Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Governments Will Want Much, Much Higher Gold Prices Soon!

Commodities / Gold and Silver 2012 Jan 24, 2012 - 04:32 AM GMT

By: Arnold_Bock

Commodities Best Financial Markets Analysis ArticleThat governments will want - and will NEED - much, much higher gold and silver prices in the future is counter intuitive, given that they have done everything within their power till now to throttle back and to keep a lid on bullion prices. Let me explain why.

Although we have seen eleven consecutive years of gold bullion price rises, such increases have been incremental, measured and at levels which make the remainder of the commodities and equities markets look volatile.  Governments have used their preferred bullion banks as agents in the paper futures markets and their central banks, in conjunction with their respective Treasury bureaucracies, to limit the inexorable rise in precious metals prices as much as possible to keep gold - the only ‘real money’ - from drawing unfavorable attention to their own failing fiat currencies and uncontrolled sovereign debt.


Recently central banks have become net purchasers of gold bullion after many years being net sellers.  In 2011 central banks purchased 430 tonnes of gold, five times more than in 2010 and the highest since 1964. Much of this new demand has come from ‘emerging markets’ central banks like Mexico, Russia, Turkey, South Korea and of course China and India.

This causes one to speculate as to why governments would suddenly, however quietly, turn into buyers rather sellers of gold.
  • Could it be that gold is the only ‘real money’ in a world comprised of paper money backed up only by faith and confidence, or lack thereof? 
  • Are ‘paper money bugs’ losing their confidence and swagger? 
  • Are governments positioning themselves for a period when paper money loses its value faster than they can create additional digital versions of it?

 COUNTRIES WANT TO CHEAPEN THEIR CURRENCIES

The owners of the globe’s respective currencies, especially the important and freely traded currencies, are constantly, deliberately and competitively devaluing their currencies against those of other nations. They don’t admit that is what they want and are doing, which is to make their goods and services more competitive in international markets, because voter reaction would be too politically unpalatable.  

Even more important in the future, will be the need for governments to be able to meet the promises made to their own citizens for pensions and health care as well as payments for past debt to bond holders.  What better way than to pay debts than with nominal devalued dollars, euros, yen and pounds?

Financial repression (see my article entitled “Financial Repression” May Become Our Worst Nightmare! Here’s Why) is a tried and true public policy mechanism designed to take care of the massive debt following WWII.  It works its magic simply by keeping prevailing interest rates lower than the real rate of inflation.  Well managed, it allows for the imperceptible and inexorable devaluation of the currency.  Implemented with precision and stealth by governments and their central banks, it works magically over a relatively short period. It allows governments to pay for their promises and obligations with constantly devaluing money…almost unnoticed.

Given the role of asset inflation, citizens may even think they are getting wealthy as the nominal price of their investment assets increase.  Instead, it is a form of taxation and confiscation invisible to the average person.  Government statistics using arcane methodologies such as seasonal adjustments, ‘headline’ and ‘core’ inflation numbers, hedonic adjustments and substitution are all facilitators of this deception.

A NEW GLOBAL RESERVE CURRENCY IS COMING

The US dollar is in the process of losing its special status as the means of pricing and paying for the goods and services traded internationally.  This is happening daily with special bilateral arrangements between trading partners which use something other than the US dollar for political and financial reasons.  Before long:

  • the US dollar will be replaced by a basket of currencies, appropriately trade weighted, including International Monetary Fund SDR’s (Special Drawing Rights).
  • gold will also be a featured element of this new multipronged global reserve currency.  Given that gold remains the only real money in a world of the crumbling paper variety, a thick veneer of gold is essential.  Member nations of this new global reserve currency, of course, will not want the constraints or discipline of a full-blown gold standard, only its appearance for reasons of credibility.
  • the new global reserve currency will no longer be American which will be a big win for the            internationalists and globalists who value multinational alliances and who will no longer have to defer to one dominant nation, namely America.
  • better yet, any institution comprised of several members will make it extremely difficult to assign blame, which in academic language means responsibility and accountability.  Clearly a global currency used in foreign trade, operated by a committee of nations, will be perfect for dispersing blame.
  • all nations will continue with their own faltering currencies for all internal pricing and transactions.  National fiscal and monetary policy will remain with individual nations thereby avoiding untenable constraints currently faced by countries such as Greece and Portugal in the Euro zone.
  • interest rates will invariably rise from their current arbitrary, market manipulated and unprecedented low levels in response to the growing concerns of bond holders about risk.
  • individual nations will point their fingers accusingly at other nations and especially at the global committee of nations responsible for the new reserve currency. 
  • political scapegoating will become national pastimes designed to justify high taxes, lower currency values, price inflation and low economic growth all resulting in much lower living standards of the citizens.  Confused citizens will be inundated with multiple reasons for their deteriorating circumstances.

HIGH GOLD PRICES WILL DEVALUE NATIONAL CURRENCIES SIGNIFICANTLY

National governments almost universally want their currencies to devalue versus those of other nations primarily to protect their competiveness in international markets.  They also want cheap currencies to make good on their obligations to their own citizens for pension and health care promises too.  Cheapening the currency makes paying off bond debts easier since the currency today is worth less than when the debt was originally incurred.

Ever higher gold prices, the only real money, have the effect of devaluing national paper currencies in relative terms.  This again is custom made for politicians and governments to point their fingers in blame, rather than assuming responsibility and accountability for their own profligate financial behavior and decisions. (Read a previous article of mine entitled America’s Political Process Guarantees Another Financial Crisis!)

HIGH GOLD PRICES WILL BECOME THE PREFERRED PUBLIC POLICY

Nations which have stocked up on gold will occupy the catbird seat.  Their large foreign exchange holdings comprised of gold place them in a particularly advantageous position.  Is it any wonder that nations such as China, India and Russia, as well as many other emerging nations, are feverishly working to acquire as much gold as they can afford while it is still available and cheap?

A WINDFALL PROFITS TAX WILL LIKELY BE IMPOSED ON GOLD

Private investors, institutional and individual, will become wealthy simply by being invested in gold in this environment.  Stupendous capital gains with gold priced at USD $5,000, $10,000 or $15,000 or more per troy ounce should be expected.  But should we assume that hugely indebted governments, whose citizens are struggling with ever lower living standards, will stand idly by while investors reap what will be characterized as unwarranted and unearned capital gains?  Not very likely! I can already hear populist calls for a Windfall Profits Tax to confiscate these unwarranted gains in the name of fairness and equity. Owners of gold, therefore, might be wise to take appropriate evasive action which anticipates this eventuality.

    Arnold Bock is a frequent contributor to both www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial writer. He is also a frequent contributor to this site and can be reached at editor@munknee.com."

    © 2012 Copyright Lorimer Wilson- 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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

anonymouse
24 Jan 12, 14:04
windfall profits tax

If most of the gold is held by billionaires, will a windfall tax be allowed? Why no windfall tax on oil stocks or banks stocks when they are making hay---


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules