Business and Finance

Gold is soaring to record high prices, and guess who has the biggest stash?

The U.S. government.

The Treasury Department has 261.5 million ounces of gold in its reserves, representing about a third of the gold stockpiles held by governments around the world. With gold selling at about $1,100 an ounce, that means Uncle Sam is sitting on $288 billion worth of the shiny stuff.

Treasury’s gold sits in vaults across the country. It holds about 25,000 bars in a vault five floors down, 80 feet below street level, in the New York Federal Reserve in Manhattan. The majority of the nation’s gold reserves still reside in Ft. Knox in Kentucky.

But rather than sell it, the government is hanging onto its bullion.

So are other global central banks. In fact, as the dollar continues its downward spiral, many countries are even buying up gold.

Last week, the International Monetary Fund offered up 400 metric tons of gold, and the Reserve Bank of India bought 220 metric tons of it. Sri Lanka bought 5.3 metric tons in the auction as well. In the second quarter, central banks were net buyers of gold for the first time since 1997.

"Gold is gold," said Nathan Lewis, author of Gold: The Once and Future Money. "There’s no real change in gold’s value. Only the value of paper currency declines."

Gold has come in and out of fashion with investors over the years. In times of economic instability or inflation, gold demand and prices have trended higher. Despite wild price fluctuations over the years, gold has maintained its purchasing power for about the past 750 years.

"From the mid-14th century until now, you can draw a relative straight line in the purchasing power of gold, and every central banker in their heart knows that," said Judy Shelton, an economist and director of the National Endowment for Democracy. "Gold is universally recognized as a store of value. That’s important because it denotes price stability."

Gold had been the standard currency for international trade for centuries. In fact, the Federal Reserve vault in New York has compartments for different countries. When one country would trade with another, a "sitter" would simply move bars from one compartment to another, according to David Girardin, spokesman for the New York Fed.

Gold’s inherent value is buoying its resurgence in popularity. The comeback also raises important questions about the United States’ own reserve position and the government’s ability to maintain demand for U.S. Treasury bonds as the world catches the gold bug.

Why we’re sitting on it

Governments’ dependence on gold has waned over the years, but they still hold 848 million ounces of it, down 29% from the 1965 peak of 1.2 billion ounces, and just 10% from the 942 million ounces they held 50 years ago, according to the World Gold Council.

Curiously, Treasury still values its gold at $42.22 per ounce. Congress reached that figure in 1973, two years after the the post-World War II Bretton Woods gold standard, which had valued gold at $35 an ounce, was scrapped.

With gold selling at prices 26 times that amount, why doesn’t the Treasury, and by extension, the Fed, realize those gains on their balance sheets by displaying the market value of their holdings? Or, with the gold standard abandoned, why doesn’t the government sell off its reserves to put that money into the economy or pay off debt?

There are lots of reasons, ranging from the psychological to the practical.

"If we started selling gold from our official reserves, it would be recognized as a sign of weakness for the dollar," said Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital. "America’s relatively large gold holdings provide some psychological benefit to our currency."

Many gold experts and economists agreed that even though the gold standard has been abandoned for nearly 40 years, the world is still cleaving to its gold because it is a tangible asset.

Another reason for Treasury to hold tight is gold’s fluctuating price. Just ask British Prime Minister Gordon Brown. When Brown was the nation’s chief finance minister a decade ago, he decided that gold had become relatively useless to the government — without the gold standard, it was just an inert metal, and it was expensive to store.

Brown sold off 400 tons, or 60% of the United Kingdom’s gold, between 1999 and 2002. Brown’s problem: Gold was selling at a record low inflation-adjusted average of $275 an ounce at the time. It turned out, had he waited 10 years, the U.K. would have made four times what it hauled in from the sale.

"Geithner doesn’t want to be the Treasury secretary that sells gold at $1,100 an ounce and next year it’s at $2,000," said Shelton.

Furthermore, a sale of all the country’s gold wouldn’t make much of an impact. With the nation’s annual deficit at $1.7 trillion, a $787 billion stimulus package and a $700 billion bank bailout, $300 billion is kind of puny in comparison.

"The Fed has plenty of tools to pump money into the economy; it doesn’t need to sell gold to do it," said Lyle Gramley, a former Fed governor. "The government has its gold by historic accident, but there’s no reason why they’d sell it — there’s no motivation."

But most of all, a sale of the government’s gold would be especially poorly timed now, since foreign central banks are lining up to add gold to their reserves. As a result, experts say a mass-sale of gold would mostly end up in other nation’s coffers.

That could spell disaster for the U.S. government, which is trying to finance its economic rescue packages by selling record amounts of debt to foreign countries in the form of Treasury securities. As gold holdings take up a larger percentage of foreign reserves, Treasury holdings could be reduced.

Shelton, who believes that paper currency should have ties to hard assets, said the resurgence of gold buying should be unsettling for the government. The trend indicates that some foreign countries would rather hold onto an inert metal than Treasurys that pay interest. Treasurys have long been viewed as a riskless asset, because they are tied to the dollar and are backed by the U.S. government.

"If the trend continues, that could reduce the demand for Treasury securities and bonds’ book value would go down," said Shelton.  

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The U.S. trade deficit widened in September by an unexpectedly large 18.2 percent, the most in more than 10 years, as oil prices rose for the seventh straight month and imports from China bounded higher, a U.S. government report showed on Friday.

The monthly trade gap grew to $36.5 billion, from a slightly revised estimate of $30.8 billion in August. Wall Street analyst had expected the shortfall to grow modestly in September to around $31.65 billion.

Both U.S. exports and imports had their best month since December 2008. But in a sign of renewed U.S. economic growth, imports grew 5.8 percent in September, the biggest monthly gain since March 1993, while exports rose 2.9 percent.

Imports of industrial supplies and materials showed the biggest gain, suggesting that U.S. manufacturers are ramping up for production.

The average price for imported oil leapt to $68.17 per barrel and imports from the Organization of Petroleum Export Countries increased to $11.9 billion in September, both the highest since November 2008.

The closely watched U.S. trade deficit with China widened 9.2 percent to $22.1 billion as imports grew 8.3 percent to $27.9 billion, both also the highest since November 2008.

The overall U.S. trade deficit, including with China, has fallen significantly this year in response to the worst economic downturn in decade faxless payday loans.

But the gap with China narrowed just 15.9 percent in the first nine months of the year, compared with much bigger declines for Canada (79.6 percent), the European Union (42.0 percent) and OPEC (71.8 percent).

That has reinforced ideas that China’s currency remains overvalued against the dollar, giving Chinese companies an unfair trade advantage.

President Barack Obama is expected to raise concerns about China’s exchange rate regime when he meets with Chinese leaders next week in Beijing. On Friday he was in Japan for talks before heading to Singapore for this weekend’s annual summit meeting with leaders of the Asia Pacific Economic Cooperation forum.

With U.S. unemployment the highest in 26 years, Obama has said he would press for a rebalancing of world economic growth where countries in Asia would open their markets to more American goods and rely less on exports to the United States and more on their own domestic demand.

(Reporting by Doug Palmer, Editing by Neil Stempleman)

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Pushing for tougher changes in U.S. financial regulations, the Senate’s top banking legislator on Tuesday proposed a new super-cop to police banks, a systemic risk agency and strong consumer protections.

Senator Christopher Dodd, who is fighting for his political life back home in Connecticut, unveiled a 1,136-page bill that leaps ahead of previous, more moderate financial reform proposals.

The long-awaited Dodd bill raises the stakes in a struggle under way for more than a year now, with Democrats working to bring the outdated U.S. regulatory system into the 21st century and prevent a repeat of the capital market crisis that last year pushed the financial system to the brink of disaster.

Senate Republican Leader Mitch McConnell told reporters there were no signs yet of Republican support for the bill.

Dodd would create a single bank regulator by closing two existing regulators and stripping two others, including the Federal Reserve, of direct bank supervision duties.

He also seeks crackdowns on over-the-counter derivatives, hedge funds, mortgage-backed securities, credit rating agencies and executive pay, reflecting Obama administration proposals in some ways, but charting new territory in others.

Flanked by eight other Democratic senators, Dodd released his comprehensive bill at a news conference. He said he is targeting early December for debate to begin in the Senate Banking Committee, which he chairs.

“The financial crisis exposed a financial regulatory structure … unable to prevent threats to our economic security,” Dodd said. “This proposal will create a new architecture to make our financial institutions more transparent, more responsible, and more accountable online cash advances.”

The late 2008 collapse of ex-Wall Street giant Lehman Brothers and massive taxpayer bailouts of firms such as AIG and Citigroup sparked a flood of concern over the risks of firms considered “too-big-to-fail,” exotic investment instruments and other areas.

While bank lobbyists and most Republicans are trying to preserve the status quo, the administration and Democrats in the House of Representatives have been making some halting progress.

REPUBLICAN SUPPORT LACKING

The Dodd bill will restore momentum in the Senate to the issue. But it was expected to win little or no support from Republicans, setting the stage for still more debate, with analysts expecting no final Senate action until 2010.

The size, complexity and controversy of the Dodd measure mean “it is unlikely that the bill will be passed by the Senate before the end of the year,” said policy analyst Brian Gardner at investment firm Keefe Bruyette & Woods.

Reaction to the bill off and on Capitol Hill was mixed. Lobbyists for big banks and small alike criticized the proposed single bank regulator, while insurance industry groups questioned portions of the legislation.

Democratic colleagues of Dodd and consumer activists praised his support for the Obama administration’s proposal to create a Consumer Financial Protection Agency that would regulate mortgages, credit cards and other financial products. 

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EU antitrust regulators launched an investigation on Tuesday into news and financial data publisher Thomson Reuters’ use of its real-time market datafeed, saying it might block users moving to rival firms. The European Commission, which polices competition in the 27-country European Union, said the investigation was launched on its own initiative and that it did not imply it had proof of an infringement.

The Commission said it would examine whether Thomson Reuters could prevent clients from mapping Reuters Instrument Codes (RICs) to alternative identification codes of other datafeed suppliers.

“Without the possibility of such mapping, customers may potentially be ‘locked’-in to working with Thomson Reuters because replacing RICs by reconfiguring or by rewriting their software applications can be a long and costly procedure,” it said in a statement.

RICs — short, numerical codes that identify securities and their trading locations — are used to retrieve information from Thomson Reuters’ real-time datafeeds which are virtual pipelines of electronically distributed real-time market data that feeds software applications developed by banks and financial institutions.

Thomson Reuters confirmed it had received a questionnaire from the Commission on the use of RICs and that it was cooperating with the Commission easy payday loans.

“Thomson Reuters provides its customers with consistent, dependable and convenient access to several million financial instruments from almost every electronic trading venue around the world and a vast number of other sources of valuable high quality content,” the company said in a statement.

“Thomson Reuters data is reliably and consistently identified by a managed code, which we create and maintain to enable navigation of the company’s global content. Our customers are at the heart of our business and we continue to work with them to explore how best to add value to our data services.”

The statement added: “Thomson Reuters will fully cooperate with the EC Commission’s investigation which is at a preliminary stage.”

The company was formed last year by the merger of Thomson Corp and Reuters Group Plc. Its markets division competes with Bloomberg LP and News Corp’s Dow Jones Newswires.

There is no strict deadline for the Commission to complete its investigation.

(Reporting by Foo Yun Chee, editing by Timothy Heritage)

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Is the Fed about to hit the brakes on the Wall Street gravy train?

A year after they survived the financial meltdown with considerable taxpayer help, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) stand to spend $35 billion combined this year on employee compensation.

The average Goldman worker is on track to take down more than $600,000 in pay and perks — in line with levels from 2007, before the economy cracked. Former Federal Reserve chief Paul Volcker said last month that Wall Street pay has gotten "grotesquely large."

But the bonus bubble could be peaking. After years of lassitude, the Federal Reserve is preparing to force big banks to abide by longstanding rules banning excessive or inappropriate banker pay.

What’s more, regulators appear to be paying special attention to the risks posed by the lucrative trading that has sent profits at firms like Goldman and JPMorgan Chase soaring just months after last fall’s brush with disaster.

Given the bruising the Fed has taken for its failure to act during the credit bubble, some commentators believe officials will flex their muscles.

"If they stand by the principles they laid out last month, we can expect them to give the big banks some pushback," said Eleanor Bloxham, who runs the Value Alliance/Corporate Governance Alliance advisory firm. "I think they’re going to continue to push on all this to make sure we don’t get another disaster like the one we just had."

The Fed said Oct. 22 that a review of bank pay practices will "focus on whether compensation arrangements provide employees incentives to take excessive risks that could threaten the safety and soundness of the banking organization."

Goldman and Morgan Stanley aren’t big deposit takers or lenders. But they are subject to federal oversight of their pay practices, thanks to last year’s decision to become Federal Reserve-regulated bank holding companies in the name of getting access to emergency funding.

A report last month from law firm Stroock & Stroock & Lavan notes that the Fed proposal "makes reference not only to employees commonly thought of as associated with banks, such as ‘loan officers,’ but also to ‘traders.’"

Traders are a natural focus for compensation scrutiny, given the enormous upsurge in trading profits at taxpayer-backed banks such as Goldman, JPMorgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500). Trading and principal investment revenue accounted for 81% of Goldman’s total revenue in the third quarter, up from 45% a year ago.

The big banks have benefited from numerous forms of federal assistance beyond the Troubled Asset Relief Program loans that many have since paid back. They have also issued tens of billions of dollars of federally insured bonds and gained from the Fed’s efforts to keep interest rates low.

"The problem is that there are a lot of subsidies with no strings attached, and now these guys are making huge sums of money," said Mark Sunshine, who runs a financial advisory firm that specializes in financial institutions. "Why should so many of the benefits flow to the traders?"

For now, they do because a dearth of competition and a rebound in financial markets has fed a profit surge at Goldman. Though it and Morgan Stanley are now Fed-regulated, they carry on the Wall Street tradition of paying out roughly half their revenue as employee compensation.

Both firms say their policies encourage pay for performance, balance short-term and long-term goals and discourage excessive risk-taking. Goldman says its compensation principles are in line with the guidance issued by the Financial Stability Board overseen by the Group of 20 rich nations.

But Bloxham said it’s not clear that either firms has addressed the core of the Fed’s proposal, which dictates that pay be based on so-called risk-adjusted returns.

Goldman says it manages prudently and conservatively. But the amount it stands to lose in a given trading day has risen since last fall.

Goldman has trumped that statistic by winning a huge proportion of its bets. The firm said this week its trading desk managed to make money on 64 of the 65 business days in the third quarter, including 36 $100 million-plus daily profits.

Todd Gershkowitz, a senior vice president at compensation consultant Farient Advisors, said those numbers show the runaway pay game hasn’t changed on Wall Street.

"They’re still accruing bonuses the same way they’ve done for 20 years, regardless of whether those revenues are high quality revenues," said Gershkowitz, speaking generally of big Wall Street firms. "The problem is that no one is pounding on the door saying cut this back."

Given that the sums set aside for bonuses come directly out of shareholders’ pockets, Sunshine wonders why Goldman Sachs and Morgan Stanley haven’t faced more questions about their pay levels.

"Will the trader making x millions of dollars really walk if you cut that back?" he asks. "I don’t understand why the shareholders aren’t going nuts."  

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The college application process that dominates senior year for many high school students is always stressful, but this year it’s even worse.

A report from the College Board shows that college costs continue to rise far faster than parents’ salaries: In-state public schools are pushing $20,000 a year and it costs double that to attend the average private college.

At the same time, college savings account balances have fallen, other costs have risen as many parents face unemployment, debt problems and other financial challenges. And more students than ever are applying for college, providing increased competition for the most coveted seats and scholarship programs.

Feel discouraged yet? Don’t be. Instead, remember that there are many, many paths to happiness and success that don’t run through Harvard yard or Yale’s central campus or even straight through any four-year program.

Go out and talk to folks in their mid 20s, and you’ll discover many, many people in great jobs and happy relationships who transferred into (and out of) those top name brand schools, took pre-college breaks, started at community colleges, finished at their state schools or took myriad other routes to their current situations.

So avoid worrying and avoid the stress-spewing mother (you know who she is) who waits for you in the parking lot at all of the soccer games wanting to know how your kid is doing on his apps.

Instead, focus on taking a practical, educated and smart approach to the whole college applications and financial aid process that will get your kid into a college he’s happy with and that will give you a payment strategy that won’t bankrupt either one of you.

To do that, focus on finances from the start. Here’s how:

– Have your child apply to a broad list of schools, including multiple schools that compete with each other for students. Don’t just consider state colleges and universities, because many private schools have larger endowments from which they can make bigger grant awards. When considering the list of schools, don’t look only at the academic or social issues, look at their budgets. One new college planning site, www.wisechoice.com , offers students and their families estimates of how much aid they are likely to get from every school they put on their list. They calculate this based on the aid awards the schools have given in the past.

– Do a rough cut of your family finances. Use the estimated financial aid calculators here to see how much money your family will be expected to contribute to tuition, room, board and expenses. If it’s an entirely unrealistic amount, based on what you’ve got in savings and how much you expect to earn over the next few years, start making alternative plans fast payday loan no faxing. These could include lining up other sources of money, such as a home equity line of credit or a loan from Grandma, or they could be alternative academic plans, such as having your child focus on schools that pay large amounts of merit aid, which is based on the student’s accomplishments and not on family need.

– Be ready to get the financial aid numbers in early. Send those aid applications in before the end of January, even if you have to later revise some answers. Schools tend to be more generous with financial aid awards early in the season. Position your 2009 income to be as low as possible before the end of the year is out. That includes deferring any bonuses or extra income you expect to make until 2010, taking tax losses and sending in any extra deductible health-care or tax payments before the end of the year. It could help your family qualify for financial aid for the 2010-2011 school year.

– Consider lots of alternatives. Community colleges are among the best. Even students who attend top-flight colleges have figured out they can take some of their basic required courses at a local two-year school and save on tuition. Most community colleges have agreements with state university systems; if you get reasonable grades in the first two years of community college you can transfer automatically into the flagship four-year school. That will save you money and give you time to decide on a major and build savings for the last two years. Other alternatives worth considering: Take a year off between high school and college to work and save money; squeeze four years of college into three or three and a half; attend college part time and work full time, or sign up for a four-year combined bachelor’s/master’s program.

– Plan to make the investment fit the projected results. A quick glance at Payscale.com (here) will reinforce what you probably already know: Starting salaries for engineers and scientists are a lot higher (roughly $60,000) than they are for liberal arts grads and social workers (under $40,000). And most social workers need to go on to collect their master’s degree to progress in their career. While the post-graduate paycheck may not be the most important consideration in a college plan, it is worth looking at in deciding how much debt to get into. Federal student loans do offer special repayment options for people who go into low-paying fields, but if you expect graduate school to be in the future, don’t spend every penny on undergraduate school.

(editing by Gunna Dickson)

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The U.S. Federal Reserve on Wednesday expressed growing confidence that an economic recovery was building, even though it stuck to its commitment to keep borrowing costs near zero for “an extended period.”

As expected, the Fed kept its benchmark federal funds rate unchanged in a range of zero to 0.25 percent, and said the economy had “continued to pick up” since its last policy-setting meeting in September.

The Fed, the U.S. central bank, also said it would buy about $175 billion of debt issued by government-backed mortgage finance agencies, less than the $200 billion maximum it had originally allotted, citing limited availability.

In its closely watched policy statement, the Fed said household spending “appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”

That was somewhat more upbeat than September’s statement, which referred to spending as “stabilizing.”

The central bank, wary of undercutting the fragile recovery by withdrawing its support too soon, is also on guard for any indication that its emergency lending efforts are fueling an unwelcome bout of inflation as the economy heals.

But top Fed officials, including Chairman Ben Bernanke, have said the U.S. recession, the most painful since the 1930s, has left a legacy of high unemployment and idle factories that should keep price pressures in check.

A private report on Wednesday showing U.S. companies cut payrolls at the slowest pace in more than a year may add to a sense that the economic numbers are moving in the right direction.

However, while the government on Friday is expected to report that the drop in employment is abating, the jobless rate is forecast to rise to a fresh 26-year high of 9.9 percent.

The world’s largest economy grew at a faster-than-expected 3.5 percent annual rate in the third quarter, which effectively signaled the end of the downturn.

Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in 3-1/2 years last month, though a report on Wednesday showed the nation’s vast services sector was growing only modestly.

In an act demonstrating confidence in the economy’s prospects, billionaire investor Warren Buffett on Tuesday said his company, Berkshire Hathaway Inc, agreed to purchase the nation’s largest rail company, saying it is poised to benefit from the recovery.

While the outlook has improved, many economists still expect the recovery to be sluggish and in need of the Fed’s easy-money policies for a while longer.

Unemployment is expected to climb into next year, damping consumer spending, which accounts for around 70 percent of U.S. output. The banking system is still under pressure from loan losses, and credit remains tight.

Most analysts at top U.S. banks have been expecting the Fed to keep interest rates on hold until mid-2010 or later. 

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Human Genome Sciences Inc said on Monday its experimental lupus drug Benlysta was successful in a second large clinical trial, paving the way for approval of the first new treatment for the disease in 50 years.

Results of the late-stage trial showed patients given a high dose of the drug, Benlysta, experienced a statistically significant improvement in symptoms compared with those taking a placebo.

Hopes for Benlysta have been growing since July, when it was shown to work in a first clinical trial to the surprise of many experts who had been skeptical, given the previously poor track record of new lupus treatments.

But to win approval from regulators, Human Genome and its partner GlaxoSmithKline Plc needed to have a second successful study result.

“This is a pivotal moment in lupus research,” said Margaret Dowd, president of the Lupus Research Institute, an organization that funds lupus research but did not fund Human Genome Science’s trial.

“It demonstrates the power of innovative science to drive discovery and achieve solid clinical results in the complex autoimmune disease of lupus.”

Panmure Gordon analyst Savvas Neophytou said the companies had struck gold with the latest results and predicted that registration of the drug would now be “routine,” adding the new blockbuster could be on the market by mid-2010.

Shares in Human Genome jumped 18 percent in early trading in Germany, while Glaxo stock was down 1 easy online payday loans.5 percent.

Glaxo and Human Genome, which will share profits from Benlysta on a 50-50 basis, said they planned to file for approval in the first quarter of next year.

$3 BILLION POTENTIAL

Assuming Benlysta now gets approved, Human Genome and Glaxo will have a drug worth as much as $3 billion a year, according to some analysts — nice for Glaxo, the world’s No. 2 drugmaker, and transformational for Human Genome, a small Rockville, Maryland-based company that has struggled in the shadows for years.

Data from a composite of three measures in the latest trial showed that after 52 weeks, 43.2 percent of patients taking 10 milligrams of Benlysta in combination with standard of care achieved an improvement in symptoms, with no significant worsening of disease in individual organs.

That compared to a figure of 33.8 percent for patients taking Benlysta in combination with a placebo.

The result met the main goal of the clinical trial.

Lupus causes the immune system to attack the body’s own tissue and organs, including the joints, kidneys, heart, lungs, brain, blood and skin. It can cause arthritis, kidney damage, chest pain and skin rash, among other disorders. 

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