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Why Gold, 'In Extremis?' Are We There?

Commodities / Gold and Silver 2012 Feb 17, 2012 - 05:59 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleIran

Last week we informed you that Iran claims to hold 907 tonnes of in gold reserves.

This week we're informed that Iran is using gold or oil to buy food as new financial sanctions have hurt its ability to import basic staples for its 74 million people. The difficulty paying for urgent import needs has contributed to sharp rises in the prices of basic foodstuffs, causing hardship for Iranians with just weeks to go before an election seen as a referendum on President Mahmoud Ahmadinejad's economic policies.


New sanctions imposed by the United States and European Union to punish Iran for its nuclear program do not bar firms from selling Iran food but make it difficult to carry out the international financial transactions needed to pay for it.

"Grain deals are being paid for in gold bullion and barter deals are being offered," one European grains trader said. Some of the major trading houses are involved. Another virtue of using gold is that barter or gold payments are the quickest option to get imports.

Any bank that deals with the Iranian central bank will be punished by the U.S. -they control the world's dollars in New York, even if they are owned by other nations. Please note that the U.S. can freeze ANY nation's dollar reserves! Life is about control or freedom from control.

We gave you an article last week on gold in reserves indicating the possibility of the confiscation of citizen's gold. While the case of Iran is an exception in what seems to be a stable world, investors have to ask themselves not simply, "Will there be more countries like Iran, but will monetary crises hurt the exchangeability of any other currency or its international value? Will political changes to the balance of power weaken the international exchangeability of a currency or its international value?" We also ask, will such extreme times hit the developed world?

Future Monetary Values

Such extreme conditions as Iran are not necessary for the gold price to rise. If there is a danger of other nations following down that road, then their currencies will depreciate and the gold price will rise in those currencies.

But Iran is a classic case of why gold is a last resort, reserve asset. Iran's currency is worthless outside its borders; its name is mud in the developed world -it's this that Alan Greenspan described as "in extremis".

He said, "Gold is money, in extremis". For Iran that is a very real and present situation now and gold is providing a rescue for them. It's doing the job it's expected to do. The most prudent investors in the world are central banks and those that have made sure they hold a good quantity of gold. Those who can now afford to are buying it up as fast as the market will allow.

Right now, the price of gold in the Iranian currency is sky high, but the value of that currency outside the country is zero. So much for gold prices in local currencies! When such a situation is reached, then what we have repeatedly said comes true,

"It's not the price of gold that counts, it's the number of ounces you have!"

Are there countries out there that could move down the same road as Iran? Can developed countries face the same situation? Maybe not so far down that road as things stand now, but in an uncertain future, that could happen to several rich and poor countries including the U.S.

  • If the dollar cannot hold its sole, reserve currency position and foreign buyers cease to accumulate more, the value of the U.S. dollar will fall heavily. The U.S. will then be forced to stop issuing dollars for imports but rather sell goods to earn foreign currencies -the same as all other nations have to.

  • If the Eurozone fragments, those nations leaving the Eurozone will have to turn back to their old currencies and a two-tier currency system. Then their gold reserves will take on extra importance. The continued doubts about Greece tell us that Greece is moving closer to default and to "In extremis" times. We now hear that despite it cooperative implementation of austerity measure Portugal's debt is still rising strongly as a percentage of GDP. As cash flow to repay debt contracts, it is inexorably moving into extreme times.

Banking Crisis

We have seen the profits of Societe Generale drop 89% on its investment side and note that the exposure of that bank to the sovereign debt crisis is horrific and could possibly bring the bank down, unless there is a major change of direction in the weaker nation's of Europe's economic direction. This does not appear to be on the horizon. The implication that we derive from this is that we are as close to a banking crisis as we are to a Greek default. If such a crisis does suppurate, then it will spread far and wide and many banks as well as financially weak nations will find their international credit standing facing "extreme times". This affects the very structure of the E.U. monetary and banking system.

Not only will banks then distrust each other but so will Chinese investors. No one will support a lost cause. It is that perception that brings about "extreme times". It is that perception that demands that gold be used "as money".

We are watching the euro struggling stay up against the dollar despite the massive support the currency swaps have given the euro. Just one bank signaling distress may well be the single shot that started the First World War. Then lack of confidence in the monetary system in Europe will force a wider use of gold in support of currencies.

Gold as Collateral - to unclog money flows, but at any price

We have seen gold used as collateral by commercial banks and behind closed doors by sovereign states in the last couple of years. This has discreetly mobilized gold and returned it to the monetary role in a critical but shadowy way, so far.

Gold brings interbank/international liquidity to clogged credit markets, acting as a guarantee of repayment and allowing for the lowering of interest rates on interbank/international loans. This role supports the paper money system and does not oppose it. Banker's like that! They can love as well as live with gold in that role.

Whatever way gold is used, whether it be in an Iranian situation or to support the monetary flows between institutions, we are seeing gold's value prove time and again a vital, active, reserve asset!

More importantly, such uses of gold tempt central and other bankers to bring it back into the monetary system and formally recognized as such, but under their control and out of reach of the private investor!

What is not mentioned when the 1933 confiscation of gold by the U.S. government and the subsequent devaluation of the dollar and its explosive money supply explosion, is that the devalued dollar continued to be backed by gold. This gave the dollar continued confidence.

It is looking more and more likely that gold will have to give currencies the same support as it did in 1935. Yes, savings and the dollar were devalued but the system was reinforced, made to work and fuel the recovery that took it through World War II.

This time the gold price cannot be set at any particular level. It will have to float against the local currency and reflect its market value. This in turn implies that the gold price can go to any price in any currency. Whereas you now look to the dollar as a measure of the value of a currency, each currency would have a different level against gold , which would still relate to the price of the dollar, but it would in turn be priced by gold, reflecting its international market value.

For sure a move through $2,000 could well make the market move in a more exponential manner. Then we will not expect to see the battles around $1,600 to $1,900 but to swiftly move up and down in very large, potentially hundreds of dollar moves. This will reflect the extreme, volatile times we are now moving into.

When

The timing of such an event lies in the hands of both politicians and bankers. Gold will return to its true position when a situation develops that forces their hand to act. That will be when credibility of one currency or another is on the brink of collapse ["in extremis"]. Such a change will also be made to prevent 'contagion' to other currencies. We have no doubt that contingency plans for this have already been made. In 2012 or 2013, sometime appears most likely as we are close now to a potentially messy exit from the Eurozone by Greece.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

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