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Peter Crabb: U.S. policies encourage gold hoarding — and that could help Idaho mines

In life, the golden rule is to treat others as you would have them treat you. In economic recessions, like that which we see now, it appears the rule has become “Hoard the Gold.”

This week central banks around the world increased their gold purchases. The Reserve Bank of India bought 200 tons of gold, worth $6.7 billion, from the International Monetary Fund. According to the Financial Times, China is also buying large amounts of gold - doubling their gold reserves. China is now the world’s fifth-biggest holder of gold.

As of Wednesday, gold prices were nearing $1,100 per ounce, up more than 8 percent since the end of September. Over the past year the price of gold has risen more than 40 percent and silver prices have risen nearly 50 percent.

Central banks from the likes of Russia and Mexico are buying gold to diversify their foreign exchange reserves. Banks in Asia and other parts of the world no longer want to hold as many U.S. dollars.

The dollar has fallen strongly against all six components of a key U.S. dollar index — the euro, Japanese yen, British pound, Swedish krona, Swiss franc and Canadian dollar. Just since the end of September, this index is off nearly 4 percent

Central banks will continue to buy gold rather than hold dollars as long as the United States has large fiscal deficits and the Federal Reserve continues its “quantitative easing” policy – buying up the long-term debt obligations of the Treasury and numerous government agencies.

Consumers are saving more as the recession continues. The personal savings rate is 3.3 percent as of September, compared with 1.7 percent at the end of 2007. But as a society our net savings, government and households together, is negative.

This week the Federal Reserve announced that interest rates will remain near zero and that its purchases of government debt and mortgage-backed securities will continue through spring of next year.

With such loose monetary policy, it is no surprise that others want to rid themselves of dollar-based investments and instead hoard gold.

The upside is perhaps better prices for many Idaho firms.

Rising prices for both gold and silver should lead to increased mining activity in Idaho. According to the 2008 Idaho Mining Review from the Idaho Geological Survey at the University of Idaho, silver and gold mining was up at the start of 2008 but fell off as the recession deepened.

Idaho mines like that run by New Jersey Mining Co. near Murray, north of Coeur d’Alene, may benefit from sustained higher prices driven by central bank buying in response to the Federal Reserve weak dollar actions. Policies that keep interest rates low and encourage borrowing may actually lead to a revival of Idaho’s mining industry as demand for precious metals rises.

The downside is potentially higher prices for all. Over the past decade, rapid increases in the gold and silver indexes have always preceded rapid increases in overall commodity prices.

Current U.S. policy discourages savings in productive assets like stocks and bonds and encourages many to hoard the gold.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.