December 3, 2022

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.

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Regards,

Gold Currency – An Escape From A Failing Paper Money System

Fed Chairman Bernanke’s statement that “gold is not money” seems to be an increasingly lonely position.  No less an authority than Alan Greenspan, his predecessor at the Federal Reserve, directly contradicted Bernanke by calling gold a “currency.”

In remarkably candid language, Greenspan spoke in Washington about the Euro ‘Breaking Down’, the European banking crisis and the deterioration of the fiat money system.

“The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Greenspan said today in Washington.

A lack of confidence in euro-denominated debt is straining the region’s banks, Greenspan said. “That stuff has always been thought of as the ideal collateral and now it’s getting highly questionable,” he said in a question-and-answer session at the Innovation Nation Forum in Washington.

Greenspan also said that he did not think gold, which reached a record above $1,900 an ounce this week, was in a bubble.

“Gold, unlike all other commodities, is a currency,” he said. “And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”

While Bernanke contemplates additional ways to debase the US currency his counterparts at other Central Banks are retaining gold to help manage debt and adding to their gold reserves at a record pace.  Meanwhile, before providing more bailout funds to insolvent member of the European Union, the German labour minister is demanding that gold be put up as collateral.

Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

“Once they’ve sold, that’s it, and buying back would be extremely expensive,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said in an interview. “They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt.”

“Under conditions of austerity we’re going to see a further deterioration of debt,” said Richardson, who has studied metals markets for 20 years. “Rising risk argues in favor of holding on to their gold reserves rather than selling them because they’ve only got one shot at selling.”

“The European central banks won’t sell their gold because while it may be a means to raise cash, it definitely won’t be enough to settle their debts,” said Duan Shihua, head of corporate services at Haitong Futures Co., China’s largest brokerage by registered capital. “Besides, none of the central banks believe in the currencies of other countries.”

Bernanke can deny reality and history by saying that gold is not money while he wildly prints more paper currency, but the rest of the world isn’t buying it.

“Gold Is Not Money” – Ron Paul Shreds Bernanke

Ben Bernanke’s head must have been spinning after Ron Paul’s rapid fire series of questions on gold at a hearing by the House Financial Services Committee.

Ron Paul’s confrontational and decisive questioning left the former Princeton professor looking uncomfortable and befuddled.

Ron Paul started off by noting that instead of spending $5.1 trillion bailing out banks and enriching corporations with no discernible economic benefit, the Fed could have simply given each and every American $17,000.  Ron Paul also suggested that the huge amount of money injected into the economy by the Fed has caused a real inflation rate of about 9%, far above the government inflation statistics.

Bernanke, obviously annoyed with Paul’s remarks started to elaborate on why the Fed was actually a “profit center” for the government, but was quickly cut off by Ron Paul who noted that he had only five minutes of allocated time to ask questions.

Ron Paul then followed up with a series of devastating questions that left the Chief Money Printer reeling.

Paul:  “When you wake up in the morning do you care about the price of gold?”

Bernanke:  “I pay attention to the price of gold.  I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as protection against what we call tail risks, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis they have gold as a protection.”  (Editor’s note: Gold has been steadily rising for the past ten years.)

Paul: “Do you think gold is money?”

Bernanke: (after a long awkward pause) “No, it’s not money, it’s a precious metal”.

Paul:  “So even if it’s been money for the past 6,000 years, somebody reversed that, eliminated that economic law?”

Bernanke:  ”It’s an asset.  Would you say Treasury bills are money? I don’t think they’re money either but they’re a financial asset.”

Paul:  “Why do central banks hold it?”

Bernanke:  “Well it’s a form of reserve”.

Paul:  “Why don’t they hold diamonds?”

Bernanke: “Well it’s tradition, long term tradition”.

It’s unfortunate that Ron Paul was only allowed to question the Fed Chief for five minutes.  In a couple of hours, Ron Paul would have shredded the foundations of the dollar’s value.  In an interview with thestreet.com, Ron Paul says “Gold, if you pick up a coin minted 6,000 years ago, you’d still have your money. If you pick up a piece of paper printed a year ago, it might be worth half its value. So history is on my side of the argument.”  Gold as money has retained its value over the millennia – does anyone really expect any modern currency to retain value over the long term?

In Bernanke’s world he is right – gold is not money.   All contemporary monetary systems are now based on fiat money with no intrinsic value other than the full faith and credit of the government issuer.  Unfortunately, the world’s short term experiment with a fiat money system seems to be swirling towards financial disaster in Europe as nation after nation totters at the edge of default.

The real disaster is that the hoax of fiat currency has been very effectively promoted by Bernanke, Governments and Central Banks.  The middle class citizens of most countries still hold the unshakeable, religious conviction that their paper money will retain its value because it is backed by an all powerful government that can protect their bank savings, pension plans, etc.  If this profound belief in paper money did not exist, gold would be thousands of dollars higher as currency holders of insolvent countries such as Greece, Ireland, Portugal and Spain desperately lined up to buy gold.

As the looming financial crisis explodes, bank depositors will discover that a bankrupt nation cannot protect their savings.  It will be too late for many as bank holidays and the financial collapse of financial institutions prevent depositors from accessing their money.  Middle class savers will be financially destroyed.  If depositors eventually get paid back in printed paper money, it will be worth a fraction of its original value.

Bernanke can say that gold is not money but time will prove him wrong.