Former Fed Chairman Alan Greenspan on Gold

Alan Greenspan

Where will gold be in five years? “HIGHER.” How much Higher? “MEASURABLY!”

Former Fed Chairman Alan Greenspan spoke Wednesday to the Council on Foreign Relations. He said QE ultimately fell short of its goals referring to the end of the bond-buying program, which aimed to lower unemployment and spur stronger economic growth.

Mr. Greenspan’s comments to the Council came as Fed officials were meeting in Washington, D.C., and expected to announce within hours the end of bond purchases. Mr. Greenspan said the bond-buying program was a mixed bag. “The purchases of Treasury and Mortgage backed securities did help lift asset prices and lower borrowing costs, but did not do much for the real economy.”

“Effective demand is dead in the water” and an effort to boost it via buying “has not worked” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

The former Fed Chairman was bearish on the economy and the state of central bank policy around the world. He observed that central banks historically could only prick bubbles at great economic cost. “It’s only by bringing the economy down that you can burst the bubble,” and it was something he was unwilling to do while leading the Fed. The question of when officials should begin raising rates is one “I cannot answer.” He then stated, “I don’t think it’s possible for the Fed to end its easy money policies in a trouble free manner.” Mr. Greenspan admitted, “we’ve never had any experience with anything like this so I’m not going to sit here and tell you exactly how it’s going to come out.”

He said the Fed might not be able to control when they raise interest rates. The problem as he sees it is the interest rate the Fed pays on the money banks park at the Central bank, called reserves. If bankers decide to put this money to work, creating inflation risks, the Fed may be forced to raise rates, even if the economy isn’t ready for it,” he warned. “I think that pressure is gong to come from the markets themselves.”

Mr. Greenspan then said that gold is a good place to put money these days given its value outside the policies conducted by governments. When asked about where gold would be in five years, Mr. Greenspan replied “Higher.” When asked how much higher, he said, “Measurably!”

Mr. Greenspan’s decision to publicly analyze the effectiveness of the QE program on the very day that his former colleagues were expected to announce its completion is remarkable, if only because during his tenure he was notorious for his desire to give the financial media little or nothing of substance to analyze about the Central Banks decision making process. These are comments that Mr. Greenspan would have never made while running the Fed, but now that he is a private citizen, he can freely be more direct with his honest opinions.

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