 GOLD vs. FIAT:
Demanding A Divorce!
Alex Wallenwein
May 27, 2004
The age-old "marriage"
between gold and fiat is in the process of being dissolved.
The part of this that still is news to many gold bugs - even
though the idea has been bandied about for years now - is the
fact that gold has won friends (well ...I won't go that far;
let's call them 'supporters') even within the fiat camp.
These supporters understand
that this shotgun wedding wasn't in anyone's best long-term interest,
really - including their own. Rather, they see that it constitutes
the epitome of a failed experiment, a disastrous boondoggle,
in fact.
To understand who or what is
being "divorced" from what here, we first need to understand
the nature of this (un)civil union. At first blush, a reader
might think: "Hey, this has already happened when Nixon
severed the last connection between the dollar and gold, hasn't
it?"
Not so.
"Severing the last connection"
is a horrible misnomer, 'cause that ain't really what happened.
Taken Hostage
When Nixon did what so many consider his "dirty deed"
back in 1971, he didn't really file for "divorce" between
the dollar and gold. He forced a sort of "de facto
separation" and at the same time held gold hostage to the
dollar's fortunes, locking it away in chains in the Treasury's
legislative value-prison.
When Nixon refused to observe the US' legal obligation to exchange
gold for dollars at the then prevalent official price of $35.00
per ounce, he only took the dollar off the international gold
exchange standard. Nixon did not take gold off the de facto
dollar-standard he thereby established.
What I mean by that is: although
Nixon refused to ship gold to foreign nations upon their demand,
he did not totally rescind the legislatively fixed, official
dollar-gold price. That means the US Treasury continued to value
the public's gold stock at the now effectively useless legislatively
fixed price ratio (then $35.00 per ounce, today at $41.222 per
ounce).
Nixon's reasons for doing that
are somewhat unclear, and we are left to idle speculation. Maybe
he just forgot?
One could argue that it doesn't
matter one whit why he did this because the official dollar price
of gold is obviously not being observed by anyone in the world
other than the US Treasury's bean counters. That, of course,
would be partially correct.
'As Good As Gold?'
However, what is clear as day
is that the dollar has tried to replace gold in the minds of
the world as the ultimate standard (and keeper) of value. The
dollar has tried to be "as good as gold," with the
implied message that it's safe to save unbacked fiat dollars,
just like it was safe to save gold before then (for the world,
anyway. Americans were not yet allowed to own gold again until
1975).
So, in essence, the US needed
to convince the world that gold was worth little, and the dollar
was worth much. What better symbolic way to do this than to show
the world how little the US valued gold by keeping the "official"
price at $35.00 while allowing the market price to fluctuate?
Besides, I'll bet you that Nixon and his cronies in their wildest
dreams never thought gold would go anywhere near $800 - and it
didn't, for almost a decade afterwards.
What is equally clear is that
the dollar did in fact function as a gold-substitute ever since.
Maybe not that well, but it did, nevertheless. Nations used it
as their currency reserve. Nations, corporations, and individuals
used it in international trade settlement. People in third-world
and communist countries saved it to hedge against their own currencies'
decline. Oil was bought and sold in dollars. The entire world
learned to revolve around the dollar, and the dollar alone.
Meanwhile, gold was kept a
symbolic hostage in the US' legislative value-basement.
If old-time hard money thought
was correct, the world would have figured out that fiat cannot
last and would have been reluctant to use it, but this did not
happen. Demand for fiat remained high even after the market last
vestige of gold-convertibility was severed.
Now the financial leaders of
at least part of the world appear to have recognized that fiat
money is here to stay, but that gold cannot be "suppressed"
forever without bringing the entire wold financial structure
to an untimely demise.
In other words, they realized
that the political, economic, and other costs of keeping up the
illusion of the dollar's store-of-value function are too high
and continue to rise as time goes on. Never has this been more
clear than today, when one looks at the unbelievable derivatives
tower that has been built on the dollar's back to hedge against
any declines in the dollar's (and in the US economy's) fortunes.
Divorced - But Still 'Friends'
So, in essence, the world's
nations and their citizens want to be able to save something
other than the dollar, something that has great value and that
doesn't lose that value - like gold.
At the same time, however,
they want to be able to use fiat in order to trade their worldly
things, because it's so convenient and so easily manipulated.
Naturally, the US has the most
to lose in such an arrangement. What it stands to lose is its
current privilege to simply loan into existence whatever currency
requirements there are for the goods it wants from the world.
That explains why the US is fighting this trend tooth and nail.
What the world (outside
the US) appears to be moving towards is an arrangement where
cash will be used for spending, while gold will be used for saving.
What needs to happen for this
to occur is expressed in the title of this article: gold needs
to petition the court of high finance and the jury of the public
for a divorce from fiat. In other words, gold needs to be totally
disentangled from all officially decreed and controlled national
currency involvement in terms of any fixed fiat to gold price
relationship.
Nothing else will do the trick.
Why not? Because we have already
seen what happens to a gold standard when the government that
decreed it gets into trouble.
No More Gold Standards
Every time a war was fought
in the twentieth century, and more money was required to pay
for it than the economy would produce, governments conveniently
got off the gold standard to 'sock it' to their citizens in the
name of national defense and public policy. Those governments
cranked up the currency printing presses and ran them until they
quit to allow them to deficit-spend their way out of the war
debt.
You can argue until you're
blue in your face that this should not be allowed to happen,
that it's wrong, unconstitutional, etc. and that a constitutional
amendment should be passed to prevent such a thing in future.
Good luck!!
You are not going to get 'the
powers' to do anything unless it either adds to their power,
or at the very least serves to preserve their power in the face
of an oncoming calamity.
And that is the point where
some of the world's money powers have pricked up their ears and
started to listen to the tolling of the golden bell.
They are not stupid or inept,
by any means. They are extremely bright - they just happen to
be wrong most of the time. Their ineptness lies not in their
lack of intelligence, but in their excess of intelligence. It's
arrogance that nips them in the bud, in the long run.
Now some of the most powerful
ones have recognized that you just can't fight gold forever.
It drains too many resources.
So they figured: "Hey,
if there is such a demand for fiat by the public for transactional
purposes, and if fighting gold drains too many resources and
creates too many imbalances in the world of finance, then let's
have it both ways! We can give the masses their fiat and control
them that way, while we save gold. Let's totally disconnect gold
from any official currency use by letting it trade freely at
whatever fiat-value the market brings, and protect our purchasing
power with gold, not fiat or fiat derivatives."
Sharing the Power
They see of course that in
doing this they will open the door to empowering the masses to
do the same, but alas, such is the price of leadership. You can
just hear them: "Sometimes you just gotta give the 'plebs'
what they want - even if it's a piece of our own power. Better
have a little bit less power and preserve it long term than have
all the power short term only and have it all come down crashing
on our heads someday."
They see, of course, that the
current dollar system is untenable. They have seen it for the
longest time, even way back from 1971. So they quietly, unassumingly,
through painstaking work, created the conditions that would make
a brand-new super-currency possible, one that could compete with
the dollar in terms of the size of the underlying market it services,
and in terms of international desirability as a trade medium
and currency reserve.
I'm talking about the euro,
of course.
That this is exactly the plan
can be seen by the steadfastness with which the ECB pursues its
stability-oriented interest rate policy. Despite all the pressure
coming from the euro member countries to drop rates so they can
goose their stagnant socialist economies like the Fed does here,
the ECB has held fast so far - and continues to do so. Even though
the Maastricht Treaty's 'growth and stability pact' has suffered
tremendously by the council of ministers' refusal to hold France
and Germany accountable for their budget excesses, the ECB has
stayed its course. And now, even though oil is threatening to
fire up price inflation and further strangle those members' economies,
the ECB has announced it is not changing its policy.
That's quite a feat for a central
bank - and is a clear sign that the ECB is marching to a different
beat than the US Fed, altogether. The plan is to convince the
world that the euro is at least as good, if not better, than
the dollar as an international trade medium and as a currency
reserve.
The plan is NOT, however,
to convince the world that the euro is as good as or better than
gold.
Rather, the plan is to free
gold from all governmental price controls and let it literally
run free.
The euro has nothing to lose
by letting gold rise. One clear sign that this is so lies in
the fact that the euro system values its collective gold reserves
at market price - whatever that may be. This shows more than
just their concept that an ounce of gold is worth more to them
than $41.22. It shows a definite philosophical, psychological,
and especially political break from the American notion that,
in order for their fiat currency to prosper, gold must be 'controlled.'
It shows a willingness to let
gold rise to whatever price it may, because the euro is not competing
with gold in its function as a savings-medium, as the dollar
is. The euro is not even competing with gold as a currency. History
since 1971 has already proven beyond a doubt that there is virtually
endless demand for fiat.
No More Conflict
There is simply no conflict
- as long as each is allowed to operate in its best-use arena.
Even though it may be the case
that gold is used as a currency again, especially when efforts
like those of Hugo Salinas-Price with Mexican silver coins take
hold and bear fruit, this still would not threaten the euro and
its eventual copycats. It just happens to be the case that fiat
is better suited for day-to-day transactions while gold is better
suited for saving. Any such gold/silver coinage (including online
digital gold currencies) would of course become as tradeable
as fiat, but because people will recognize that gold is the better
'value-safe,' it will rather be hoarded than spent.
This will only change once
gold and fiat have reached their natural "equilibrium price"
- whatever that may be. Maybe it's thousands and thousands of
today's dollars, or euros, or whatever. Maybe its only a few
hundred (highly unlikely, but theoretically possible). Once that
level is reached, gold/silver may circulate as much as fiat will
- but there will still remain that one important distinction:
you can't "print" precious metals!
So, even then, gold will always
remain the favorite value-safe - and that's why the entire notion
of fiat having to 'compete' with gold in that arena is really
misplaced. It was a giant international monetary policy snafu.
Gold has its perfect sphere and primary function - and
fiat has its.
Either one may make temporary
inroads into the other's 'territory.' Some fiat will undoubtedly
be saved, at least short-term. Some gold will undoubtedly circulate
along with fiat - but so what! Who cares? The fiat powers will
be assured of a more stable, self-supporting world financial
system once such an equilibrium has been reached (a system they
can still manipulate to their hearts' content) because gold-suppression
efforts no longer drains their resources. The gold hogs (the
rich, and the not-so-rich gold savers in the world) will be assured
of the value of their accumulated wealth.
And all will live happily ever
after...
...except those who don't have
any gold and must buy it, if they want it, at ever higher prices
in the future.
Some day in the not-so-distant
future, even avid gold traders who trade for gold's paper-value
in paper-form for future hoped-for paper-riches will recognize
that the real "killings" will be made by owning and
holding physical - for the long haul.
Some day in the not-so-distant
future, even hedge funds and tech funds will figure out that
holding physical is way better for their bottom line than trading
its paper-derivatives for depreciating fiat profits.
Because of the sheer volume
these outfits are able to move, that will be the day when the
real gold price-hike begins. Unfortunately, a lot of water will
run down all the rivers before that day comes. It is not a two
or three-month proposition. Gold will "crash" and almost
instantly recover many times before then, but those who can hold
their gold until then will live like Kings - or better.
But first, there must be a
divorce. A real divorce, not a legal "hostage crisis."
Got physical?
May 27, 2004
Alex Wallenwein
Editor, Publisher
subscribe to The
EURO VS DOLLAR CURRENCY WAR MONITOR
Email: awallenwein@houston.rr.com
Alex Wallenwein
writes the Euro vs Dollar Currency War Monitor. He is helping
thousands avoid the pitfalls of dollar-asset investing in a falling-dollar
world, exposing how 'euro vs dollar' secretly shapes world finance,
economics, politics - and your pocketbook. To sign up for the
Monitor, please click here.
321gold Inc
Miami USA
|
