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Tuesday, August 14, 2007

$42 gold: what is the future of the dollar, and central banks?

German 1,000 Mark note - overprinted to make it one billion Marks

I think I was right to puzzle over the footnote (in 6-point type!) to the US reserve accounts, which states that gold has been valued at $42 dollars an ounce and that certificates on that basis have been issued to the Federal Reserve.

It looked like dodgy accounting to me, and searching for some further clarification, I found this article in, dating from 2003. It's by Alex Wallenwein and the style hyperventilates somewhat, but here's some edited highlights:

[France and Germany's] new common currency, the euro, has taken on a characteristic that puts it into direct conflict with the US dollar.

The dollar is a purely debt based currency with an adverse relationship to gold. Gold is the dollar's nemesis. When the gold price goes up, confidence in the dollar decreases and people start selling dollars.. It's usually a sign of impending or prevailing inflation.

The euro, on the other hand, has a "positive" relationship to gold. The European Central Bank, and all the euro member's central banks, value their gold reserves quarterly at actual market prices. That means, as the price of gold goes up, the value of their currency goes up as well, and by signing the "Washington Accord" in 1999 they have announced to the world that the dollar's gold-suppression jig is up.

The dollar is still hamstrung by being tied to an artificial, government-decreed, quasi-official price of gold at the whopping rate of $42.222 per ounce. [See Title 31, United States Code, Section 5117(b).] Obviously, with the market price of gold currently above $330 (i.e. in 2003), that "official price" has nothing to do with the realities of the gold market. It is actually a remnant of the gold standard days when every dollar was immediately convertible into gold on demand, at a stated rate.

Being thus tied down, the US government and banking elite can never afford to let the price of gold float freely according to actual market forces...

This little difference in the valuation of gold makes the euro the undisputed, hands-down future winner of the euro vs dollar conflict... free market forces can never be violated with impunity for a very long time. They always reassert themselves - sooner or later.

The euro was constructed to take advantage of free market forces - especially the free market of gold. The dollar is anchored in a useless, repressive scheme that cannot allow market forces to prevail vis-a-vis gold.

Ergo, the dollar is doomed...

Once it is replaced as the world's reserve currency, the dollar - and with it the United States - will cease to be a world superpower... And all of America's current military might will [be laid to] waste when the international currency reserve dollars return home, causing hyper-inflation and economic havoc...

As the dollar crumbles and loses its control of the price of gold, the yellow metal will soar to heights heretofore unimagined. Nothing will stop it. All economic forces will aid it in its ascent... including... the world's most powerful central banks.

For then, a rising gold price will boost their collective reserves, and therefore their currencies' values, not undermine them as has been the case before the euro's advent.

Gold will be free, and the dollar will be dead: so be careful where you put your money !

The official US price above (still current) is about one-sixteenth what its gold would now fetch on the market. And as I figured late last month, even at open market prices, America's gold reserves only cover around 1.5% of the dollar money supply defined as M3.

In other words, the official price of Treasury bullion makes its total holding worth over 1,000 times less than the amount of money it has in circulation. If ever the world should divorce from the dollar standard, the results could indeed be chaotic.

Now, Iran wants yen from Japan in exchange for oil; the Chinese re-pegged the yuan in 2005 to a "basket of currencies" instead of exclusively to the dollar; the Euro has the potential to be backed by significant national holdings of gold, especially Germany's; an Islamic gold dinar is making its appearance (in Kelantan, Malaysia). I understand that Malaysia is even beginning to entertain the notion of doing away with central banks altogether and taking direct control of its own currency - a financial revolution could be brewing.

Before I get accused yet again of being a gold bug, let me say that I'm not - gold doesn't do anything much except look beautiful, same as our local stray cats. This is not about gold, but about the fiat currencies' potential for real catastrophe, on a Germany-in-1923 scale.

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