Gold Takes One More Step Toward Monetary Center Stage, Pt. 1


"Only a matter of time before the developed world is eclipsed economically by Asia."

Central Banks Selling Gold While Respecting It
Before the Gold Forecaster came into being, it had become clear that gold was headed back into the monetary system. Why, you may well ask? It was because of the Washington Agreement. This agreement changed the tone of central banker's approach to gold. This agreement inspired the start of Gold Forecaster. Since then, the newsletter has forecast the very events that are now taking place and has been right on each of gold's moves in price and in reacceptance over this last decade.

What did the Washington Agreement do? Instead of harping on about gold being a 'barbarous relic' and continuing to threaten to dump it into the market and out of the monetary system, the European central bankers involved in the agreement that bound them, reaffirmed that gold was an important reserve asset and restricted the sales of gold to a 400 ton 'cap' on gold sales per annum. It was at that point that the gold price began to rise. While the establishment of the euro was deemed to require these sales, central bankers were not keen to sell and some were even forced to do so by their government (France in particular). This established gold as an important part of the monetary system and that it was not going to be dumped into the market place then or in the future.

Foundations for Currency Crises Built
During the next nine years, the world saw the restrained sales of gold by European central bankers, leaving the market believing that gold was not really going to be a credible part of the monetary scene in the future. But then came the 'credit crunch', the banking crises, the sovereign debt crises and now quantitative easing, all of which has slowly sapped confidence in the system of government issued currencies. With the credibility and the value of currencies utterly reliant on the central banks and governments behind them any misbehavior in terms of a currencies value both home and abroad, would reflect itself eventually. With the U.S. dollar the heart of the currency system, when it began to be devalued through a continuing trade deficit over decades, doubts had already been established.

Emergence of Asia—Decline of the West
Riding in tandem with these currency-debilitating events, was the emergence of Asia. With half the world's population living in Asia and less than half of China's population making up the total population of the developed world, it is only a matter of time before the developed world is eclipsed economically by Asia.

Asia has realized this and slowly but surely has begun to build its own gold reserves in difficult circumstances. As a result, in 2009 central banks turned from sellers of gold to either holders or buyers, taking 400 tons to themselves. The IMF sale of 403.3 tons of gold is likely to be the last time gold in quantity is offered by any of the world's leading institutions.

Asia's emergence does not mean that it will accept the developed world's currency system. So far as it is to its advantage it has done so but it is clear from the current friction between China and the U.S. on these matters that China will walk its own road, just as the U.S. will do so too. The system as it stands is a hotchpotch of compromises since the Bretton Woods system was established after the World War II. It suits the U.S., primarily. As the U.S. declines, so will the U.S. initiated currency system, not just the dollar. It is inevitable that monetary reformation will come. The question is: Will the West work with the East on the reformation or must it be forged in the friction of discord? How bad is this discord?

Wang Jun, China's vice finance minister, said that instead of helping, QE2 is a shock to financial markets. With +$2.5 trillion in their reserves, China is most unhappy about the devaluation of these reserves through QE. It is taking steps to diversify and we believe that we will see dramatic steps taken soon that will further undermine the U.S. dollar in the global system. QE will push China into accelerating these steps. China is buying its own gold production and has encouraged the importation of gold and its own citizens to buy gold.

Wolfgang Chauble, Germany's finance minister, criticized the return to QE and said the U.S. economic model as in "deep crisis." The Eurozone itself is suffering heavy debt stresses still with few believing that the sovereign debt crises have abated. So, comments from Germany, which is part of the Eurozone in deep crisis emphasizes the interdependence of the Eurozone with the U.S. currency and economic plight. We noted that Germany has not been a seller of its own gold (except for a small amount for coins) in the Central Bank Gold Agreements. It believes that gold is a 'counter to the swings in the U.S. dollar.'

Emerging nations with relatively high interest rates will be the collateral damage that ripples out from the U.S. They are being encouraged by the World Bank to impose temporary Capital Controls to cope with the flood of U.S. dollars leaving the shores of the U.S. Some Asian emerging nations are increasing their reserves of gold as fast as they are able to do so.

The world's central bankers have had an extreme change of heart when it comes to gold. They have told us by their actions that they want gold in their reserves as an asset that will help them should they face a time when currencies, in general, need the support of gold.

A Global Currency Crisis
Not since the end of the last World War has the world faced so many doubts in the future of currencies and the paper money system. Worse than that, there is still no perceived need to do anything about it, with each nation myopically looking inwards.

That is until the head of the World Bank wrote his piece in the Financial Times. He has advocated that gold should be used as an 'international reference point and guide to market expectations of inflation, deflation and future currency levels. Before looking at the workability of these suggestions, we should pause and consider what prompted such remarks from the head of one of the two world institutions that appears qualified to comment on the state of the current monetary system impartially (WB and IMF).
  1. His comments have to have been prompted by the growing loss of confidence primarily in the U.S. dollar whose value is expected to fall particularly in the light of this next batch of money printing by the Fed. This loss of confidence is being felt by central banks, institutions and by individuals involved in global markets. It has yet to be felt inside the U.S.

  2. The fact that he, the head of the World Bank expressed such views reflects the fact that at all levels of the monetary system doubts are being felt by governments in the overall monetary system, not just in the dollar.

  3. That he spoke on this subject reflects the need for and debate about monetary reform at very senior levels globally.

  4. He raised the subject ahead of the next G-20 meeting perhaps in the hope that the subject will be attended to at this coming meeting. We have absolutely no confidence in the meetings of the G-20 as they have consistently failed to produce any concrete action in past meetings. This too reflects the fear that nothing will be done about reformation until the situation has decayed to an extremely dire one.

  5. If he feels that gold, a globally accepted form of money, can be used to measure currencies as they decay, then there must be a swell of agreement that as all else is failing gold would at least give some measurability and consequentially, responsibility to correct matters. Please note that this suggestion is not a gold standard, simply a use of gold to value other monetary instruments.

  6. Politicians and bankers are completely opposed to being measured by gold as this will give clear visibility to the decay in monetary confidence. Hence, we do not expect action to be taken on gold until all else has failed.
Part 2 will cover the World Bank CEO suggestions on gold and the implications for gold. It is these implications that will disturb you!

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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