Will 'Audit The Fed' Impact The Price Of Gold?

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Includes: GLD, SLV
by: Michael Fitzsimmons

On July 24, 2012, the House of Representatives passed an historic piece of legislation know as the Audit the Fed resolution. The bill, which calls for a full audit of the Federal Reserve System-- including its lending facilities and monetary policy operations-- passed overwhelmingly by a bipartisan vote of 327-98.

Rep. Ron Paul (R-TX), who is also Chairman of the Domestic Monetary Policy and Technology Subcommittee, is an ardent supporter of "sound money." Many feel his legislation may the lead the country back to the Constitutional requirements for a U.S. currency backed by gold and silver. Some think such a transition would be very bullish for gold. But will gold prices stand to benefit from passage of this bill?

It may be anecdotal and simplistic, but let's begin by taking a look at a 30-day gold chart which includes the day of the bill's passage up to the present time:

Gold was roughly $1583 on the day of the bill's passage. As I write this article, gold is trading at $1674 - up 5.7% since July 24th. This is not a claim of "cause an effect", just a data point for whatever it's worth. It is important to note most of the move in gold has been in the last few days, nearly a month after the bill's passage.

Ron Paul

Upon passage of the bill, Paul's office issued the following press release:

I am very pleased that the House passed my Audit the Fed legislation today," Congressman Paul stated. "It has been a long, hard fight, but Congress finally is getting serious about exercising its oversight responsibility over the Federal Reserve. Auditing the Fed is a common sense issue supported by the overwhelming majority of the American people. The Fed's trillions of dollars worth of asset purchases and its ongoing support of foreign central banks cannot be allowed to continue without Congressional oversight. Today's passage of H.R. 459 is a good first step towards full Fed transparency, and I hope that the Senate will consider the bill before the end of the year.

Paul has been an outspoken critic of the Federal Reserve, calling it the most destructive financial institution in the world. He has also been a staunch defender of what he terms "constitutional money", which he describes as primarily gold and silver He backs up his claim with constitutional law. In Congressman Paul's own words:

The American people have suffered for decades from the declining purchasing power of the dollar. The Federal Reserve has abused its position as the monopolist issuer of currency to enrich Wall Street and impoverish Main Street," stated Chairman Paul. "The Fed can effectively create money out of thin air with impunity, while creators of gold and silver currencies face jail time. This is a travesty. The only way to stabilize the economy is to return to monetary freedom by legalizing Constitutional money. Until the American people are free to choose the money they want to use, and not what the government forces them to use, the economy never will be truly stable and any recovery will be illusory.

My Seeking Alpha review of Ron Paul's book End the Fed can be read here.

But Will the Legislation Actually Impact The Price of Gold?

The question remains whether or not such legislation will actually affect the price of gold. One of Paul's goals is to conduct an independent audit of the United States' actual gold inventory. The United States claims more reserves than any other country. Although Paul has stated there is no reason to believe the gold inventory is not as reported, he does believe an independent inventory audit is important to prove that the gold reserves are as claimed. Upon auditing, if those gold reserves were to be substantially less than claimed by the government, it would certainly adversely affect the value of the U.S. dollar. Since gold prices, like oil, are commonly linked to the value of the U.S. dollar, gold would rise accordingly.

Will the Senate Even Vote on Audit the Fed Legislation?

Although Paul's Audit the Fed bill passed the House, and despite the Senate Majority Leader's past support for similar legislation, no vote has been scheduled on the bill this year in the Senate. Only 29 Senators have co-sponsored Senator Rand Paul's version of the bill in the Senate. Paul believes it will take grassroots pressure from the American public to force the Senate leadership to hold what would be a very popular vote. In fact, "Audit the Fed" is so popular that 75% of all Americans support it according to this Rasmussen poll.

Despite the overwhelming support of the American people, I doubt the Senate will even bring the bill to a vote this year. In fact, I seriously doubt the bill will ever see the light of day in the Senate. Congress is unlikely to shoot the "golden goose" (pun intended) which enables them to run the deficits both parties apparently find necessary. For this reason, it is doubtful Paul's legislation will have any direct affect on gold prices (other then the previously mentioned potential of a gold reserve audit uncovering falsely reported reserves). That said, the price of gold should do fine on its own for many of the reasons Paul criticizes the Fed: the U.S. dollar will continue to be devalued in order to "fund" big government, an over-reaching military, and resulting fiscal deficits. So I remain bullish on gold and silver and the gold and silver ETFs (NYSEARCA:GLD) and (NYSEARCA:SLV) respectively.

What if the Senate Were to Vote and Pass Audit the Fed?

If the pundits are wrong and Audit the Fed legislation does pass the Senate, then it would be a whole new ball game. The ability of Congress to influence Fed monetary policy could be a seismic shift in the gold market. Consider current events: gold, and commodities in general, seem to be rising simply in anticipation of more Fed action via QE2. If Congress was able to throttle the Fed, gold could very well gyrate based on Congressional elections. Were Congress to reduce or eliminate Fed easing instruments and in conjunction get a handle on the country's fiscal deficits, the combination would be very bullish for the U.S. dollar and therefore bearish for gold. However, in today's environment that scenario seems, at best, very remote. Once again, the safer bet is to stay long GLD and SLV.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.