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The Return of Gold from Commodity to Currency
By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch - GoldForecaster.com



-- Posted Sunday, 25 February 2007 | Digg This ArticleDigg It! | Source: GoldSeek.com

Gold Forecaster - Global Watch  - 20th February 2007       

-         Below is the presentation from www.GoldForecaster.com to the

Virtual Gold Conference

http://www.GoldSeek.com/2007

It’s both a pleasure and an honor to represent the Gold & Silver Forecaster at Goldseek’s Virtual Gold Conference today.

 

As gold has many facets and culturally different gold markets, as well being influenced by a host of external markets, it is critical to get a proper perspective of the metal.  The importance of this perspective is overriding or participants will only conclude it is a volatile and unpredictable asset.   A proper perspective gives us understanding of gold.   Our talk today aims to give investors a background against which to understand the main flows in the price of gold, today and in the future.

 

In this presentation, we will cover the decline and fall of gold, the advent of the €, to the turning point for gold and finish with today’s position of gold in this world.

 

The decline and fall of Gold

Gold and silver has been man’s money throughout history, that is until 1971.   Then Nixon refused to exchange gold for U.S. dollars held by European Central Banks.   At this point, the world faced a major monetary disaster, with the $ having failed to gain the confidence of the European nations as the U.S.$ began to bleed from the States, overseas.

 

What happened next has set the standard for the years since then.   The $ had to regain credibility with Europe and the world’s support.   The $ had to be made attractive and constantly in demand.   It had to meet the criteria demanded of a global currency.   The U.S. with its dominance over the oil producing nations made sure that oil was priced in the U.S.$ alone, giving rise to a constant demand for the U.S.’ money across the world.   As the wealth of the developed nations grew in the second generation after the war, their demand for the U.S. $ grew alongside their demand for oil.   Since then the U.S.$, tied to oil, has for forty years been the globe’s established global reserve currency to the point at its peak it accounted for 86% of the world’s international transactions and 76% of its reserves.     

 

Of course gold had served as global money throughout the difficult 20th century until then, so the world had to be weaned off this type of money.   Naturally Central Bankers favored paper money not simply for the acceleration it provided global growth, but because it could be leveraged without regard to the underlying value it had, based on the economy of the issuer.   Gold highlighted and restrained the profligacy of the money issuers.   So they decided that gold had to be emasculated and sidelined.   Through accelerated gold production and sales and Central Banks sales sufficient to persistently weaken the gold price, the $ was made to rule.   This campaign was successful, taking the gold price down to $275 from its peak of $850.  

 

With gold removed from its active role as daily money, the need to relate paper currencies to an intrinsic value, left with it.  Incredibly the need for money is vital in any economy and will be used even in a debauched state until a more acceptable currency is available [take Zimbabwe].   Consequently the $ was accepted as the way forward to growth, vital for future global prosperity.

 

While the $ rose like a star over the globe, gold spent 20 years being discredited, ignored and forced down to the level of ‘just a commodity’.   Even today as the sins of the issuers of the U.S.$ are being visited on all of us, no attempt to bring an intrinsic value to paper money is being made.   Even today, as the loss accumulated to date, on the sale price of the U.K.’s gold passes $2.2 billion, Chancellor Brown is still being castigated for selling Britain’s gold at way less than half of today’s price.   No doubt this will be a constant condemnation in his future career alongside a rising gold price.   But it was the last effective act against gold.   Since then all acts to elevate paper money against gold have steadily lost impact.

 

The advent of the €

At the time Europe invented its own currency, the Euro [€] in 1999, it too had to take measures to bring about the acceptability of the € as well as its credibility.   The abolition of the European nation’s currencies to be replaced by the € was the first step.  The changeover was treated with suspicion, but what else could the people do but accept this political currency?   What’s more the currency was not linked to oil, so what gave it credibility?   It has had to rely on people using it and as it gained acceptance, so it gained credibility.   But it was not linked to oil so it broke Greenspan’s rules of the ingredients needed to qualify as money.   All the € has behind it is gold to the extent of a ill-defined target of 15% of reserves.

 

 

But, almost as a prudent backstop, the larger nations of Europe retained the bulk of their gold and some all of it [France has sold some [the Banque de France was not happy to], Italy and Germany haven’t].   After all, what if the European Parliament and Central Bank ceased to represent their interests and they wanted a way out, back to their own currencies?

 

However, when lined up against the U.S. $ in today’s world the € is proving if not more acceptable and is even being used by a growing number of nations to pay their oil bills.   It is now the only currency of a trading bloc bigger than the U.S.A. numbering 400 million people and growing by the year.  Will oil producers accept it as a means of payment for oil – Yes some of them do already?   The grip the U.S. had on the global economy has visibly weakened, as has its role as the oil price currency.   Russia has priced its oil in the Ruble and accepts other currencies too.

 

The turning point for gold

 The turning point for gold from a commodity falling in price to its return to the investment and monetary world was the establishment of the “Washington Agreement” an agreement, in 1999 on September 26th, whereby European Central Bankers led by the European Central Bank, decided to stop the gold price from falling and to put an end to the persistent rumors that Central Banks would sell gold until there was none left.   This constant threat of unlimited gold sales had hung over the market for 20 years until then.   The “Washington Agreement” itself restricted what would and would not be sold in the future by these Central Banks.   This agreement had the tacit approval of both the Bank of Japan and the Federal Reserve, headed by Alan Greenspan.   The signatories to this agreement also agreed not to expand their gold leasings and their use of gold futures and options over this period.   The net effect was that hedging began to wane before gold producers began to buy back their hedges.   Accelerated gold sales by the mines stopped, as did the development of large new sources of gold.   Gold looked attractive as an investment again and the market swung back into balance, became transparent to some extent and stabilized.

 

Why was such a decision taken in the first place, had there been a change of heart towards gold?   What was it that prompted Europe to halt the attack on gold, when it is the most natural reflex of a banker of any kind to promote paper money, which he could control completely and turn into one of the world’s most important and profitable industries?   Gold was anathema to that concept, bringing discipline and control to the other knee-jerk reaction of a banker, the over-issuance of paper money.  

 

With the invention of the € at the same time, taking the place of Europe’s national currencies, the Deutschmark, the French Franc and the others.   Surely the further discrediting of gold would support the establishment of the €?   Or did Central Bankers perceive that the acceptance of paper money was so widespread that it could stand alone without the support of items of intrinsic value?   It seems so.

 

But just in case, Europeans had, put together, more gold than the U.S.A. [who still retain a firm grip on the gold they have].  So, why weren’t these sales stopped altogether?   The Central Bank’s involved, except for Belgium and Spain, had previously announced sales of gold and had taken the steps to complete those sales and did not see fit to halt them then.  This appeared to be the course of bureaucracy alone.   It was clear that full governmental and Central Bank control of the money system had to be maintained over money in the global context, so gold had to remain a “money non grata”.   But it was clear the Europeans did not want to sell more gold than already arranged and wanted to keep the rest.

 

At the same time three global features began to weigh heavy on the global reserve currency, the $.  

 

1.      First was the lack of control on the U.S. Balance of Payments [Now totaling $763 billion for 2006 after $720 billion in 2005] allowing an almost systemic deficit flow of $ from the States.   A heavy price for the elevation of the U.S. $ is being paid right now as we see for the first time Capital withdrawn from the U.S.A. whilst continuing Trade deficits pour the U.S.$ overseas in an seemingly unstoppable flood.   For the last several years this deficit has grown unacceptable and 2007 could easily see another record deficit.   But it is not simply that the capital inflow to the States is slowing so as not to match that deficit, there was an actual deficit on the Capital account as well, last month.   We are now watching to see if this continues?

2.      The second was the rise in importance of Europe [and the €] and the emerging nations in international trade [now comprising 51% of global trade and rising fast].

3.      The third feature is the rise of the emerging nations in power and wealth.   They have already caused a massive shift of wealth from West to East, gradually raising the question of the appropriateness of the U.S. $ to remain the sole global reserve currency.

 

Both these new blocs and their currencies are large enough to gain a place amongst the reserve currencies of the world and are sufficient in economic power to drive the global economy even if the U.S. is in a recession [the € is taking its place there now, but the Yuan is by no means ready to do so].   So the risks facing U.S.$ holders are massive and growing by the day.   Unfortunately, the interdependence of the globe’s nations and their currencies means that a large drop in the value of the $ will have rupturing ‘ripple effects’ on the global monetary system, bringing confidence to lows not only at individual levels, but between the international Central Banks themselves.   The disunity among nations leaves no support for the monetary system in this event.   Consequently we are seeing not only the decline of the U.S.$, but the decay of the present global monetary system, with large nations beginning to take steps to protect themselves from such a decline [including China and Russia].

 

Where is gold now

Where are we now in this process from commodity to currency?  There are 8 significant features we can now highlight: -

 

1.      More than a year ago, the President of the German Bundesbank informed the world that their gold was a “useful counter to the swings in the $” so telling us that their confidence in the $ was already waning.

 

2.      China has been concerned about its holding of the $ for sometime and has now laid plans to buy up present and future sources of strategic supplies with its $s.   Talk is that it wants to hedge its $ holdings too, for fear of at least a 5% drop in its value in 2007.

 

3.      A series of Middle Eastern Central Banks have been talking about switching their reserves to the € and some have either done so or are in the process of doing so, but not in such quantities as to affect the $’s value, yet.   Political considerations are behind the moves of some, but this should be seen as a further danger to the $ in the future, as these tensions grow.

 

4.      Russia has publicly stated that it is in the process of reducing its dollar reserves.

 

 

5.      Both Venezuela and Iran presently demand payment for oil in euros - not in the U.S. $.

 

 

6.      Most competent analysts and banks expect the $ to weaken substantially from now onwards and the charts are indicating that this is soon to occur, if it has not started already.

 

7.      U.S. monetary officials are calling for the Yuan to revalue in the mistaken belief that this may lessen their own Trade deficit, about which no attempts are being made by them to rectify their own situation.

 

8.      We all are waiting with baited breath for a heavy drop in the $.

 

 

In this environment where can we turn to protect ourselves against not just the $, but all currencies, in the gathering storm on the horizon?   Switching to other currencies is the only alternative for the Central Banks because of the size of their holdings, but thankfully, for us mere mortals gold is the ultimate protection against this interlinked paper. 

 

China with a $ one trillion cannot switch to gold even with a small percentage of that as it would make little to no difference to its own situation, as the amount of gold it could buy to make a difference is just not available.   Were gold $10,000 + an ounce then it could be an option, but that price lies in a disastrous future.   If nothing is done soon, that day will come.

 

But wealthy individuals and institutions are keenly aware of the dangers for the entire monetary system and the value of gold as an investment.   Gold has moved back onto the screen as a counter to all forms of paper [all of which represent promises] and to date they have bought 620 tonnes of gold in paper form, over the last couple of years, totaling more than the gold holdings of the People’s Bank of China and that figure is growing at an electrifying rate. 

 

Individuals in both the East and the West are increasing their holdings of physical gold [the ultimate way to protect oneself].   We personally believe that the tonnage of gold held in the world’s Exchange Traded Funds is headed towards 3,000 tonnes plus, the level held by the main European Central Banks of Italy, Germany and France.   At that point in time the gold market will hold enough liquidity to attract even the largest of institutions to the gold ‘paper’ market.  

 

As of now the announced sellers of gold amongst the European Central Banks are running low of the quantities of gold they arranged to sell previously and will run out of gold well before the agreement ends.   It is more than evident that their appetite to sell gold has gone, as the risks to the $’s value rise.

 

To Central Banks gold is not a practical alternative to paper currencies, but the gold they have already, they do want to keep.   It would almost be a condemnation of paper currencies were they to go out and buy gold, an act they don’t want to let people see, but one they would love to happen.   Of course the price would leap to five figures the moment they started to scrap over the gold available on the market.   Such a path is therefore not open to them.  

 

However, should the gold price rise to these astronomical prices then the metal in their vaults would serve to give credence to the paper they are issuing.   And it is in the nature of bankers to want to harness gold to serve their paper’s interests.   How?   The situation at that time will dictate just how, but we can tell now, it will not open the way to any practice of convertibility.

 

But the very confidence that is being demonstrated by the Central Bankers tightening grip on the gold in their vaults is starting to convince wealthy individuals, institutions and us mere mortals of the long-term value of gold against paper.   With Russia breaking Central Bank ranks by buying gold, albeit a small amount so far and the prospect of other Central Banks buying gold, we are on the brink of a swelling tide of investment into gold greater than we have seen since gold and silver were money, previously.   If the oncoming monetary crises are as we expect, will Central Banks risk repeating the action of the United States in 1933 in appropriating their own citizens gold and then trying to send the price skywards?

 

But the larger question becomes, at what point do the Central Banks emulate the actions of individuals and institutions in buying gold, because they have to, because of a crisis of confidence in paper currencies secured by the vague promises of undisciplined money issuers?   It is inevitable at some point, but when it happens it may be far too late to bring credibility back to the monetary system.   Certainly it will be beyond the abilities of the world’s national Central Bankers to harmonize a monetary system, globally, without gold being a key feature at a far higher price than we even hope for now.   

 

 

Please subscribe to www.GoldForecaster.com for the entire report.

 

Legal Notice / Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.


-- Posted Sunday, 25 February 2007 | Digg This Article




Contact us: www.goldforecaster.com

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