The dollar has started to tumble and the gold price has positively turned. Meanwhile investors are not staring into the abyss quite as much. With interest rates tumbling across the globe, the world’s central bankers are acting in concert, clearly in hopes that foreign exchange rates will steady. At the same time, the global economy and the nations that make it up are all stimulating their economies. The Swedish central bank, Bank of England, and the European Central Bank cut short-term interest rates by 1.75% to 2%, 1% to 2%, and 0.75% to 2.5%, respectively in the last week and, without a doubt, more cuts to come, from anyone out of line. Add to this the monetary stimulation, through direct injections into the money system, alongside “quantitative easing” [flooding the system with liquidity directly] that we are now seeing across the developed world, and you end up with a tidal wave of reflation that hopefully will effectively tackle deflation. In the event that this does in fact take place, will all be well again? Unfortunately, the answer is no and we firmly believe that the Central Bankers are fully aware of this.
If successful, we will return to the days of “live now, pay later” that supported the global economy before we were bitten by the credit crunch. The tidal wave of new money will add up, globally, to a Tsunami of capital. This leaves another monetary disaster ahead of us; that is unless the stimulation is allowed to cheapen paper money irrespective of its dropping value persistently preventing any repeat of a credit crunch. And what of the buying power of money? It will drop directly in line to the additional quantity of money released less the amount lost through deflation. This will send the gold price soaring. There is absolutely no doubt that this will send the gold price up to the extent necessary to counter such a cheapening of currencies. Even now, many are alarmed that governments and institutions are staring at government promises [Treasuries] at a zero interest rate, the same rate that promise-free gold offers. Bankers hate gold because it can be as attractive as paper to individuals and institutions everywhere. Bankers don’t like the competition, but it is a useful counter to the $ no matter what bankers throw at it.
The gold market currently is tiny compared to the cash markets of the world, but it was not always so. There was a time in yesteryear when gold backed the entire global monetary system and removed doubt from the question of what really is paper money worth? Since the system of gold backed money was dropped, the sheer quantity of money has increased so much so that many will say it can no longer be used to back money. That is true with gold at its current prices. The uneven spread of gold in the world’s system also mitigates against its use to back paper money, even if the gold price were raised to the level where it could back money again [five figures + ?]. But if gold is used as a back-up to paper money, it will engender confidence in currencies [held only in Central Bank Vaults?]. It could even find a valuable home in the monetary system on a more active basis.
So why would there be such resistance to that? What was the reason it was removed from the system in the first place? The reason is primarily that gold was seen at that time to be unable to provide the flexibility to accommodate a money system that needed huge and growing quantities of money. Global economies needed such growth to provide governments with tools that empowered them in the way paper has since it cut its links with gold. The U.S.A. would have been in a very different state had it not been for the unbreakable link between the dollar and oil. If that link were broken, global demand for the dollar would sink.
Governments wanted to pull gold’s teeth and to hold the reins of money in their own hands as they did in 1971. The global use of oil provided that link to the dollar that forced everybody to turn to it. Of course all oil producers had to agree to the pricing of oil in the U.S. dollar. And they did, ensuring that the world’s most powerful economy stayed so, linked to the world’s most needed commodity.
But the U.S. economy is on the wane as the hinge of the global economy as the Far East, with half the world’s population living there, rises up. Simply because of that, the dollar has to retreat from the center of the monetary stage and does so in an orderly fashion. But can it, or will it, be allowed to? China, with its $2 Trillion of reserves, holds the answer to that. Yet China will not give that answer until it suits it to do so, no matter how much pressure Paulson and Co. exert. While major global structural changes happen in the next few years, taking wealth to the East from the West, the global money system needs an internationally respected instrument of value that can strongly support the global money system. Hopefully that respected commodity will be gold. With gold back in the system, the worst of monetary abuses is hoped to disappear. Unless this happens soon, we will see a new global financial crisis on global foreign exchanges.
But Bankers will not want to be restrained by gold in any way, nor will governments. So the role such an anchor will take will still have to be under their control if they are to willing to bring it back into their money systems. Its role will only be as support, and not as the Gold Standard was, the measure of money Gold’s role will only be supportive, with no chance of a reversion to the Gold Standard, where it was the measure of money. In the Gold Standard, it became clear that there was more money printed against gold, than there was physical gold. Bankers did not like this revelation. Bankers loathing of gold comes from the punishments it inflicted on them at the revelation of these abuses. They will be most careful not to let it be seen as active in the money system. No doubt, should he want to, Mr. Ben Bernanke, who is the sage on the way to handle deflation, together with his peers, can re-write the use of gold into the global economy. Using similar methods, gold’s role needs not inhibit monetary expansion, but support it. In this role international bankers will show greater confidence in other currencies as well because a banker has to trust another banker no matter where he’s from for the global money system in order for it to work. The clear lack of such trust, alongside their unwillingness to lend even to each other, is bringing bankers into the spotlight, a place they don’t like. We have no doubt that between each other they will trust gold.
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