Why Do Bankers Hate Gold? An Overview of Gold and the Banking System
The
$ has started to tumble and the gold price has positively turned. Meanwhile
investors are not staring into the abyss quite as much. With interest rates
tumbling across the globe, the world's central bankers are acting in concert,
clearly in hopes that foreign exchange rates will steady. At the same time,
the global economy and the nations that make it up are all stimulating
their economies. The Swedish central bank, Bank of England, and the European
Central Bank cut short-term interest rates by 1.75% to 2%, 1% to 2%, and 0.75%
to 2.5%, respectively in the last week and, without a doubt, more cuts to come,
from anyone out of line. Add to this the monetary stimulation, through direct
injections into the money system, alongside "quantitative easing" [flooding
the system with liquidity directly] that we are now seeing across the developed
world, and you end up with a tidal wave of reflation that hopefully will effectively
tackle deflation. In the event that this does in fact take place, will all
be well again? Unfortunately, the answer is no and we firmly believe that the
Central Bankers are fully aware of this.
If successful, we will return to the days of "live now, pay later" that supported the global economy before we were bitten by the credit crunch. The tidal wave of new money will add up, globally, to a Tsunami of capital. This leaves another monetary disaster ahead of us; that is unless the stimulation is allowed to cheapen paper money irrespective of its dropping value persistently preventing any repeat of a credit crunch. And what of the buying power of money? It will drop directly in line to the additional quantity of money released less the amount lost through deflation. This will send the gold price soaring. There is absolutely no doubt that this will send the gold price up to the extent necessary to counter such a cheapening of currencies. Even now, many are alarmed that governments and institutions are staring at government promises [Treasuries] at a zero interest rate, the same rate that promise-free gold offers. Bankers hate gold because it can be as attractive as paper to individuals and institutions everywhere. Bankers don't like the competition, but it is a useful counter to the $ no matter what bankers throw at it.
The gold market currently is tiny compared to the cash markets of the world, but it was not always so. There was a time in yesteryear when gold backed the entire global monetary system and removed doubt from the question of what really is paper money worth? Since the system of gold backed money was dropped, the sheer quantity of money has increased so much so that many will say it can no longer be used to back money. That is true with gold at its current prices. The uneven spread of gold in the world's system also mitigates against its use to back paper money, even if the gold price were raised to the level where it could back money again [five figures + ?]. But if gold is used as a back-up to paper money, it will engender confidence in currencies [held only in Central Bank Vaults?]. It could even find a valuable home in the monetary system on a more active basis.
So
why would there be such resistance to that? What was the reason it was removed
from the system in the first place? The reason is primarily that gold was seen
at that time to be unable to provide the flexibility to accommodate a money
system that needed huge and growing quantities of money. Global economies needed
such growth to provide governments with tools that empowered them in the way
paper has since it cut its links with gold. The U.S.A. would have been in a
very different state had it not been for the unbreakable link between the $
and oil. If that link were broken, global demand for the $ would sink.
Governments wanted to pull gold's teeth and to hold the reins of money in their own hands as they did in 1971. The global use of oil provided that link to the $ that forced everybody to turn to it. Of course all oil producers had to agree to the pricing of oil in the U.S. $. And they did, ensuring that the world's most powerful economy stayed so, linked to the world's most needed commodity.
But
the U.S. economy is on the wane as the hinge of the global economy as the Far
East, with half the world's population living there, rises up. Simply because
of that, the $ has to retreat from the center of the monetary stage and does
so in an orderly fashion. But can it, or will it, be allowed to? China, with
its $2 Trillion of reserves, holds the answer to that. Yet China will not give
that answer until it suits it to do so, no matter how much pressure Paulson
and Co. exert. While major global structural changes happen in the next few
years, taking wealth to the East from the West, the global money system needs
an internationally respected instrument of value that can strongly support
the global money system. Hopefully that respected commodity will be gold. With
gold back in the system, the worst of monetary abuses is hoped to disappear.
Unless this happens soon, we will see a new global financial crisis on global
foreign exchanges.
But
Bankers will not want to be restrained by gold in any way, nor will governments.
So the role such an anchor will take will still have to be under their control if
they are to willing to bring it back into their money systems. Its role will
only be as support, and not as the Gold Standard was, the measure of money
Gold's role will only be supportive, with no chance of a reversion to the Gold
Standard, where it was the measure of money. In the Gold Standard, it became
clear that there was more money printed against gold, than there was physical
gold. Bankers did not like this revelation. Bankers loathing of gold comes
from the punishments it inflicted on them at the revelation of these abuses.
They will be most careful not to let it be seen as active in the money system.
No doubt, should he want to, Mr. Ben Bernanke, who is the sage on the way to
handle deflation, together with his peers, can re-write the use of gold into
the global economy. Using similar methods, gold's role needs not inhibit monetary
expansion, but support it. In this role international bankers will show greater
confidence in other currencies as well because a banker has to trust another
banker no matter where he's from for the global money system in order for it
to work. The clear lack of such trust, alongside their unwillingness to lend
even to each other, is bringing bankers into the spotlight, a place they don't
like. We have no doubt that between each other they will trust gold.
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Author: Julian D. W. Phillips
Julian D. W. Phillips
Gold-Authentic Money
"Global Watch: The Gold Forecaster" covers the global gold market.
It specializes in Central Bank Sales and details, the Indian Bullion market
[supported by a leading Indian Bullion professional], the South African markets
[+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $,
Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the
influential gold price factors across the globe, so as to truly understand
the global reasons behind the gold price.
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