Central bank policy is obscuring market values, Warsh tells Stanford audience

Section:

10:04p ET Thursday, January 26, 2012

Dear Friend of GATA and Gold:

Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values, former Federal Reserve Board of Governors member Kevin M. Warsh told the Stanford University Institute for Economic Policy Research tonight.

This influence is especially evident, Warsh said, with the Fed's purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.

Warsh, who disclosed during GATA's freedom-of-information litigation with the Fed in 2009 that the central bank has secret gold swap arrangements with foreign banks (http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf), added that the Fed is trying to do too much and the rest of the government not enough to encourage economic growth.

While he said nothing explicitly about gold, Warsh seemed to come pretty close to your secretary/treasurer's observation almost four years ago that there are no markets anymore, just central bank interventions. (See http://www.gata.org/node/6241.)

... Dispatch continues below ...


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Sona Discovers Potential High-Grade Gold Mineralization
at Blackdome in British Columbia -- 13.6g over 1.5 Meters

From a Company Press Release
November 22, 2011

VANCOUVER, British Columbia -- With its latest surface diamond drilling program at its 100-percent-owned, formerly producing Blackdome gold mine in southern British Columbia, Sona Resources Corp. has discovered a potentially high-grade gold-mineralized area, with one hole intersecting 13.6 grams of gold in 1.5 meters of core drilling.

"We intersected a promising new mineralized zone, and we feel optimistic about the assay results," says Sona's president and CEO, John P. Thompson. "We have undertaken an aggressive exploration program that has tested a number of target zones. Our discovery of this new gold-bearing structure is significant, and it represents a positive development for the company."

Sona aims to bring its permitted Blackdome mill back into production over the next year and a half, at a rate of 200 tonnes per day, with feed from the formerly producing Blackdome mine and the nearby Elizabeth gold deposit property. A positive preliminary economic assessment by Micon International Ltd., based on a gold price of $950 per ounce over eight years, has estimated a cash cost of $208 per tonne milled, or $686 per gold ounce recovered.

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Warsh was especially critical of the federal government's efforts to stimulate the housing market. "The government-sponsored housing entities remain sources of vulnerability to the U.S. economy," he said, "and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense are deeply counterproductive." Such efforts have not succeeded, he added.

Warsh said higher real incomes are far more important to economic growth than recovery in the housing sector.

He said he opposed pursuing economic recovery through inflating debt away and devaluing the currency.

Warsh was the youngest person ever appointed to the Fed board, resigning eight months ago after five years in office, and is now a distinguished visiting fellow at the Hoover Institution at Stanford and a lecturer in the university's Graduate School of Business. He received his undergraduate degree at Stanford in 1992 and a law degree at Harvard three years later. He was special assistant for economic policy under President George W. Bush and executive secretary of the National Economic Council. He was also a member of the President's Working Group on Financial Markets, commonly known as the Plunge Protection Team.

Warsh spoke tonight from an outline he provided to GATA and then answered questions from his audience, which included Stanford faculty and students. The outline is appended.

Warsh's talk was broadcast live at the Internet site of the Stanford Institute for Economic Policy Research --

http://siepr.stanford.edu/

-- and video of it is expected to be posted there shortly.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Home Truths

By Kevin M. Warsh

Distinguished Visiting Fellow
Hoover Institution, Stanford University

Lecturer, Graduate School of Business, Stanford University

Excerpts from Remarks as Prepared For Delivery
to Stanford Institute for Economic Policy Research

Thursday, January 26, 2012

EMBARGOED Until 5 p.m. ET
Remarks Delivered at 8 p.m. ET

Regarding the state of the global economy:

-- Excessive spending and the assumption of new liabilities endanger the creditworthiness of key nations and undermine prospects for the global economy. The famed "paradox of thrift" -- used to justify still more aggressive policy -- is confronting the cold, dark comfort of a sovereign debt crisis.

-- Economies falter and markets flail when risk-free rates turn out to be not so risk-free.

-- Global economic conditions are weak, leaving the global economy far from a durable recovery. In spite of this, and substantial errors in the conduct of policy, the private sector in the U.S. is outperforming.

Seven "home truths" regarding the conduct of U.S. economic policy:

1. Policy has favored stability over growth and achieved preciously little of each.

2. Good economic policy takes time to bear fruit. Bad policy does harm in a hurry.

3. Exceptionally accommodative monetary policy can provide important transitional support for an economy. But recent policy activism -- measures that go beyond a central bank's capacity or traditional remit -- threatens to forestall recovery and harms long-term growth.

4. Central bank transparency is good, but transparency that delineates future policy breeds market complacency. It threatens to undermine the wisdom of crowds and the essential interchange with financial markets.

5. The primary responsibility of financial market regulation is to markets, not to firms.

6. The government-sponsored housing entities remain sources of vulnerability to the U.S. economy, and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense are deeply counterproductive.

7. In charting a better path for the economy, policymakers should remind themselves of two essential and oft-forgotten virtues: greater humility in the conduct of policy and stronger faith in the underlying resiliency of the U.S economy.

* * *

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Saturday-Sunday, February 11-12, 2012
Hyatt Grand Champions Resort
Indian Wells, California, USA

http://cambridgehouse.com/conference-details/california-investment-confe...

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Prophecy Coal (TSX: PCY) Wins Positive Feasibility Study
for the 600-MW Chandgana Power Plant in Mongolia

Company Press Release
January 17, 2012

VANCOUVER, British Columbia, Canada -- Prophecy Coal Corp. (TSX: PCY, OTCQX: PRPCF, Frankfurt: 1P2) has received a positive feasibility study for the company's 600-megawatt Chandgana Mine-Mouth Power Project in central Mongolia. The report was independently prepared by Ralf Thomsen, project manager at Steag, a German firm specializing in the planning, financing, construction, and operation of highly efficient thermal power plants for fossil fuels.

The study covers technical specifications, deployment, and financial analysis of a 4x150-mw thermal power plant to be built adjacent to Prophecy's Chandgana Tal coal deposit, which contains 140 million tonnes of measured coal. Last year the power plant received a construction license and the coal deposit received a mining license. Engineering, procurement, and construction management selection and project financing discussion have begun and are expected to be concluded this year.

Construction is planned to start in April 2013, with the first 150-mw unit being commissioned in October 2015 and subsequent units to start in April 2016, October 2016, and April 2017. With proper maintenance the project will have 30 years of commercial operation.

For the complete statement from the company, including maps and charts, please visit:

http://www.prophecycoal.com/news_2011_jan17_prophecy_receives_power_plan...