‘Quo vadis’ gold in the money system?

As it becomes clearer that the $ hegemony is going too far, as record after record U.S. Trade Deficits are published, most nations and wealthy individuals are seeking to diversify away from the $. It is clear that despite any present or future exchange rate management [and the Fed has just prepared itself to interfere on the foreign exchanges of the world] and the reality that oil is priced in the $ the exchange rate value of the $ is suspect and likely to fall, eventually.

But where are do you run to from the $? All the world’s other currencies are dependent on the global monetary system of which the $ is the foundation on which other currencies rely, especially the Euro [despite its design as a reserve currency]. Each currency has its place in the currency world and has an enormous dependency on the $. We even suspect that those controlling the Euro do so in tandem with the $, so as to keep the relationship between the two largest global currencies completely stable [as can be seen in the last year’s performance of the $:Euro]. So diversifying out into another currency would hardly solve the problem, would it? In the face of a fall from power of the $, all currencies would follow, like Pilot fish stick to sharks, down to the depths.

The Yuan you may say, yes, but that is not available for such purposes, not yet certainly and only if it eventually suits Beijing.

The Rupee? This currency is well managed so as to ape the U.S.$. The Rupee is committed to be a part of the present monetary order and so not an alternative to the $.

Essentially we are left with hard assets, such as gold and silver. These are too small for governments to turn to, certainly at these present low $ prices. And with individuals able to access this market, the ‘depth’ of the market [ability to buy in volume without disturbing the price] just isn’t there. So gold, unless at prices around 10 plus [?] times the present price, is just is not eligible as stand-alone money in this world, yet!

To explain, a set of nations can sell gold at the rate of between 500 and 1,000 tonnes of gold a year in the present markets without unduly pressing the gold price down. Now take a bank that wishes to buy the same amounts and you have the gold price leaping to four figures in a matter of weeks, unless the purchase is handled most discreetly. Even then, a four-figure price will be reached in a relatively short period of time. Such potential volatility would wreak havoc on gold’s eligibility as the world’s prime money.

Gold as money at the global money system level has been unwelcome, partly because of this but more importantly because it challenges paper money’s performance. But should the U.S. / I.M.F. and the rest decide that its presence should be felt in support of currencies as uncertainty grows, it may find its way back into the every day system, behind currencies, but at much higher prices.

Will Central Banks permit individuals to influence the gold price then? They didn’t in the past in 1933 – 1935, and for the same reasons may not now. But how do they corner the global market now as they did in the States alone, then?

To orchestrate this supposes a heavy dose of global cooperation amongst the leading nations to place it back into the global money system. As gold shows its greatest value where there is no cooperation, should nations try to re-adopt it even in support of currencies, individual national interests will overwhelm such cooperation, leaving it to assist the nations with gold to help themselves alone. After all, gold is the money used when nobody trusts another. So ‘in extremis’ it is the only money around that keeps its convertibility always. In this climate its price will rise, until we no longer price gold in currencies, but price currencies in gold itself! In a fragmented global economy, full of uncertainty gold would be needed for credibility purposes.

The Oil Currency

When we look at the decaying balance of demand and supply in the oil market, we can foresee days when cooperation gives way to caring solely for national interests. This was the one disadvantage of depending on oil to establish $ hegemony. As it is consumed, so a time limit for it to be the platform on which the $ ruled, was set.

Time is now fast running out before it is in crisis and upends its passenger, the $! But the U.S. has and will, brook no opposition to oil being priced in the $, because that may well upend the $ before the oil market, itself does.

With gold seen as no longer a threat to the money system, its role as a support, [being kept on the back burner shoring up the credibility of the paper currency system], is now slowly moving as a possibility, onto our screens. Central Banks themselves are appreciating that the superficial harmony of the present system is not likely to continue for too much longer.

As a reserve asset, backing paper currencies, gold is proving its value as is aptly demonstrated by both the behavior and commentary of Herr Weber, the president of the Bundesbank who said gold is, "a useful counter to the swings in the $" [Germany has an option to sell 600 tonnes of gold under the present Central Bank Gold Agreement] and has chosen not to exercise this option to date and appear unlikely to do so during the tenancy of the present agreement.

The Devaluation of the $.

But the credibility of the U.S. $ is now in question, as it takes the "Tribute" it draws from the globe [a form of taxation], via an over issuance of the $, through its horrendous Trade deficits [$726 billion in 2005 and headed higher]. Most people have not yet realized that the $ has already been devalued by half.

This is because of the way it is expressed. Look back two years ago to those fond memories of $35 a barrel and look today at $65+ a barrel and the expectancy of $70+ per barrel. So, in terms of oil, we have seen, so far, a de facto devaluation of the a U.S.$.

Far from reducing the use of the $, as should happen to a questionable currency, its use has grown enormously as all nations on this earth have to pay so many more $ for their oil. With demand for the $ growing this way, and set to continue to grow as the oil price rises, the globe has to suck up the cheaper $ ad nauseam.

The worst that could happen to the $ is that a fall in the oil price, leaving excess U.S.$’ floating around the world! But this is most unlikely given the present state of the oil market short through to long-term. Quite the contrary, we expect further devaluations of the $, via a rising oil price keeping the $ strong for quite some time yet!

More Gold for China

China was left out in the cold by its own views on gold [HSBC went some years ago to China to persuade them to buy gold, but were seen as trying to push up the price of gold], have only 600 tonnes in their reserves, whereas to have even a low percentage of its reserves in gold would need 3,000 tonnes. They have now begun to increase this to 1250 tones, as we mentioned above. But now it is being accepted not in the simple role of a reserve asset in the western mode, but as another way of diversifying out of the U.S. $.

China, at last has become pragmatic and decided to build its reserves in the currencies of its leading trade partners. Should the bulk of or even a few important oil producers decide to accept currencies other than the $ in payment for oil [Russia, Venezuela?], the $ will have its grip on its role as the main global reserve currency loosened. Should the Chinese Yuanto bring their currency to the global table in this manner, then the Tsunami of $s being sold for other currencies and having to go home will be enormous bringing rampant inflation to the U.S. or having to be blocked from entering the States. The decline of the $ and the ascent of gold will have then been fully established

Will we see "inverted" capital controls, such as these? More of that in future articles!

© 2006 Julian D. W. Phillips
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