The Qualities of Gold Shine Through?

By: Julian D. W. Phillips | Tue, Jul 1, 2003
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In the last twenty and more years, gold has been insulted, belittled, called a "Barbarous Relic", a mere commodity and treated with disdain, whilst being on the end of a campaign to reduce its U.S. price. We have discussed many times in the pages of G-AM the prospects for gold in the Monetary system, its future role and the activity in the "Official" market. In this article, we thought it necessary to go back to some basics of gold, gorgeous gold. Why does it have this allure. Why from senior Statesman to lowly thief, from the International Monetary Fund to a Chinese business man, from King Solomon himself to the Joe Citizen, does Gold have this fascination, this allure, this ability to breed such emotion and to stay a valued measure of wealth, throughout man's history?

In recent days three startling stories hit the newspapers, with features belonging more to fiction than facts, from far flung Iraq back to London and New York, focussing on one of the key faces of gold. Gold moved from the hands of Central Bankers, Bankers and Jewellers, to Drug Lords, fleeing Dictators and to just plain villains showing us that all of them believed in the retaining value of gold! These stories brought to the fore this facet of gold, a facet that cuts cleanly to the reason of why gold is an unchangeably, enduring store of value in the hands of, not only the extremes of Society, but across its spectrum and throughout history, whether we like it or not.

1. The story of Colombian Drug Lords moving their ill-gotten gains back to Colombia, via gold and the Jewellery centre of New York is the first intriguing tale. Involving only a $1 million, it seems, much more seemed to have been travelling this way than that paltry sum. Our attention is not on the villains who, let's face it have been putting their mounting billions somewhere, for decades now, despite the efforts of anti-laundering legislation and dedicated policemen. This story was delicious, because of gold! Not diamonds, which were also seemingly involved to a greater extent, but gorgeous gold. The flavour of the strange characters involved from the midden of society to the respectable Jeweller, is also not the focus of our attention. It is the recognition by these extremes of society, that gold is a vehicle that has reliable and trustworthy qualities that transcends their own morality and ethics, present or otherwise, in any situation it may find itself in.

2. As if to emphasis this independent value that story pales into insignificance against the three, [now a series] of battered Mercedes trucks, driven by somewhat moronic drivers [paid $+500 to do the job] claiming that they had a truck load of "brass", which amazingly turned out to be, so far discovered, 4,000 bars of 21 carat gold. How many trucks went through without being stopped, headed as they were towards Syria or Iran before and after that? Riveting stuff in the hands of a fiction writer, but of a different significance to a gold market man. These bars weighed between 10 and 20 Kgs each, so we are told. Times 4000, turns out to be a whopping 39 to 78 tonnes of gold. It appears to be "Scrap" gold. Significant questions should be, "how much more of this stuff is there"? It must have been held before in a safe and protected place, out of the reach of looters. Further tales of the overload of power grids in Southern Iraq were linked to our tale, supposedly being caused by the melting down of the jewellery making up these rough wrought gold bars of 21 carat gold [pure gold is 24 carat] This story again elevates the transferability of wealth as gold, particularly when set against a country being pillaged by its own people, in a seemingly uncontrolled manner. Even the nation's conquerors were amazed at the three trucks, realising that they could not control such a transfer of wealth, having stumbled upon the trucks only by accident!

3. The third story involves the hallowed gold bankers, the Rothschilds and the theft of their 400 gold antique boxes from their enormous estate, family heirlooms, belonging to the centuries old, prominent banking family that financed the Suez Canal, who have been key players in the Gold Bullion market since its inception. Understandably their fear is that the boxes will be melted down and sold as more gold scrap at market prices.

The common denominator of the three stories? - across the world, untrusting and untrustworthy men turn to: -

Isolated stories of gold? No, not at all. Even in our days and our fathers days, such piratical stories went on, even at government level. The difference? - A government does it in the 'interests of a nation', the ultimate sanitizer:

Past "Official" Gold 'Piracy'

1. 1935.
The dollar was officially devalued was in 1935, from $20 to $35, as part, not only of facing the realities of recent history, but as a prelude to snatching the real wealth of other European nations. At the time the Gold Standard persisted across the civilised and wealthy world. Exchange rates were based on their relationship to gold. When President Roosevelt devalued the $ against gold, it was seen, as would be the case were it done today, as a "revaluation" of the gold price! Consequently, every man and his dog saw the opportunity to buy gold in Europe and elsewhere in those foreign currencies and sell it to the U.S government. With the $ they received they quickly exchanged them for the now overvalued European currencies, but with the same exchange rate to the $ and bought more gold. This went on until the U.S. had acquired well over 25,000 tonnes of gold, from a denuded Europe, until they got the message and devalued their currencies against gold too. Very neat, but a confidence trick nevertheless! Why? In a period of Depression - followed by war - the time had arrived for a chest to be filled in preparation for a conflagration of never before seen magnitude. The war chest accumulated by the States proved more than adequate to fund the WW2 and the rebuilding growth period following it, through gold giving, what was a strong currency, a credible gold backing. The means justified the end, the usual reason for political action.

2. 1968+
The picture swung full circle the next time this trick was attempted by the U.S. under President Nixon when again the dollar having flooded Europe was devalued, but this time through a floating exchange rate depreciation in the late sixties and early seventies. This time Europe was ready, taking their cheapening dollars and under the sagacious guidance of President de Gaulle converted them for U.S gold, until a now self consumed U.S. had to face the real value of the $ and remove the convertibility of gold, gripping firmly to the remain 11,000 tonnes of gold it had left. Europe was left with larger total of gold than the U.S.

3. 1973+
The piracy changed its nature thereafter, to the imposition of a false value on the $, against gold. The U.S. staged a few sales of "Official" gold in an attempt to knock the price of gold down. Unsuccessful in this posturing, sales of U.S. gold were suspended. Hoping to have a concerted attack on gold, the International Monetary fund, on behalf of its members, had a go at knocking the gold price, again unsuccessfully, suspending their gold sales shortly after they began.

The wonderful quality gold demonstrated in these three acts of piracy, was to demonstrate that the desire for gold even at international governmental levels, is greater than their perceived dislike of gold. With the degeneration of money spreading world-wide, more and more will turn to gold and do so even when defeated, or criminalized, knowing that no matter how dark the days, men will value gold! That's why 34,000 tonnes of gold are held by the worlds richest nations!

In each case a massive rise in the price occurred. It was so great in 1933 that the only way the States could control the demand for gold was to outlaw individual ownership of gold in the U.S., buying what they had left, at the new higher prices.

Today's Piracy at government level

When all is growing thriving in the economy, paper money does the job well, being under the complete control of the government. Its banking system, relies on people, to control and dominate money, irrespective of its ownership. Confidence in nations is expressed in the paper currencies of those nations - this is in competition to gold. The level of that confidence is reflected in the exchange rate of that currency. Confidence in the $ has decayed and threatens to decay considerably further. Today, with the scene having been set for a breakdown of the $, which has already lost 40% of its value in the last year, and its regulators swinging towards more devaluation. Are we being extreme here, no, not if we listen to the 'makers' of the $? - The federal Reserve Governor Ben Bernanke warned of much more devaluation to come, saying recently that, "The US government has a technology called a printing press that allows it to produce as many U.S. $ as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar." So the way out of the problem seems now to be to pull the plug on the dollar and to devalue the overhang of U.S. debt at the same time.

How would you like it if the bank where you held your savings turned to you, having dropped the international value of your savings already and said that.

Why such desire for gold by governments:

We face, not war as we know it, but the start of a currency degradation, probably followed by competitive devaluations across the globe and possibly extending into a Trade War. So the lessons of war can be pertinent here: -

The Qualities of Gold in war are:

History, the Future?

Only the senior, older men in the financial markets have an awareness of the history of currencies and gold. It was these Baby Boomers parents who saw and experienced times when currencies were destroyed alongside governments in wars that made a mockery of confidence in man made money and saw just why gold is so special.

During the last century Europe got to know the destruction of currencies and the desperations accompanying and following war, well. They understood the conjuring tricks of value perception and real value. They saw the destruction of currencies and governments twice in their lifetime, alongside the implosion of economies, in the aftermath of war. Their appreciation of real value was borne from all seasons, not simply from fair weather. Indeed the concept of happy growth was accepted, alongside grateful survival. Not only did they grow to trust the safety of gold, but they noted how governments rapaciously acquired it in war. They saw throughout the century its stable performance, such performance only being marred by an outright attack on its value from the bulk of the wealthy nations, who they noted, kept a firm grip on the bulk of their own Gold!

Please also note that the three leading holders of gold in Europe, today, were badly savaged in the two world wars!

In earlier times? In the main, the last 6,000 years has, primarily, seen gold as the prime currency, because no acceptable alternative has been available, certainly not on an international basis. The difficulty of international dealings, leading to these taking place amongst relative strangers, elevated gold to a position of measurable trust in values, decided upon by the two parties, the fundamental requirement of any currency. The international acceptability, independence and consequent liquidity of Gold, was a standard that had no competition outside national boundaries. Even within national boundaries, local currencies always bowed to gold, either constantly or eventually.

The wisdom of one who has seen all seasons stands for not only today, but tomorrow. They have seen gold support nations in the face of currency debauching and destruction, they understand the need to have it in the background if not in the foreground. After all how many of mankind have lived entire lives basking in the reliability of other men in a growing Utopia, free from strife and breakdown and been able to trust paper money?

Yes, the nineties were good years of growth, but things are changing. To quote the Spectator we were "in the Nineties but, now we're in the Noughties"

So why the antagonism towards gold?

From the 17th century onward, the accelerating growth in trade and production stimulated an urgent expansion of the money supply - and although gold played an important role, it was increasingly subordinated to more flexible systems: promissory notes, bills of exchange, goldsmiths' receipts and banknotes. The production of gold was not sufficiently expansive to match this growth. Banking, using paper, allowed for such expansion, it was thought. So gold restrained the banking system. The number of derivatives from a single cash deposit, is thought to be around 16, allowing for global expansion of the economies of the world. In the above cases of Official gold manipulation, gold kept on bringing a spotlight onto the actions of the Monetary Authorities. This fierce light of publicity, quickly warped their standing, out of the vertical of public opinion. The rising price of gold was clearly seen as a falling price of the $, leaving confidence in it, badly mauled. How so? - Inflation cheapens the value of currencies, elevating the gold price in the process. Deflation causes uncertainty and chases Investors to an item not declining in value with deflation - Gold. This has caused governments since the seventies to tax, belittle and rupture gold's market and its price.

And now, is gold really obsolete?

We do not believe for one moment that the verbalised dislike of gold is genuine. We at G-AM have stated loudly, our conviction that the Washington Agreement was a key step towards the rehabilitation of gold. As evidence we quote one of the ex-sellers of gold, who stopped selling after seeing the gold it sold snapped up like a shot, at market prices. The sellers? - The International Monetary Fund now states: -

" The IMF's gold reserves are a fundamental strength in its financial position, giving it increased credibility and the capacity to assist its broader membership in crisis situations. The 1999 decision by the membership to use, as an exceptional one-time measure, income from the investments of the profits from limited off-market gold sales to help finance the IMF's contribution to the HIPC Initiative had a substantial cost to the institution and its members. Additional sales would put at risk the confidence of members in the Fund's solidity, and thus its ability to lend."

Why not a re-marriage of gold and currencies in a new form.

If somehow the Gold price could be allowed to rise without this perception of a devaluing $, gold could be useful again as a support for the $. If gold could be allowed to rise in price without the threat from a market that can be manipulated, it could be not just a valued reserve asset, but a critical one. One could now say that many nations have their own "market related" gold valuation method, so Gold's presence in the monetary system would be not only acceptable but confidence building! Yes, it would take international co-operation to achieve that and provided there was no fixing or implied fixing of currencies to Gold, such a role should work.

Indeed it could form an Anchor for the paper currencies it was related to, both in times of growth as well as in times of deep loss of international currency confidence. The number of derivatives that have been developed from gold over the last twenty years have increased gold's capacity to have an effective supportive role in the World's Monetary system. Europe has taken a strong step down this road with their policy of having 15% of the E.C.B. reserves in gold. [But the question remains will this translate into further disposals of gold, or expansion of paper currency content.] Is the monetary system ready to harness a rising gold price to achieve their targets of maintaining a strong and stable currency, reflecting confidence, boosted spending power and supportive of price stability? With many dramas about to unfold in the world economy, there is a desperate need for such a union. Failure to do so would have gold again point fingers at badly behaved monetary authorities.

If history is to be repeated, a fourth time, we are on the brink of a huge gold price rise, as currency decay moves into second gear. The choice before the monetary authorities is therefore to suffer the humiliation of this price rise or to harness it to their restoration.

We have believed and still believe that the authorities have been aware of the need to bring gold back into the system for some time. Proof of their intention to do this will be expressed after September 2004, if not earlier.

Summary of the qualities of gold:

The Qualities of Gold in war are:


Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"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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