Hey, Washington, Buy Gold to Support Dollar, Guggenheim CIO Says

Worried about the dollar’s decline and Washington’s ballooning debt, Scott Minerd, global CIO of Guggenheim Investments, has a partial antidote: expand the US government’s gold holdings.

The addition to the Federal Reserve’s gold reserves could bolster the dollar’s standing, Minerd wrote in note. “With the Fed going all-in on financing the government deficit, the US dollar could be at risk to negative speculation of its status as the dominant global reserve currency,” he contended. “Investing in gold may help offset this trend.”

The basic idea, he explained, is that gold increases in value during bad economic times, as investors flock to it as a refuge. They reason that it is the ultimate tangible asset, incapable of being diluted, at least physically.

“The accumulation of gold as a reserve asset historically has been seen as a responsible policy response in periods of crisis,” Minerd argued. “This may very well become the policy option of choice in the future.

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The shiny metal, an ancient store of value, has for decades occupied a niche of the financial world. Originally, gold backed up the dollar, but that system proved outmoded for a world of rapid-fire currency trading. President Richard Nixon severed the last tie of gold to the dollar in 1971.

Gold has been on the rise with the coming of the pandemic and the recession. Since March 19, it has advanced 16.7%. Meanwhile, over the same period, the US dollar has tumbled 6.8%.

This comes amid enormous federal rescue efforts, with the Treasury Department aiming to borrow $3 trillion to cover the tab. To bolster the government’s campaign, the Federal Reserve intends to buy enormous amounts of the new Treasury bond supply. This maneuver is called quantitative easing (QE), which also is aimed at holding down interest rates.

“Given the government’s financing needs, I expect that the next QE program will be larger than any previous rounds of QE in terms of monthly purchases,” Minerd said. The Fed will need to step up its Treasury paper purchases, he went on, adding, “it will likely take at least $2 trillion in asset purchases per year just to fund the Treasury.”

Right now, the entire gold storage of the US government (261.4 million ounces) has a market price of $452 billion. The Fed holds 5% of that, or $22.6 billion. The gold is stored in various vaults around the country, including beneath the Federal Reserve Bank in New York and at Fort Knox, Kentucky, the site of a fictional attempted plot in the classic James Bond film, “Goldfinger.”

Famed British economist John Maynard Keynes disparaged gold as a “barbarous relic,” although demand for the metal never has gone away. In addition of its use for jewelry, gold has an avid following among private investors. They buy it either as bullion (usually gold bars) or in coin form.