The Power of Gold

Gold Falcon

Enormous effort has been put into the elimination of gold from the international monetary system since 1971 until 2008. Nowhere it is more obvious than in a 1974 note from the Deputy Assistant Secretary for International Finance and Development (Sidney Weintraub) to the Under Secretary of the Treasury for Monetary Affairs (Paul Volcker). He states that “US objectives for the world monetary system – a durable, stable system, with SDR as a strong reserve asset at its centre – are incompatible with a continued important role for gold as a reserve asset.” He continues by saying that “It is the US concern that any substantial increase now (1974) in the price at which official gold transactions are made would strengthen the position of gold in the system, and cripple the SDR.”

The SDR who was supposed to replace gold was introduced in 1969 and linked to gold. In 1973 it was delinked from gold and became an index of 16 fiat currencies. It is now composed of 4 currencies and from October 2016 it will be composed of five currencies when the yuan will be added. The graph bellow shows perfectly how right Voltaire was when he said “Paper money eventually returns to its intrinsic value – zero.” In 1980, just 10 years after the delinking of the hard SDR from gold, the new fiat SDR index lost 93% of its value in gold. As of May 2016 it lost 96%.

SDR priced in Gold

From 1971 and until 2000 governments and especially the US tried to hold down the price of gold and the economic academia used all kind of analysis to denigrate gold as money and push it out of the international monetary system. However, gold never left the international monetary system in reality. Alan Greenspan called it “money in extremis” and author Jim Rickards in his latest book The New Case for Gold says that we have been on a “shadow gold standard” after 1971. I also said for many years that we remained on a “de facto” gold standard since 1971.

In a book on gold (The Power of Gold) Peter Bernstein says that “today (1990s) many people believe that the dollar is the glue that holds the system together, as gold did in the past.” However, he also adds that “Gold may again serve as the ultimate hedge in chaotic conditions. Its return to its traditional role as universal money is unlikely, however, unless the time should come when the dollar, the euro, and the yen have all failed to function as acceptable means of payment across international borders.” He wrote this 10 years before the 2008 crisis when the dollar was at its highest at the same time as the US stock market. He was in his 80s with close to a century of life experience and wisdom.

In 2008 the world witnessed a major financial crisis that almost brought the international monetary system to a collapse and saw gold coming back into the international monetary system first behind the scenes and then in the open as Peter Bernstein predicted. Since 2009 western central banks stopped selling their gold reserves and eastern central banks accelerated their accumulation of gold.

In a recent article economist Kenneth Rogoff, who is a potential candidate for the US Fed’s board of directors and even chairman, has written an article suggesting emerging markets should go for the gold. That would mean not to start buying gold, since they have been buying constantly since 2008 and in large amounts, but actually accelerating their buying of gold. It is interesting that Mr. Rogoff feels also the need to justify himself by distancing himself from gold advocates saying “I am not siding with those – usually American far-right crackpots – who favor a return to the gold standard, in which countries fix the value of their currencies in terms of gold.” Even holding one kilogram of gold was considered being a “far-right crackpot” by the established economic profession. He also says that “Even shifting, say, up to 10% of their reserves into gold would not bring them anywhere near the many rich countries that hold 60-70% of their (admittedly smaller) official reserves in gold.”

Mr. Rogoff is also one of the economists who is proposing banning physical cash so governments have full control on people’s cash and impose negative interest rates. If this happens it will also encourage private investors to switch into gold. Maybe he is also thinking to ban gold ownership by private investors too.

This accumulation of gold is not only done by central banks but also private investors. The sale of gold bars and coins from a one gram to one kilogram have increased substantially since the 2008 crisis and also worldwide. Prof. Fekete says “Gold that circulates inspires confidence; gold kept locked indicates lack of confidence.” This accumulation clearly indicates gold being taking out of the market by fear of a collapse of the current international monetary system. Once the reset, what ever it is, gold would start again to circulate.

In an excellent history of the second world war seen from the angle of gold reserves (Chasing Gold: The incredible story of how the Nazis stole Europe’s gold, George M. Taber) we can see how powerful gold is and through how much effort countries went to protect their gold reserves while leaving fiat currencies behind. In one case they were thinking to burn paper currency for better lightning while loading the gold on ships. I was surprised reading the book by how much risk employees of the European central banks took during the war to keep gold out of Nazi’s reach and to what extent Nazis went to get their hands on the national gold and that in every country they occupied. As I understand today the American CIA also considers gold as a strategic asset.

2750 years separate the two gold coins below. Both weight approximately one gram. One was found in 2014 in shallow waters near the resort town of Sozopol on Bulgaria’s Black Sea coast and is dated from 736 BC the other was minted by the Royal Canadian Mint in Ottawa, Canada in 2015 AD.

Gold Coins X

Coinage was invented in the seventh century BC in the Black Sea region northeast of Greece, where the alluvial flow of gold and silver mixed together yielded the metal known as electrum. Gold and silver had been used by the earliest Egyptian and Mesopotamian civilizations as a store of wealth, and a medium of exchange. But this naturally occurring electrum was first coined by the kings of Lydia, Miletos, Ephesos, Phokia, and then Lesbos and Kyzykos.

However, the monetary history of gold goes beyond the minting of coins as far as more than 6,000 years if we look at the gold objects found in Varna Necropolis, Bulgaria. The oldest golden treasure in the world, dating from 4,600 BCE to 4,200 BCE, was discovered at this site on the sore of the Black Sea in 1972.

Thracia

It has been my hypothesis that what would make the price of gold explode to a $5,000 level would be a stamped by central banks as it happened in 1978 when the London Gold Pool collapsed. Economists’ statements like Mr. Rogoff’s can create a similar run on gold as I have been predicting.

Ben Bernanke, past Fed chairman, when asked by congressman Ron Paul during a US House Financial Services Committee Meeting if gold is money said that gold is just a tradition and that is why central banks hold it. I always wondered if he really believes that? It seems Mr. Rogoff doesn’t agree and wants developing countries to hold at least 10% of their reserves in gold. This is also the magic number that has been transmitted throughout generations as a good insurance policy (hold 10% in gold and pray God you will never need it).

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