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.

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

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.

An occasional series of curiosities of Gold, its history and ideas about it.

By Mark Rogers

For all practical purposes, it has looked for a very long time as if the gold standard has become a curiosity; reviled by Keynesians, found impractical by politicians (I wonder why?!), alleged to be unworkable as a medium for regulating international trade – these are just some of the reasons that anybody who advocates a possible return to it is regarded as a crank. (This does not stop governments from wanting to get their hands on gold or control it, as witness the buying of gold in China, and the curtailing of paying for gold in cash in Europe.)

That is not the only reason why I am, at least for the purposes of this article, putting the gold standard in the category of a curiosity. Although Britain came off the gold standard in 1931, at least as late as 1934 candidates sitting the Final Examination of the Institute of Chartered Accountants were still being asked questions on the gold standard.

I discovered this in a small crib published in 1934 for such candidates: “109 Examination Questions on General Financial Knowledge together with Answers Thereto” by R. Byrne (A.C.A, A.S.A.A., F.C.I.S), published by The Coaching Association Ltd, London E.C.2.

Here they are, giving as good and succinct a definition as one could wish for, written with essentially practical business in mind:

Q.77 Explain concisely what is meant by the gold standard, and mention the various forms of the gold standard.

By “the gold standard” is meant a system of monetary management whereby the currency of the country has a definite gold value, even though the circulating medium is a paper currency or a metal other than gold.

Any country which is on the gold standard undertakes that its standard coin shall contain a fixed and unalterable amount of pure gold. It also undertakes that such standard gold coins shall be legal tender to an unlimited amount, and that its central agent (the Bank of England in this country) shall buy and sell gold at certain fixed prices.

Under the gold specie or circulation standard – which is the most perfect form of gold standard – gold coins are actually in circulation and the central bank undertakes to redeem any of its bank notes in gold coin. Gold coin, therefore, is readily available for the settlement of debt. This is the system which was in operation in this country prior to 1914. The gold bullion standard, which was in operation in this country from 1925 until 1931, is a more restricted form of gold standard. Under this system the central bank is bound to buy and sell gold bullion at fixed prices. In England, the Bank of England was compelled to buy gold of standard fineness at the rate of £3 17s. 9d. per oz., and to sell it – in bars of not less than 400 ozs. – at £3 17s. 10½d. Consequently, gold was always available for shipment in payment of debts, and the £ always had a value fixed in relation to these prices. The gold exchange standard is that adopted by silver-using countries. Thus, a country such as India would maintain the gold standard by purchasing the exchange or securities of a country which was on the gold standard, e.g. England. These securities could be sold, and with the proceeds gold obtained from the Bank of England. This gold could then be transferred to India’s creditors so that the rupee, although silver, could be definitely linked to gold.

Q.78 Explain how the gold standard operates to adjust the balance of international trade.

The gold standard maintains stability of the exchanges, for when the currency of a gold standard country is convertible into gold at a fixed price, the value of that currency in terms of the currencies of other gold standard countries will only vary within small limits known as specie points. Therefore, international trade may proceed without any fear on the part of the trader of loss owing to exchange fluctuations.

In order that the gold standard shall operate freely, it is necessary that no restrictions shall be placed upon the free movement of gold from centre to centre, and that there should be some relationship between the internal and external purchasing power of a currency.

When a country has an adverse balance, payment will be made in the form of gold. The loss of gold will result in a contraction in the volume of money, and prices will tend to fall. In consequence, the country exporting gold is able to produce more cheaply, and its exports tend to increase. Its imports, however, tend to decrease because of the higher costs of production prevailing abroad. In the countries receiving the gold the opposite results will be noticed, i.e. more imports and fewer exports, so that in due course the country which had the unfavourable balance will tend towards equality with the others, and will ultimately have a favourable balance, resulting in the receipt of gold.

The gold standard therefore operates as a corrective, whereby the course of international trade is facilitated by the transfer of gold.

If the gold standard is not permitted to operate freely, i.e. by an inflationary policy on the part of the gold-losing country, or by excessive tariffs on the part of others, gold will tend to move one way only, resulting in the exhaustion of gold supplies of at least one country, and the eventual abandonment of the gold standard by that country.

For good measure, Q.79 is What are the disadvantages of a paper standard of currency? the last sentence of the answer reading emphatically: It may be remarked that inflation has always occurred in cases where a paper standard has been adopted.

[The author is, amongst other things, a dealer in secondhand books and is always picking up little gems such as this crib on his rambles!]

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

… 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

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.

The continuing furore over bankers’ pay led to the recent decision by Stephen Hester, the Chief Executive of the Royal Bank of Scotland, to forgo his contracted bonus, worth just under £1 million. Wayne Rooney, the popular footballer, earns that in five weeks.

Top executive pay in the banks hovers around £1.2 – £1.35 million; these salaries are complemented by bonuses, which are largely or entirely paid in shares. Total remuneration for bankers is therefore high (albeit that a large element, the bonuses, may be said to be nominal). But, compared to the remuneration of other high earners, is it excessive?

Wayne Rooney earns £18 million a year, a combination of pay, score bonuses and sponsorship fees. Yet he is not damned for greed. Pop stars and film stars earn as large if not larger incomes; in fact some earnings are so high it is hard to find out exactly how high they are – the singer Rihanna, for example, is rumoured to be worth £70 million but her total income and net worth are undisclosed.

We hear nothing, however, about the impulsive greed of such people. Footballers’ transfer fees, when they do cause eyebrows to be raised, are justified in the context of the competitive world of international football, and the explanation seems to be accepted, notwithstanding the huge discrepancy between what bankers and footballers earn. So whence the moral froth?

Footballers and singers and film makers give people pleasure; their fans follow them, paying to see their latest games or films or buying their latest songs. Their value as entertainers is taken for granted by their audiences; it is easy to understand what they do, thus their value for the individual is measured instantly as a factor of that individual’s enjoyment of their endeavours. It is equally understood that their earnings are simply an aggregate of the money that audiences willingly pay to be entertained by them.

Given that bankers exercise, and are expected to exercise, an enormous responsibility for the deposits and savings of their clients, why is this fact not equally well understood? Presumably because the actual workings of the banking system and high finance are not amenable to the sort of instant understanding that facilitates the benign regard in which entertainers are held. That is, the fury directed at bankers is born of sheer ignorance.

There is another moral issue that lies behind this debate, and that is the way in which poverty (and therefore wealth) has come to be defined in the affluent west: it has ceased to be defined in absolute terms. The Poverty Site states the case for “relative poverty” thus:
“The view that relative poverty is not important is a perfectly valid position to take – it is just not the view that the authors of this website, along with most other researchers, the EU, the UK government, and politicians of all hues across the political spectrum take. So, for example, the government’s target of halving child poverty by 2010 is defined in terms of relative poverty.”

At least this makes it admirably clear that “relative poverty” is defined politically, that it is a political tool, designed to justify high taxation and providing politicians with their raison d’etre. Such a definition therefore helps perpetuate our contemporary intrusive and anti-wealth creation political system. The politicians needed someone to blame when that system imploded – and footballers just didn’t seem to fit the bill…

Watch the Ads they didn’t want you to see here – read on

There are many theories surrounding the manipulation of the Gold Market and the Gold Spot price but few doubt that it takes place, orchestrated by some greater beings that seek to control the money supply.

In a recent cynical twist, gold has been effectively censored off the air of a host of major US TV Networks working in collusion with the Obama administration and the Fed.
An established gold investment company recently made two TV ads to be aired across the networks. The ads feature caricatures of Obama, Bernanke and Pat Boone who narrates the story. The latter works for the company Swiss America and has long been an advocate of the virtues of gold versus dollars.
The first of the ads takes a humorous jibe at Bernanke’s Wall Street reputation for being “helicopter Ben” , ready to dump money on a crisis.

“made-up” reasons for ban?

The reasons given for rejecting the ads vary from ;
• Comcast who explained that it “doesn’t meet our standards on public symbol. The Comcast Public Symbol Policy apparently specifies that the “use of the name or likeness of the President of the United States and/or the Presidential Seal for endorsing commercial purposes must be authorized by the White House.”
• Fox News said the “representation of public figures is something we try to avoid.”
• CNN/HLN told Swiss America the commercials were “not appropriate for the current political landscape.”

Swiss America CEO Craig Smith said “The networks’ reaction shocked me,” Smith said. “It’s a threat to First Amendment rights when a commercial message is rejected not because it is inaccurate or misleading, but because it makes what is perceived to be a political statement the networks want to avoid.”

Smith told WND he was concerned that the networks were protecting Obama and Bernanke.
“All we are saying in these two commercials is what dozens of responsible professional economists are saying every day,” Smith said;

“Gold investment as a responsible diversification strategy when governments printing of fiat currencies with abandon risk unleashing inflationary principles.”

Inflationary pressures are building globally and no-one has an answer to them rising and the consequent economic impact.
It is a common known fact that storing gold through a crisis and inflation is the BEST way to protect your wealth value and its purchasing power. This has been the case for 6000 years.

Gold can never be worth zero – it has intrinsic value.
Fiat currency can become worthless – its only value is that of a piece of paper

The Ban backfires

However, the censorship has backfired as Google TV accepted the ads which will eventually be shown throughout the networks via Google TV!
These humorous videos tell a very straight and simple story and the only possible reason for banning them is because of how close to the TRUTH they really are – and that hurts the Politocrats who believe they are all supreme and mighty to judge over us, control us and bankrupt us.

They are so desperate to cling on to power they will do anything – except we are not the fools they take us for – are we?

Here we continue our conversation from the previous article “When Debt’s called Credit”.

So, you mortgaged your salary and have been fortunate enough with your earnings to stay the course of a twenty-five year mortgage repayment plan. However, the asset which you now possess has cost you something like three times its original price. You are inclined to think that this, plus the profit on any potential sale, is what your house is now “worth”. However, your house will only be worth its inflated price (a price entirely created by debt) relative to a booming economy which puts a premium on home ownership. That is, it is worth this potential only if there is sufficient activity in the economy to fuel someone else’s borrowing to purchase your house to further inflate the value of that property.

One point to clarify, at the risk of stating the obvious (though there is little that is obvious about the modern mortgage): where does the borrowing come in – you have paid for your house out of your earnings on a monthly payment plan. The bank/building society has lent you the money by buying the house, and the repayment plan reflects the cost of, and length of time that, the money is out on loan in the form of bricks and mortar.

Thus house prices become grossly inflated. If the cycle continues, the house at the end of each twenty-five year period will keep tripling its nominal value – but this is unsustainable in the long run, and, despite Keynes’s dictum that “the long run is a misleading guide to current affairs”, that is exactly the view that should be taken: in the long run, the mortgage inflates the value of the asset, and it is entirely foreseeable that it should do so. In fact, that it does so renders the word “asset” in this context potentially meaningless. What happens if you cannot sell the house, and no-one wishes to rent it at a price that reflects anything like your “investment” in it?

Of course, there are many who buy their houses as homes and a long-run inheritance for their children. But the trouble with the modern mortgage is that it is sold largely on the basis that the asset is a tradable good. This is not a natural assumption for most people to make, especially families, and was not something that our forefathers generally assumed – unless they were builders, property developers and speculators.

There is a serious and somewhat sneaky consequence of the inflation of house prices: the government under New Labour changed an important measures of inflation, the Retail Price Index which included mortgage interest repayments, that is house prices, (and was used, amongst other things, to adjust selected benefits, including state pensions) by switching to the Consumer Price Index, which does not (interestingly, the latter also omits Council Tax, which is a concern for pensioners, who may well own their homes, but are not free of this major property cost). The measure of inflation used by those who make public policy does not include a major source of inflation.

Has the desire to own one’s own home become a mania of the Tulip or the Railway kind?

It is also worth remembering that inflation rates currently higher than interest rates, thus all monies stored/saved in this type of way are effectively losing value daily and their purchasing power rapidly eroded.

There are few “inflation-proof” savings or savings plans on offer but one to consider is the purchase (and ownership) of the only safe haven tangible asset – Gold in physical form. Historically gold has always protected wealth against periods of inflation and crisis. One important aspect is to ensure that you own your gold as this gives you complete control over its eventual resale which is the most important moment for your investment.
We strongly advise against the purchase of “paper” gold such as ETFs as these are so oversold that only 5% could be redeemed against physical stocks. These types of investments are extremely vulnerable in an economic crisis and the risk of significant losses is increased.

True value is an asset that maintains its worth at all times – during prosperity and austerity.

Choose yours wisely!

By Mark Rogers

The worsening crisis in Greece has prompted savers to empty their bank accounts to exchange their Euros for Gold coins.
Concern is growing over the stability of the Greek banking system and of course the astronomic sovereign debt which is crushing Greece.
The Prime Minister George Papandreou may well have persuaded the parliamentarians to back further austerity measures and have won the vote from them but that will not change the resolve of the Greek people.
Greece would need 12% growth annually for at least 30 years to come anywhere near having the means to repay its debts.
How likely is that?
The Greek economy does not have the means to recover and the fact that they have secured the next gigantic loan from the EU and IMF changes little in real terms. This money will only payback the Banks’ debts and therefore not stay in Greece. Surely the only way to help the Greek economy is to inject some funding into it. The only winner in this situation is the Banks who’ll feed their greed for profits and the loan sharks of the IMF and EU who obviously take their cut of interest.
The losers are the Greek people who will still have an impossible sovereign debt blighting their future whilst falling below the poverty line from increased austerity.
On top of this the Government has agreed to prostitute the future of Greece to the lowest bidders who have the cash to buy whatever “good” state assets they have.

A decision that Greece will regret

Without a doubt this line of action will never save the Greek economy or start to rebuild some confidence for a decent future. Greece will stay in Debt for generations. The Greek people will never accept this and their strong protests are understandable. Headlines talk of a possible Greek default – Why? Greece has been bankrupt for over a year, since it first asked for a “bailout”.

The only route to recovery is to restructure the debts or simply declare the country bankrupt. This would be the best solution for the Greeks but of course they’re in a weak position and all recent decisions, including the political waffle and rhetoric, have been taken to secure the European banks that are hugely exposed to the Greek debt. Be under no illusion that the only reason for this action is to appease the power brokers that support the European Governments. The politicians including the Greek government don’t care one iota for the regular people of Greece and why would they because they are all sufficiently immune to the deepening crisis because their deep pockets are lined with personal wealth that removes them from harm’s way and any sense of reality or empathy with those suffering the effects.

The people’s retribution

The one way Greek people have of preserving and protecting their personal wealth is to opt out of the normal system and there is evidence that they have started to empty their bank accounts (maybe à la Cantona – see Eric Cantona’s French Revolution).
Firstly they are taking retribution on the Banks by weakening them and also showing their distrust for reckless, uncaring institutions.
Secondly they are storing their wealth in something tangible and much more reliable than invented currency which could devalue or collapse anytime – they are buying gold coins as they did during the Second World War because they know that this will maintain real value and purchasing power through the difficulties ahead.
Here is some evidence provided recently in the Financial Times by Kerin Hope

ATHENS — Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.

Pledges by socialist Prime Minister George Papandreou that his government would “save the country” have been widely discounted by the public. However, parliament gave him a vote of confidence late on Tuesday night. The socialists have a six-seat majority in the 300-member house.

Sales of gold coins have soared as savers seek a safer and fungible source of value.

“When the global financial crisis started, our sales of coins to investors overtook bullion for the first time,” said Harry Krinakis, at Sepheriades, a Greek precious metals trader. “Now the sales ratio has reached five to one.”

Tomas, a computer technician, has exchanged his euro savings for gold coins: “I keep them at home just like my grandmother did in the Second World War.”
Monthly bank withdrawals were running at E1.5 billion-E2 billion in the first quarter. Last year, depositors withdrew E30 billion, equivalent to 12.3 per cent of total savings, according to the central bank. Greek deposits worth an estimated E8 billion were transferred to banks in Cyprus in 2010. But the flow has dried up this year amid fears that Cypriot banks could suffer contagion.

Andreas, a supermarket manager, transferred the family savings to Munich earlier this year. “The Swiss banks aren’t interested unless you’ve got several hundred thousand euros,” he said.

“We can’t trust the politicians to get us out of this mess [and] have to protect our families,” said Sakis, a garage owner, at an anti-austerity protest in Athens’ Syntagma Square. “A bank collapse has got to be in the cards.” He added he had withdrawn his savings and placed them in a bank safe deposit box “for security. Who cares about interest right now?”

Others put their savings into land when prices fell after Greece’s first European Union-led rescue last year. Angelos, a software specialist, bought a neighbour’s olive grove. “I grabbed the opportunity,” he said.
“A year ago I wouldn’t have considered making such an old-fashioned investment.”

It is no accident that other European countries, particularly Germany and France, have experienced dramatically increased investment in gold coins during the last three months. In France investors own more gold than the Bank of France and transactions in coins have increased by 35% (source AuCoffre.com) since January. These countries have aan historical reference to gold coin investments and their benefits so it is no surprise to witness such an increase during periods of crisis. In fact one can determine the “temperature” of concern from this rising activity and people are seriously concerned about an impending crash on the horizon that will have global significance.

Countries like the UK are rather slow on the uptake and the gold investment market tends to be reserved for the extremely well-off and well-connected. What a shame so many people are misled by false information to detract them from participating or they are just ignorant of the facts.

Anyway their loss is someone else’s gain and come the day they will be left holding bits of paper good for burning while their European neighbours use their gold coins to pay for provisions and ultimately survival!

Remember that the signs of crisis were ignored by myopian political rhetoric pre-2008 leaving millions of ordinary folk open to its consequences. The signs of crisis have been with us ever since and still they pretend all will be well and their policies are “working”.

2008 was just the prelude and the worst is yet to arrive.
Be warned and be prepared or once again you will be hung out to dry!

An investment in gold is a survival kit for your future.

Last month Belarus witnessed the effects of a collapsed currency when the Government cut the rouble’s value against the US dollar by almost half. Previously 3155 roubles would buy a dollar but in the blink of an eye they decided 4930 would be needed. This was not even the reality because perception of the collapsing currency meant the situation was even worse as people scrambled for foreign exchange on the black market where you needed at least 6000 roubles to buy a dollar.

So what sparked this crisis?

President Lukashenko had promised to raise public sector wages by a third during his election campaign, which he duly carried out. This was sustainable only because of the support Belarus received from Moscow in terms of loans. However, as fears grew about the country’s finances, support from Russia waned and even near neighbours from the EU didn’t fancy the risk thus sparking a sharp drop in confidence in the currency.
To exacerbate the problem there was a shortage of foreign exchange currencies, dollars or euros, in the country.

The consequences of a collapse

Shelves quickly emptied of food and any "tangible asset" that would hold value better than their currency

Wide spread panic broke out as the economy effectively became paralyzed and people suddenly realised their currency was of diminishing worth. Shops were quickly emptied of everything that could be bought. Everyday food was snapped up at “luxury” style prices as people thought of survival but also they also bought electric goods like toasters, microwaves, canned goods and virtually anything that was for sale as they rushed to convert their currency into “any tangible assets” that were not losing value as quickly as their roubles.
The empty shelves throughout the towns seemed eerily reminiscent of the Soviet controlled days.
Shoppers knew that anything they could purchase could be more useful as a form of barter than the diminishing currency in their purses and wallets.

The human cost was quickly evident from the stories of employees sent on unpaid leave as companies also struggled to cope and comprehend the impact. Andrei, a computer company employee explained how he queued for a week in Minsk trying to buy dollars but didn’t even get one. “In just one month, I have been made bankrupt, the entire country is bankrupt” he said, adding that “even during the Soviet collapse we never suffered such a nightmare”.

There are many more stories of hardship, families without food or the means to buy any, shops without stock for them to buy even if they had the means.

Dmitry who is a 48 year old factory worker explained how he closed his bank account to get out 5 Million roubles in cash so he “could buy something before my money turns to dust”.

Tensions are growing as many people blame the President for mismanaging the economy.
Staple food supplies are now hoarded but people feel anxious that unrest is starting that could spill over into conflict at any time.
Revolution is always more likely when the population are starving.

Which country is next?

This may all seem so far away from wherever you are reading this but the causes of currency collapse may be closer to your doorstep than you think.

How many countries are in deep debt and reliant on support loans and bailouts right now?
Greece, Ireland, Portugal, Spain, Italy, Japan, USA, Belarus and virtually all of Eastern Europe and the Euro zone (only they never put it in the headlines!)

What happens when the support cannot be maintained?
Currency Collapse.

It could be the US Dollar, the Euro, the Yen who knows?
But even if it isn’t your currency that collapses what will be the knock on effects in every developed country if one of these currencies collapses?
The same as in Belarus.

Globalisation has been the buzz word for expanding Capitalism but it also means that economies are now inextricably linked and inter-twined to such an extent that when one sneezes they all catch a cold!

Remember the level of Sovereign Debt is spiralling out of control in the US, Greece, Ireland, Portugal and others are close behind such as Spain and the UK. Austerity measures in all countries are hurting normal folk badly – they are losing their jobs, suffering pay freezes, inflation and pension erosion. Social unrest and industrial action looms large across Europe and this will itself impact the recovery and debt repayment. This has already started in Greece, Portugal, Ireland and large scale protests in the UK are gathering momentum with the Autumn likely to be the boiling point of anger.

The discontent and despair of regular folk is understandable as they are bearing the brunt of all the hardship and it just isn’t fair.
Politicians spout their practiced rhetoric about how to fix things but the reality is they just don’t care that much as they are not the ones affected. They have means to isolate them from the hardships and many of them are actually responsible for producing the mess. How can they care about regular people or preach what we need to give up when they don’t – ever met a poor politician? Enough said!

There is now even talk of a “sub-prime” type problem in China because of over-indulgence in property speculation, leaving huge swathes of developments empty or under-occupied and therefore leaking money and ready to default.

We need more than lip service!

Mainstream news outlets are all controlled by self-interest groups (private and Governments) and they never provide the whole story about global economic frailty as there would be worldwide panic if they told the truth. The situation right now is on a knife edge and the next Belarus is not far away. Politicians won’t admit it but then again they won’t suffer like the rest of us as they’re all rich enough and well connected to see out any storm. They care too much for their own popularity to be honest.
Posh boys and rich kids rule the world and their assets are well protected in advance.

Remember what happened when panic struck in Belarus, people bought any tangible asset they could because it would maintain value better than their currency.
This phenomenon is happening daily – your bank account is the best place to keep currency if you want it to devalue!

Currency is not a means of preserving wealth because it has no inherent value especially when confidence is lost – then it is just a piece of paper.

The only real money available is a tangible asset that maintains its value whatever happens to printed bits of paper currency – and that is gold!

A lesson on Money and currency

We need to understand the difference between money and currency as one is real and the other a promise. Money can be defined as a medium of exchange and a store of value and until fairly recent times was in fact coins made out of precious metal with an intrinsic value or for ease of use, notes backed by precious metal.
Money, when considered as the fruit of many years’ industry, as the reward of labor, sweat and toil, as the widow’s dowry and children’s portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency. Thomas Paine (1737 – 1809)
Currency is still a medium of exchange but is not a store of value as it only derives its value by government degree or “fiat”. It’s value is based on the issuing the authority’s guarantee to pay the stated (face) amount on demand, and not on any intrinsic worth or extrinsic backing. All national currencies in circulation, issued and managed by the respective central banks, are fiat currencies.

A days wages in Germany 1923

The problem is that fiat currency runs the risk of central bankers printing too much and causing large inflation or worse. The more that is printed the more the currency is debased just as the Fed is doing now with the dollar. This has been going on for decades with central banks indiscriminately creating money to cover expenditure and ever increasing debt. There are examples throughout history and in the 20th Century most of us are aware that in Germany in 1923 it would take a barrow load of Deutschmarks to buy a loaf of bread but an ounce of gold could buy a reasonable house and one dollar was worth 4 trillion marks.

This irresponsible printing of money has eaten away at the value of the world’s reserve currency the USD dollar and dollar based assets, to such an extent that they have lost 82% of value since 1971, the year the US cut links with the gold standard. The GBP has fared even worse that the USD losing around 85% of value since 1971. There are many illustrations of then and now and how owning gold with intrinsic value would have more purchasing pro rata than currency. E.g the latest model Cadillac Eldorado would have taken 180 ounces of gold at $42.02 to pay the showroom price of $7,546. This same 180 ounces is now worth over $200k and would buy two Cadillac convertibles with enough left over to fuel to first service. In the UK an average family car cost £1000 around 60 oz of gold and now the same would cost £17000 around 23 oz of gold. The 60 ounces would have bought the same family car for you a sports car for your wife and a hatchback for your son or daughter. Gold retains its purchasing power year after year.

Not long ago the gold standard imposed monetary discipline on countries as they had to hold enough gold to cover the money in circulation but this all changed with the Jamaica agreement in 1971 when the decision was taken by President Nixon on the 15th August 1971 to suspend the direct convertibility of dollars into gold, the keystone of the financial system created in July 1944 (the Bretton Woods Agreement). On the 1st October 1971 the general assembly of the IMF asked the board of trustees to study and propose a comprehensive reform. This would be adopted by member States during a meeting held in Kingston (Jamaica) on the 7th and 8th January 1976, and included a set of provisions which put an end to the reign of gold. The US money supply in 1971 was $776 billion and quickly became an upward curve which rose dramatically over the last decade where the US money supply doubled from below $7 trillion to $14.3 trillion indicating that spending is out of control.

The US National debt is now greater than this!

The US though still likes to play the rich kid on the block and bizarrely gives aid to those supporting its debt as a report in the Daily Mail of London illustrates:
The U.S. is providing hundreds of millions of dollars of foreign aid to some of the world’s richest countries – while at the same time borrowing billions back, according to report seen by Congress.

The Congressional Research Service released the report last month which shows that in 2010 the U.S. handed out a total of $1.4bn to 16 foreign countries that held at least $10bn in Treasury securities.

Four countries in the world’s top 10 richest received foreign aid last year with China receiving $27.2m, India $126.6m, Brazil $25m, and Russia $71.5m. Mexico also received $316.7m and Egypt $255.7m.

And yet despite the massive outgoings in foreign aid, the receiving countries hold trillions of dollars in U.S. Treasury bonds.

China is the largest holder with $1.1trillion as of March, according to the Treasury Department.

Brazil held $193.5bn, Russia $127.8bn, India $39.8bn, Mexico $28.1bn and Egypt had $15.3bn.
Maybe it’s just additional interest on the debt to keep them sweet!

Greece figures predominantly in the spotlight and unrest is growing – will the Government have to mortgage the Acropolis and Parthenon or even sell them off to pay their debts?
Clearly they can never work their way out of this debt because they would have to increase GDP by 12% a year for 30 years in order to grow their way out of debt.
The Sovereign Debt crisis is well and truly out of control and the only solution will be to default on the debts and devalue currencies.

As discussed in the example of Belarus, chaos ensues when currencies collapse and regular folk suffer badly as they don’t see it coming or refuse to believe it could happen to them.

Be warned: A currency collapse is coming near you.
Be prepared: don’t put faith in bits of paper which have no inherent value.
Protect yourself: Invest in tangible assets that hold real value at all times, especially during a crisis.
Remember: Real money has inherent value, it is worth something because of what it is not because of what is written on it.
Now you know why people buy gold to protect themselves from crisis – it always holds value and is the only real money.

In summary:
• Currency is not money and its value can be changed by monetary policy makers
• Currency can be created and printed at will with no substance to support it
• Currency depreciation in value is accelerating with subsequent loss of purchasing power
• National debt is increasing to disastrous levels with threat of sovereign debt default
• Confidence in the USD is waning and its use as a reserve currency is under threat
• Countries and investors are shedding their dollar assets
• Central Banks are diversifying into gold and out of dollar assets
• Smart investors are diversifying their portfolios with a proportion of gold
• The value of gold has been consistent in retaining its purchasing power
• Gold is insurance for your wealth
• Gold is the only real money

I rest my case!

Recently, a wave of panic swept the precious metals markets and there was talk about the end of the cycles of mega-rise in raw materials! And whereas some thought there was a bubble on gold, it was on silver that the bubble inflated, then burst: The Wall Street Journal talked about the sudden   fall in the grey metal which “ fell 12% in just 11 minutes when the fall was at its most severe. Spot silver saw its informal open at $47.863/oz before rising to a peak of $48.150/oz; it then sold off sharply to a base of $42.210 before stabilizing.

The move down is the first break in an extraordinary run for silver, which has more than doubled in price over the past six months as investors bet on rising prices from renewed industrial demand and as a cheap safe-haven alternative to gold.”.

A piece in the  Financial Times asked  “Did the Silver bubble just burst?”,  illustrating with a chart that “the grey precious metal has tumbled 20 per cent in a week”.

The feeling was that a rapid rebound would be unlikely as expressed by Phillip Klapwijk, executive chairman of the precious metals consultancy GFMS, who said of silver’s position, “I think it could be over on the upside for the next little while.”

The FT also explained the extent of the early May slump saying “Silver prices plunged for the fifth consecutive day on Friday(6th May) as the grey precious metal suffered its biggest correction since the billionaire Hunt brothers cornered the market in 1980.” As the week drew to an end they summarised “The reversal of fortunes for silver – which until this week’s 25 per cent drop had been up 56 per cent since January – has led a wider sell-off in commodities markets, which were heading towards one of their worst one-day falls on record.”

Market manipulation rumours were rife and silver faced additional challenges because of rule changes by the CME Group. “The volatility in silver has been exacerbated by a series of increases in margin – or the amount of cash that investors must set aside to trade each contract – by CME Group, which runs the silver futures exchange in New York.

CME has raised its margin requirements five times in the past 15 days. Investors must now set aside $14,000 per silver futures contract, worth about $180,000 at current prices. The rate will rise to $16,000 on Monday (9^th).”

The grey metal, with a predominantly industrial use, is traditionally much more volatile than gold.

So where does gold feature in all this?

According to the FT “gold has managed to remain relatively unscathed compared with its poorer cousin”

It remains on top, as always!

Silver has never been able to compete with gold

For a long time, these two precious metals have been linked by a ratio of 10 to 15.5. In the time of the Pharaohs, it was said that there was a ratio of 13.3 between gold and silver. In 440 BC, this ratio was of 13 during the Roman Empire it was set as 12.

In 1876, Henri Cernushi wrote in “The Bimetallic Currency” that “gold and silver are two natural and eternal currencies. Nobody can produce them artificially nor by decree and this is why they remain a trustworthy guarantee”. During this era most fiduciary systems fixed the parity between gold and silver at 15.5.
In 1840 Europe, the situation was tense because almost everyone felt that there was a tendency to believe that the ratio of 15.5 tended to overvalue silver.  Indeed the grey metal was abundant due specifically to heavy production in the United States.

These historical references are interesting because they are not too distant from geologist’s estimates that Silver is 17 times more abundant than Gold in the earth’s crust. This has given rise to some investors believing this ratio is the natural balance between the two metals and that one day we should somehow return to it.

Many traders, speculators, and investors focus on the gold/silver price ratio in determining which metal is under or overvalued. In recent weeks and months the ratio has collapsed from above 65:1. The ratio of gold to silver prices is at its lowest since 1980, and has plunged from 46 in January this year to 33

Throughout the twentieth century, the gold/silver price ratio went to nearly 100:1, occasionally dipped below 30:1, and only briefly hit a ratio of 17:1 in 1980.

Put against gold, silver does look distinctly volatile and vulnerable.

Simone Wapler (Editor of MoneyWeek France) writing in La Chronique Agora explains why this ratio dropped:

“The gold/silver ratio collapsed because gold, like silver, has been demonetarized. Silver even more than gold. The central banks still have some gold in their coffers, but not silver. Gold is always popular in the jewellery market, but aside from  monetary uses, the uses of silver are in decline (traditional  photography, silverware). For many silver is just a poor man’s gold. When one cannot afford gold, one buys silver.

However this argument although valid is not strictly true because of innovations that make gold investments even more accessible and in a way that is not restricted by individual budgets.

Investors no longer need to settle for second best when they can have the real thing.

It is now possible to start investing in gold by the gram including a savings account that encourages investment in physical gold (that you own outright) with a plan to start from as little as 1g of gold per month.”

Similarly this form of investment is finding increasing favour from businesses looking to protect their contingency funds against inflation and the risk of traditional portfolio investments that are vulnerable to sovereign and national debt issues. Holding physical gold as an owned asset has an increasing appeal   as an investment with security and profits.

But when the figures speak for themselves…

Simone Wapler also adds that “when gold goes up, so does silver, but to a lesser degree. When gold drops, so does silver, but to a greater degree”.   Furthermore, gold gains twice as much as silver during a rise yet silver loses twice as much as gold during a fall. Before the bubble on silver this rule was proved, clearly meaning that something was going on. The sharp current correction reminds us that there was an unfounded rush on silver- and today the rate should be around 25 euros. Above that it is overheating.

If you are not convinced, here is a brief outline of the evolution in the rates for silver and gold, in recent days and over the last 5 years.

In short, when gold sneezes, silver catches a cold, and when silver starts to take take-off, gold reaches towards its peak!

Gold remains a safe haven

According to the French daily Le Monde, one reads that in spite of the fall in rates, “gold should remain protected by its status as a safe haven when faced with inflationary threats, and a prolonged decline in oil prices does not appear very likely. Worldwide demand remains solid and supply remains under the shadow of tensions in the Arab world, with light crude from Libya still cruelly lacking.”

In MoneyWeek France we are told that “Falls are necessary and compulsory in a large bull market we are more than ever convinced that gold has a promising future ahead. Let’s give time for the new world order to be created, for the former rich countries to become aware that they are the new poor and that they live well above their means… in short, there is still quite a while to go”.

Arguments in favour of gold

Indeed, gold has recorded a slight fall recently, but if you need additional arguments to be convinced of its role as a tangible asset;

• gold is “reconverting into money”: it is clearly not the case for silver
• silver has lost its status as a safe haven contrary to gold
• silver is a rare industrial metal, very volatile just like other raw materials.   Let us take for example palladium: the market for palladium remains confidential and prices extremely volatile. The production of palladium is concentrated within Russia and in South Africa. This concentration of production confers a certain instability in the market with regards to price and reliability of supply. And uncertainties with regards to its provision have even caused the price of palladium to rise in October 2010, reaching its highest level since June at 605.13 dollars an ounce. Demand is increasing consistently, mining development is limited, a hold by the Russian State on reserves and lack of investors: such are the characteristics that have led to the palladium market finding itself in deficit.
• silver is not a product for protection against crisis. It is rather comparable to platinum which had fallen in 2008 because the automotive industry was at its lowest point (noteably platinum is used in catalytic converters)
• silver is increasingly rare and difficult to revalue. Silver is a non-renewable resource and experts agree that by 2021 -2023 the exhaustion of silver supplies will be final.  In any event, silver is a metal which cannot be synthesized and for which no substitute exists. And even if the exact date of a drain in the metal market still remains on hold, in 2010, with a production of 19,300 tons, and demand standing at 25,200 tons, reserves are clearly running low. Remember that principle industrial uses consume the silver
• silver takes up space in storage, and savers prefer gold which in value and in volume is better
• because of its scarcity, industrialists are trying to replace silver as soon as possible. This  linked article deals  with the uses of silver in particular in the manufacture of RFID Tags for stock control and identity cards. If we imagine that one day industrialists find another metal or synthetic to replace this need what leeway will remain for silver? This article is based on a completely biased study of silver. All industrialists say if one day they are able to do without silver, they will do so because it is expensive. The use of gold in industry itself remains limited compared to its use for investment purposes and jewellery.

This is exactly what one is looking for from gold, once again it becomes  a private currency, regardless of form.

Let us leave silver to those who want to get their fingers burnt with molten metal…