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Gold Dreamtime, The Euro And Other New Moneys

Commodities / Gold and Silver 2011 Jul 12, 2011 - 09:23 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleOnce upon a time there was the Eurozone and its all-new hard money, the euro. It got off to a good start with a monstruously high forced surrender cash-in rate for the national moneys it replaced: depending on country, around 15 to 25 percent above the euro's real worth. This yielded several years in the early 2000's when it wasn't even necessary to doctor the official inflation numbers, but through a penchant for old ways and traditions, national economic agencies, the European Commission, the ECB and other rightly named players kept on doing it. This made sure the economic data was absolutely fake, an important aid to launching a now-floundering cuckoo money.


KEEPING THE MONEY STRONG
The 1956 Treaty of Rome and subsequent treaties like Maastricht and Nice lectured that governments must leave their central banks alone and not force them to liquidate gold assets. They could play around with SDRs and paper gold behind closed doors at the IMF, but in their home patch the central bank's role is currency and money supply management, not government financing woes. Making this a lot less than sure by creative intepretation of the founding texts, the creation of the ECB and operation of the Eurozone, recently expanded to 17 countries, included the Protocol of the European System of Central Banks and European Bank, with "ESCB" being is the correct name for the Euro zone.

This protocol says in one of its Articles that neither the ECB, nor any national central bank, nor any member of their decision-making bodies will be told what to do by any European Union institution, body or national government Another article prohibits community institutions or governments having what the article calls overdrafts, or any other type of easy loan facility with the ECB or with any national central bank. This rather ferocious-seeming limit on selling gold, of course in secret, was easily got around by interpreting it to mean that gold cannot be put up as collateral for loans received by a central bank and passed on to private banks or to its national government, but it can be swapped. While the IMF's recent director Strauss-Kahn was surely interested in wife-swapping, his gold-swapping appetite was even stronger, with the IMF's action in this domain on extreme high almost since Strauss-Kahn moved in, late 2007. Since that time, the swapping bug has new and powerful adepts - or competitors - in Europe, as the IMF, ECB, the US Fed and European central banks scrabble to invent, shuffle, swap and sell paper gold, buy government debt, and bail out private banks.

SELLING GOLD
The ECB under another French political nominee, J-C Trichet, lost no time with its Eurozone central bank partners in ignoring these strictures and ran official gold sales rising from around 35 tons a year, to their first high point in 2009 at 142 tons. In 2010 the brakes were slammed, and sales crashed to 6.2 tons. Official reasons given for this nicely underline the schizophrenic balancing act played out by all central banks and the governments they are officially independent from and unrelated to.

On the one hand central banks seek a low and preferably declining gold price, because a low gold price, by money magic, means that fiat paper moneys they also print and circulate will be stronger. To help that process, claimed to generate and maintain confidence and trust in their paper moneys, they have to sell gold. On the other hand if the gold price is rising, they have to buy gold, and by 2010 (in fact long before), gold was showing ugly signs of going only one way: up. Central bankers mulled the dire fact that gold, by 2010, had had its best 10-year streak for price growth - since the 1920s - a fateful decade for central bankers, and everybody else after 1929.

The Central Bank Gold Agreement (CBGA) set at the dawn of the 2000's, sought limited and controlled European central bank gold sales because of concern that uncoordinated selling was destabilizing the gold market and driving down gold prices too far - despite this being what one side of the Jekyll-and-Hyde central banker pschye wants. In February 2001 gold prices had fallen from their previous record high (in nominal dollars) of $850 an ounce, reached in 1980, to $253. By September 2010 the price had grown to $ 1300, and today is menacing to break out from current levels around $1550 to unknown and exotic new extremes - for central bankers.

By pure schizophrenia therefore, gold selling suddenly became dangerous and unacceptable in late 2010 but well before then, from 2008, national governments were in panic mode on sovereign debt, budget deficits and collapsing private banks across Europe, in the USA, and Japan. They needed huge new amounts of financing, and central banks had no choice but to poney up liquid cash using the only real hard asset they have: their gold reserves. They were therefore thrust into the purest of all two-way splits: they had to buy (or in fact invent) gold, while they also had to sell both real and invented gold: needing a frenzy of gold swaps.

THE NUMBERS DONT ADD UP
Looking at the debt-and-deficit crises of the Europe-USA-Japan threesome it is hard to say which one might be less out of control than the others. Each has its special edge of unreality and uncontrollability, with the USA oppressed by the single biggest debt load, the Europeans having the fastest spreading and most dangerous loss of control, and the Japanese having the oldest and most untreatable hyper-debt.

If we took the total official gold stocks of the world's 180-plus central banks, or the 15 - 19 European parties to different versions of the CBGA since 1999, and the current gold price which central bankers tell us is extreme high and dangerous, the present total net worth of these two official gold piles is not just tiny, but minuscule in relation to present-day sovereign debt and deficit crises.

If by magical means it was possible to sell the biggest of these two piles, world total central bank gold reserves as reported to the World Gold Council, around one-third of it held by CBGA parties, this would produce about $1500 billion. This is far short of the Obama administration's annual deficit for 2011. Even the recent and current ECB and IMF bailout of Greece, costing above $250 billion, is one-sixth of that amount - to unsuccessfully bail out the sinking finances of one small country with 11 million inhabitants. Japanese sovereign debt is over $12 300 billion, and growing, most recently by a probable $150 billion hit from the Fukushima disaster, with the same again for tsunami damage.

What can central bank gold stocks do, against that ?

Possibly this is known, but also possibly it is too extreme to be understandable - by central bankers and their ilk. Heavy attention in government-friendly and politically correct media has gone to the horse-trading process for shoehorning France's Christine Lagarde - who was a near world class swimming champion in her youth - into the IMF. Europe wants and needs the directing role, because Europeans must invent and swap an awful lot of gold, real fast. To be sure, under Strauss-Kahn the "loan portfolio" of the IMF was multiplied from $1 billion in 2006 to around $100 billion today, and the amount of paper SDRs the IMF could print, allocate and shuffle between member countries were drastically raised, but the numbers remain peanuts compared with the size of the problem. The next quantum leap might only need to be 10-fold, or 20-fold, believers in good luck and muddle through tell us to believe, but how the IMF could do this trick is unknown.

Financial markets, as expected are doing their predictable best to drive the crisis. The US debt ceiling of $14 300 billion sets a nice playfield for political horsetrading and name-calling; after Greece, market operators in Europe are quaking with music hall fear from their surprise discovery that Italy is a super Greece; and Japan's latest weak government is on its way out as national debt racks on and up by as much as $400 billion since March. Ingredients have fallen into place for a Summer Panic on world stock markets - which is unusual in modern times, but no problem at all if we go back to classic Victorian-era panics.

NEW MONEY WITH NICE NUMBERS
To be sure, both political elites and their well-disciplined media and press supporters will hunker down and ignore the crisis, driving financial market operators to new extremes of saying out loud what they want: easy cash and low interest rates. They have the whip hand for exactly that reason. Easy cash and low interest rates has been the only tune in town since 2008 - but the results are unreal. Saying there is no cause for concern is nice and traditional, but the vastest amounts of new money ever printed in human history has failed to do anything to, or with the real economy: this is more than just alarming.

Today's crisis is totally unlike the 1979-1980 panic era. This is despite the "Crash of 79" being cited more and more as the likely model for what happens now, featuring the solid-looking precedents of high gold and oil prices, high unemployment, banking sector stress, rising government deficits and falling regimes in the Arab and Muslim world. Today's crisis has major missing ingredients: high inflation and high interest rates. It also includes ingredients that weren't present in 1979: the BRICS are big creditor nations today, both China and India are massively industrialising. In 1979, sovereign debt in the OECD countries was tiny or even inexistent - Japan for example was a huge creditor country.

One new money could in theory therefore come from over the horizon, BRICS Money, but this neat fantasy is as unreal as the debt-and-deficit crisis of the OECD group. Gold-backed money, an idea that was tried in the 1920s, but resulted in gold prices only rising and the gold-backed moneys of the day folding one by one, is another non-runner. To work, it would need a cut in world liquidity by let us say 90 percent, to allow each new bill or note to command, equate to and freely exchange with a measurable speck of metallic gold. Bancor-type money of the Keynesian genre, in fact never really detailed in the ramblings of Keynes but featuring a basket of real resources able to range across the commodities space, could or might be a candidate new single world reserve currency. If so, setting it up would take a lot more than a single day's work for ex-swimming champ Lagarde at the IMF.

Other fantasy solutions have already come and gone. In particular the Carbon Money trial balloon of 2009, heavily promoted by Strauss-Kahn at the IMF, which folded as fast as it had appeared.

We can be sure that financial market operators have their own solution: another 1929. Lemming-like and driven by herd instinct, they are drawn to these kind of events because, for them, it is a Total Solution, after which nearly all of them will take very, very long vacations. Leads and ideas from the finance sector can be counted on for their apocalyptic-type absence. This in turn could or might suggest that No Alternative economics, as some early neoliberals in their heyday right after the crash of 1979 called their first solution of the day - high street bank interest rates of 20% or more in OECD countries - has generated a No Solution crisis in 2011. The problem might be so special and so big that we can only anticipate totally unprecedented solutions. These would likely have to include debt moratoriums on some of the biggest economies of the world, starting with the USA, existing moneys would have to be protected from implosion, world prices of key basic commodities would have to controlled - the list goes on and gets further out into new dimensions.

Whatever the solutions, they have to come fast.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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