By Mark Rogers

Is the Gold Standard set to make a return and is that return inevitable?

The answer must be yes to the first question and an interestingly qualified yes to the second.

There is little to no consensus amongst politicians and academics that the crisis we are passing through is a crisis of paper money, but even the most died-in-the-wool quantitative easer cannot but notice that QE is (a) a stop-gap and (b) that the gap refuses to be stopped.

Academic Blindness

Part of the perhaps inability to see that this is the paper money crisis to end paper money crises, is the hold that the consensus as to what caused the Great Depression has on such a wide range of academics and policy makers, the most important exponent being Ben Bernanke.

While faulty analysis is to be blamed for the position that Bernanke assigns to gold in the Great Depression, this position is also the result of the fallacy of assuming that the coincidence of two things necessarily entails cause and effect, in this case that because the gold standard existed at the same time as the Great Depression, ergo the gold standard caused the depression.

As James Rickards points out in his exceptionally informative book, Currency Wars (Portfolio/Penguin, New York, 2011), Bernanke’s argument depends on the observation that “[c]ountries that left gold were able to reflate their money supplies and price levels, and did so after some delay; countries remaining on gold were forced into further deflation.” (Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach” Journal of Money, Credit and Banking 27, 1995). Rickards extrapolates: “Gold was at the base of the money supply; therefore gold was the limiting factor on the expansion of money at a time when more money was needed. … the evidence showed that gold had helped to cause the Great Depression and those who abandoned gold first recovered first. Gold has been discredited as a monetary instrument ever since. Case closed.”

But, while this academic case against gold is proved beyond controversy in the minds of policy makers, it is simply untrue. It was policy decisions that caused the problems: “As gold flowed into the United States during the early 1930s, the Federal Reserve could have allowed the base money supply to expand by up to 2.5 times the value of gold. The Fed failed to do so and actually reduced money supply, in part to neutralise the expansionary impact of the gold inflows.”

This then was what the Fed chose to do, and as a policy option was actually independent of the supply of gold. “It is historically and analytically false to blame gold for this money supply contraction.”

Bernanke’s Real Fear of Gold

“One suspects that Bernanke’s real objection to gold today is not that it was an actual constraint on increasing the money supply in the 1930s but that it could become one today. … [He] may want to preserve the ability of central bankers to create potentially unlimited amounts of money, which does require the abandonment of gold. Since 2009, Bernanke and the Fed have been able to test their policy of unlimited money creation in real-world conditions.” [Emphasis in the original.]

With the Bank of England recently following hard on the heels of the Fed. Pun intended. And one should note that the word “creation” in this context is an irony… but one that is almost certainly lost on those with an academic agenda to pursue: Mr Rickards’s last sentence above is a masterpiece of understatement!

Rickards summarises his conclusions on the false attribution of the Depression to gold thus: “the crime of tight money was not committed by gold but by the central bankers who engaged in a long series of avoidable policy blunders.” (Readers are well advised to get hold of Mr Rickards’s book: his analysis of the inaccuracies of the enemies of gold is extremely well done – as is the rest of this very important book.)

Which brings us up to date: avoidable blunders by policy makers. For how long have we been reading headlines that essentially declare Greece/Italy/Spain/the euro/the EU all to be teetering on the brink, when it is quite obvious that they are all well over the cliff and clutching at clouds to reassure themselves even as they plummet.

How does the current situation presage a return to the gold standard?

The gold standard must return, and in one of two ways. Either it is deliberately courted through enquiries as to the best form it should take and how it should be introduced, whether unilaterally at first, or in some form of international cooperation, or a unilateral introduction leading to other economies tagging along, pegging their currencies to a revitalised dollar anchored to a clearly defined gold standard… the options are adroitly canvassed by Mr Rickards.

Or, in the interestingly qualified yes to the question as to its inevitable return, it is reintroduced on the sudden as part of the emergency procedures that the President of the United States adopts to halt the chaos resulting from the unwillingness of politicians and economists and central bankers to do anything about the paper money crisis until it is too late.

Mr Rickards is extremely good on the possible agendas that will result from the present impasses: paper, in the form of multiple reserve currencies and Special Drawing Rights; Gold; or Chaos – with gold making its back door entrance as an emergency measure because by that time nobody will be able to stop it. And true to that emergency requirement, of course, gold will make its entrance by way of confiscation and the prohibition of all exports of gold from the States.

So if gold is going to make a comeback anyway, why wait? Why not prepare for its orderly reintroduction now, which will have the effect of avoiding the chaotic melt-down of value that will otherwise ensue?

“A studied, expertly implemented return to the gold standard offers the best chance of stability but commands so little academic respect as to be a nonstarter in current debates.”

In other words, there are none so blind as those who will not see.

Currency Wars

Mr Rickards has written an immensely important book. He is dry and unalarmist; he is not scaremongering – the situation is already too scary for that. His recommendations are measured, and as a plea for a change of mind and heart are couched in terms of compromise – for example, he insists that the only way to defeat the Bernanke thesis is for gold advocates to take it seriously and argue the evidence on its own terms, something which he does brilliantly.

He is also illuminating on how the gold standard can live comfortably with occasional central bank manipulation of the money supply – indeed his argument with Bernanke shows just how it was the failure to do this that caused the problems that Bernanke and co. blame on gold – but in such emergency circumstances that gold will still act as a constraint on the possible solutions – i.e. will keep the interventions in check. As well as, I would say, provide the yard-stick by which such interventions can be properly evaluated as necessary.

He even suggests reviving Keynes’s suggestion, made at Bretton Woods, for an internationally gold-backed currency; he goes further and suggests that Keynes’s rather inelegant name for this substance, the “bancor”, could be adopted. Now there’s an olive branch for you.

If only Keynes had not held all his other prejudices against gold… his thinking seems to be that gold was a barbaric relic perhaps in so far as it supported nation states, but was alright as the support for a supra-government supervised international currency of last resort. Well, the European Union is teaching us a lesson about supra-government international arrangements that we should heed before the chaos that Mr Rickards so calmly describes engulfs us all.

[At a later date, I will continue reviewing the whole of this illuminating book.]

Some thoughts on the return of gold as a means of exchange from L’Or et L’Argent (the original article may be read here).

Payment for Iranian oil in gold

More than a trend, there is a strong signal being sent: gold is returning to the markets as a currency of exchange. Thus, China, the largest importer of Iranian oil, follows in the footsteps of India and avoids the embargo imposed on Iran by choosing to pay for crude oil in gold. Because it decided to continue with its nuclear program, Iran saw sanctions imposed by the United States in late 2011. The oil embargo, which will take effect in June, prohibits payment for Iranian crude oil in international exchange currencies (Dollars, Yen, Euros…). Soon after, the European Union announced that it was also going to apply the embargo which will take effect in July.

Gold returns in trading

Although Iran does not represent a large percentage of oil imports to the US and to the EU, the same cannot be said for India and China which between them account for 40% of imports. India, which has a large demand for oil, has chosen to maintain its commercial trade with Iran by paying its bills in gold.

Recently, Forbes magazine reported that China was also intending to avoid the financial sanctions imposed on Iran by buying its oil with gold. China, the largest producer but also the largest consumer of gold, already imports huge amounts of the yellow metal (its imports tripled in 2011, to 428 tons). Such a decision will only amplify the economic effects on the price of gold.

Gold: exchange currency and political weapon

Gold, which is increasingly returning to the mechanisms of means of payment will also take a more political dimension and become a real weapon of war. These events confirm the most bullish gold market for years. In the same way that investors made wise choices by betting on gold since 2007, this also goes for today’s investors, when they will see the ounce crossing the $2,000 mark in the next few months.

 Gold has recently been undergoing a consolidation period – its price is below the value that in reality it should have. It is therefore the right time to strengthen one’s positions on gold, before the summer. Moreover, because of the presidential elections in the US next November, uncertainty over the economic future of the country will undoubtedly cause a new rush on gold… which will not stay at the current level of $1,640.

By Mark Rogers

Welfarism undermines democracy: this is one of the manifest lessons of the eurozone crisis, and is seen in many ways, the most recent being the Greek elections in the fissipiration of the political system, with the running being made by minority parties with unrealistic and self-aggrandizing agendas. Instead of there being any attempt at shrinking the state, more, and more aggressive, groupuscules want more of the same: “Syriza’s idealistic economic programme calls for providing students with free meals and doling out pensions equal to final salaries. Mr Tsipras says the state should hire 100,000 more workers to help reduce unemployment.” (The Economist, May 12th 2012). Is this “idealism” or ignorance (though the latter is, of course, the handmaid of the former)? After all one of the things that brought the Greeks to their knees was the number of people entitled to government largesse.

When the Greeks received the first bailout from the Germans, Papandreou publicly thanked the German government and people for their largesse and acknowledged that as a result the Greeks would have to do some serious cleaning up, starting with an attempt to find out how many people worked for the government. They didn’t know! This is welfarism with an insouciance.

Democracy and accountability

The idea that democracy is a device to hold government to account implies a responsible, independent citizenry and limited government. One of the things that the government is to be held accountable for is limitations on its growth. The welfare state, instead, thrives on factional interests which seek to carve out niches for themselves at the expense of others, with the state as overlord and facilitator – and therefore at the mercy of being captured by the bolder interest groups.

The Founding Fathers of the American Constitution wanted to strike the right balances between majorities and minorities, while recognizing both that majorities could become tyrannous and that minorities could descend into factionalism. The balances that the Founding Fathers sought were to prevent majorities from dealing with minorities in the old-fashioned European way – i.e. simply eliminating them, whether through exile or execution. This meant allowing minorities a functioning place within the body politic accommodating their ways where they were beneficial without creating vested interests which might put the public order at risk.

While it is self-evident that the Constitution of the U.S.A. has not prevented the growth of big government or the gradual assimilation of the American people to welfarism, it is also clear that modern government’s most serious derogation from constitutional principle is the emergence of the centralized state as a faction in itself. Large civil services become an end in themselves; the purveyors of welfare form a huge vested interest group, averse to change that may damage their own position however it may benefit the taxpayers who fund them.

While it is usual to equate freedom with democracy and welfarism with fairness, in fact there is no logical or historically necessary connection between freedom and democracy, nor is welfarism necessarily fair. In fact, the larger the state’s involvement in wealth distribution, whether it is by cash transfers, or manipulations of the educational and health systems, the more that the least admirable moral qualities are promoted in the welfare state: envy and greed.

Entitlement

The welfare state encourages the vice of entitlement, actively encouraged by the administrators of the welfare state – through education, through multiculturalism and through the benefits system. If bankers are thought to be too quick to justify their salaries, it is only done in the language of the welfare state which all are encouraged to use. (An aside on bankers: while, as has been maintained here, here and here,their remuneration is an utterly inadequate basis for the crisis, bankers at least operate in a world of more immediate accountability: recently shareholders have risen to the task of curbing pay in relation to poor performance.)

Envy in the East?

I grew up in Hong Kong (my political and economic gold standard). That there were exceptionally wealthy people was well-known, but they tended not to live celebrity lives and had risen to their riches, in many cases from extreme poverty, through hard work and good judgment. That everyone had a chance to better themselves to the extent that they were prepared to work for it because the tax system was simple and equitable, meant that envy was at a discount in Hong Kong – people tended rather to admire the rich because they were hard working and philanthropic, and because each and all had the opportunities open to them to advance to similar riches. A breeding ground for hard work, thrift and imaginative enterprise rather than envy, greed and carping.

By Mark Rogers

One day.

The “sarkozy” in question? Bashing the City of London. So nothing has changed on the despising of the Anglo-Saxon economic model front, then. What else has changed as a result of the French and Greek elections?

While the Times has reported that there is a capital flight out of Greece (The Times, 8 May 2012) – which is hardly surprising – the answer to the above question is: nothing, politically.

The fireworks will be different colours after the French and Greek elections, but the unwillingness to recognise and to deal with the political death of Europe will continue: there is still no political will to recognise the failure of the euro and all the difficulties that that entails for the “union”. Not that there is much show of unity; there is little love lost on the continent for each other, but there is a determination to keep the bone of contention alive – not even the faux-radicals who have been elected to the Greek Parliament, while perfectly content to call their Northern neighbours barbarians, want to pull out of the euro! (Bloomberg here.)

“Voters shy from hard choices.” Thus Lexington in the Economist, April 28th 2012, page 42. “…voters everywhere … want many impossible things before breakfast, including low taxes and all the things that high taxes pay for.” He is, after a fashion, taking issue with Grover Norquist of Americans for Tax Reform, who concedes that the argument for small state-low tax politics is yet to be won: “Too many voters continue to like some of the things their taxes buy, such as entitlements and government jobs. If those things can be shrunk, [Mr Norquist] believes, so can their fondness for the state. Good luck with that, Mr Norquist.”

Well, Mr Norquist is perfectly entitled to point to Europe, where fondness for the state was invented and has become inbred, and in particular to Greece.

Greek voters wanted low taxes, so they simply didn’t bother to pay their taxes at all – and the tax collectors went on strike in sympathy – and they still wanted the things that high taxes pay for. A price system this is not.

The idea, fantastic as it seems, that tax collectors would go on strike against changes to their salaries would beggar belief were it not yet another strong reminder that those who advocate that the state simply pays it way out of trouble (which is what got us into the trouble in the first place) forget that the state has no money.

Even the editor of the Economist has advocated that the state in the UK should build more infrastructure (which, he says, “incidentally” provides more jobs) as a way of spending its way to recovery. This is the same Economist which considered the Socialist candidate, now victor, in the French presidential elections, M. Hollande, “rather dangerous” (April 28th) – even though he promises just such spending…

The tax collectors of Greece went on strike because they do not want their salaries cut, but in striking, i.e. refusing to do their job which is to collect the taxes out of which their salaries are paid, they are in effect cutting their incomes to zero.

The state has no money of its own: all that it spends is ultimately derived from the taxpayer: either directly, or by borrowing, which is then paid back by further despoliations of the taxpayer.

Ah! but what about Quantitative Easing? Apart from sounding like what Gargantua did after arriving in Paris, it has pretty much the same effect on the average saver: deluging the economy with printed money simply attacks the taxpayer from another angle – those who have saved see their savings and pensions eroded. Without savings, where is investment, and therefore growth, to come from?

Too much liquidity, and fake at that: QE seems to me to be essentially the government forging its own currency…

By Mark Rogers

While there is much speculation that there are moves afoot in some countries to rein in the private ownership of gold (see here and here), it is encouraging to read the following story (originally posted at L’Or et L’Argent) about how Singapore is opening up its markets to gold. This is yet another move in the free Asian economies to strengthen their positions, a welcome strength in view of the economic turmoil in the developed world and in China, whose economic future seems very uncertain.

Given that the following article points out the strong position of gold in Hong Kong, readers might like to read this fascinating account of gold dealing there; amongst other interesting points is the note that the Chinese Gold and Silver Exchange Society is the world’s oldest gold dealing exchange. Gold and stability could have no sounder exemplification than the growth of Hong Kong as one of the world’s strongest economies throughout the twentieth century and still leading the way in the new millennium!

Singapore’s move comes in tandem with growing speculation amongst gold observers that there is a slow but sure momentum building up to a return to the gold standard. The financial turmoil in Europe and the erosion of the US economy is fundamentally a crisis of paper money and cannot continue without a major shift towards the kind of stability that a properly backed currency provides. This shift will come either when the relevant governments realise that such a resolution of their problems needs to be carefully managed – or it will be forced upon them if they continue to do nothing other than roll the printing presses, which will in the end precipitate a catastrophe of an order such that even they will not be able to deny the obvious.

I shall in the very near future be posting reviews of Detlev Schlichter’s Paper Money Collapse and James Rickards’s Currency Wars, which contain detailed analyses of how our present woes are the inevitable result of fiat money, and, in Rickards’s book, an outline of how a return to the gold standard should be managed.

Meanwhile:

Singapore bows before Gold

The world’s fourth largest financial centre is seeking to open itself to the gold market. Thus, it has decided that tax cuts will apply to precious metals including gold.

The Finance Minister Tharman Shanmugaratnam confirmed a month ago that an exemption would be made to the 7% tax rate, hitherto applied to gold and all other precious metals, in order to encourage growth in trade negotiations and in particular as an incentive for producers to participate in the market.

Singapore will thus be able to compete on an equal footing with other neighbouring markets open to the gold trade, the most important being Hong Kong where producers prefer to sell their bullion – free of tax. It is evident that having to pay a 7% tax in Singapore discourages investors. This measure is completely logical and fair since no kind of taxes should be applied to a safe haven investment – the latter being basically currency.

This reduction will be initiated as of next October – which prompted certain declarations to be made at the time this measure was made public, for example, `that an important producer has expressed a particular interest in opening a factory in Singapore in the light of the announced tax change’ and furthermore that there will be more gold trading companies present in the country.

Gold has risen sharply and this is why there is so much competition between countries which are putting in place strategies to meet current requirements. If Singapore wishes to compete with its Asian neighbours who have a significant advantage, it will be extremely advantageous for it to adopt this fully justified initiative which will enable the gold market to benefit from a fall in tax or an exemption. By maintaining high taxes, Singapore has risked putting off all potential investors – the latter being welcomed with open-arms in Hong Kong and Japan.

Translated from an original article by Charles Sannat, Director of Economic Studies, AuCOFFRE.com, Paris

The Fourth Summit of the BRIC nations, a major political event.

This is a huge story and yet has gone largely unreported by the major western media. On the 29th of March in New Delhi, the Fourth Summit of the BRIC nations took place (Brazil, Russia, India, China).

“The BRIC nations (Brazil, Russia, India, China and South Africa) should no longer use the US Dollar in their bilateral exchanges. That is what was decided on Thursday the 29th March, 2012, during the Fourth Summit of leaders of these five nations in the Indian capital”.

Source: algeriedz.info and rian.ru

The following was decided during this meeting: an essential step was taken towards a “multipolar” global monetary system. March 29th 2012 will undoubtedly not be the date remembered in history as marking the end of the era of the Dollar. Nonetheless, the change is major.

Towards an overhaul of the IMS

We are entering a phase of disintegration of the International Monetary System as we know it. Our monetary system dates back to the Bretton Woods agreement of 1944 which was brought to an end by the Jamaican agreement of 1976 (this ended the gold standard).

So what will happen now? Stock markets are starting to fall because the issuing of European bond funds is doing badly or is disappointing (depending on your degree of optimism about the outcome of this policy), which is the case for Spain and now Italy.

What one must understand is that according to the current economic system it is the surpluses of some which finance the deficits of others, thus creating a balance. In other words, western countries are in a chronic deficit which has been, and I stress has been, financed by the major Asian exporting nations on the one hand (China and India) and the oil-producing nations on the other.

For the last few years, nobody was lending to western states (by this we mean the US and Europe) which now find themselves in an irreversibly compromised situation.

It is this lack of external funds which is pushing the central banks, the FED and the ECB to massively intervene in the markets. The only option that remains for us is indeed the use of the printing press and the creation of money with all the negative consequences that follow.

Though this Fourth Summit of the BRIC nations is a founding step towards the overhaul of the IMS this is certainly not the ultimate goal.

Ground-breaking events in international relations

Discussing the topic of the monetary system without mentioning the political dimensions would be a mistake. The future International Monetary System will be shaped by the international balance of power and alliances between the major players in the context of the fight for access to energy and agricultural resources and in the broader sense to raw materials. A strong axis is taking shape amongst the BRIC countries, and Iranian diplomacy is also far from insignificant.

The trans-Atlantic relationship remains strong despite the strains and divergences. Lastly, one should not imagine that the United States of America will let their status as world leaders slip away without a colossal “fight”. American policy has always been based on a simple concept: “America First”.

We are thus entering a new phase in the current crisis:

In 2007, the subprime crisis led to a financial and stock market crisis.

The financial crisis led to an economic recession.

The economic recession lead to massive state intervention in the form of stimulus packages which resulted in massive debts for these states.

The debt crisis can only lead to a major monetary crisis.

The monetary crisis (which is on its way) will lead to the restructuring of the International Monetary System.

And… the manoeuvres have already begun. The global repercussions will be deeply felt, as the International Monetary System is to the global economy what tectonic plates are to geology. We are touching upon the essential part. The tremors will truly be felt.

Will you be ready?

By Mark Rogers

Needless to say, there is a great deal of concern about this story, first addressed on this site on Monday. Conspiracy theorists are in little doubt this is a government swindle, though leveller heads are pointing out that this is unlikely. Nevertheless, it has to be said that the Mint’s Media Statement is very cagey in what it says about the origin of the dud coins: the suspension of senior staff last December was because of “technical issues”, and the longer statement quoted in my last article doesn’t exactly link those “technical issues” to the dud proofs.

Nor does it link the criminal gang which stole R5 circulation coins to the minting scandal. While it is entirely understandable that the Mint does not want to debase the trust that any such institution must maintain and therefore does not want to say too much in case panic ensues, why, then, has it said anything at all?

The curator of modern money at the British Museum, Thomas Hockenhull, is quoted in The Washington Post, April 24, as saying that it is unusual for mints to go public on problems of this kind, while Tom Hallenbeck, the American Numismatic Association’s President is also quoted to the effect that glitches in manufacturing are to be expected given the volume of coins produced.

Exposed

An obvious reason for saying anything at all is damage limitation. Whatever is going on at the SA Mint was already under investigation by CNBC and Forbes, and with television exposure and Forbes publishing its findings next month, perhaps the Mint thought that its hand was being forced.

Undoubtedly, it has fallen between two stools as a result. The clarification that it had (somehow) produced under specification coins and not as TimesLive reported underweight ones, led at least one commentator to conclude that this was evidence of a deliberate skimming exercise by the Mint itself:  “A national mint producing investment grade gold coins for several months with debased gold is not accidental. Period.”

That, of course, still does not rule out infiltration by a criminal gang, but that having been said, that such a gang could get away with it apparently for so long says volumes about accountability and transparency in a major public institution.

Effect?

A claim is made here that dealers are buying Krugerrand bullion coins at a lower premium than usual, while raising the possibility that there will be a “flight” from the coin. Did it escape the mind of the author of the Mint’s statement that this might happen, and that if the proof Krugers fell under suspicion, the contagion might spread to the bullion coins?

Even the mere speculation by a writer with an “anonymous source” on an internet site might be enough, especially in the light of the generally gloomy picture of politics in South Africa.

All over the world, political elites are coming under fire: high taxation, monetary incompetence, the keeping of a self-serving distance from their electorates – general nannying while the ship of state flounders.

Even if the problems of the SA Mint were occasioned by such political incompetence, rather than a deliberate crime sanctioned at the highest level, the suspicion that is falling on governments everywhere is reason enough to seek safe havens elsewhere – indeed, they are vital as havens from the financial incontinence of the state.

Alternative

Whatever else is revealed, and happens in consequence, there is an alternative, again as mentioned on Monday: the Vera Valor. Not only is this coin of the highest standard of purity; not only is it audited to a high standard, and its source and manufacture of a high standard of purity; it also has another quality – it is a purely commercial venture, with no connections to malfunctioning government institutions and suspicious officials.

We here at Goldcoin.org have had the pleasure to interview Señora Lizette Paternina, the editor of LingORO.info, a blog dedicated to gold investment, gold coins and the unstable economics of our time. Her story has an interesting evolution based on the response she had to her blog articles. The popularity of her blog has paved the way for the launch of a commercial website, LingORO.com, which enables the Spanish speaking market to have access to a proven, reliable method of gold investment.

Editor: When did you first launch the blog LingORO.info?

Lizette: In March 2011 I posted my first article on line having spent some months previous immersed in the research of blog content. The first article is always special and I remember the feeling of excitement when I saw the visits to my blog and knew that people were reading my article. I was encouraged to continue producing and evolving content that was obviously attracting a growing audience.

Editor: What do you look for in an article?

Lizette: A story that tells a truth, with substance, meaning, logic and often on a subject ignored by the mainstream media. My articles present information to readers regarding the current economic climate and its impact on all of us. Many things are left unsaid that need expressing and this can be particularly true in the gold industry. I am originally from Colombia and so issues regarding “ORO VERDE” that could be so important for the survival of whole communities & their livelihoods need highlighting. Similarly I fully support the Clean Extraction initiative for 100% traceable gold that respects people and the planet. It is also important to have an historic perspective on the economy and gold investment as well as for the evolution of everyday changes in the economy. To this end I like to combine numismatic and historical facts about gold coins as well as the story of certain important coins that have a particular place in Spanish or Latin American history.

Editor: Why have you launched LingORO.com now?

Lizette: This is the ideal moment to launch an alternative method of Gold Investment to the Spanish and Latin American markets because there is no similar offer currently available. The current market is based more on jewelry and physical possession of gold bars and coins. However, our experience suggests that this is not the best way to invest in gold as it is difficult to realise a good value at resale when you inevitably have to sell it back to a dealer. Our business model allows Members to freely trade between themselves, therefore maximizing the opportunity to realise the full potential of their gold coins. It’s easy, practical, logical and has a proven track record in the French and the English speaking worlds as demonstrated by our sister sites AuCOFFRE.com & LinGOLD.com.

The advantages of LingORO are that investors can buy and sell on-line 24/7 from anywhere they want and also that we offer vault storage – this model allows ease of resale.

Editor: What type of products are available and why? Where do they come from?

Lizette: Only professionally sourced investment quality gold coins are available – these are all verified and sealed in cases. We also have a focus on certain Spanish and South American gold coins which are of great interest including the 25 Pesetas, The 50 Pesos and the Soles and Libra from Peru.

Editor: Why should we invest in gold?

Lizette: Gold is an excellent way to save, it is an alternative to the traditional bank products which have proved to be unreliable (particularly during the current crisis) and of course it is a diversification of a portfolio. Perhaps most importantly Gold is the safe haven currency when all other currencies are failing and losing value.
It is worth noting that most investments have a risk attached – that is to say a risk to the counterpart offered in the investment. If these are shares, certificates, funds etc there is a possibility that the counterpart to your investment ie. the shares or assets supposedly backing funds could fall to zero in a crisis due to company failure, the debt cycle or unscrupulous traders who have oversold their funds such as is the case with ETFs (less than 20% physical gold to back the certificates sold).
Gold can never fall to zero as it has consistently had value for 6000 years which is better than any modern day currency or fund.
Finally, we should think of gold as an insurance against economic crisis. It will protect your wealth against inflation and it will always maintain purchasing power whatever happens during the crisis. No other product can offer this. If you have a house you usually have fire insurance in case one day the unthinkable happens. At least you have the peace of mind that you can rebuil it.
If the crisis deepens as is largely expected our whole way of life could be challenged – therefore it is prudent and wise to take out an insurance against the effects of crisis.
As in the case of fire insurance it is wiser to buy insurance before the catastrophic event!

Editor: Do you have a message to the people?

Lizette: Choose a good option that helps you save not only in a moment of crisis but which will also work for them during normal situation.
Gold protects money and the people can have a real savings to leave for the family or indeed help them with the costs of life, houses, holidays, cars, university fees etc.
We have a beautiful collection of professionally certified coins that are designated as investment quality which is not always the case elsewhere. We offer quality of service as well as trust and confidence with our Members.
My message to investors is to look at what we have to offer and then compare this to other methods that they have traditionally used and evaluate which is the better option for you – that way I know I will be welcoming lots of them real soon.

Editor: Many thanks for your time and best of luck with LingORO.com

Lizette: You’re very welcome and thank you. I am a regular reader and fan of Goldcoin.org because there are so many interesting facts and articles that are pertinent to the economic situation and the gold market. I often post links to your articles and sometimes translate quotes made by economists and commentators about the gold market. I wish you continued success with your blog and hope to see you in Spain soon.

By Mark Rogers

Is there a necessary connection between gold coins and politics? The short answer is: yes. Undoubtedly over the course of the last century, and beginning fairly early on, gold became, and still remains, a highly controversial political subject. The most influential economist of the century, John Maynard Keynes disparaged not just the gold standard but the metal itself: he thought wealth creation a sort of secular sin, and considered those who saved to be selfish. In 1933, President Roosevelt banned the private ownership of gold, and passed measures to confiscate privately held gold – something that may be about to occur in places as widely diverse as the European Union, Turkey and Vietnam, with a suspicion that the same is afoot in China.

Not surprisingly, these animosities towards gold have gone in tandem with the creation and expansion of the Welfare State, the political entity that is utterly bankrupt and is the prime cause of the financial crisis.

So, yes indeed gold, whether in the form of collectable coins or other types of investment, is very political indeed, but not just because it is seen as a store of selfish wealth, or, as its enemies derisorily call it, “hoarding”.

Ray Vicker in The Realms of Gold (published by Robert Hale, London, 1975) makes this very important point:

“The deeper one gets into monetary matters, the more one realizes that the whole argument about gold’s monetary role, or its inability to perform it, involves fundamental emotional attitudes toward man and his environment.

“Not only technical monetary systems are at odds when the chrysophilites and the chrysophobes argue money. This is cash versus credit. Sound versus easy money. A balanced federal budget versus deficit spending. Rugged free enterprise versus government economic management. A black-and-gray world versus utopia. The belief in sinful man meeting the conviction that man is essentially good. The idea that progress only comes through individual gain clashing with the contention that communal efforts spell forward movement.”

Gold, therefore, is not only a measure of prudence, it is also the summation of the political arguments of the last century – and even a repository of some of the profoundest truths of human existence.

Those who invest in gold are, in the long run, realists, as the following account by Vicker of what happened in the 1960s and 70s makes clear:

“When sense and nonsense are being evaluated the chrysophobes must explain how come they erred so much in the 1960s when they were denigrating gold and claiming that it was on the way out. It was in the 1960s and early 1970s that the great monetary battles involving gold were fought, with few people in the United States realizing what was happening even after the dollar experienced two devaluations. Briefly, the dollar, which had been ‘as good as gold’ for so long, no longer was as good as a thirty-fifth of an ounce of gold. And many people were discovering this fact.

“These people were termed ‘speculators’ through the monetary cyclones which erupted. Actually, they were ordinary businessmen, bankers and others who had sense enough to protect their assets. In politics, whenever anyone disrupts a pet project of the party in power, it is customary to tack some derogatory term onto the disrupters. The word ‘speculator’ has enough of an unsavoury connotation that it appealed to those in government who saw themselves as ‘defenders of the dollar’, though they couldn’t see the easiest method of preserving the whole system – a doubling of the monetary price of gold.”

Therefore, however unlikely it may seem on the surface that a numismatic website should feature regular political commentary, the central role that gold plays in human affairs means that its political and economic aspects need constant analysis.

By Mark Rogers

Taxation in the modern state is an attack on wealth and its creation.

Which is illogical, because without wealth creation there can be no tax base.

The Welfare State was founded, and is foundering, on conundrums such as these. So perhaps it is not surprising to see a Tory Chancellor of the Exchequer engaging in what amounts to left-wing style class warfare.

George Osborne has just announced that he is “going after the wealthy tax dodgers”. As reported in The Daily Telegraph, Tuesday 10th April, he has been examining “anonymised” tax returns furnished by HM Revenue and Customs which show the completely legal measures that some very rich people have been using to reduce their tax bills, through what the Chancellor and the Revenue are pleased to call “loopholes”.

If the measures are legal, how can those who use them be called “dodgers”? (And see here for another example of the Revenue being rude.)

Osborne has cleverly turned the issue into a moral one and in doing so has introduced a novel legal concept on the hoof. These schemes of tax avoidance have been dubbed “aggressive” avoidance, as if by hurling an adjective about what is legal is suddenly rendered “un”-legal.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

And it is to be observed that such charities find more efficient and targeted ways of spending the money they receive through such donations. Can the government be expected, can the government even promise, to spend the money that it thus intends to steal as efficiently? Of course not.

One obvious practical problem that also looms is that many of these allegedly “aggressive avoiders” are foreigners, who settled here because of the way the tax rules had already been drawn up: they run businesses, they spend – in other words, they are already “contributors” in various ways to the economic life of the country. If the rules that encouraged them to settle here are changed, then they will simply leave, or if they stay, the taxes imposed on them will dry up certain expenditures, which will amount to much the same as if they had departed.

So the plans to deal with people who have done nothing illegal will have the opposite effect: less wealth creation, less voluntary “distribution” through getting and spending of that created wealth through the rest of the economy and more government waste – of human resources as well as cash…

Once upon a time, these things were done so differently: here is the opening paragraph of A. J. P. Taylor’s volume in the Oxford History of England, “English History 1914-1915”:

Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without any restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service. An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence. Substantial householders were occasionally called on for jury service. Otherwise, only those helped the state who wished to do so. The Englishman paid taxes on a modest scale: nearly £200 million in 1913-1914, or rather less than 8 per cent. of national income.

By Simone Wapler (translated from an article originally published in France)

In the middle of a difficult economic situation, investors rush for gilt-edged securities, among them: gold. But watch-out for the swindlers… do not confuse actual stocks with virtual stocks.

Everyone is talking about gold at the moment, especially as it is falling. Those who believe in a gold bubble are licking their lips. These bears are primarily to be found in the world of the big money men, the people who explain to you that your money must be made to “work”… in their own interest, clearly, just like Goldman Sachs. A recent survey carried out in France by the IFOP for the company AuCoffre.com produced surprising results. This particular French company is on the way to becoming the leading French company selling gold coins online. According to this survey, 68% of French people believe that gold is an investment with a future, but 60% find that it is incomprehensible and reserved to a privileged audience.

Some people who recently tried to buy gold through their banks found that it was not easy. Banks prefer to put forward their own certificates, or trackers, that are supposed to respond to the price of gold, rather than sell physical gold.  At first sight, if people want gold it is because they think that it will go up. Which is completely untrue. It is not gold that rises but currencies that drop. Here is the rise in the price of gold in the main currencies over the last 10 years:

• Peso 694%
• Rupee 487%
• US$ 474%
• Rouble 443%
• Pound Sterling 421%
• Real 339%
• Euro 287%
• Yen 262%
• Rand 262%
• $CAD 258%
• Francs 219%
• AU 186%

It is obvious that with the help of the crisis and the restarting of dubious monetary transactions, currencies continue to lose ground to gold and therefore its rise (since it is the commonly used term) continues. It is because currencies fall, with the dollar in the lead, that the central banks of the emerging country buy gold to diversify their reserves.

Who are the people holding gold for investment?

Out of the 166,000 tons of gold extracted from the ground, the central banks have 28,000 and private sector investment 30,000. Gold for investment is therefore to be found in the safe deposit boxes of the central banks, therefore the official sector, but also (and especially) in the private sector and in this case in two forms: in a shared form with the ETC (Exchange Traded Commodities) and in a private form for individuals. The ETCs are continuously listed certificates, in theory guaranteed by a physical gold reserve. Private individuals may also choose to obtain gold through their bank, and store it in their bank. In this case gold appears simply as one line on the bank account statement (1 ingot with a value of €40,000) and the bank stores it. Benefits: reduced management fees (since they are shared with others) and the safety of the large deposit-box of your bank.

But the real question is “does everyone actually have the gold that they claim to have”?

Why does the Fed refuse to have its reserves audited?

Our eyes are immediately focussed on the Fed, its colossal balance sheet of bad debts and its gold reserves. The Republican Senator Ron Paul has been asking for years for an audit on the gold reserves. In vain. [And see here for an analysis of this problem.] Just to stir up more problems, false ingots lined with tungsten have been discovered. They would appear to be of American origin.

Why do the central banks loan out their gold?

During the double decade (1980-2000) and the flat-period in the gold market, central banks engaged in the regrettable practice of giving gold out on loan in order to get some income from this dormant stock-pile. They can loan it out to commercial banks which use it to satisfy demand from an institutional client, for example. The last report on these strange practices goes back to 2006 and emanates from a private player, the specialized trader Blanchard. One then has to ask the question: do the ETFs (Exchange Traded Funds) ETCs actually possess their gold?

There exist various legal arrangements according to country. The following question is often repeated: wouldn’t these reserves not just be gold out on loan?

When banks give gold in exchange is it their own or your own?

In February 2011, The Wall Street Journal informed us that gold is accepted in the swaps transactions of commercial banks.  At this date, the inter-banking market is completely seized up. Banks are terrified and refuse to lend between themselves. Where does this gold, that suddenly appears, come from? Is this gold out on loan by central banks or is this the famous gold in the pipeline of the customer? Deafening silence.

Comex sets the price of gold… paper gold. The largest futures market in the world remains Comex. A futures contract is a bit of paper which bears an expiry date, a commodity, a quantity and a price. At the expiry date, the owner of the bit of paper has a choice: to take delivery at the agreed price of the commodity or “roll-over his position”, i.e. take the following contract. The majority of speculators choose the latter. In the warehouses of Comex, there is therefore much less gold than that which is covered by the futures contracts which circulate. So much less that the Canadians (who are large gold producers) got annoyed: Comex sets its prices, disconnected from reality, on paper. Short sellers are financed by the lobby of the large US banks and everything is distorted, they claimed.

A revolt was organized in 2008 Vaporize Comex (Let’s smash Comex). Principle: that the holders of futures contracts ask for delivery, in unison, all on the same date to show to the face of the world that the warehouses of the Commodities Exchange were almost empty. The Canadian rebels had agreed on a contract at the end of December. Shortly after, rumours circulated according to which certain contract holders had agreed not to take delivery in exchange for substantial compensation in dollars…

 And that’s why the premium goes up!

 Simone Wapler is Chief Editor for Agora Publications (financial analysis and consultancy).

Source: Reuters

A lucid analysis from France on the logic of gold investment

Translated from an original article by Charles Sannat, Director of Economic Studies, AuCOFFRE.com, Paris

With regard to the economy, we have just gone through a “settlement” period with the Greek crisis. But in reality nothing has been settled. As far as Greece is concerned, we have gained a few months’ respite in so far as that country remains indebted to the tune of more than 120% of its GDP and nothing indicates that a recovery in the public finances can succeed. Having said that, we shall see within 12 to 24 months.

More worrying of course is the economic situation of Spain and Portugal, with here too monumental social damage in progress and popular demonstrations which are starting to become extremely significant in the fight against austerity plans. Beware. Spain is not Greece. Spain is a great country, with a great history and Franco’s nationalism only dates back to 1975, i.e. yesterday. As any expert on Spain will tell you, that country will never accept a Greek-style humiliation. The Prime Minister has in fact called a stop to certain reforms. And he is right-wing. Spain will not be able to find a way out of the economic, financial and property crisis with a strong euro which does not correspond to the intrinsic characteristics of its economy. The same applies to Portugal.

We should not forget our own country, France. If we recall, in 2010, there were 1.42 working people for every retired person. Retirements will end up by no longer being paid for because there is quite simply no more money. The problem is not in 20 years’ time. It is now.

France is also in bankruptcy. The Court of Auditors in France, chaired by the Socialist Migot, has stated that it is necessary to dispense with indexing pensions to inflation. With real inflation of 5% per annum, in 10 years’ time a pensioner will lose the equivalent of 60% of his purchasing power. That is the reality.

Lastly, let us remember the end is nigh atmosphere at the end of 2011 (that was three months ago). One really wondered whether the euro would have survived by Christmas. What has changed since then?  One simple but basic fact. Over-indebted countries (France and Germany) became even more indebted, to temporarily save a country like Greece from immediate bankruptcy. But it is the entirety of our economic system which is in an irremediably compromised position. Nobody is able to say so. Even less the “people” behind the system. That is self-evident.

The only truth is the following: infinite growth related to mass consumption thanks to abundant and cheap energy in a finite world is a system likely to fail.

• A gold purchaser does not buy gold to speculate.
• A gold purchaser does not buy gold to get rich.
• A gold purchaser does not have a view on the financial results of the next quarter.
• A gold purchaser buys gold because he or she has a fundamental analysis of the current dead end in which the global economy finds itself.
• He or she buys gold because each serious crisis ends up by finding a “monetary” resolution that is usually painful.
• He or she buys gold because gold has been the Vera Valor (true value) for more than 6,000 years whilst the euro barely celebrates its 10th anniversary.
• He or she buys gold because before 1914 the currency was gold; because in the inter-war years those who had given up gold got to know a period of hyperinflation which led to Nazism coming to power with the disastrous consequences that we all know.
• He or she buys gold because in 1971, the dollar was no longer convertible and only the banknote plate continued to function unsupervised.
• Above all, he or she buys gold because he or she knows, and it is a historical certainty, that nothing is immaterial. During the last century we saw five different international currency systems or one every 20 years on average.
• He or she buys gold because the current system will change. Regardless whether it is in six months or six years.
• Gold buyers buy gold because they know that whatever the outcome of change, they will have simply kept the value of their assets. And it is that which will make all the difference.

Everyone else is half-witted, rendered moronic through TV and lobotomized by the eternal Welfare State. They will suffer. But this last sentence should of course not be quoted. It is OFF the record as they say. And I will not even give a small coin (out of gold) to a tramp when he goes around begging with his small sign: “May I call upon your kindness, Ladies and Gentlemen, in helping a former paper salesman by giving a bit of change to eat and help me to remain clean.” These people are ruining French people, just as with the Russian loans, or the assignats, and with each devaluation… In short it is necessary to know history and fully understand that they do not support us. The people act as compensation for the rich (banks and the system).

That’s why gold is bought.

Gold is rising I am happy. Gold is falling I am equally happy because I can buy more.
A gold buyer is always happy:-)

… and the government follows their lead

By Mark Rogers

In recent posts I have looked at what money is, what underlies the knowledge economy and suggested the role of “de-development” lying at the core of the financial crisis.

It is therefore interesting to report on how ordinary Greeks have rapidly over the course of the last few years started building informal economies, part-barter, part-alternative currency.

As reported in The New York Times, October 2011: “‘Ever since the crisis there’s been a boom in such networks all over Greece,’ said George Stathakis, a professor of political economy and vice chancellor of the University of Crete. In spite of the large public sector in Greece, which employs one in five workers, the country’s social services often are not up to the task of helping people in need, he added. ‘There are so many huge gaps that have to be filled by new kinds of networks,’ he said.”

In Volos, a fishing port in Central Greece, an alternative banking system has been established based on something called a Local Alternative Unit: its value is at par with the euro and can be used to exchange local goods and services. Members even receive books of vouchers, proofed against forgery, which can be used like cheques. (This is reminiscent of the way in which in nineteenth century Hong Kong, cheques themselves were simply circulated as currency without ever being cashed!)

“In Patras, in the Peloponnese,” continues the story in The New York Times, “a network called Ovolos, named after an ancient Greek means of currency, was founded in 2009 and includes a local exchange currency, a barter system and a so-called time bank, in which members swap services like medical care and language classes. The group has about 100 transactions a week, and volunteers monitor for illegal services, said Nikos Bogonikolos, the president and a founding member.”

The most significant aspect of the story is how the Greek government has responded: legislation was passed in the last week of September 2011 which recognised these “alternative forms of entrepreneurship and local development”, giving these groups non-profit status. In the light of the severity of the Greek position, it could not very well do anything else, but that is not where its significance lies.

Extra-legal economies are the time-honoured way in which poor and impoverished peoples have banded together to build an economy from scratch; eventually, the pressure on the legal economy, in 18th Century Britain and throughout the developing world today, which largely exists to protect the monopolistic privileges of the guilds of yore and the professional castes and trade unions of today, forces it to give way: monopoly privileges are legally rescinded, and legal protections extended to those in the extra-legal economy so that they can operate beyond the immediate locality (i.e. safely do business with strangers) and realise their assets.

It is this that the Greek government with admirable perspicacity and speed has enabled for its beleaguered citizens. The Greek government over the decades has acted as one enormous vested interest, which coupled with the incredible way in which Greece was permitted to enter the euro, reduced its citizens to these bare economies. But is there the seed of something else?

There is here the potential to wean people off the whole concept of welfarism: “‘The most exciting thing you feel when you start is this sense of contribution,’ [said Maria Houpis, a retired teacher at a technical high school and one of the Volos group’s six co-founders]. ‘You have much more than your bank account says. You have your mind and your hands.’”

By Mark Rogers

It is a universal truth that revolutions devour their children: this is ruefully acknowledged in the cases of the French and Bolshevik revolutions – considered “good” revolutions, as if Robespierre or Lenin were somehow accidents.

The revolution that is now unwinding with a vengeance is the Welfare State. It may seem overdoing it to call the Welfare State a revolution, but consider: it is normal to discuss the Welfare State in terms of safety nets, short-term solutions to modest problems like seasonal unemployment and housing for the poorest, or, in a more wide-ranging version of the arguments for it, as a necessary bulwark against economic catastrophes such as the Great Depression.

Yet the Welfare State itself devours so many resources and applies them without the constraints of market discipline, with the accompanying bloating of the civil service to administer it, that this in itself constitutes a revolution in economic and political habits. Add to this that as a result huge numbers of people have come to perceive government as a necessary arbiter of the way they live and the provider of their needs: this is an even bigger revolution.

For example, many people live in council flats and houses and survive on benefits including housing benefit. What the benefits system effectually does, in consequence, is to deprive people of any assets whatsoever, including themselves. That is, those who live entirely at the provision of the state do not exercise the assets they possess in hands and brains to carve out a living for themselves – it is not worthwhile to do so, as they are better off on benefits than working. This is a major reversal of those virtues that Keynes reviled (as we have noted here): industry, thrift, independence, a proper self-respect.

What this means is that the Welfare State is the chief driver of what we may call “de-development” in the western democracies. This takes two forms: the destruction of economic facts (see the discussion here) and the culture of dependence on government. Both have their origins in the misplaced desire to assist the poorest in society. The subprime crisis, for example, has its origins in FDR’s “New Deal” and the creation of the government-backed savings and loans “banks”. The massive growth of these institutions in itself became a problem, compounded by the Clinton administration’s drive to force lenders to lend to the poorest African Americans, under penalty of being convicted and fined for “racism” if they did not do so – ignoring the economic reality that no-one’s interests were served by deliberately creating debt in households that manifestly could not afford to repay it.

The bundling of “toxic debts” into securities that could then be traded was the banks’ and the markets’ ingenious but short-sighted nostrum to deal with one consequence of government intervention that had gone badly wrong. It may have kept western economies afloat a few years longer, this juggling act by the banks – but the policy behind it seems to have been somewhat Micawberish, waiting for something else to turn up…

And what has turned up is the massive bankruptcy of the Welfare State, nowhere more obviously epitomised than in the eurozone. Entirely driven by the manifest fact that the Welfare State is unaffordable, as is bluntly stated by those who know this – those who don’t, harp on about services being “underfunded”, as if unsustainable taxation only needed to become even more unsustainable and the problem would be solved!

As James Bartholomew points out in his crucial book “The Welfare State We’re In” it is only in the Welfare State that the poor are taxed – in ultra-capitalist Hong Kong the poor pay no taxes because the threshold on earnings before taxation kicks in is high, meaning that everyone has a chance to better themselves.

It should be more widely understood that bankruptcies are a sign of a healthy economy – stripping out ill-conceived or unworkable economic projects. This is the core of the eurozone crisis: what are we being told doesn’t work?

By Mark Rogers

The Federal Reserve’s holdings of gold are not only non-existent, contrary to what many people understand, they do not even amount to paper gold.

In 1933, the first year of his presidency, President Roosevelt ordered the seizure of private holdings of gold (with some exceptions for jewellery and dentistry); this was followed in 1934 by the confiscation of gold from the banks. This was allegedly in response to the shortage of gold caused by the great depression.

In 1934 the United States fixed the dollar price of gold at $35/troy ounce (devaluing the dollar thereby). This became known as the “statutory” or “legal” price. In spite of all that subsequently happened, the U.S. refused to consider an increase in this price of gold, not the establishment of the Bretton Woods agreement and the International Monetary Fund, nor the devaluation of the pound sterling in 1949 which in effect raised the price of gold in the sterling area without a rise in its price in the dollar area.

In the 1950s the volume and value of the world trade in gold kept on increasing, leading to the idea that a universal rise in the price of gold could be brought about by its dollar revaluation. The growth of the world’s monetary gold reserves as then valued fell far below the increase in the current volume/value; thus, it became clear that the annual yield of new gold (at the same valuation) could not express the increasing volume of goods produced. The U.S. gold reserves had by now fallen to well below the level at which they guaranteed paper money. Nonetheless the U.S. price of gold remained the same.

Decoupling the dollar from gold

In 1972 the “statutory” price was adjusted to $38/ounce and again in 1973 to $42.22/ounce. These movements were followed in 1975 by the revocation of the prohibition on ownership of gold by private parties.

Amongst the banks that had had its gold reserves confiscated was the Federal Reserve – the Treasury was the authority which performed the confiscation. The fact that the Federal Reserve is quasi-independent of the government (somewhat analogously to the Bank of England before it was nationalized in 1946), explains the apparent anomaly of the state confiscating its own reserves.

The Federal Reserve was obliged to sell its gold to the Treasury at $20.67/oz, in return for which it received gold certificates worth around $3.617 billion.

So why does the idea persist that the Federal Reserve has any gold reserves at all? Because the deal done with the Treasury issued in those certificates just mentioned, which is why the Federal Reserve lists them, as the “Gold certificate account”, in its accounts, consistently valued at the final price of 1973.

The Fed’s “paper gold” not even paper gold

Dr Ron Paul, member of the House of Representatives, is the champion of getting the Federal Reserve to be audited by the Government Accountability Office: that task has always been undertaken by the Federal Reserve itself (surprising as that may seem). Hitherto his efforts at getting this into law have met huge resistance and evasion by the Federal Reserve (which is not surprising at all).

On the first of June, 2011, testimony by Scott G. Alvarez, General Counsel, and Thomas C. Baxter Jr., General Counsel, Federal Reserve (formal testimony here) before the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, U.S. House of Representatives, Washington, D.C., of which Dr Paul was the Chairman, on Federal Reserve Lending Disclosures, exposed the nature of the “gold certificate account” in exchanges between Dr Paul and Mr Alvarez.

Crucially, it transpires that these certificates are not even claims to the actual gold that the Treasury confiscated. Said Mr Alvarez: “No we have no interest in the gold that is owned by the Treasury. We have simply an accounting document that is called gold certificates that represents the value at a statutory rate that we gave to the Treasury in 1934.″

In a fascinating analysis of this extraordinary statement, GoldNews.Com discusses what this means in terms of the relationship between the Treasury and the Federal Reserve: “The Treasury, however, in a desire to realize the value of the gold without selling it, used their gold as collateral against gold certificate issuance to the Fed in exchange for fresh cash for the Treasury to spend. The Treasury is able to print as many gold certificates as they choose, under one restriction from the Gold Reserve Act: the amount of gold certificates outstanding shall at no time exceed the value of gold held by the Treasury, priced at the statutory rate. This meant any increase in the value of the Treasury’s gold could be matched by printing gold certificates and those certificates could be used to acquire new Federal Reserve Notes (dollars) from the Fed.”

This is Quantitative Easing with a vengeance! In order to have more money to spend, the Fed is asked to print more notes, in return for which, and in order, presumably, not to disturb the “statutory” price recorded on the Fed’s accounts, the Treasury then prints more gold certificates.

An upshot of this is that the dollar is worth a good deal less than is assumed. And a corollary of this is that the manner in which the Treasury acquired the gold and its subsequent valuation as “gold certificates” would explain why, as noted above, the U.S. insisted on maintaining the dollar price at $35 for so long: it was an accountancy exercise and no more, and continues as such to this day.

Does this, at least in theory, mean that should there ever be a deal whereby the Fed buys its gold back from the Treasury, it would do so at that “price” on its books?

The analysis of this extremely complicated state of affairs by GoldNews.Com can be found here (Part One) and here (Part Two, from which the substantial quotation above has been taken).

Credit no measure of true value

Here, in the light of the above discussion, is a sobering observation made by C.H.V. Sutherland, then Keeper of Coins at the Ashmolean Museum, Oxford, in “Gold: Its Beauty, Power and Allure” (published by Thames and Hudson, 1969): “Collapse of the gold standard was followed by the era of credit currency. We accept a bank-note for the payment of £1, but in accepting it we receive in fact only the bank’s promise to pay £1. We accept a cheque, similarly; but a cheque again is no more than its drawer’s promise that his bank will pay us another bank’s promises. The growth of ‘money’ in this sense – and of course it is not money at all, in any true sense, but an extension of credit – is one of the most remarkable features of economic life since 1914 [emphasis added].”

There is considerable historical irony in the fact that President Roosevelt ended Prohibition in 1933, only to enact another prohibition on the private ownership of gold, with consequences which are still unravelling in the “current” financial crisis: I say “current” because the problems of paper money have been unravelling ever since the decisions about gold related above were taken – just as the same President’s New Deal, with its state-backed savings and loans funds, is a fundamental cause of the subprime crisis.