Are
gold-reserves the only way out?
Alex
Wallenwein
January 3, 2005
A
very simple case can be made to show that world central banks
will soon be forced to return to a pure gold-reserve
system.
If
they want to save even a smidgeon of their former power, they
really have no choice - unless they prefer that the whole ship
go down before they change course.
Right
now, international dollar reserves constitute the proverbial
hot potato. Nobody really wants them, but no one can afford to
drop them, either.
Best
way to demonstrate the truth of this: a look at Asian central
banks, especially those of China, Japan, and India.
They
are awash in dollars, and they know that dollars are falling
and will continue to fall. They also know that:
- If
they simply keep them, their value will rapidly decrease over
time;
- If
they sell them, their value will decrease even faster;
- If
they buy more to keep the dollar and their export-based (rather
illusory) profits from collapsing, they will only delay the inevitable
and build themselves an even bigger problem.
There
can be no greater argument than this to return to a system where
gold is held in reserve instead of fiats - or any other country's
financial obligations (government and agency debt, etc.).
Staying
on a fiat-based reserve system simply is not an option. The more
time is "bought" by these countries continuing to buy
dollars to keep their own currencies low and the dollar system
from imploding, the bigger the problem gets. All of the participants
know very well that, eventually, a point of no return will be
reached.
Right
now, they are still waiting, hoping - against all better knowledge.
But that will stop at some point in time, because it will become
impossible to maintain.
The
only hope they have right now is that, somehow, their tactics
will enable another credit-fueled "boom" of the world
economy - but they really know better. They know exactly that
credit-fueled "booms" are what brought us all to this
juncture in the first place. Any more of this, and this pressure
cooker will simply explode. That's not the kind of "boom"
they want.
The
only viable alternative is the one thing they have collectively
tried to abandon and have worked so hard to forever lay to rest.
It will take some time to sink in, but sink in it will. Namely,
only by exchanging dollars for physical gold reserves can they
truly save their countries from this mess. Here is why:
The
very same reason why the Asians can't sell dollars right now
(their dollar-holdings' value would dramatically decrease, so
they end up with huge losses) will eventually force them to abandon
all pretenses at being able to run a world-wide monetary regime
apart from gold, and it will force them to start buying gold
with their dollars.
If
they sell dollars for other currencies or productive assets,
each time they spend dollars to buy these their remaining dollars
will decrease in value and buy less, while any real assets they
could buy with the proceeds will increase in price as the dollar
sucks all currencies down that old competitive-devaluation sinkhole.
The
same will be true of they buy gold with their dollars' of course.
But there is one decisive difference.
If
they buy gold for their dollars, then yes, the value of the dollar
will decease just as rapidly - but the accompanying rise in the
price of gold will more than compensate them for this loss. Why
is that so? Because the "performance" of the gold
they buy does not depend on the performance of any underlying
economy where other real assets they might diversify into may
be located.
As
each additional dollar spent buys less and less, each additional
ton of gold becomes more and more "expensive" in terms
of dollars. As this process continues, their balance sheets will
on balance be, well ... balanced.
Whatever
downward pressure their fiat-sales will exert on the dollar,
gold will make it up in a commensurate price-jump. Eventually,
they will come to the realization that the dollar-price of gold
(or whatever other currency price of gold) is nothing but a red
herring, a ruse.
The
real value lies in the gold, not in the dollar
Instead
of looking at the "price of gold", they will eventually
begin to look at the price of fiat, and they will realize that
its price - due to fiat's inherent worthlessness - is always
too high. It doesn't matter which way you look at it. If you
have any grasp on economic reality at all, you know that the
cost of fiat is always too high.
Once
this process starts, how much fiat do you think they will demand
for their gold? How much fiat will they be willing to give for
gold?
Eventually,
other central banks will catch on to that, and will join in on
the game, driving the price of gold ever higher and the value
of the dollar ever lower.
Obviously,
the central bank that begins this process first will get the
most bang for its buck. (Take a good look at China.) The bank
that joins last will lose out big - but such is life. It's called
'reality' - and reality, of course, cannot be ignored forever.
As
each central bank buys gold with its surplus dollars, the price
of gold will increase exponentially, but at least this way they
end up with an asset that has proven its value - and especially
its store-of-value function, throughout human history.
Fiat, on the other hand, is now proving its ultimate uselessness
and unreliability just once more.
The
point: However much or little gold they are able to buy with
their dollars, they end up with something they can rely on, while
even currencies, government debt, or even productive assets of
other nations or economic unions are shaky at best (because the
underlying economies are shaky and fiat-dependent) and will eventually
lead to the exact same problem.
Look
at the euro. If they buy those, euros will become super-expensive
because the entire concept behind the euro is "price stability"
- which in effect means limited printing. To counter that effect,
the ECB would have to seriously dilute its currency by either
printing more or lowering its interest rates, direct intervention
buying other currencies, or all of the above.
The
foundations of the EU are already cracking under the weight of
its expensive currency. Talk of abandoning the price-stability
mandate abounds in the constitutional debates. For how long do
you think they can continue to operate on virtual recessions
and deficits while supporting the international reserve role
of the euro? For how long do you think the nations making up
the union will go along with that? Once they break away - where
is the euro?
Even
if a basket of currencies centered around the euro is used as
a currency reserve, the effect on the euro will be quantitatively
less severe but still too much for the struggling euro zone to
digest. They are complaining even now - while the euro hasn't
come anywhere near the heights it will soar to when the dollar
collapses.
Of
course, most central banks will fight tooth and nail before admitting
that they have screwed up with their little fiat paper experiment,
but the day will come.
Let's
say they will try to institute another basket-case policy and
adopt a currency "basket" that contains gold among
other currencies. Can you see purely unbacked fiat paper successfully
competing with gold once gold has been officially elevated to
"currency" status again by the IMF, the World Bank,
and all other international reserve banks?
Ha!
I can't wait for the day.
Watch
their little experiment go up in smoke and see the high and mighty
central bankers sit around their conference tables with soot
from the explosion all over their faces like little kids who
failed to heed the instructions on their first chemistry kit.
But,
seriously, try as they might, gold is what will become the number
one reserve asset again - one way or the other.
The
problem is: where does that leave the US as the dollar's issuer?
What effects will it have on the US economy if the all world
sells dollars for gold? Will the Fed and Treasury join the gold-buying
rush and in the process annihilate their own currency?
Or
will some smartypants politicians (like past and current White-House
occupants) step forward and tell us that, "for the sake
of national security, and to prevent the clandestine financing
of terrorism,  blah, blah, blah ..." we all need to forget
about cash-money and gold altogether and accept a convenient
little tracking device under our skin that can function as authorization
to use a new cybercurrency to buy and sell what we need?
This
cybercurrency will of course exist purely in the imagination
and on the computer screens of certain programmers. It will need
neither currency reserves, nor central banks, nor commercial
banks, nor wallets, nor safes, and that quality will be trumpeted
as the salvation of the world economy. All it needs is one single,
humongous computer database into which your entire life's record
will have to be fed including mental health records and your
innermost wants, dreams, and aspirations - only for you own protection,
of course.
Which
way will the world proceed? Judging from past (and current) experience,
I'm willing to bet my life that the latter will be at least attempted.
Whether it's successful or not depends in the final analysis
on - you.
If
you own and possess physical gold, at least you will have something
to defend, something to fight for. If all you own is paper, and
paper/computer claims to more paper, why should you care?
Expect a witch-hunt of all gold owners, if that comes to pass,
BUT:
As
hinted above: Take a good look at China. Interesting to note
in all of this is that, of all places China - yes, supposedly
communist China - is strongly advocating that its people
own
and save physical gold to hedge against currency risk. Thus
quoth Zhou Xiaochuan, the governor of the Peoples Bank of China
in a recent address to the LBMA.
If
China will be the leader of the emerging post-dollar world
order as so many expect, can we anticipate that private gold
ownership will be an officially sanctioned policy world wide?
Or, maybe only Chinese citizens will be allowed to own gold??
More
time will have to pass before that call can be made with any
degree of certainty.
In
the meantime, take advantage of artificially suppressed, pre-dollar
collapse gold prices, and stop complaining about gold price manipulation.
It's a pure blessing for those who are wise enough - like the
Chinese.
The
motto? Don't fight it - take advantage of it! Its days
are numbered.
Got
gold?
Alex Wallenwein
Editor, Publisher
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EURO VS DOLLAR CURRENCY WAR MONITOR
Email: awallenwein@houston.rr.com
321gold Inc
Miami USA
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