April 20, 2024

Gold Becomes The Ultimate Store Of Value As Central Bankers Create Unlimited Fiat Money

By Vin Maru

Lately we have seen many articles about China and many other central banks continuing to buy and increase their holdings of gold as part of their effort to continue diversifying out of foreign paper currencies. Who can blame them? Would you want to hold paper promises to pay off financial obligations from countries that are essentially bankrupt as a part of your currency reserve? China is doing what is the right thing and in the best interest of China, buying more gold to hold as a part of your reserves in order to make your currency more marketable. They want to make the yuan a competing currency to the other major currencies around the world and they will succeed and owning gold is part of their strategy.

There is some speculation that China is increasing its gold holding to make the yuan a gold-backed currency in an effort to make it a world currency reserve. While it is an interesting concept, it will most likely never happen. In order to back a currency, their gold holdings must increase or decrease alongside the increase or decrease in the number of currency units in the system. A gold backed currency would entail having a fixed rate of convertibility for each ounce of gold to a specific number currency units issued by that country. There is probably no country in the world that will honour convertibility on a fixed basis, it would be financial suicide and is part of the reason why Nixon closed the gold window. Also having a gold backed currency would mean the country would be continually increasing gold purchases to match the inflation of currency units issued. Tracking the amount of gold that is backing currency would also be next to impossible since there is a complete lack of transparency around the amount of currency units being issued by central banks and the amount of gold held by them. Currently currencies can be converted to gold on a floating basis at market price, but going to a gold backed currency would likely never happen.

China is making its currency more readily available for trade, thus bypassing the US dollar and making its currency the payment of choice for its export. Currently the yuan is fixed to the US dollar, but over time it will most likely have to adopt a floating currency like the rest of the world. Until then, expect China to continue adding to its gold reserve in an effort to make the yuan a competing currency for international trade. The US will lose its reserve currency status over time (most likely some time this decade) but it most likely will never go away completely and the yuan will not take over completely. We will most likely just have bi-lateral trade agreements with several national currencies being used for payments. The yuan is just the new kid on the block but there is still the Euro, British pound, Japanese yen, the US$ and probably the IMFs SDR that will also be used. Even the Canadian dollar has been strengthening lately, as the IMF said it’s considering classifying the Canuck buck and the Australian dollar as reserves currencies.

While gold may not be convertible at a fixed rate any time soon, VTB Group is Russia’s first lender to sell perpetual bonds and debt linked to the country’s benchmark equity index and is now selling the nation’s debut notes tied to the price of gold (see Bloomberg article). VTB is offering 1 billion rubles ($32 million) of securities that will be redeemed in December 2013 that will pay a rate on returns based on the gold price up to a limit of 20 percent. Being a pioneer in the Russian market, VTB is the 2nd largest bank and will provide pension funds an alternative to invest in gold without the limits placed on commodity holding by regulators. The article even talks about how even Western financial institutions such as JP Morgan, Barclays, and Credit Suisse are issuing notes tied to gold this month. This is just another example of how gold is becoming an important financial asset. The need to diversify and protect wealth becomes more apparent in an era of currency wars which will destroy the value of fiat money. Financial institutions realize that central banks will continue down the path of printing money, inflation and currency devaluation, there is no other choice. They see the writing on the wall and are now capitalizing on a new markets by providing financial assets tied to the price of gold price.

All these currencies will continue to inflate and I doubt the bankers will allow gold to become a competing currency for everyday transactions. However its role as a store of value will continue to appreciate as long as fiat money continues to exits. So we should be happy that government and central bankers will continue to use and expand fiat currency, it makes their currency worth less and gold will continue to benefit in the long run.

What we are seeing now, with short term fluctuations in the price of gold is just market noise and short term trading opportunities created by the gold market high frequency traders and bullion banks. This will come to pass as the price of gold gets smoothed out and then slowly advances higher with a two steps forward one step back dance along a rising trend. All this talk about gold by mainstream media is just market noise to try and explain very short term movements in price. They have very little understanding of gold and the role it will play in the future as a store of value. Being the good slaves and puppets for the central bankers, MSM is only good at misdirecting the public and they are paid very well for doing so. Once gold finishes this consolidation, the price should continue to advance to all time highs in 2013 and 2014 with a possibility of doubling from the current price to reach a minimum target of $3500 in the next few years.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.


Why A Gold Backed Currency Is No Longer Possible

It is ironic that one of the most eloquent proponents of a gold standard did the most to ensure that we will never have one.  Alan Greenspan’s 1966 paper entitled “Gold and Economic Freedom” expounded on the role of a gold backed currency in protecting wealth against inflation by restricting the amount of money that could be produced.

Greenspan notes that the creation of the Federal Reserve was based on the premise that a central bank could supply increased reserves to banks when necessary and thereby offset natural turn downs in the business cycle.

“But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.”

It was not long before the Fed’s ability to allow unchecked credit expansion by banks laid the groundwork for the economic collapse know as the Great Depression.  Greenspan states that in an attempt to offset a mild business contraction in 1927, massive amounts of new bank reserves fostered a speculative boom ending with the Wall Street Crash of 1929.

“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage… The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.”

Fast forward 75 years and we are looking at an eerily similar situation.  Unlimited credit creation by the Fed creates multiple asset bubbles that precipitate an economic crash and the dawn of Great Depression II.

Greenspan goes on to explain why there was ardent opposition to the gold standard despite the catastrophic results of unchecked  credit creation by the Fed in the 1920’s and why deficit spending is equivalent to the confiscation of wealth.

“But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold…The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

Ironically, the man who best understood the merits of a gold backed currency became the driving force behind the unlimited credit expansion that lead to the largest financial crisis in U.S. history.

Greenspan’s compromise of principles is beyond reproach for a man who understood the consequences of  ultra easy monetary policies, yet allowed himself to be corrupted by lobbyists, bankers and politicians.  Does anyone expect a better performance from current Fed Chairman Ben Bernanke, a man who blatantly prints money in an overt attempt to further debase the U.S. dollar?

Incredibly, Alan Greenspan disingenuously initiated another discussion on the need for a gold standard earlier this year.  In an interview with Fox News in January 2011,  Mr. Greenspan had the temerity to say:

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board or something to that nature, because unless you do that, all of history suggest that inflation will take hold with very deleterious effects on economic activity.”


Three conclusions can be reached regarding a U.S. gold standard:

1.  Mr. Greenspan should cease talk about a U.S. gold standard and the dangers of unlimited credit expansion – his previous record  speaks for itself.

2.  The ability of the U.S. to adopt a gold backed currency has been overwhelmed by the debt and leverage which now threaten to bring on a deflationary collapse.  Ben Bernanke knows this which is why he has been printing money on an unprecedented scale.

Ironically, the creation of new credit may be the only factor preventing us from sliding into a deflationary depression  triggered by massive debt defaults.  Ben Bernanke’s prescription of inciting inflation and curing excessive debt with more debt may be the only poor policy option remaining to forestall an unimaginable economic nightmare.  With the global economy tottering on the edge of another financial crisis,  the adoption of a gold standard by the U.S. remains a very remote possibility.

3.  Since the government is not interesting in preserving the value of our currency, individual initiative becomes necessary.  Ten years of rising gold prices tells us the smart money is not waiting for a gold backed currency but instead is turning directly to gold.

Ron Paul’s Call For Gold Backed Currency Would Value Gold At $54,300 Per Ounce


Ron Paul said today that the creation of a sound U.S. currency, “backed by gold or some other commodity respected by the market” was the most important first step to create new jobs and encourage capital investment in America.

In an article published on the Ron Paul website entitled “The Keys to Economic Growth“, Ron Paul argued that the U.S. economy was in “terrible shape” and that the trillions of dollars borrowed and printed by the U.S. government have done nothing to turn things around.  Rep. Paul noted that the real unemployment rate was closer to 20% rather than the officially published rate of 9.1% and that real job growth would only come from private capital financing existing business or entrepreneurial growth. New job growth will not occur, said Ron Paul, if we continue to punish those who accumulate capital needed for business expansion.

Ron Paul listed four essential steps that must be taken to turn around the American economy through new job creation.

  1. The U.S. economy cannot be restored, according to Ron Paul, until we “prohibit the Treasury and Federal Reserve from essentially creating money and credit from thin air.”  A currency that is rapidly being debased will not attract private capital.  In order to ensure a sound currency, the dollar should have its value legitimatized via gold or commodity convertibility.
  2. The extreme regulatory burdens on business have greatly inhibited job growth.  The vast bureaucracies and compliance nightmares being created by Obamacare and the Dodd-Frank Act have served to choke off business growth and new jobs since businesses cannot cope with “unknowable regulatory compliance burdens.”   Rep. Paul said it is time to “start shrinking the federal registry.”
  3. The trillion of borrowed dollars spent on foreign wars has reduced our economic growth by sapping the private sector and increasing the Federal debt. Rep. Paul declared that “There is no point in debating a foreign policy we cannot afford.”
  4. According to Ron Paul, the U.S. tax system needs to be revamped to allow U.S. foreign income to be repatriated tax free to the U.S. to allow the funds to be deployed in the domestic economy.   Ron Paul also said it would be better to simply “abolish the income tax altogether.”

Ron Paul noted that free market capitalism and respect for property rights was essential in allowing the creation of U.S. wealth.  The poorest nations on earth routinely demonstrate hostility to free markets, private property and the rule of law, with the predictable result of widespread poverty.

Ron Paul’s attempt to preserve the integrity of the U.S. dollar by backing the currency with gold has little chance of succeeding.  A gold backed currency would prevent Congress and the Fed from running deficits and printing money, something they would fight to avoid at all costs.

It is interesting to speculate, however, on what the value of gold would need to be to in order to back the massive debts and obligations that the U.S. government has piled up.  The United States has issued the most amount of debt of any nation on earth.  Ignoring the trillions in unfunded and off balance sheet obligations, the United States has official debt of $14.2 trillion dollars outstanding, including both marketable Treasuries and intergovernmental debt.

If the U.S. used its official gold reserves of 261.5 million ounces to back the $14.2 trillion of U.S. debt, gold would need to be valued at $54,300 per ounce.




Zimbabwe Central Bank Chief Bashes U.S. Dollar While Promoting Gold Backed Currency

According to a news report in New Zimbabwe, the head of the Zimbabwe Central Bank is warning that the U.S. dollar may lose its reserve currency status soon and suggested that Zimbabwe institute a gold backed currency.

Central Bank Chief Gideon Gono said in an interview that  “There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only be stable but internationally acceptable.   We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country…to me, Gold has proven over the years that it is a stable and most desired precious metal.”

The irony here is overwhelming.   Zimbabwe, a country without a functioning currency due to hyperinflation is worried about the declining value of the U.S. dollar.  The Zimbabwe dollar has been worthless since 2009 and the Zimbabwe economy now functions through the use of foreign currencies, including the U.S. dollar.

The central bank of Zimbabwe had fueled hyperinflation the old fashioned way by trying to use printed money to pay government expenses.  The people of Zimbabwe were not fooled and the currency soon lost all value.  A $100 trillion dollar Zimbabwe bank note is now a novelty item on EBay, going for about $7 each.

$100 Trillion Dollar Zimbabwe Note

The U.S. dollar must be in real trouble if officials of Zimbabwe are worried about accepting U.S. dollars.   Zimbabwe central bank officials have had first hand experience seeing how quickly a paper currency can become worthless.

According to Central Bank Chief Gono, “Zimbabwe is sitting on trillions worth of gold-reserves and it is time we start thinking outside the box, for our survival and prosperity.  The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way”.

How ironic would it be if the Central Bank of Zimbabwe winds up with the world’s strongest currency by introducing a gold backed currency?

Gold and Silver Recap: Prices Mixed, $500 Silver Campaign

The excitement seems to generally be wearing off.  It could be the end of the bull market in precious metals.  I don’t think so, but if I call it now and it does happen I will look like a prophet as every one else (including me) thinks that gold is going up.  Words are cheap.  Silver certainly isn’t.

In fact the market has been a bit up and down.  Down for two days on Tuesday and Wednesday, back up on Thursday and then gradually back on Friday.  In fact the gold price for once seems to have been helped by the world not going to pot, as the Euro zone seemed to be edging towards a deal to put Ireland into run off.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,342.50 -46.00 (-3.31%)
Silver $27.07 +0.28 (+1.05%)
Platinum $1,650.00 -62.00 (-3.62%)
Palladium $695.00 -8.00 (-1.14%)

It seems to have affected silver as well.  It only went up 1% this week.  On silver’s past form this is a fall.  So have they stopped competitive devaluation?  You bet they haven’t.  It’s just that fewer people are noticing it.

One stealth seller of gold from the official sector – which has been very quiet – has been the IMF.  While the World Bank goes around telling everyone that the gold standard is something worth considering, the IMF has been ever so quietly selling gold.  This has accelerated when the gold price has been relatively high as the IMF is not making an ideological statement in the same way that Gordon Brown did in the UK when he sold off a chunk of the gold reserves.  This has been counteracted by equally quiet gold buying from some Central Banks, particularly Russia.

Another source of demand is the Asian consumer, and that was quite evident on the week’s trading as much of the dip was attributed to the Chinese resolve in fighting inflation.  If China is successful against inflation then demand for gold will lessen.  One fact on the demand, China is now approaching India as the biggest gold consumer in the world, how long before the Chinese Central Bank shares its peoples growing love of gold?

Silver is still going up, even when all the other precious metals have a bad week.  There’s been relatively little action on the price fixing case, although there is now a rather bizarre campaign to bankrupt JP Morgan (one of the alleged fixers) by having everyone buying an ounce of silver which JP Morgan would have to sell back.  Their target?  Silver at $500 an ounce.  Currently it’s $27.

Source for GLD Gold, SLV Silver Exceeds Capacity, Fort Knox Gold Audit

As gold turns lower on reports of a “turning point” for the entire global economy, let’s take a look at some thought provoking gold, silver, and precious metals related stories from other news sites and blogs. This round up includes stories on the Gold ETF and Silver ETF, a call for a return to the gold standard, Fort Knox, and prospecting for gold.

Where does the Gold ETF get its gold?

As the SPDR Gold Shares ETF marked a series of succesive all time highs for tonnes in the trust, many people started asking questions about where the gold was coming from. Here’s the answer.

SLV exceeds its silver storage capacity

Discussed in the Got Gold Report, the holdings for the iShares Silver Trust SLV have exceed the storage space allowed under its custodian agreement as the holdings reached another new high.

Russia backs return to Gold Standard to solve financial crisis

Following China’s call for a new world currency, Russia suggests that gold should be included in the basket-weighting.

Is there any gold inside Fort Knox?

It’s been decades since an independent audit of the reported $137 billion in gold stockpiled in Fort Knox has been independently audited. Ron Paul is pursuing a Bill to conduct an independent audit of the entire Federal Reserve System. Separately, GATA plans to file Freedom of Information requests for full disclosure of US gold ownership and trading activities.

The Great Credit Contraction

Trace Mayer, J.D. announces the availability of The Great Credit Contraction, which is a foundational document for much of the writing on his site Run to Gold.

New Gold Rush

Believe it or not, people are making money prospecting for gold in California. One prospector claims to have made $10,000 during one good day.

Gold and Silver News & Headlines for November 26

Dig It: These People are Burying Their Cash

Some people are withdrawing money from their FDIC insured, interest bearing bank accounts to bury the cash (or gold purchased with cash) in their backyards. A few years ago something like this would have sounded paranoid or at least eccentric, but it doesn’t seem that way anymore.

The gold price over Thanksgiving

Will the bullish bent for gold hold true this Thanksgiving Thursday and Friday?

Gold vs. Oil: Gold is Winning

If you haven’t seen a chart of the gold/oil ratio lately, check out this article.

Is the Great Bear Bullish on Gold?

The Central Bank of the Russian Federation continues to increase their holdings in gold. As the price of gold has fallen, their purchases seem to have accelerated.

Bring back the link between gold and the dollar

Many high profile publications are starting to voice the opinion. First, it was the Wall Street Journal, now the Financial Times.

Gold and Silver News & Headlines for November 21

Trump Alumn Fired Up About GoldandSilverNow

A former finalist from “The Apprentice” has started a peer-to-peer network for buying and selling gold and silver. The idea is that such a network would avoid the unavailability and long waits necessary to buy gold and silver from bullion dealers. Definitely an interesting concept.

Demand for Gold Hits a Record Even as Institutions Head for Exits

It’s a tug of war between institutional sellers and retail buyers.

Inventory at SLV declines modestly

Some great analysis of inventory and price for the iShares Silver Trust. Since July, amidst a sharp decline in the price of silver, there has been an influx of buyers of SLV rather than sellers.

The Six Biggest Myths about Gold