Skip to comments.Eric Sprott On How Central Banks Are Setting The Stage For The Next Big Move In Gold
Posted on 01/31/2010 8:05:51 AM PST by FromLori
A brief look at the contentious gold/central bank history as it is about to rhyme all over again:
The Federal Reserve System was created in 1913 on a promise of stabilizing the banking system. What followed instead was an unprecedented growth in fractional reserve banking, as well as the money supply, which helped fuel the roaring 20s. The aggressive money printing created inflated values in bonds and stocks, which peaked in 1929. When the market began its precipitous slide, and the public began to realize that stock and bond values were artificially high, the populace began to convert its cash holdings into gold. The government lacked the ability to satisfy that demand and was thus forced to renege on the currencys founding promise of gold convertibility. Its important to point out that without this original promise of convertibility for citizens, the currency may never have been adopted.
In 1933, The Gold Reserve Act was passed by Congress and formalized into law the breaking of the gold standard. This law provided for a controlled-currency issue through the Federal Reserve System which was non-redeemable in gold. Although the link to anything tangible had been broken, the citizens had little choice but to continue using these non-redeemable dollars as a medium of exchange. The currency had already been broadly accepted, proven convenient and a perception of safety had already become entrenched.
After forty years of continued dollar printing, in August, 1971, President Nixon effectively declared the US dollar to be a completely fiat currency by refusing to allow foreign governments to convert their US dollar holdings into gold. The right of conversion which had been granted under the post World War II, Bretton Woods agreement could not be honoured because of decades of money supply expansion. The original promise, which had vaulted US dollar to its status as a global reserve currency and a stable store of value, was now completely broken.
These historical events resulted in a world in which all currencies are fiat; they are not backed by gold or any other tangible asset. The supply is infinite. In fact, the production of todays newly created paper money in relation to historical commodity-based money is akin to counterfeiting. A US dollar printed today has no ties to anything tangible and as a result carries only four cents of the equivalent purchasing power of a gold-backed dollar of 1913. It is ironic that in a poor choice of wording on Wikipedia, the definition of counterfeiting states that it is usually pursued aggressively by all governments. It is only because the evolution of money has occurred slowly over generations that the obvious flaw with fiat currency is not widely understood. Why Gold, as a consequence of 90 years of paper debasement, will be the next big thing.
We are gold investors because we have made a specific and calculated bet against paper money. Simply put, we are betting against paper money as a store of value. We believe its supply will continue to increase. We do not believe that the worlds major governments have any stake left in protecting it. Government debt loads have grown so massive that printing them away has become obligatory - there is no longer any other feasible option left. In our view, the savers of the world should already be outraged by the dilution they have been forced to suffer at the hands of the Central Banks. Are we to infer that the limited reaction of savers to the combination of zero interest rates and debasement of currency is a result of learned helplessness? In our opinion, the lack of overt inflation to date due to the "successful" implementation of globalization, aka exporting inflation to China and anyone else who needs to purchase US securities, is the sole reason why there has not been an explosion in fiat-denominated prices to date. Yet as Zero Hedge has been pointing out for several months, the global trade picture is now dramatically changed, and China will need to look inward rather than outward. This means, that sooner or later exporting inflation as a fiat policy will fail. When pundits finally comprehend this and start blaring about it every day on CNBC, that is when the rush to gold (plated) safety will finally become acute.
And since in a fiat-debased world, everyone wonders where gold will hit (which in principle is the wrong question, as monetary representation of value will very likely cease should Central Banks finally lose control over the infinite dilution mechanism), here is what Sprott believes:
We also wanted to prepare our readers and clients for the next leg of the gold bull market as it will prove to be extremely volatile. Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Todays gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted 1980 inflation adjusted high of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. Read the full note here.
also at site you might want to read
Next Currency A Real One?
Spam on FreeRepublic?? It’s more likely than you think!
“A US dollar printed today has no ties to anything tangible...”
A good article. But let me use the above point to clarify/correct what ZeroHedge is stating.
The US dollar had maintained value for quite some time even though we effectively lost our gold-backing in the 1930’s. You see, fiat currencies can have quasi- and non-tangible values. In America, what gave our currency value was our ability to produce (massive manufacturing), the quality of our manufacturing, our “good word” (meaning we were reliable and safe to invest in/lend money to). These points created real potential value through manufacturing and through good credit.
Part of the reason that we are headed for total financial Armageddon (or Currency Armageddon) in the next two years or so is that our currency (that has no tie to the value of a commodity like gold) has now lost all its non-tangible value. We no longer have manufacturing and our credit has been destroyed through big-government spending on really stupid socialist-type programs.
I’ll argue that under Obammie the Commie this is deliberate and they are creating a currency meltdown in order to make the American people demand that we abandon our own currency in favor of a global currency controlled by a global-level central bank. We kiss good-bye to our national sovereignty and liberty as our Founding Fathers structured it when we do so.
But the article is spot-on. The people investing in commodities are not speculating for future profit. Much of these purchased commodities will be clung-to desperately and will be taken off the selling/trading floor for decades, creating scarcity and further accelerating the increased cost. This is true because people are buying out of fear and necessity because this green paper stuff in our wallets and the cheap zinc and chrome in our change trays is soon to become absolutely worthless.
Excellent the way you broke that down thank you I completely agree. Will the new global currency be carbon credits?
Remember the creator is on jp morgans staff.
I don’t think so. I think the carbon credits will become a two-headed creature: an investment instrument as well as a regulatory measurement device. But I think the world is waking up to Eco-Communism.
As I’ve been saying since the mid-1990’s: Green is the New Red.
I think the new global currency will be something like the SDRs of the IMF, though they may change the term. It will be a global, fiat currency with enough national “chips” to forever dilute what once was the potency of US currency.
Oh, by the way. If you notice, when other nations talk about a new global currency to replace the US dollar as the world’s reserve currency, they always mention using gold as part of that basket. Don’t be fooled. They are doing that to draw attention and investment away from anyone and any nation that fears Currency Armageddon. Once that global currency basket replaces the US dollar, they will remove gold from that basket, because it is gold (and other commodities) that prevent the central bankers from inflating the currency supply and thus prevents them from having total control over monetary policy. In other words, that gold is just a teaser for an eventual bait-and-switch.
If this SDR-type global currency becomes the case, we have something else to worry about. Nations will have to “buy” or “borrow” a great deal of that currency in order to continue to function. When you join a poker game, they don’t just push a pile of chips in front of you when you sit at the table. You put money in the kitty in exchange for those chips.
What will we put up as collateral?
My suspicion is that the globalists who are working behind-the-scenes to make this happen have prevented access to our natural resources so that we collateral to offer. That means that the world will have access to our natural resources.
Another possibility is our real estate. The US government currently owns about 50% of the mortgages in this country through the various GSEs (Fannie and Freddie, primarily). Who’s to say they wouldn’t offer up our homes as collateral?
Let me clarify this statement I made, “I think the carbon credits will become a two-headed creature: an investment instrument as well as a regulatory measurement device. But I think the world is waking up to Eco-Communism.”
Imagine a world where everyone is forced to purchase stock in a national utility company and to purchase their electricity usage from that company. We’ll call this hypothetical Corporate-Socialist enterprise ElectriCo.
Now also imagine a world where ElectriCO can regulate how much electricity you can use, what it charges for that electricity, charts those that are over- and under-using that electricity, fine those who over-use and then can buy-back and sell that “left-over” electricity from companies that under-use.
That is how I see the carbon-credit scam working out in reality. It is demented and straight from the science fiction that Marx or Engles or Lenin or Stalin or Keynes would have written had they been creative writers.
Gold is down 15% off its recent peak.
The democrat party is only beginning to rev up the Treasury Dept. printing presses.
Buy now, IMHO.
Watch for big Chinese purchases soon.
What are the SDR's that you refer to, what are they?
Special Drawing Rights. In a nutshell — the SDR is not an actual currency but it is the de facto currency of the IMF. If a country wants to “borrow” (they are almost always “gifts”) money from the fund, it borrows SDRs from the IMF and they use that to purchase the currency they need.
If you eliminate the currency you convert them to, you have a de facto global currency.
Of course, on the back end, those SDRs only accumulate because countries like America give them US dollars to put in their bank to lend out as SDRs. So, the question arises, if those currencies that fund the IMF with SDRs cease to exist, what “thing” of value goes into the IMF to create SDRs? (Global tax.)
Just to keep the record straight, this is erroneous. Dollars were printed as "silver certificates" which could be and routinely were exchanged for real silver, in the form of dimes and quarters and half dollars.
Dollars issued as "Federal Reserve Notes" waited till the sixties.
One thing I don't understand is why the IMF would accept American dollars as collateral for these SDR's, seems to me that if this did happen it would be because the dollar has become worthless.
I don't mean to question you, it's just that I am no expert in this field and am trying to learn.
In any event it seems rather evident that there are some folks actively trying to destroy this Country. I pray we get them before they get us.
Thanks for the ping. I’ve been on ZH all weekend, it seems.
Excellent link. Thanks!
Currently, there are a handful of countries that give money to the IMF. The US is the largest contributor. The IMF “converts” that donated money into SDRs and then “lends” that “currency” out to other nations, usually poor nations.
If the US dollar and the currencies of other major nations collapse, we will all be looking for a new currency that we can all use for trade. All nations will blame capitalism and “selfish” sovereign currency for the Currency Armageddon and, to prevent that from happening again, they will demand a global currency controlled by a global central bank.
What I was saying is that the SDR is already half there in fulfilling this role. When that happens, we will have no money. The World Bank and the IMF who loathe America, won’t show us any privileges. They will make us put up collateral (sell something to them, actually) in order to receive an installment of the global currency.
It probably won’t be the SDR per se, but they will use the SDR as a starting point to build a new currency.
Seems to me this is also a recipe for a lot of black market and bartering in the fuure should this happen.
Damn I want my country back, thank you again for your help!
Don’t mention it.
If you want to learn about these issues, I’d recommend G. Edward Griffin’s “The Creature From Jekyll Island.” I’ve read quite a few books on these topics. His is the best.
Thanks for the kind words. There are a lot of good folks here. And, of course, we owe a huge thanks to Jim Robinson for giving us this forum.