The Global Monetary System,
Gold & Oil -1971 until the future
Part 1 - The rise of the
Dollar - The fall of Gold
Julian D.W.
Phillips
March 15, 2006
Gold 1971 +
In 1971 Nixon closed the gold
window on the $ and turned the European nations away from redeeming
Eurodollars into gold at the price of $42.35, thus devaluing
the U.S. $ by the extent the gold price rose. This was keenly
felt in all the markets across the globe because it was a particularly
visible blow for the $ and for the sterling as the "$ Premium"
was imposed in the U.K. to prevent a wave of capital exiting
the country. Shortly thereafter the oil price shot up to $35
a barrel from the $8 level it had happily sat at before. In those
days, even with no gold standard, gold was considered the foundation
on which paper money stood.
There being no more effective
defense than discrediting your accuser, the States tried to defend
the $ through the sale of 500 tonne lots of gold, but terminated
these as they saw the gold gulped down by private buyers. They
had hoped that gold, as money would lose its reputation as well
as its position in the Monetary System. Having failed with their
sales. The United States then persuaded the I.M.F. to do the
same, but again demand overwhelmed supply but this time with
outcries from I.M.F. members over these sales.
The U.S.$ and Oil
1971 +
At the end of the seventies
the over issuance of the $ came home to roost and Volcker the
Chairman of the Federal Reserve at the time found it necessary
to ramp up interest rates in quick time, to the extraordinary
heights of 26% to tame the inflation engulfing the U.S.A. then.
What happened then to the $?
The world power could not permit the $ to lose its name, after
all it was the dominant nation financially in the globe as well.
A new role for paper money had to be found. It had to be able
to implement the power, political and economic, by itself [as
the days of colonization through war had passed into history].
It had to be money in demand beyond the value gold had traditionally
attracted. What was used by all right across the globe even reaching
part that U.S. 'might', could not even reach? One item - oil!
By pricing oil in the U.S. $, U.S. power could be imposed across
the globe. Even Russian oil outside Russia was priced in the
U.S.$. But it was vulnerable to a different choice if selected
by opposers, so the U.S. had to use heavy pressure to make this
$ pricing non-negotiable. To do this the U.S. made it clear to
Russia in the "cold war" that the Middle East was a
critical part of its 'vital interests' [items over which it would
go to total war over]. Whilst the U.S. itself was dependent
on Middle Eastern oil for a good portion of its oil, so was the
bulk of the world! Only Russia could stand separate.
The U.S. also imposed a grip
on global oil producers [except Russia] ensuring that their governments
were dependent on U.S. backing to stay in power. With their loss
of individual power as well as possible sovereignty at stake
it was not big step to comply with whatever the States required.
Thus to this day the Middle
East, Indonesia and the States comprising the bulk of the globe's
oil supplies are found and under U.S. governmental control. Having
formalized this policy of oil priced globally in the U.S. $ it
was a short road to the $ becoming the global reserve
currency. Gold left the stage as money, but continued quietly
in the vaults, of and in particular, the U.S.A.
Apart from the inevitable desire
of every Banker to do away with cash and valuables that can trade
as 'cash' [after all it's out of their control and fee charging
range], so many more powers and control possibilities existed
with paper money. After all gold was limited as a currency, disciplining
governments and politicians alike, enforcing monetary stability
and beyond political control. And with the $ targeting control
of the global monetary system, through a reserve currency role,
what more satisfying degree of control could be achieved without
an army? What better way to bring in the wealth of the globe
to the U.S,, than through the issuance of the $ to fund global
growth, oil needs and the like. As a means of exacting tribute,
never has there been a cheaper and more effective instrument!
With oil superior as a form
of money, needed and imported by every nation on earth it was
accepted as the most eligible commodity on which to carry the
$ to dominance! Through this the concept and reality of $ hegemony
[Imperialism] was then imposed. The $ then rode the back of oil
and grew to be used in 86% of the globes transactions and making
up 75% of the globe's reserves.
It must have taken the tacit
if not the full support of Europe to support the move from gold
to the $, held as they were, to ransom through U.S. power over
oil supplies and its pricing as is the case today! But note well,
please that the objective was not to thoroughly discredit gold,
as it will always prove vital "in extremis", but was
to put it in a non-monetary role, as a non-threatening or challenging
reserve asset.
Discredit Gold!
Thereafter through the eighties
and nineties, gold suffered under a persistent campaign to discredit/
demean it as money, but not through actual sales
of gold [although these were constantly threatened], but through
the accelerated production of gold into an already oversupplied
market. This accelerated production of gold came about by a system
whereby Central Banks lent gold to bullion banks, who then on-lent
it to mining companies to finance their development.
Today this is still done, whereby
the cost of financing development of a mine was raised through
the immediate sale of the gold borrowed from the bullion banks,
with a promise to repay the gold from future production [called
"hedging"] in an operation where gold was sold forward
at the forward price [in the futures market] which included the
interest to be accrued over the period [the "Contango"]
until future production supplied that gold. Much higher than
market prices were achieved in this way, particularly as the
gold price was steadily falling over the period, aided by threats
of gold sales made loudly in the market by Central Banks. But
the banks, Central and otherwise, together with the mines went
overboard and sold the bulk of their future production forward
in this manner. This looked wonderful in a falling gold price
market, but became the reverse when the gold price started to
rise!
Some Central Banks did sell
their gold [Canada, Australia included], in particular Britain
who had the dubious honor of selling the bulk of their gold at
close to the bottom price of gold seen in the period from 1972
to today. In honor of the eminent Chancellor Mr Gordon Brown,
who initiated these sales, this low point of Central Bank Gold
sales is to be known as the "Brown Bottom".
The Advent of the
Euro and Gold
In 1999 the European Central
Banks, with the impending launch of the Euro in mind, decided
that the anti-gold campaign had gone too far and decided to form
the Central Bank Gold Agreement, whereby they would restrict
gold sales to those already announced to the public and to place
a ceiling on such sales of 400 tonnes for the next 5 years. Again
gold was placed in a secondary role in the European monetary
system in a campaign highlighting its junior role.
But the limitation of gold
sales took the fear of dumping of gold onto the open market,
away. However, after a full 20 years of such threats the market
was slow to fully appreciate the change in "Official"
attitudes. Britain was part of this first agreement, but only
until it completed its sales and walked away when the second
agreement was proposed. Of course, by the time this had happened
its sales were complete.
In an environment already created
for it, the Euro was launched without gold as a threat to it
as a paper currency anymore. A generation had passed by and the
average fund manager knew nothing of the world in which gold
was money. The European Central Bank could happily announce that
it aimed for the Euro to be backed by its reserves of which gold
would represent only 15% [a target not a rigid line]. Now gold
could enter the monetary scene as a reserve asset in support
of fiat currencies, not a challenge for oil was the fulcrum on
which the main reserve currency, the $ was now founded. The leading
Eurozone Central Banks, Italy, France and Germany held onto their
gold which represented in the region of 50% of their reserves,
a figure that roughly matched the U.S. level of gold in their
reserves still. Thus the real place of gold in the main global
reserves had not changed in 30+ years. Therefore, the
story was really a continuation of the past with nothing new
in the picture. Gold remained and remains a vital feature of
the monetary system!
We would speculate that the
founding of the Euro with its gold backing received the U.S.
and Greenspan's approval, as did the "Washington Agreement"
the first Central Bank Gold Agreement in 1999 September 26th.
Greenspan was in on the meetings held in Washington, as were
the Japanese Central Bank representatives. We repeat that the
objective was never to destroy gold as a monetary asset but to
reduce it to a minor one, allowing the $ and subsequently the
Euro to flourish without challenge.
It would appear that the price
to be paid by Europe would be to not challenge the role
of the $ in the pricing of oil. History confirms this! Indeed
it would appear from the performance of the Euro and the $ that
there is a managed approach to the exchange rates of these currencies.
Talk of the fall in the $ and rise of the Euro has not been fulfilled
in a price that has barely [+5%] moved in the last year. This
implies some sort of managed axis on the two sides of the Atlantic.
Provided the world stayed as it was with the power distribution
limited to the developed world all well and good.
Read Part 2
- The
rise of Gold [and China] - The fall of the Dollar
Part 3 [to
be published shortly] - "The Future of Gold and the Devaluation
of the Dollar".
March 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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