What’s up with gold?

Wednesday, 1 February 2006

Hugo Salinas Price

The graph, courtesy of Kitco, shows us 31 years of the world’s monetary history. It illustrates 31 years of efforts by the World’s Central Banks (WCBs) – the group of the world’s Central Banks, headed by the US Fed and the UK – to consummate their deepest wish, which has been that humanity will totally forget that money must be something valuable and hard to get, and will accept what favors the WCBs: paper money and magnetic money with no intrinsic value whatsoever and which they can roll out in unlimited quantities.

From “ODE TO THE FEDERAL RESERVE”

“More happy cash! More happy, happy cash!

Forever green and still to be enjoyed,

Forever printed and forever fresh!”

Unfortunately for the WCBs and fortunately for humanity, we can now consider this effort as defeated. Gold has triumphed over fiat money.

Early in 1980, there was a world-wide panic to get into gold. In 1971, President Richard M Nixon “closed the gold window”, and gold immediately discounted the value of the dollar by a rise in its price. Efforts to keep the price down were a failure.

By the middle of 1976, the price of gold had risen to $100 dollars an ounce. At that point, concern took hold and later on gave way to panic, which did not end until January of 1980, when gold was momentarily worth as much as $850 dollars an ounce.

This rise in the price of gold terrified the WCBs because it clearly reflected the lack of public confidence in fiat money – money by decree – and since then, the WCBs have constantly and carefully monitored and controlled the price of gold so that its price and price action may no longer attract the attention of investors the world over.

How was the price controlled? Not to go into wearisome details, two principles were put into action:

1. Important economists and economic commentators were bribed, one way or another, into bad-mouthing gold, that “barbarous relic” as defined by John Maynard Keynes, the great apostle of paper money, inflation and the “in the long run we are all dead” point of view.

3. The WCBs agreed, behind the scenes, to sell gold from their reserves in such doses as the market required, in order to squelch any rising trend and keep gold in an unattractive situation for investors. (How they did that is a long and complicated story, but that’s the simple description of the strategy.)

The first sign that something was not going well with the control of the price of gold, was the first Washington Agreement signed by various European Central Banks in 1999. Under this Agreement their sales would be limited during the next five years. This was a very important signal because it let the world know that these Central Banks in Europe did not wish to continue throwing unlimited quantities of gold on the market, to keep the price down.

From that moment, the price of gold began to rise.

In the gold market, to keep a price at a given level, all the gold that finds buyers at that price, must be supplied immediately. Otherwise, the price will rise until the amount offered is rationed among those willing to pay a higher price.

Today, there is not enough gold offered for sale to satisfy demand for gold at $550 dollars an ounce. Gigantic quantities of paper money and magnetic money all over the world are seeking a safe haven in all sorts of tangible and valuable goods, a place where the purchasing power of this money will be protected against the depreciation of fiat. The WBCs today either cannot or do not wish to let go of gold in quantities sufficient to keep the price of gold in check.

The public and big investors in the Western World are hardly aware of what is going on in the gold market. When a handful of investors with a few billions of dollars in spendable funds take notice – which may happen any day now – then gold will have to rise to prices we can hardly imagine today.

We are about to see a “bank run” on the WCBs.

Down here in Mexico, we know what a “bank run” on our Central Bank means.

“We’ve seen that movie before”. First the CB says that its reserves of dollars are more than adequate; it assures us that foreign investment will continue flowing into the country in abundance; it argues that “a devaluation would not be helpful in any way”. Finally, one fine afternoon the CB announces that next day, the market will determine the new quote for the dollar and - Lo and Behold! - we have what could not possibly happen: a devaluation.

The “bank run” on the WCBs is similar, except that what is running short is gold and not dollar reserves, of which the WCBs have mountains.

Gold on sale, cheap, is over! It’s over, either because the WCBs are running low on gold, or because they do not wish to sell what remains in their vaults. (According to some respected detectives in this matter, the WCBs do not have anything close to the 31,000 tonnes of gold they report, for that amount includes gold “leased” in prior years – still carried on the books, though long gone – and that “leased” gold will never be recovered. Probably, the WCBs have at the most 20,000 tonnes, perhaps only 16,000 tonnes, and that might be the reason they do not wish to sell more.)

Another reason for not selling, is that there is no longer unanimity amongst the WCBs about getting rid of gold; some CBs have said that they want to – Heaven Forbid! – increase their gold reserves. The selling CBs have second thoughts: “Why sell, if our gold is simply going to Russia’s or China’s vaults?”

Gold has defeated the WCBs! The nightmare of electronic money for humanity from now till doomsday is turning out to be a farce; the scam of fiat money we have lived in since the 30’s will soon be clear for all to see. In terms of fiat money, any number for a price of gold is imaginable.

Stay tuned. It’s going to be a fantastic show.