Republicans Asserting Reliance on Gold as World Loses Faith – by David J. Lynch & Peter Robison (Bloomberg News – November 14, 2013)

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.

Sound Dollar

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.

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