Steve Forbes: Gold Should Be An Insurance Policy In Your Portfolio

This is a summary of a very interesting Q&A with Steve Forbes (founder of Forbes, former presidential candidate and author of the book Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t) conducted at the Freedomfest 2013 event. Courtesy of Kitco.

Mr. Forbes starts by saying that free markets have a bad rap because it involves money and so it’s very easy for big government types to portray markets as based on greed, selfishness, hurting other people. Government always portrays itself as “yes we may be a little inefficient but our hearts are in the right place; we are there to help the people and prevent bad things.” Government occupies the high moral ground, but it does just the opposite. Big government looks after its own selfish needs. In free markets you only succeed if you provide something that somebody else wants or needs.

Question: What would be needed in order to have a properly functioning gold standard?

A gold standard is like a ruler (like 12 inches in a foot or 5,280 feet in a mile). It like a fixed measure in the marketplace. What a gold standard does is just ensure that the value of the US dollar remains stable. So if you make an investment and get paid back in five years it still is a 100 cent dollar and not a 20 cent dollar.

Interest rates are the price of money. What the Fed does is a form of a price controls. We know from 4 000 years of experience that price controls do more harm than good. That is one reason why we have had a punk recovery in this economy. The Fed has totally distorted the credit markets.

Question: Would the gold price need to be pegged at a certain price in a gold standard?

Yes. Let’s take a hypothetical example. Let’s say you peg the gold price at $1,200 an ounce (this is a hypothetical number). It means that if the gold price goes above $1,200 the Fed tightens (prints less money). If it goes below that price the Fed prints more money.

Question: Is the Fed trashing the dollar?

Yes when the dollar has uncertain value it means that people tend to go to hard assets. There are less future-oriented investments. Money just stays on the sidelines. Investing is risky enough but if you do not know what you are going to get paid back it makes investing exponentially more risky.

Question: Given the world landscape right now are you buying gold and what are your thoughts on gold today?

Gold should be simply like an insurance policy for your portfolio. If things go wrong you have something that is going to protect you. In terms of investing in gold that is a very tricky thing which we have seen in the last two years. Gold has gone from $1,900 to about $1,300. You have to be very careful. You should buy it mainly as an insurance policy. If the politicians do things right then you can invest your money in productive assets.

Question: What should the fair value of gold be?

Let the market tell it. If the government announces that it is going to set the dollar to gold, using gold as the ruler, the markets will tell you quickly. A lot of the price movement in recent years in gold was in anticipation of bad things happening. You are always trying to divine what the people running the Fed are going to do.

Anytime Ben Bernanke talks people are wanting to divine what is going to happen. The Fed has created a lot of money, put it on the market place and then pull it back in by paying interest on bank reserves.

Question: What is the solution of money printing not working?

Sound value for money. It’s like 60 minutes in an hour. You do not try to stimulate the economy by increasing the number minutes in an hour; it is a fixed measure.

Question: What do you think of the ongoing currency war?

It gets to the whole illusion that if you trash your money you get an advantage against your neighbor ignoring all the other distortions introduced into the economy. We saw the same thing in the 1930s: everyone devalued their currencies in the early thirties. We saw the same thing in the inflationary 1970s. Neither decade went down in history as a very good one; the were both disastrous decades.

Question: Where do you see the US dollar headed?

Right now it’s strengthening not because the Fed is doing things consciously but because they are doing a few things less now than they were before. Because they have no real anchor you do not know what they are going to do next. I hope that after 2016 we get a new president who realizes that fooling around with the dollar is not the way you make a strong country and strong economy.

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