Mirages of Western Gold Bugs:
The Islamic Gold Dinar, the Iranian Oil Bourse and the Gold Standard

Dr. Eckart Woertz
Dubai, UAE
May 8, 3006

For many Western gold bugs, the precious metal is not an investment but a religion. Not surprisingly, the styles of their writings often resemble apocalyptic judgment sermons rather than sober investment analysis. The ideological importance they attribute to gold is rivaled only by the one the Communist Manifesto used to have for a different tribe. If gold is salvation, there needs to be a devil taking the other side. For die-hard gold bugs, this is the paper dollar and its various sinister manifestations reaching from big government to Wall Street, and the freemasons. Everything that is supposedly against such evil mongers has to be blown out of proportion and the farther away the country of origin the more outlandish the exaggerations become. Two perfect examples are the Islamic gold dinar and the Iranian euro-denominated oil bourse. Living in the Middle East, I have repeatedly been astonished by the huge gap that exists between web-based gold bug perceptions on the one hand and actual reality on the other hand.

The Islamic gold dinar was supposed to be used to settle bilateral trade between Muslim countries. By randomly surfing the Internet during the height of Islamic Dinar advertisements in 2002 and 2003, one could have gained the impression that the Islamic world was on the verge of skipping any payments in dollars or other paper money and switching to a gold standard like that of the good old 19th century. Unfortunately, off the web, in Middle Eastern reality the gold dinar was a non-issue. Yes, the initiator, Malaysia, had talks with Iran, Saudi-Arabia, and some other countries, but that was pretty much it. Even specialized central bankers in the region who were supposed to make the gold dinar a reality didn't have a clue about the idea. Thus, nothing has happened, Iran has not engaged in a settlement of bilateral trade with Malaysia using gold dinars, and the Gulf countries, which offered some polite interest, have quietly withdrawn, and are more inclined to discuss diversification into the Euro. A possible explanation for this failure is the trade surplus of Malaysia, which would have sucked the tiny gold reserves of the Gulf countries dry in no time, as an adjustment mechanism between the gold dinar as a trade currency and the money supply of the participating countries was not intended. Even more importantly, this hints to the simple fact that Islamic governments also love some expansionary monetary policies every once in a while. With the retirement of the main gold dinar proponent, former Malaysian Prime Minister Mahathir, the insight has dawned on many that the idea is dead. Even hard core gold bugs who are reporting from the "occupied South" or roaming the forests of Montana with their militia buddies should have grasped this in the meantime. But that's no problem as there is a new kid on the block: the planned Iranian oil bourse, which will offer euro-dominated oil contracts and will thus bring about the fall of the dollar.

The oil bourse as well has not really been a topic in Iranian newspapers. The Iranians do not seem to attribute the historical 'dollar-killer role' to the idea like gold bugs do. On May 6, Mohammad Javad Asemipour, advisor to Iran's oil minister and head of the bourse project, dismissed such notions as "propaganda." The project was not intended to rival marketplaces in New York, London, and Dubai, he said. Its goal was simply to increase liquidity in local energy markets, and in the beginning there was not to be any trading in crude oil, only in petrochemical products. The real bombshell for gold bugs, however, was that he said that pricing in euros was not intended! Anyway, after some postponements, the Iranian oil bourse is supposed to be set up this month on Kish, a small island free trade zone in the Arabian Gulf. The island is sleepy, and in the middle of nowhere. Along an empty road outside the city center there is a concrete desert of run-down hotels where workers from Dubai dwell. When their UAE visas are up for renewal, their employers send them to Kish for a visa roundtrip. But sometimes the paperwork does not arrive for weeks due to red tape and deliberate delays and they get stuck - cost-efficiently 'stored' without pay.

If you told one of these desperate souls that the lost island they are on will be the center stage of the coming dollar collapse, they would probably think you are crazy. It is not really a place where a highly paid oil trader from London, New York, or Singapore would like to relocate. It is as far from a functioning financial infrastructure as Pyongyang or the Antarctic. Back office facilities, settlement procedures, trading infrastructures, legal frameworks, debt markets, you name it. Need some credit to finance a major transaction? No problem, fill out a form and send it to one of the government-owned banks in Teheran, and in the meantime relax and enjoy the sunny climate. Pricing oil in euros would certainly be a nightmare for the dollar, but it will not happen to any meaningful extent because of the Iranian oil bourse. Like the Islamic gold dinar, it is a mirage of Western gold bugs - they see it from far away, on the web, but if they took the pain to apply for a passport and travel a bit, they would see it disappear.

I guess the political correctness squads of the gold bug community are already on their way to flood my mailbox. But wait a minute - I like gold, I am heavily invested because I think it will go much further, especially in dollar terms. Yes, the US twin deficit has gone out of control, and yes, Helicopter Ben is likely to choose inflation over deflation as a 'solution' to the debt problem. But at the same time, this debt is the only thing that keeps the world economy running, as every gold bug accurately observes. The US housing and consumer markets that goes without saying, but the Japanese love it as well, as the yen carry trade has enabled them to stabilize their shaky financial system with a zero interest rate policy and without inflation. China and Southeast Asia still have no alternatives developed for their export-oriented industrialization, and the Europeans have not exactly invented balanced budgets - they are content to sail in the geopolitical and economic wake of the US as well.

Of course, there will be continued diversification out of the dollar via the currency markets, and the euro and gold are obvious candidates. Norwegian plans to set up a euro-denominated oil bourse are much more likely to be a success than Iranian ones, and bilateral trade agreements like the $70 billion gas deal between China and Iran are already taking away liquidity from dollar-denominated open markets. Such deals might even use the euro as a pricing unit some day. But that will not change the nature of the game; the virtual reality of financial growth has become paramount. It seems like capitalism cannot expand in the real world anymore because geographically, it colonized all the non-commodified virgin lands a long time ago, and the inward expansion of new products and new markets got stuck in a stillborn microelectronic Kondratieff cycle. New products and markets still emerge, but do not absorb enough labor anymore because of the huge rationalization potentials the microelectronic revolution has set free. That leaves as the last frontier of growth the deceivingly limitless realm of numbers and financial engineering. If you think that's bad, be sure the deflationary shock of a gold standard would be worse.

What leads us to the ultimate mirage of Western gold bugs: the reintroduction of the gold standard. This is neither feasible nor desirable. Forget that the much-hailed age of the gold standard was not as cosy and peaceful as gold bugs perceive. After all, child labor was rampant and Western governments divided their time between policing the poor at home and killing and colonizing natives on foreign shores. Once they had consolidated their nation-states, imperialist competition between them got really ugly and finally ushered in World War I. Hardly a proof that a simple metal makes better societies; but there was low inflation, and gold bugs celebrate the period as 'freedom.' However, the main flaw in the gold bugs' view of history is that the homo oeconomicus who has expressed all his needs, relationships, and wishes in monetary quanta from time immemorial is a fiction. So is the conviction that in capitalism money is used to fulfill needs, instead of being an end in itself. These are axiomatic beliefs invented by neoclassical economists, Austrians, and other flat earthers of economic history.

Capitalist societies in the 19th century were still in a nascent stadium of development, and hardly comparable to the completely commodified ones we face nowadays. They comprised various forms of non-capitalist production (e.g. household work, agriculture), and the cold logic of accumulating abstract wealth in the "disembedded" spheres of market and state (Karl Polyani) was not yet generalized. It is hardly conceivable that capitalist societies could fit again into the tight golden corset in which they once flourished for a while when they were little babies. Thus, the gold bug's state of mind - affirming capitalism by evoking a harmonious picture of peaceful market communities and the whole 'honest money for honest work' charade - alludes to a past that never was and a future that will never be. The only thing that saved capitalism after 1929 was state intervention and monetary expansion, and the only thing that saved it after 1971 was even more monetary expansion and the advent of a brave new world of financial engineering. So let's hope that the music will continue to play for a while, because it will be difficult to grab a chair once it stops. And be careful what you wish for - or which gold bug is ready to tell the last GM worker to go home without knowing how to feed his family?

Best regards from Dubai, Eckart

-Dr. Eckart Woertz
Program Manager Economics
Gulf Research Center
P.O.Box 80758
187 Oud Metha Tower, 11th Floor
303 Sheikh Rashid Road
Dubai, UAE

Copyright ©2006 Dr. Eckart Woertz. All Rights Reserved.

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