Nobody really understands gold prices,” said Bernanke, who was chairman of Princeton University’s economics department. “And I don’t pretend to really understand them either.”
Heller today posed a similar question to Fed Vice Chairman Janet Yellen at a hearing on her nomination to succeed Bernanke.
“I don’t think anybody has a very good model of what makes gold prices go up or down,” Yellen said. “It is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles.”
Further complicating efforts to fathom price movements are profound changes in the gold market. The rise of exchange-traded funds, for example, opened the market to retail investors, allowing them to buy shares representing physical holdings of gold without the hassle of taking delivery.
Such funds, which held more than 84 million ounces of gold in December compared with less than 2 million ounces eight years earlier, were a major force behind gold’s pre-financial crisis surge, according to Marc Chandler, chief currency strategist for Brown Brothers Harriman & Co. in New York.
“Before, you had to buy gold bullion,” he said. “Now ETFs gave access to people who didn’t have it before.”
During gold’s 12-year bull market, the metal was touted as a store of value as well as an investment in its own right. Popular interest in the traditional safe haven mushroomed alongside fear of an eroding dollar. Gold prices roughly tripled in five years, topping $1,000 an ounce for the first time in March 2008.
On March 10, 2009, Republican Senator Mike Crapo of Idaho introduced into the Congressional Record a letter from a constituent he identified as “Adam,” who cited an 18th-century law to urge the death penalty for those responsible for the dollar’s shrinkage.
“Heads should have rolled after we abandoned the gold and silver standards,” the letter read. “I am sure you know what debasing currency is. This is what helped bring Rome to an end.”
Interest in gold rose alongside the Fed’s unprecedented expansion of credit to fight the recession. From around $900 billion in August 2008, the Fed’s balance sheet expanded to its current $3.85 trillion. Gold completed 12 consecutive years of higher prices in 2012.
That same year, the belief that gold’s rise signaled a loss of faith in the U.S. dollar inspired a provision in the Republican Party platform calling for a study of a “metallic basis for U.S. currency,” a possible return to the gold standard. The move was more than just a sop to supporters of Paul’s longshot presidential bid, according to Representative Marsha Blackburn of Tennessee, the platform committee chairwoman.
The platform planks were “adopted because they are things that Republicans agree on,” Blackburn told the Financial Times. “This is something that we think needs to be done.”
Supporters of a new gold standard -- wandering in the political wilderness since a 1982 Reagan administration commission squelched their last bid -- welcomed the discussion. Elsewhere, the idea was derided as a relic of a bygone age. Bernanke already had ruled it out, saying in a March 2012 lecture at George Washington University that it “would not be feasible for both practical reasons and policy reasons.”
Elite opposition did nothing to quell interest in gold outside the nation’s capital. Before the metal’s April price plunge -- its worst in 30 years -- several states considered proposals to recognize bullion as currency. A lawmaker in Texas proposed creating a Texas Bullion Depository to store gold, an idea championed by Republican Governor Rick Perry. Utah passed a bill making gold and silver coins legal tender in 2011, when it also eliminated state capital gains or other taxes on the coins.
In Utah, with a population of 2.8 million, about 250 people are participating in a pilot program that lets them pay bills from an account established with deposits of gold, said Lawrence Hilton, an attorney and chairman of the Utah Precious Metals Association, which established the initiative.
The number of participants has risen from 100 in April, despite gold’s decline, he says. The group encourages members to buy at regular intervals, saying that will smooth out price fluctuations and hedge against inflation.
Gold actually is an unreliable inflation indicator, according to recent academic research. Economists Jonathan Batten of Australia’s Monash University, Cetin Ciner of the University of North Carolina at Wilmington and Brian Lucey of Trinity College, Dublin studied the relationship between gold and inflation since 1985 and concluded “a stable link between these variables does not exist.”
Likewise, Andrew Ang of Columbia University wrote in 2012 that gold has only a 1 percent correlation with inflation. “Gold has not been an inflation hedge over the last 130 years,” he wrote, adding that gold prices demonstrate a strong tendency to revert to their long-term average.
Americans’ fervor for gold as an investment has also ebbed. In an April Gallup survey, 24 percent of respondents called the metal “the best long-term investment,” down from 34 percent in August 2011.
Gold fans are undeterred by studies or 27 months of falling prices. “Could you have a period of several months, or even several years, where gold is in a downward trend? Yes, that can happen,” said Hilton. “But it should come around.”
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