Sometimes, all that glitters is gold

Something is wrong with the way the world is handling gold and lesser mortals like us shall probably never make sense of it. Still, given its eternal significance, some of the activity and thinking around gold merits our attention. For centuries, international trade ran on the basis of the gold standard, which determined a fixed amount (weight) of gold for each nation’s coin. Similarly, paper currencies could be exchanged for gold. National reserves were held only in gold, and balance of payments deficits settled by gold. The system regulated itself and could not be manipulated.

But after World War I, changes were introduced subtly. The gold standard changed into the gold exchange standard with dollars and pounds, then the dominant currencies. After World War II, it mutated into the gold/dollar standard, making the dollar the only international reserve currency convertible by foreign central banks into gold on demand. After 1971, this metamorphosed into the dollar standard, and took the world into a downward spiral, the consequences of which are now manifesting forcefully.  

Mr Hugo Salinas Price, retired Mexican businessman and activist, says gold alone can (must) be the centre of the monetary universe, round which currencies revolve. This means currencies must be valued in terms of gold and not gold in terms of a currency (as decreed by the United States). Until the time of Franklin D Roosevelt, when the dollar stood at $20.67 per ounce of gold, the price of the dollar was 4.84 hundredths of an ounce of gold. During the Depression of the 1930s, Roosevelt “raised the price of gold” and reduced the price of the dollar (2.86 hundredths of an ounce). The idea was to cheapen labour costs, make people accept lower wages, and give more people work — without their realising the ploy.

This reduced the cost of American products and boosted exports.As the price of the dollar fell below market value and gold became overvalued in terms of dollars in the world market, huge amounts of gold began to flow into the US from all over the world. Today, the dollar stands at 7.2 ten-thousandths oz. of gold, so gold is leaving the US and the dollar-centric West because the dollar is overvalued. Soon, the private bankers who manage the Federal Reserve and control the price of the dollar in gold will run out of gold to sell. At that point, which is fast approaching, the world will devalue the dollar and the US won’t be able to prevent it. In fact, this is happening in the Gulf countries, India, Pakistan, China and Southeast Asia, where gold sells at premiums to the undervalued “price of gold” fixed by the Western banks. 

Countries like Russia, China, The Netherlands, Brazil, Turkey, Azerbaijan and Kazakhstan are buying gold. Once the US-West run out of gold, other nations will bid for gold, both against the US dollar and against all other currencies. This will slash the price of all currencies and bring about a new equillibrium where the flows of gold will curb both under-valuations and over-valuations. In other words, gold will once again be the international monetary language of business. All prices will be gold prices, or silver prices at various ratios around the world. The American-Western gamble of selling off gold and hoping that the dollar (backed by brute force) can triumph over gold is wrong, and will create a disaster for all following this path.

Earlier in February this year, Germany publicly asked America to return its gold (300 tonnes) as the dollar and Treasury bonds are in trouble. The demand followed the Federal Reserve’s refusal to permit an audit of its German holdings, fuelling suspicion that it did not have the requisite amount of gold. It is pertinent that France under General Charles de Gaulle, who distrusted America, converted its entire dollar holding into gold. It was vindicated when, in 1971, President Richard Nixon reneged on the US pledge to exchange 35 dollars for an ounce of gold. Experts believe the Federal Reserve cannot return Germany’s gold immediately because it has re-hypothecated all its bullion as collateral for different lenders. It could, of course, print dollars and buy gold in the open market to return to Germany, but this would hike gold prices and remind the world of the decline of the dollar. 

Experts suspect problems with Western banks. Mr John Embry, chief investment strategist, Sprott Asset Management, has long claimed that Western central banks have collectively leased out or swapped huge amounts of their gold. This was vindicated when the Belgian central bank admitted in 2011 that it had leased out 41 per cent of its gold. Mr Embry insists that claims by Western central banks that they have over 30,000 tonnes of gold are untrue. “They may say they still maintain ownership, but they do not have it and they will never get it back. It’s been sold, it’s gone into the market and it’s gone. Ultimately I assume that gets settled up with cash...”

This brings us to the UPA Government’s determination to make gold imports unviable by raising duties and actively discouraging citizens from buying gold by making it look like a bad investment. This brings back memories of the then Finance Minister Manmohan Singh pledging the nation’s gold abroad, and exhorting citizens not to ‘block’ money in dead investments like gold and housing but put their savings in the stock market. When they were ruined in the subsequent stock market crash, it was blamed on their inexperience. When they again followed ‘experts’ and invested in the mutual funds of nationalised banks, they were wiped out in a fresh scam. 

Interestingly, Prime Minister Manmohan Singh’s declaration before the Election Commission during his recent re-election to Rajya Sabha showed that he never took this route himself, and had healthy savings in fixed deposits! Yet his Finance Minister is giving the same homily to the Indian people; whyIJ

Is India serious about the BRICS (Brazil, Russia, India, China and South Africa) proposal to restructure the global financial system and end the US dollar’s supremacy as the world’s reserve currencyIJ The dollar retained its status as fiat currency because Washington, DC compelled Saudi Arabia and the Gulf monarchies to trade oil exclusively in dollars. But in recent decades, attempts have been made to trade oil in a basket of currencies, and despite the destruction of Iraq and libya, the trend is irreversible. New Delhi must come clean about its thinking vis-à-vis oil and gold.