The Role of Gold - Dollar ImperialismIn this - the final piece - of a four part article on the Role of Gold - We look at the real reasons for the eclipse of gold and how it will slip, seamlessly and unobtrusively, back into a vital position in the Monetary system.
"Dollar Imperialism"
The ambitions of the U.S.A. precipitated the spawning of what we call "Dollar Imperialism" - the exporting of $'s to unhappy recipients, such as Europe - post the recovery period after the war, as Europe moved to a position of re-established wealth. The U.S. confidence in its own currency ran well ahead of its declining confidence in gold. Indeed the confidence in the dollar by the U.S. Administration repeated the British over-confidence in Sterling, at a time it too, was backed by gold and it too, played false to its solid gold backing and sold off its gold a mistake it seems unable to avoid. The U.S. Administration began to believe in the Dollar alone - as opposed to a Dollar backed by Gold.
The emergence of the "Eurodollar" in Europe from - initially - the spending by U.S. troops of $s in Europe came into a headlong collision with the convertibility of gold permitted by the U.S. then - via Official routes. The resultant battle saw U.S. reserves of gold declining steadily from over 20,000 tonnes in 1952 to the 8,500 tonne level in early seventies when Nixon closed the gold window of convertibility.
By this time the Dollar was under siege having lost the bulk of its credibility!
The exported dollars were a puzzle to the recipients in Europe - and an unwelcome one. Certain that the over 'printing' of Dollars through the persistent Balance of Payments deficits, had lowered their value as well as their use - Germany, France and Switzerland - led by that peppery warrior - President de Gaulle - not sharing the U.S. confidence in their currency and its bad behaviour - gladly sold their Dollars back to the States, acquiring such an accumulation of gold, as their own wealth grew, that they held more gold than Fort Knox itself did! A real transfer of wealth had occurred. This rejection of the $ and acceptance of gold was followed by the shocking currency crises from 1968 through the early 1970's setting the precedence for many more since then.
The failure of the Europeans to accept the "foreign" dollars highlighted a need - as perceived by the U.S. Administration - to have them accepted - and willingly!
The U.S. "Victors" were not happy at all. This- after all - was a serious assault on the credibility of the Dollar. The Dollar was devalued, again - to $42 - in a weak attempt to restore credibility. Then, having failed to attain sorely needed confidence in the currency, both the Dollar and Sterling were floated, this taking place at the beginning of the seventies. Attending this was the suspension of the convertibility of gold by the U.S. administration - securely imprisoning gold in Fort Knox.
The U.S. felt that to threaten gold by an apparent rejection of gold through selling it at auction would discredit it, but the auctions were such a resounding success their bluff was called and the auctions had to cease. These auctions clearly showed that the U.S. could have sold all its gold relatively easily to happy buyers in both Official and unofficial Europe and elsewhere. But the U.S. did not want to divest itself of gold then or now, as their reserves continue to show. So what next? The assault on the credibility of gold had to continue, but not at the expense of the U.S> gold reserves. Hoping to find a more convincing dis-creditor of gold, the U.S. turned to the I.M.F. who was encouraged to begin its own gold sales. Not unexpectedly, other than the U.S. - Members of the I.M.F. suffered a massive sense of humour failure after but a few sales and these sales too were then halted in the early eighties.
Both the U.S. and the I.M.F. stated, by their actions what was subsequently restated in the Washington Agreement - that 'Gold remains an important element of Monetary Reserves!
Thereafter the war on Gold was effectively waged by words and threats of more sales, in conjunction with, what was an essentially downward facing Derivatives Market, combined with the leasing of gold to Gold Producers - enabling them to accelerate the arrival of new supplies to the market in the face of dropping prices. This together with relatively small volumes of Official sales on individual bases, continued successfully, until the Washington Agreement of 1999. But please note an important factor - the Gold Reserves of the major Central Bank holders had remained relatively unchanged since the seventies.
But in the eighties the severing of the ties of the Dollar and the Pound the world's key currencies from gold, was hailed as the demise of gold, then and now labeled a 'barbarous relic'. But the reality was that gold had reflected that the excessive printing of the Dollar and this condemnation was unacceptable and out of line with the political monetary objectives of the U.S. ten and now the most powerful nation , in terms of wealth, then and now.
But like a woman - 'hell has no fury like a U.S.$ scorned'!
The draining of gold to Europe threatened the $'s burgeoning "Imperialism". In addition U.S. inflation infected its least powerful fellow nations. Despite the scorn on gold - the U.S. and other countries needed to find ways of hitting gold - particularly its price, or continue to lose currency credibility!
During these days - Sterling itself suffered as badly as the U.S.$ and put a wall around U.K. resident, foreign capital - through the "Dollar Premium" system - the two-tier capital and trade currency system which relatively successfully prevented capital from flowing abroad until the storms subsided.
Dollars continued to pour out of the US into the far corners of the world - a flow that, as we now see clearly with hindsight - was clearly not an accidental weakness of the system - but an effective 'Colonization' of the world by the U.S.$. Currently, 85% of the world's trade is in $ - with the former reserve currency of the world - the pound sterling - being reduced to a mere 5% of that total. Dollars form 76% of the world's reserves. The powerhouse of growth within the U.S. attracted a home for the foreign dollars - providing a good return in a protected and strong currency - a more than acceptable alternative to gold over the decades since then.
The price paid? The devaluation of the $ (and Sterling) brought to an abrupt end the concept of solid currencies and saw the collapse of the Bretton-Woods monetary system. The period of inflation that followed and the burgeoning of the U.S. $ outside the USA and the foreign exchange turmoil that attended it - was no accident of inexperience. It has turned out to be a small price to pay for the imposition of the $ on the world's financial system. Indeed "Dollar Imperialism" has been a resounding success.
The most demonstrative example of this $ Imperialism was the imperious reaction of the U.S. authorities to the oil price rise in 1973. That a group of weak nations could hold the developed world to ransom in this way was incredible to the financial world. However, as was discussed in the perspicacious and highly respected, "International Currency Review" [still going strong in London], back then and during the "Oil crisis" - the OPEC nations were allowed to keep their price high - on condition that all the consideration was invested in US T-Bills - with half the interest being paid to them via the purchase of U. S. goods and services and only half of the remaining interest payments placed in their hands for their own use. At no time since then has a whimper of complaint been heard by them about this. "Desert Storm", exemplified what could happen to them if they disagreed. In turn the U. S. found an acceptable vehicle for the expansion of their money supply, in the form of emasculated debt.
The Decline and "Fall" of Gold
Earlier we used the expression, 'devalued' for the $ at the beginning of the seventies - because gold - alone - was perceived, at that time as the real monetary unit - the only measuring tool for fiat money. Such a devaluation was accepted by the entire world because the Dollar was seen, not as it is today, as the world's reserve currency - but as simply, yet another of the world's currencies, in which Sterling then played the key role in a Nation's paper reserves. The subsequent demeaning of gold was accompanied by a changed monetary system - reflecting the changes in the political balance of power - without the formal control of a set monetary system and without gold's involvement.
The backing and support given by gold through to the sixties had seemingly turned upon currencies, particularly the Dollar and Sterling and the politics behind it, as they were warped out of their upright credibility by the fierce glare of gold. This left, as the only option, not as a petulant act of revenge, the campaign to discredit gold that we have seen since then. In the next thirty years the gold price was systematically assaulted with the full support of the leading nations. Note - we did not use the term 'Central Bank'. Whilst the 'independence' of the Central Banks is being hailed - they remain as always, squarely, a servant of their political masters.
A tragedy of the modern approach to many subjects is 'over specialization', confining individual subjects to their own areas, often excluding dominating influences of related subjects. So it is with gold and its role in the monetary system. Without the examination of political influences on the decisions of the monetary authorities, no clear understanding of the monetary system and gold's role can be achieved.
The Dollar had to be King, at the time of its expansion into its financial colonies. Gold had to be stopped from either highlighting this or discrediting the process - accompanied as it was and is by its over-printing - to satisfy more important U. S. government objectives.
How can one not admire the brilliance and foresight of these events. The conquest by the $ has been achieved without wars, without the sins of past empires, and seemingly with the willing cooperation of all. Now through the iron grip on the world's reserves and economies, we have a world power with an Empire unsurpassed in man's history by the extent and impact of its influence. Remarkable!
In addition, during the period of gold's decline and fall from favour - the U.S. dollar established a reputation expected of a 'Reserve Currency'. Despite the inflation, the Dollar and U.S. investments have provided good returns and a safe haven for reserves. Now unchallenged - Dollar imperialism is nearly complete. A rising financial power, such as China, has no alternative but to hold Dollars as its main reserve - despite the potential for the U.S. to control them, if it wishes to enjoy the fruits of economic wealth and development.
As we have seen, until 1999 - gold was constantly under a threat from the Central Banks through intended and to a small extent, realized, sales of Bullion into the market. As we mentioned earlier - the U.S. sold some - the IMF sold some - followed later by sales from Britain, Holland, Belgium - each sale diminishing and discrediting gold as a monetary instrument.
The Central Banks gave further, significant help to the campaign to discredit gold, through the setting up of the system of leasing of gold to gold producers - a major influence structured, as it was - to further facilitate the falling price of gold and increase the pace of the production of newly mined gold. So the Gold Price was attacked with a sledge hammer force and what better way of doing this - without actually selling gold - than by leasing gold to those who wanted to mine more and enable an acceleration of gold production and sales of bullion. This together with the development of a massive Derivatives market in Options and Futures - et al - combined with constant fears of Official Sales, provided the ideal environment for a falling Gold price seen over the long period of nearly twenty years.
Consequently, the price of gold fell from the dizzy heights of $850 to the mid $200's. More importantly the image of gold was thoroughly tarnished - its role as a monetary instrument virtually eliminated - in the mind's of the modern generation of Fund and Monetary Managers. The result has been so complete that the generation now making investment decisions - in the bulk of the world's financial institutions - would probably agree that gold is simply a commodity - with no real monetary function today. Some current Analysts - have even said that it is still under threat and could fall back to $68 per ounce - eventually.
Like a Phoenix…
Private or 'open' gold markets as opposed to Official markets for gold have always conflicted. The early thirties provided the textbook answers in the U.S. -answers that would not work in less patriotic nations. However, the objective of controlling the price of gold is essentially achieved by ensuring that the Official markets can should they wish -dominate the price of gold. Confiscation and a 69% increase in the price of gold was the answer for the thirties - in the U.S.A. We believe that an increase in the price of gold in Official Reserves can follow the principles of 'Floating' - by letting the open, market raise the price of gold. The management of the supplies of gold - as in the principles of 'dirty floating' - would ensure the price stays at stable, manageable high levels. How can this be achieved? Again history has set the precedent.
The case in the early 1900's when Britain was the dominant monetary nation with sterling the key Reserve currency, new supplies of gold emanated from South Africa and were sold directly to the U.K. exclusively. As time developed and the colonial imposition could not be repeated, the system changed in nature but not 'in content'.
In 1968 South Africa established a special relationship with the Swiss "Gold Pool" Banks - the Union Bank of Switzerland, Credit Swiss and the Swiss Bank Corporation. They, in exchange for guarantees of certain performances on gold sales, gave an orderly and secure market to South African Gold producers, who, under the auspices of the South African government, ensured the Swiss received the major portion of new gold from South Africa.
Currently, with the world now a global forum, with gold being produced mainly outside the First World, it is reasonable and logical to speculate that the same route will be followed. Hence, we expect that, along these lines, the world gold producers will be offered the same security and - what they have valued so much over the last decade and more - a premium over the gold price, as well as a high market price for all their supplies, in return for passing control of their sales to various international interests. Perhaps the I.M.F. or the B.I.S. would find such a role attractive in the future, if other nations have not secured these agreements first?
What of locally produced gold amongst the nations such as the States etc? We feel that, inevitably, governments will continue to assume control of these sales to foreign markets - perhaps even through, in emergencies, the nationalization of the mines if seen as warranted.
A further aid to a higher price and a perpetuation of gold supplies, could follow the route used in South Africa currently - where the grade of gold that is mined is lowered by the individual mines - as the gold price rises. This is not at the discretion of the mines, although seemingly in their interests but a part of the nations legislation so as to extend the life of the mines as long as possible. This adds the intriguing possibility that the main gold producing countries may well find that their currencies will appreciate and economies remain extremely healthy in the face of disastrous situations in other countries. The management of the gold price - at considerably higher gold prices - is therefore more than feasible, it is very close at hand!
The Central Bank Agreement of 2004
The next Washington Agreement will rivet the attention of the markets we hope sooner, rather than later. Going back to the clauses in that agreement , this is how we see it being renewed: -
Gold will remain an important element of Global Monetary Reserves.
As no gold sales proposals from the signatories to this agreement have been made since the last Agreement, any such proposal will have to be agreed, prior to such sales by the signatories of this agreement and over a period to be agreed by the Signatories unanimously. [We would like to hope that they would also add this:- "Any proposed sales by a signatory, shall be offered first, to the others signatories to this agreement prior to any public offering".]
The signatories to this agreement have continued to agree that they shall not expand their gold leasings and their use of gold futures and options over this period.
This agreement will be reviewed after five years.
The impact of this?Official Sales of Gold from these key holders of gold will be deemed to have ceased!
Other Central Bankers will follow suit, probably, offering their gold to other Central Banks rather than to the market.
Like Russia and China, et al, Reserves held in Gold will regain favour, being supplemented by local supplies first.
The markets will realize that the market has lost 400 tonnes of gold from annual supplies and react accordingly.
Market short positions will be closed, if this has not already happened. [The concept of "Accelerated Sales" being replaced with "Accelerated Purchases".
The market perception will be that all Official Holders of gold will favour higher prices for the metal.
The Bullion Banks will adjust their positions to a rising price.
The Future Role of GoldGold's role will increase seamlessly - as turbulence in Macro-economics and currencies increases, together with rising pressure on the World's Monetary systems.
Individual nations will write their own rules for gold within their own borders.
Each nation will follow the road of pragmatism in gold dealings as was the case with India's, use of gold in meeting international obligations.
Official transactions, such as seen between Brazil / Mexico and the I.M.F. will cease to be exceptions.
Gold cannot have an effective role in the World's Monetary system except at a significantly higher price!
The Washington Agreement was the key to an orderly market restructuring. Its renewal seems certain.
The I.M.F. and the B.I.S. will play a significant but unobtrusive role in gold's functioning in the Monetary system - as always.
New supplies of gold could well be managed to the producing countries benefit.
Gold will fit into the objectives of its Political masters - so it is hoped. However, there may be times when they attempt to quash gold again. A prime objective will be to ensure gold silently supports fiat currency and buttress the impression that they have a substantial gold backing.
Both Inflation and Deflation are good for gold as is war and any other tragic time of man's history.(HOPEFULLLY THESE LESSONS FROM PAST AND CURRENT HISTORY WILL HELP YOU
BENEFIT FINANCIALLY FROM WHAT IS COMING IN THE FUTURE - HISTORY OF GOLD)
Julian D. W. Phillips
2 November 2002
Copyright©2002 Julian D. W. Phillips
www.authenticmoney.com