Golden Toilets, Paper Dollars

By: Adrian Ash | Fri, May 22, 2009
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"The backdraft blows both ways. But repeated attempts to wean the world away from gold only served to send its price higher..."

A SCATTERING of random-looking dates to kick off...

Mon 21 Sept, 1931

Sun 15 Aug, 1971

Weds 2 June, 1976

Sat 1 April, 1978

Tues 7 Oct, 1980

Weds 31 Mar, 1982

Fri 7 May, 1999

Highly selective? Yes. Wilfully so? Of course. But you get the picture, right?

"Any actual program of official gold sales," as The Privateer recently noted, "has always resulted in time in a HUGE leap in the price of gold. That's why the US in particular, and especially now, is so reluctant to embark on any type of official gold sales again."

Closer still to the ebb and flow of monetary history, political statements about the value of gold-as-money tended to create unintended consequences - inevitably hilarious for gold buyers, if not immediate or obvious without hindsight - throughout the 20th century. (And you could choke on the irony, let alone the politics, of the Financial Times leaning in favor of gold here in mid-2009).

The backdraft blew both ways, of course. But repeated attempts to diminish gold's role only served to boost its price as open-market investors bid up the metal time and again.

"The incompetence is staggering," as a BullionVault customer wrote to us earlier this week. He was in fact commenting on a little-seen detail of Gordon Brown's 1999 Gold Sales, but the description holds good for much more than the horrors he went on to reveal.

"As you probably know, Britain's gold is held by HM Treasury in the Exchange Equalisation Account. Reports back to 1998/99 can be found at the Treasury website.

"You have to go through the reports quite carefully, but I found the following...

Year ending March 31st

Total gold stockpile

Maximum gold loaned

Tonnes sold

Loans as % of stockpile

Sales as % of stockpile

1999

715

161.5

-

23%

-

2000

588

200.4

125

28%

18%

2001

437.1

199.3

150

34%

26%

2002

314

155.1

120

36%

28%

Yes, the UK Treasury - just before it launched gold sales that initially knocked the price lower by one-eighth - actually helped gold traders profit from the resulting fall.

Genius!

Lending out more than a fifth of its stockpile, the Treasury gave short-sellers the gold they needed to borrow, to sell, and then to buy back lower down...returning it to the government's vaults and pocketing a fat wad as difference.

In fact, by the time that Gold Prices in Sterling broke back to five-year highs above £200 an ounce, the UK government had facilitated more shorting of gold than it actually sold itself into the market!

More fools than knaves? We'd like to hope so here at BullionVault, sticking with our patented Idiot's Theory of Political History. And "they may have learned their lesson," as our gumshoe customer notes. "In the year ended March 31st 2008, the maximum loan was 6 tonnes."

Looking forwards, not back, "It would seem that central banks are not all-knowing," writes Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York to the Financial Times. He has a point.

"They too have an information set that is fundamentally incomplete, like private sector participants. [And] while the central banks have sold gold, the price of gold has indeed gone up. Yet many observers seem to take for granted that if and when central banks begin selling dollars the Dollar will fall."

Hmmm, let's see now. If they turned seller, would China and Russia loan out their Dollars to enable short selling by currency dealers? And would private-market investors step up to buy all the Dollars they've got?

Perhaps. They might find a good use for them. "When we are victorious on a world scale," said Lenin, writing in Pravda on the Complete Victory of Socialism in 1921, "I think we shall use gold for the purpose of building public lavatories in the streets of some of the largest cities of the world."

And long before the global soviet takes over, you might find US Dollars hanging off a nail on the back of the toilet door.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

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