Category Archives: Gold

Dollar Crisis Redoubt:

The Breton Woods post Second World War monetary system, designed and maintained, at great cost by the Americans, fell apart in August 1971. This is when the convertibility of the dollar into gold at a fixed price of $35 was officially ended.

The beginning of the end started much earlier in 1967 /68 when a crisis in monetary confidence bought on by the devaluation of the British Pound, created a run on gold and the depletion of almost half of the 650 million ounce gold reserve of held by the Americans at Fort Knox Kentucky.

There had been a serious wobble before, when the Cuban Missile Crisis caused a buying panic on the Gold Bullion Market in London. The sudden and unexpected demand for gold, as a safe haven against possible nuclear Armageddon, led to the formation of the London Gold Pool. This unofficial agreement between Central Bankers, known only to a few, was to lend reserves of gold bullion held in the national accounts, of  The US, Britain, a few European Countries, so as to maintain order in an unregulated market.  This seemed to work for a while but was totally inadequate  when the dogs of speculation were let loose on the International Markets in 1967.

The Stirling crisis had been coming for some time because the Socialist  Labor Government of Britain  was unable, or unwilling, to enact  the austerity measures required to pay for the massive nationalization of industry  and infrastructure that had taken place following the declaration of peace in 1945. Sharply increased wages had rendered much of Industry uncompetitive and the  national balance of payments had suffered accordingly. An initial devaluation of 40% against the  US Dollar had not been enough to reflect the dire condition of the nation’s balance sheet.

Breton Woods was greatly influenced by Keynesian Economics that favored fiscal rather than monetary discipline, and a belief that elected governments could and would keep their budgets in balance In this utopian world  bankers were seen as a second line of defence only to be called upon when needed. Experience, almost from the beginning, had shown the fallacy of this dogma and the monetary system had only survived to this point because of the hegemony of the US Dollar freely convertible into Gold.

In 1967 Britain was required to maintain a trading range for the Pound Stirling, of two cents either side of official rate of $ US 2.80   using reserves of gold and dollars held  by The Bank of England to buy and sell Stirling as required. The problem arose because the reserves of the B.O.E. were inadequate for the task at hand. So the bankers, arranged to borrow huge sums of dollars (3 billion) to throw into the caldron should the need arise. The lead banker for this rescue was the Federal Reserve Bank of New York that pledged a billion dollars and the backing of all the gold in Fort Knox to the cause.

The rescue worked for a while, but the fates were not on the side of the angles and very soon speculation about a further devaluation of the pound began once more. This time in spite of the continuing efforts of bankers to maintain the status quo the British Government capitulated and the pound was devalued to a new official rate of $US 2.40.  The effect, totally unexpected, was a loss of confidence in the dollar and a run on gold, this time on scale never anticipated.. In a matter of a few days the market for gold spun out of control with buyers shorting the dollar and forcing the American Treasury to make good on its promise to deliver gold in exchange for dollars.

So dire was the situation that The Federal Reserve Bank of New York, along with the US Treasury, was forced to suspend  gold for dollar transactions, and allow an unofficial or floating rate to prevail. The immediate effect was a spread between the official rate and the actual rate or a devaluation of the dollar of approximately $5 or 14%.

Suddenly the American dollar was vulnerable, and nobody, it seemed, knew what to do, other than suspend the market for gold. The French Government under President Charles De Gaulle , having recently created the  New Franc  to purchase the tons of gold held by French Citizens, was intransigent and refused to cooperate. Also the members of the newly formed O.P.E.C.(the Oil Cartel) who suddenly realized that they were being paid for their oil in depreciating dollars thus reducing the value of the commodity. Their answer was to hedge future deliveries by selling dollars and buying gold.

After a weekend meeting of the monetary powers, this time including Switzerland,and the gold backed Swiss Franc, along with Japan and the Yen, a new form of specie was invented to supplement gold, as the principal monetary reserve. The specie, or new currency, took the form of Special Drawing Rights (SDRs) issued by The International Monetary Fund created in 1944 at Breton Woods as the sole arbitrator on International Currencies.  At the same meeting it was decided to do away with fixed exchange rates, that had been at the heart of Breton Woods, and allow currencies to find their own value.

The initial stated value of an SDR was 0.888671 grams of pure gold. This provided a continuing  link to hard currency and gold, and had the desired effect of stabilizing the gold market, that now traded independently from the US Dollar.  But it would not be long until the final link with gold was broken and the daily value of SDRs’ was calculated based solely upon the trading range of a basket of four currencies, The Dollar, the Pound, the Yen and finally the Euro, thus excluding gold.

The number of issued SDRs’ is now a very far cry from the original stop-gap issue, and is thought by the New York Federal Reserve Bank and the other central bankers to be sufficient to curb excessive currency speculation. But no one really knows, and herein lies the problem.

What will happen if all four major currencies, are depreciated or devalued at the same time, as it appears they maybe at this time. If unlimited amounts of dollars, yen, pounds and euros are created to stop deflation and start inflation what happens to the Basket 

Stay tuned.

The Skin of the Gods Part Three:

In 1973 then President Nixon executed what has come to be known as ‘The Nixon Shock’ by liberating  the  price of gold that had been fixed for thirty-eight years at  US $35 per ounce. With  similar Executive Order he reversed the system of fixed exchange rates  and allowed the dollar to ‘float’ against the other major currencies of the World.

The Vietnam War and President Johnson’s ‘Great Society,’ paid for with borrowed funds, created a ‘Guns and Butter’ situation that let loose the dogs of inflation on an unsuspecting public. The dollar had ruled supreme as the International medium  of exchange since the Breton Woods Economic Summit at the end of the Second World War. The very idea that America did not have enough wealth to fight wars while lavishing  its citizens with expensive social programs came as a shock to a society that has been promised an ever-increasing standard of living. The result of the broken promise was even more shocking.

The Stagflation of the 70’s resulted in never before seen values for gold. In 1972 it took just US $100 to buy and ounce of gold By 1978 it took nearly US $1800 to buy the same ounce of gold. The rot was only stopped by exorbitant  Central Bank Rates of interest that made the dollar palatable for lenders. Expressed in different terms The Bond Market (the lenders) dictated policy to the US Treasury and the Federal Reserve Bank alike.

The surprise here in not that Stagflation occurred, or that the Bond Market ruled supreme. It is rather that Citizens of the Western Trading Nations were so quick to forgive and forget the pain and suffering caused by the policy blunders of their rulers. No doubt the Dot.Com Bubble of the 90’s made life  easier, as did the resulting easy money policy of the Greenspan Federal Reserve.  But the sheer hubris that it was possible to return to the same policies without a repeat of the pain is breath-taking.

History has shown time and again the consequences of profligate spending and the indiscriminate printing of specie. There is no reason to believe that it will be any different this time around the dance floor. The US Dollar will be devalued by one means or another so that the massive US debts ($ 14 trillion and counting) will be serviced in ‘New Dollars’.

Because the Dollar remains the most commonly excepted medium of exchange in International Trade, many believe that this devaluation will be accomplished by a new World Order for currency alignment, in much the same way as that achieved by Breton Woods in 1946. There is  a good possibility that the measuring stick for this new order, will be a basket of currencies and commodities that will include gold and silver, but not to the extent that the savers of the Eastern World would want.

The is no practical way of returning to the wonderful simplicity of the Gold Standard. The spenders of the Western World would never agree to grant such power to the savers, at least not all at one time. The gold standard worked so well because the Bank of England was in the unique position of being at the center of World Trade and a vast empire ruled by Gunboat diplomacy. England was also an exporter of capital as opposed to an importer of capital (as the United States now is) and thus able to dictate the terms of the Bonds that financed so much of Western Industrialization.

With the hindsight of the Gold Reserve Act as a guide, the coming monetary re-alignment will provide gold owners with a one time lift, but it is very unlikely help gold or silver producers in the longer term. Assuming the basket theory is correct the weighting of gold to the total value of the basket will attempt to fix the value of gold as a constant rather than a variable.  During the first thirty ears of Fort Knox Gold the  miners were very depressed and in some cases were forced to rely on Government largesse for their continued existence.  Only those who mined excellent grades and had long-term contracts with International Jewellers survived.

Gold Miners have never really been a good investment, unless that is you happen to be lucky enough to own shares in a company at the time gold is discovered. The so-called magic multiple accorded to shares of gold companies is based on voodoo mathematics. The idea that somehow a company with more ounces of gold in the ground is worth more that a very profitable one with fewer ounces is nonsense. So is the idea that anyone anywhere knows how to find gold. They do not and there are 3000 years of history to prove the point. The lure of gold is the metal, not the miners, who produce the 99.99% pure metal.

The best method of owning gold ever devised was  structured and sold by the investment division of the Royal Bank of Canada in 1987,  during the last gold rush of the 20th Century. The investment vehicle was a dividend paying share, in a company with a lot of gold, that was exchangeable into a fixed amount of gold, as valued by the London Bullion Market. This vehicle, that is unfortunately no more, was the for-runner of the etf  (Exchange Traded Fund Ticker Symbol g.o.l.d.) designed by the World Gold Council who guaranteed the physical gold bullion for the exchangeability of the fund shares.

The etfs’  are now the best way to own gold without having to pay for storage and insurance of physical bullion and are far safer than taking the chance on a gold miner. The etfs’ also, just happens to be a direct look-alike to the Bills of Exchange issued by Chartered Banks during the early years of twentieth century. There are now etfs’ that link gold in currencies other than US Dollars and offer a near perfect arbitrage between the various exchange rates. They are very liquid and trade around the clock on the various exchanges of the World.

The future for the Skin of the Gods is murky but the chances are great, that despite continuing efforts to marginalize the importance of the metal it will survive as the only reliable store of true value.