Historian and portfolio manager Don Coxe was in fine fettle on BNN recently when he mused that two of the strongest investments over the past couple of years date back to the time of Moses: grain and gold. So much for technology.
Mr. Coxe has gained a considerable following for his untiring enthusiasm for commodities, especially gold, oil and agricultural stocks. Recently, he has tilted more in favour of agricultural stocks. Over the summer, he launched the Coxe Global Agribusiness Income Fund to complement his earlier closed-end offering, the Coxe Commodity Strategy Fund.
Mr. Coxe’s early career as a historian has given him considerable foresight – big thoughts that go well beyond the next move in the commodities markets. So listen up, traders. Rather than letting bullion kick dust in the eyes of the greenback and the euro, U.S. President Barack Obama and his European counterparts could “do a Roosevelt,” he says. Mr. Obama should grab gold by the ear and cap it, say, at $2,000 (U.S.) an ounce, Mr. Coxe argues. “They could declare themselves willing sellers at that price in bars or bonds backed by gold.” He based that number on a market price for gold of $1,800 an ounce.
The U.S. Treasury could then issue gold-backed bonds, perhaps convertible into gold bullion over their 20-year life. Other countries wouldn’t rush to snap up gold because no one wants their currency to strengthen, he says. The well-known strategist put the idea forth in the September issue of his Basic Points newsletter, distributed by the Bank of Montreal.
Was it merely an intellectual exercise?
“It’s a very serious proposal,” he said. “We’re heading into a worse financial crisis than the last one [in 2008]. The fact that no one has proposed it is an illustration of the tremendous success of economic schools [based on the teachings of John Maynard Keynes] that say gold is irrelevant.”
Such a move would have a historical precedent – in 1933, to be exact, at the depths of the Great Depression. That’s the year U.S. President Franklin Delano Roosevelt – in an attempt to re-inflate an economy caught in a deflationary spiral – revalued gold bullion from $20.67 an ounce to $35, declaring the United States government would be a buyer and seller at that price.
Mr. Roosevelt also made it illegal for American citizens to own gold, although Mr. Coxe is silent on that aspect. The Bretton Woods Agreement made the $35 price worldwide in 1944. The United States ended the convertibility of the greenback into gold in 1971, unleashing a 40-year bull market, Mr. Coxe said.
It would be an elegant solution. Mr. Obama could cap the gold price by presidential directive so the move wouldn’t have to go before Congress, he says. Republicans would be reluctant to criticize it on principle because the President would merely be bowing to market forces.
While a move to cap the bullion price would spoil the speculators’ party, it would give gold investors a graceful exit, cheer miners, whose stocks would soar, and relieve the debt problems burdening the United States and Europe, albeit temporarily. It would also give policy makers some breathing room.
“Mr. Obama could say, ‘Now let’s talk long term,’” Mr. Coxe said.
Fixing the gold price would resolve Europe’s sovereign debt impasse because severely indebted countries could issue bonds backed by their gold holdings. Italy, for example, has 2,452 tonnes of gold sitting in its vaults; Spain has 280 and Greece has about 110. Rather than indebted countries going to Germany, cap-in-hand, asking for a blank cheque, Mr. Coxe hopes “some of the Germans will take up the suggestion and say, ‘Hey, these countries have gold.’”
