Gold's Rise: Something New To Worry About
Dr. Jude Wanniski
At $385 per ounce and climbing, the dollar/gold price is now threatening to
break the $400 level we think would put a major crimp in the financial
markets and the economy. When gold last broke $390 in late September it may
have been no coincidence that equities sold off, recovering only when gold
sharply retreated. What we now have to worry about is an unintended
consequence of the Patriot's Act, one that almost certainly is steadily
reducing the demand for dollar liquidity in a way that produces upward
pressure on gold and downward pressure on the dollar relative to the euro
and yen. These are in the provisions designed to track down suspicious
transactions that might be endangering homeland security, specifically
those referred to as "Know Your Customer," (KYC). The due diligence is
horrendous, with the problem not in the language of the Act, but in the way
Treasury is writing the regulations. Earlier this month, it published a
"clarification" to Section 326 of the Act, which requires financial
institutions to have a process to identify customers and periodically check
data about them against watch lists maintained by Treasury's Office of
Foreign Asset Control. But while the Act requires financial institutions to
develop the ability to detect and report money laundering by suspected
terrorists, there are more than 46 specific subsections that cover
enforcement requirements.
The net effect is unambiguously to partially destroy the "moneyness" of the
dollar, i.e., in its ability to serve as an international invoice currency
-- also reducing its value as a reserve currency. At the margin, this acts
like a US tariff on the use of the dollar and reduces demand not
necessarily for "cash dollars" in circulation, but in the liquidity that
underpins the dollar. Inasmuch as the Fed pays no attention to the dollar
price of gold as a policy signal, it would not be putting two-and-two
together as we suggest adds up to the falling dollar and the inflationary
implications of the dollar/gold price getting further from its $350 optimal
level.
We're getting anecdotal evidence that dollar transactions that were
capable of completion in 3-5 days are now requiring 30-45 days. The KYC
requirements go far beyond mere identification. Inquiries pry into as much
information as possible about the assets and business dealings of every
party, especially if the party is wealthy. The inquiries seem to want to
know all about each party's property, and how that party goes about making
money. From the viewpoint of the disclosing party, there is a concern both
for government confiscation and private competition. Wealthy people in this
circumstance have been and are now relocating to expatriot domiciles. Since
the Patriot Act requirements follow them if they continue to do business in
dollars, they are switching to euros. Here's how one party explained it on
the internet:
"If you are trying to by $100M in paper from a company in England, it
should be a matter of transferring the funds (possibly through an escrow
agent) and receiving the executed documents. End of story. But now, the
Fed wants to know the providence of the paper and your funds. But,
wait! You don't have all of the money. You are borrowing the money from a
bank, with the help of a guarantor, who has secured an insurance wrap on
the deal. Well now, the government wants to know the providence of the
guarantor's funds. Then, when they find out about the insurance wrap, they
have to investigate the insurance company and the individual broker who
will benefit. In the mean time, they find out that the way that you were
put in contact with the seller, was through a broker - let's call him Al,
who learned of the deal from broker Bob, who learned of it from broker Cal,
who learned of it from broker Don, who learned of it from broker Ed. Well
now, the government wants the passport copies and banking data on all five
of the brokers, even though their combined take will only be 0.5% of the
total price paid. If the paper is discounted at 30% of face, then all five
brokers will split only $150K, or $30K each on an even split. But, until
the government learns everything about every party to the deal, they will
hold up the entire $100M ($30M discounted) deal."
If you had not heard, the Moscow Times on October 9 reported that Russia
is again looking at pricing oil sales in euros instead of dollars,
reflecting the euro's growing role as a reserve currency. "European leaders
have long expressed interest in seeing energy contracts priced in euros
rather than dollars to promote the currency and boost price stability in
the European Union. Most energy contracts are settled in dollars, meaning
that for European buyers, trade in gas and oil is subject not only to
fluctuations in their market prices but also to variations in the value of
the U.S. currency. In 1999, just after Vladimir Putin became prime
minister, he laid out a proposal to move Russia's trade out of dollars and
into euros." Is this connected to the Treasury regs? There does seem to be
a link, with the Eurocrats encouraging this move into euros and getting
unexpected help from the KYC provisions.
I've heard indirectly that Treasury officials are pooh-poohing these
concerns, saying there are other reasons causing the dollar to fall against
the euro and that there is plenty of red tape in Europe. This misses the
point entirely, if indeed mega-million dollar transactions are being
delayed by several weeks. The invitation to shift to European red tape is a
tempting one, especially for big transactions and wealthy participants.
There is no red tape in Europe that demands as much confidential
information as the Treasury regs. With the new "clarifications" issued
earlier in October, the anecdotal evidence of a giant screw-up should be
making its way to the top via the big banks. There is nothing in my memory
of this kind of threat to the U.S. dollar as the world's key currency. It
does, though, go a long way in our analytical model to explaining why the
dollar has been losing ground to the euro and falling in value against gold.
Dr. Jude Wanniski
www.polyconomics.com
27 October 2003
*******************************
Jude Wanniski, president of Polyconomics, Inc., Morristown, New Jersey,
is one of the leading political economists in the United States. A
prolific writer and profound thinker, it was Mr. Wanniski who, as
Associate Editor of The Wall Street Journal from 1972 to 1978,
repopularized the classical theories of supply-side economics. His book,
The Way the World Works, published in 1978 to critical acclaim, and
which brings a passion and eloquence to the supply-side model of
political economy, became a foundation of the global economic
transformation launched by the Administration of President Ronald
Reagan.
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