Encima Global president and former Reagan adviser David Malpass says Federal Reserve Chairman Ben Bernanke should directly confront the fear index imbedded in high gold prices and low bond yields.
"Gold at more than $1,800 per ounce is a loud public statement of no confidence in our central bank," Malpass writes in The Wall Street Journal.
"It means people would rather buy gold than hire workers or start businesses — that they don't trust the central bank to maintain the value of their money."
|Fed Chairman Ben Bernanke
(Getty Images photo)
The Fed, says Malpass, has caused extraordinarily wide and harmful swings in interest rates, the value of the dollar, gasoline prices and inflation in recent decades.
“This makes precautionary investments like gold, bonds and foreign diversification more profitable than investing the old fashioned way in small, growing businesses,” he says.
The solution is for the Fed to rebuild a monetary system in which the dollar is a strong and stable store of value and capital is allocated based on interest rates and market forces rather than the rationing of regulatory capital.
"Gold prices would be lower and bond yields higher in anticipation of a growing economy and a safer financial system," he says, and incentives to invest in growing businesses would increase.
"The Fed's plump balance sheet can be pared back when growth starts," Malpass notes. "Last week's improvement in the gold/bond fear index provides an opportunity for the Fed and the administration to talk up the economy and put a bullish top on the price of gold."
Bloomberg Business Week reports that gold prices are climbing after new reports show consumers on both sides of the Atlantic are worried about the economy.
The reports found that consumer confidence fell in August in the United States and the 17 countries that use the euro.
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