Originally posted on Thursday, March 29th, 2012
Chatham House — The Royal Institute of International Affairs – recently released the Report of its Gold Taskforce to a brief flurry of media attention.
Its own summary of findings, and links to the report, after the jump, below.
The Report received rather mixed reviews, including from The Economist and from former investment manager, now prominent monetary policy analyst, Detlev Schlichter.
The Economist‘s always astute Buttonwood had this, in part, to say in his review of the Taskforce Report, The Role of Gold:
CHATHAM House yesterday launched a report on the role of gold in the international monetary system. It is a noteworthy event, not least because the group’s last study on the issue was in September 1931, just as Britain was about to leave the gold standard, accelerating the system’s demise (Keynes was on the original working group).
It seems a subject that is at least worthy of consideration, not least because central banks the world over are pursuing policies that would, in earlier decades, have been considered highly unorthodox. In recent days, I have been struck by the number of investors who have told me that central banks have “thrown in the towel”, citing the ECB’s three year loans to banks (another €530 billion accepted today), the Bank of Japan’s stepped-up commitment to QE, the extra £50 billion pledged by the Bank of England, the willingness of the Swiss to create money to cap their exchange rate and so on. The investors see all this as bullish for real assets, like equities, but potentially inflationary in the medium term.
The most intriguing section is on the role of gold as an economic indicator. Here the taskforce decrees that
there appears to be no consistent and reliable correlation between bullion and a large number of key economic variables that could be employed to inform policy decision-making more effectively.
There is not much in the actual report to back up this assertion and Chatham House points to a paper on its website by John Gault (an in-joke for Ayn Rand fans?) which shows a variety of charts linking gold to various measures. At first sight, gold’s role doesn’t seem that bad; the correlation with the consumer price index (p13) is 0.749 and with commodities generally (p7) 0.862. There have been occasions when a rising gold price has given a useful signal, the panel says, but the lags are variable in length. It seems to me that gold’s historic role suggests it’s worth researching this subject rather more deeply; the recent Marsh, Dimson and Staunton report found, for example that gold was the only asset that had a positive correlation with inflation.
Schlichter’s trenchant critique, published in Paper Money Collapse and republished by the prestigious Cobden Centre, Thinking Inside the Box — Chatham House on Gold — begins:
Last week, Chatham House, formerly known as the Royal Institute of International Affairs and a non-profit, non-governmental institution in London whose “mission is to be a world-leading source of independent analysis, informed debate and influential ideas on how to build a prosperous and secure world for all”, published a report with the title, “Gold and the International Monetary System.”
This report summarizes the findings of the Chatham House Gold Taskforce. This taskforce, comprising 10 permanent members but involving additional participants in meetings in Washington, London and Beijing, was set up to investigate “whether there is a role for gold in the international monetary system.” The conclusions are predominantly negative. Chatham House sees no important role for gold beyond being one of a variety of central bank reserve assets and occasionally an interesting portfolio component (a hedge against inflation).
I regard these conclusions ill-considered and rash, and in my view Chatham House fails to make an intellectually convincing case for them. But the conclusions are certainly not surprising. Looking at the descriptions of the taskforce’s mission and the procedure of its investigation, any other outcome would have been surprising. Support for the status quo was, by and large, to be expected.
and concludes:
As I argue in Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown, our modern fiat money system, a system of fully elastic and essentially unlimited paper money, is entirely incompatible with capitalism. It is a system of constantly intensifying monetary interventionism that requires progressively more money injections to cover up its inherent instabilities and to postpone the dissolution of its imbalances. There is nothing in the Chatham House report that makes me question any of these conclusions. To the contrary, if you read the report carefully, it unintentionally provides at various points poignant support for my case.
The authors of the Chatham House report and the policy establishment which they so eagerly want to please, may continue to ignore the obvious fault-lines of this system but reality is quickly catching up. They may believe that a ‘big bang approach’ to reform is not on the cards. But the monetary system that they have helped create and that they now defend is getting ready for a big bang, and then some radical new thinking will be required, thinking that is more ‘fresh and open-minded’ and not so much hostage to the status-quo as what the Chatham House has presented here.
It is indeed a regrettable shortfall that, in Schlichter’s words, “The Chatham House report happily bobs about on the surface of the established belief-system.”
It is far more damaging to the Taskforce’s credibility that its report fails even to address the implications of the Bank of England’s Financial Stability Paper No. 13, Reform of the International Monetary and Financial System, published in December 2011 to increasing attention worldwide. Financial Stability Paper No. 13, of course, concluded, based on extensive empirical analysis, that “Overall, the evidence is that today’s system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System, with the key failure being the system’s inability to maintain financial stability and minimise the incidence of disruptive sudden changes in global capital flows.”
The Bank of England thus is advancing the discourse on the pressing issue of world monetary reform in ways that, it would appear, Chatham’s Taskforce simply was not sufficiently equipped to do. But perhaps we have not heard the last from Chatham, from whom the world of monetary thought had expected a report more relevant, more useful, and more interesting.
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