Will fraud lift gold prices to $10,000/ounce?
Published on: April 03, 2010 at 16:20
By Geena PaulNEW YORK (Commodity Online): After the sub-prime catastrophe in banking and realty sector, which led to the global recession in 2008-09, it is the turn of bullion markets now.
‘FRAUD’, that is the one word which comes to any investor’s mind when s/he reads about the Commodity Futures Trading Commission (CFTC) hearing on manipulations in bullion market by gold cartels.
So, the small and clean investors have been short-changed by big cartels during the past many years, especially during the recent boom time in bullion markets. Otherwise, how will you explain the biggest boom in paper gold (Exchange Traded Funds, ETFs) in the recent past with hardly any gold available in the market.
In fact, there is no gold left in this world if all the Gold ETFs ask for physical delivery. And, if that happens only god knows what will be the gold prices in the coming months — $10000 per ounce? Maybe, even more. Because, price of a commodity which is not available at all can go up to any level due to the sheer fact that it is not there in the market.
Now read about the Commodity Futures Trading Commission (CFTC) hearing last week about a London whistle-blower who had explained to the CFTC how JP Morgan Chase has been manipulating/capping precious metal prices. In a shocking parallel to the inaction by the US Securities and Exchange Commission (SEC) after receiving warnings from Harry Markopolos about the Madoff ponzi, the CFTC has apparently been sitting on the information on gold cartels.
Did you visit the websites of GATA and CFTC this week? If you do, you can see a lot of articles and responses from investors who have been keenly watching the developments in bullion market.
The whistle-blower in this biggest gold fraud was Andrew Maguire, an experienced precious metal trader in London. In an riveting interview (which is available on the internet all over the world) with GATA director, Adrian Douglas, Maguire describes a new dynamic impacting gold. The fact is that, there is a huge short position in the market.
The CFTC hearing confirmed what GATA has been saying all along, that the gold market is being manipulated. And, how? The gold cartel has accumulated a huge short position and the huge short positions are ‘naked’, which means these positions are not hedged. There is 100-times more paper-gold outstanding than physical gold. You must be saying Oh, My God! Then wait, there is more to it.
Sub-prime crisis was peanuts before this scam. The bullion market is now slowly taking in the impact of these revelations. The result is, there will be no gold in the market. Because, if people ask for physical delivery of gold for their ETFs, who will give all the gold. THERE IS NO GOLD! And the price of gold can be $5,000 per ounce, $10,000 or may be even more. Who can predict the value of a commodity which is not there is the market?
To add fuel to fire The Wall Street Journal wrote: “The objective of this manipulation is to conceal the mismanagement of the US dollar so that it might retain its function as the world’s reserve currency. But to suppress the price of gold is to disable the barometer of the international financial system so that all markets may be more easily manipulated. This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world.”
So, the gold cartel now has a big target. It is inevitable that the big traders and hedge funds will push the naked shorts to the wall by asking for physical metal. If there is a squeeze on the naked shorts, the sky is the limit for precious metal prices.
There have been reports that over the past 10 years, the gold cartel has staged a controlled retreat. It has been fighting the advancing gold price with propaganda, paper short sales and the occasional dishoarding of physical metal from central bank vaults and more recently, the IMF. This retreat is about to turn into a rout, which means the upside potential for the precious metals is huge.
The CFTC hearing came about in part because of long-term complaints from organizations such as the Gold Anti-Trust Action Committee and individual analysts such as Ted Butler, Reg Howe, James Turk, Frank Veneroso and Adrian Douglas that the gold and silver commodity markets have been subject to blatant extensive price suppression manipulation by the US government and its trading partners.
In November 2009, Andrew Maguire, a former Goldman Sachs silver trader in that firm’s London office, had contacted the CFTC Enforcement Division to report the illegal manipulation of the silver market by traders at JPMorgan Chase. He described how the JPMorgan Chase silver traders bragged openly about their actions, including how they gave a signal to the market in advance so that other traders could make a profit during the price suppressions.
Maguire had a series of emails with Eliud Ramirez of the CFTC enforcement division explaining how the manipulations were tied to the Bureau of Labor Statistics monthly release of non-farm payroll figures and other recurring events.
In effect, the commissioners were told that almost all of the trading activities on the London exchange were merely settled by paper for paper, not for physical metals as the exchange supposedly requires. Further, the commissioners were told that it was impossible for the London exchange to ever deliver all the gold and silver owed to the owners of contracts.
After the hearing, GATA publicly released copies of Maguire’s e-mails with the CFTC.
http://www.commodityonline.com/news/Will-fraud-lift-gold-prices-to-$10-000-ounce-27107-3-1.html
The Scramble For Gold Is On: GLD Gold Holdings Hit A Fresh Record, Increase By 12 Tonnes Overnight
The total NAV in tonnes in GLD has just hit a fresh new all time high, climbing by 12.2 tonnes overnight, and closing at 1298.53. Gold holdings in the ETF have now increased by 30 tonnes over the past week, taking up all the weekly gold supply produced by miners on the planet. Also, as the charts below demonstrate, after being relatively flat, total gold tonnage in the GLD has increased at a dramatic pace over the past month, increasing by 10% of all assets, even as gold fixing has only increased by 4% during the same time period. It appears even non-physically backed gold ETFs are now scrambling to get all the gold (either real or imaginary) they can get their hands on.
Chart of GLD closing price and NAV:
Indexed chart of GLD closing price and NAV:
The gold standard was partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton Woods system broke down in 1971, causing most countries to switch to fiat money – money backed only by the laws of the country. Austrian economists strongly favor a return to a 100 percent gold standard.
Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.[54] Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining,[55][56] which some believe contributed to the Great Depression.[56][57][58]
Gold was a common form of money due to its rarity, durability, divisibility, fungibility, and ease of identification,[7] often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve.
It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.[13]
The gold standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver.
Representative money and the gold standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. That system eventually collapsed in 1971, at which time nearly all nations had switched to full fiat money.
According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery from the great depression. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.[14]
This is due to the Fractional-reserve banking system. As money is created by the central bank and spent into circulation, the money expands via the money multiplier. Each subsequent loan and redeposit results in an expansion of the monetary base. Therefore, the promised exchange rate would have to be constantly adjusted.
In an international gold-standard system (which is necessarily based on an internal gold standard in the countries concerned)[15] gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. Under the Bretton Woods system, these were called "SDRs" for Special Drawing Rights.[citation needed]
Gold prices (US$ per ounce) since 1968, in nominal US$ and inflation adjusted US$.
Both gold coins and gold bars are widely traded in liquid markets, and therefore still serve as a private store of wealth. Some privately issued currencies, such as digital gold currency, are backed by gold reserves.
In 1999, to protect the value of gold as a reserve, European Central Bankers signed the Washington Agreement on Gold, which stated that they would not allow gold leasing for speculative purposes, nor would they enter the market as sellers except for sales that had already been agreed upon.
A gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders (e.g., paper money), or trading peers, or to secure a currency.
Today, gold reserves are almost exclusively, albeit rarely, used in the settlement of international transactions.[citation needed]
At the end of 2004, central banks and investment funds held 19% of all above-ground gold as bank reserve assets.[1]
It has been estimated that all the gold mined by the end of 2009 totaled 165,000 tonnes.[2] At a price of US$1000/oz., exceeded in 2008 and 2009, one tonne of gold has a value of approx. US$32.15 million. The total value of all gold ever mined would exceed US$5 trillion at that valuation.[note 1]
The IMF maintains an internal book value of its gold that is far below market value. In 2000, this book value was SDR 35, or about US$47 per troy ounce.[8] An attempt to revalue the gold reserve to today's value has met resistance for different reasons. For example, Canada is against the idea of revaluing the reserve, as it may be a prelude to selling the gold on the open market and therefore depressing gold prices.[9]
Special Drawing Rights (SDR) are a sort of "quasi currency".[1] Referred to by the International Monetary Fund (IMF) as "international reserve assets",[2] SDRs are held by nations as foreign exchange reserves[1] and represent a claim to foreign currencies[3] for which they can be exchanged.[2] SDRs allow nations to increase their foreign exchange reserves without money being borrowed or lent.[3]
Although they are denominated in US dollars, each SDR has a value derived from a fixed amount of Japanese Yen, US Dollars, British Pounds and Euros.[3][2] The proportion each of these four currencies contribute to the value of a SDR is reevaluated every five years.[3][2]
Sweeping up the banknotes from the street after the Hungarian pengő was replaced in 1946
In the confidence model, some event, or series of events, such as defeats in battle, or a run on stocks of the specie which back a currency, removes the belief that the authority issuing the money will remain solvent — whether a bank or a government. Because people do not want to hold notes which may become valueless, they want to spend them in preference to holding notes which will lose value. Sellers, realizing that there is a higher risk for the currency, demand a greater and greater premium over the original value. Under this model, the method of ending hyperinflation is to change the backing of the currency — often by issuing a completely new one. War is one commonly cited cause of crisis of confidence, particularly losing in a war, as occurred during Napoleonic Vienna, and capital flight, sometimes because of "contagion" is another. In this view, the increase in the circulating medium is the result of the government attempting to buy time without coming to terms with the root cause of the lack of confidence itself.
Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply: add more zeros to the plates and print, or even stamp old notes with new numbers.[citation needed] Historically there have been numerous episodes of hyperinflation in various countries, followed by a return to "hard money". Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a "run" on the store of value.
Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. An example of the latter occurred in Bosnia-Herzegovina in 2005, when the central bank was only allowed to print as much money as it had in foreign currency reserves. Another example was the dollarization in Ecuador, initiated in September 2000 in response to a massive 75% loss of value of the Sucre currency in early January 2000. Dollarization is the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency.
The aftermath of hyperinflation is equally complex. As hyperinflation has always been a traumatic experience for the area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as was the case with the German Bundesbank, or moving to some hard basis of currency such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation but this does not prevent further inflating of the money supply by its central bank, and always leads to widespread shortages of consumer goods if the controls are rigidly enforced.
As it allows a government to devalue their spending and displace (or avoid) a tax increase, governments have sometimes resorted to excessively loose monetary policy to meet their expenses. Inflation is effectively a regressive consumption tax,[8] but less overt than levied taxes and therefore harder to understand by ordinary citizens. Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months or years later. Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from taxes, government debt, cost cutting, or by other means, because either
From this, it might be wondered why any rational government would engage in actions that cause or continue hyperinflation. One reason for such actions is that often the alternative to hyperinflation is either depression or military defeat. The root cause is a matter of more dispute. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seigniorage of the monetary authority, and the gains from the inflation tax. In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognized hard currency. This is a quantity theory of hyperinflation.[citation needed]
In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, that is the confidence that there is a store of value which the currency will be able to command later. In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds: governments need to do whatever is necessary to continue fighting, since the alternative is defeat. Expenses cannot be cut significantly since the main outlay is armaments. Further, a civil war may make it difficult to raise taxes or to collect existing taxes. While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question. The banking authorities, whether central or not, "monetize" the deficit, printing money to pay for the government's efforts to survive. The hyperinflation under the Chinese Nationalists from 1939-1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalayas, and then old currency was flown out to be destroyed.
Hyperinflation is regarded as a complex phenomenon and one explanation may not be applicable to all cases. However, in both of these models, whether loss of confidence comes first, or central bank seigniorage, the other phase is ignited. In the case of rapid expansion of the money supply, prices rise rapidly in response to the increased supply of money relative to the supply of goods and services, and in the case of loss of confidence, the monetary authority responds to the risk premiums it has to pay by "running the printing presses."
In the United States of America, hyperinflation was seen during the Revolutionary War and during the Civil War, especially on the Confederate side. Many other cases of extreme social conflict encouraging hyperinflation can be seen, as in Germany after World War I, Hungary at the end of World War II and in Yugoslavia in the late 1980s just before break up of the country.
Less commonly, inflation may occur when there is debasement of the coinage — wherein coins are consistently shaved of some of their silver and gold, increasing the circulating medium and reducing the value of the currency. The "shaved" specie is then often restruck into coins with lower weight of gold or silver. Historical examples include Ancient Rome, China during the Song Dynasty, and the United States beginning in 1933. When "token" coins begin circulating, it is possible for the minting authority to engage in fiat creation of currency.
During a period of hyperinflation, bank runs, loans for 24 hour periods, switching to alternate currencies, the return to use of gold or silver or even barter become common. Many of the people who hoard gold today expect hyperinflation, and are hedging against it by holding specie. There may also be extensive capital flight or flight to a "hard" currency such as the U.S. dollar. This is sometimes met with capital controls, an idea which has swung from standard, to anathema, and back into semi-respectability. All of this constitutes an economy which is operating in an "abnormal" way, which may lead to decreases in real production. If so, that intensifies the hyperinflation, since it means that the amount of goods in "too much money chasing too few goods" formulation is also reduced. This is also part of the vicious circle of hyperinflation.
Once the vicious circle of hyperinflation has been ignited, dramatic policy means are almost always required, simply raising interest rates is insufficient. Bolivia, for example, underwent a period of hyperinflation in 1985, where prices increased 12,000% in the space of less than a year. The government raised the price of gasoline, which it had been selling at a huge loss to quiet popular discontent, and the hyperinflation came to a halt almost immediately, since it was able to bring in hard currency by selling its oil abroad. The crisis of confidence ended, and people returned deposits to banks. The German hyperinflation (1919-Nov. 1923) was ended by producing a currency based on assets loaned against by banks, called the Rentenmark. Hyperinflation often ends when a civil conflict ends with one side winning. Although wage and price controls are sometimes used to control or prevent inflation, no episode of hyperinflation has been ended by the use of price controls alone. However, wage and price controls have sometimes been part of the mix of policies used to halt hyperinflation
Some banknotes were stamped to indicate changes of denomination. This is because it would take too long to print new notes. By time the new notes would be printed, they would be obsolete (that is, they would be of too low a denomination to be useful).
Metallic coins were rapid casualties of hyperinflation, as the scrap value of metal enormously exceeded the face value. Massive amounts of coinage were melted down, usually illicitly, and exported for hard currency.
Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:
http://en.wikipedia.org/wiki/Gold_standard
Chart of GLD closing price and NAV:
Indexed chart of GLD closing price and NAV:
So, what does this mean for investors?
A rising dollar means that commodities (mostly priced in dollars) are unlikely to rise soon. Part of that is the dollar price tag but another part is falling demand from the eurozone. Oil in particular can be quite sensitive on the downside to a strong US dollar.
With petroleum products like gasoline not rising (contrary to what normally happens during the US summer driving season) and European imports on sale, expect the mushy US retail numbers to improve through Labor Day at least. Consumers won’t necessarily spend just because gasoline prices are low but if there is a sale on as well, wallets should open. Therefore, we are not surprised to see VCR and XLY in the top rankings of the system.
Will GLD perform well? Not likely. Short term Treasuries and Gold are competing for the attention of the panic stricken investor. If we toss in near term US dollar strength, the balance tips from non-yielding gold to low yielding treasuries. Of course, all of these conditions are reversible so if one sees gold correct nicely in the coming months ($800-900), a sensible investment opportunity may present itself on the next upcycle.
Again, the inevitable collapse of this pathetic gold scheme, GLD, will be like 100 Lehmans in the calamity it will cause on the world markets.
when GLD gets busted, it will be loudest explosion since Krakatoa. When they bust GLD, I hope that they look at OUR (well, .gov's) gold.
A rising dollar means that commodities (mostly priced in dollars) are unlikely to rise soon. Part of that is the dollar price tag but another part is falling demand from the eurozone. Oil in particular can be quite sensitive on the downside to a strong US dollar.
With petroleum products like gasoline not rising (contrary to what normally happens during the US summer driving season) and European imports on sale, expect the mushy US retail numbers to improve through Labor Day at least. Consumers won’t necessarily spend just because gasoline prices are low but if there is a sale on as well, wallets should open. Therefore, we are not surprised to see VCR and XLY in the top rankings of the system.
Will GLD perform well? Not likely. Short term Treasuries and Gold are competing for the attention of the panic stricken investor. If we toss in near term US dollar strength, the balance tips from non-yielding gold to low yielding treasuries. Of course, all of these conditions are reversible so if one sees gold correct nicely in the coming months ($800-900), a sensible investment opportunity may present itself on the next upcycle.
Again, the inevitable collapse of this pathetic gold scheme, GLD, will be like 100 Lehmans in the calamity it will cause on the world markets.
when GLD gets busted, it will be loudest explosion since Krakatoa. When they bust GLD, I hope that they look at OUR (well, .gov's) gold.
There is no difference between owning GLD and shorting an ETF that tracks inverse gold performance. If people aren't concerned about the latter, then why all the concern over the former?
My point is that you are assuming that the counterparty is the vault, when in fact the counterparty is the entity sitting across the table. If you are concerned otoh that the counterpaty is naked and insolvent, and the cash value settlement mechanism itself will fall apart, well then I understand your concern.
But at that point, gold isn't going to do a damn thing for you. You will want to own lead.
The fact that a gold ETF has the initials JPM attached to it in any way, shape, or form should tell you all you need to know. They get their gold from the same place BB gets his money-thin air.
They "borrow" from the BOE who "hold" it for the Arabs who "think" the prestigious BOE would never lease what they don't own.
My point is that you are assuming that the counterparty is the vault, when in fact the counterparty is the entity sitting across the table. If you are concerned otoh that the counterpaty is naked and insolvent, and the cash value settlement mechanism itself will fall apart, well then I understand your concern.
But at that point, gold isn't going to do a damn thing for you. You will want to own lead.
The fact that a gold ETF has the initials JPM attached to it in any way, shape, or form should tell you all you need to know. They get their gold from the same place BB gets his money-thin air.
They "borrow" from the BOE who "hold" it for the Arabs who "think" the prestigious BOE would never lease what they don't own.
Try taking delivery on even a single COMEX contract then come back and tell us that these guys are able to get 30 TONS in a single week.
It's all double (or triple, or quintuple, or dodecatuple) enteries in JPM's books.
http://www.blogger.com/post-create.g?blogID=732117036333292949It's all double (or triple, or quintuple, or dodecatuple) enteries in JPM's books.
Gold standard
Main article: Gold standard
The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself has no innate value, but is accepted by traders because it can be redeemed for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver.
The gold standard was partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton Woods system broke down in 1971, causing most countries to switch to fiat money – money backed only by the laws of the country. Austrian economists strongly favor a return to a 100 percent gold standard.
Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.[54] Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining,[55][56] which some believe contributed to the Great Depression.[56][57][58]
Post-war international gold-dollar standard (1946–1971)
Main article: Bretton Woods system
After the Second World War, a system similar to a Gold Standard was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold. Under the regime of the French President Charles de Gaulle up to 1970, France reduced its dollar reserves, trading them for gold from the U.S. government, thereby reducing U.S. economic influence abroad. This, along with the fiscal strain of federal expenditures for the Vietnam War, led President Richard Nixon to end the direct convertibility of the dollar to gold in 1971, resulting in the system's breakdown, commonly known as the Nixon Shock.Theory
Commodity money is inconvenient to store and transport. It also does not allow the government to control or regulate the flow of commerce within their dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other specie were retained as its backing.Gold was a common form of money due to its rarity, durability, divisibility, fungibility, and ease of identification,[7] often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve.
It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.[13]
The gold standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver.
Representative money and the gold standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. That system eventually collapsed in 1971, at which time nearly all nations had switched to full fiat money.
According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery from the great depression. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.[14]
Differing definitions
A 100% reserve gold standard, or a full gold standard, exists when a monetary authority holds sufficient gold to convert all of the representative money it has issued into gold at the promised exchange rate. It is sometimes referred to as the gold specie standard to more easily identify it from other forms of the gold standard that have existed at various times. A 100% reserve standard is generally considered[by whom?] difficult to implement as the quantity of gold in the world is too small to sustain current worldwide economic activity at current gold prices. Its implementation would entail a many-fold increase in the price of gold. [citation needed]This is due to the Fractional-reserve banking system. As money is created by the central bank and spent into circulation, the money expands via the money multiplier. Each subsequent loan and redeposit results in an expansion of the monetary base. Therefore, the promised exchange rate would have to be constantly adjusted.
In an international gold-standard system (which is necessarily based on an internal gold standard in the countries concerned)[15] gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. Under the Bretton Woods system, these were called "SDRs" for Special Drawing Rights.[citation needed]
Advantages
The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. It may tend to reduce uncertainty in international trade by providing a fixed pattern of international exchange rates. Under the classical international gold standard, disturbances in price levels in one country would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism."Disadvantages
- A gold standard leads to deflation whenever an economy using the gold standard grows faster than the gold supply. When an economy grows faster than its money supply, the same money is used to execute a larger number of transactions. The only ways an economy can execute more transactions with the same amount of money are to execute transactions more quickly, and to lower the cost of the transactions. As deflation drives costs down, the value of each unit of money goes up. This increases the value of cash, but it decreases the value of assets, since the same asset can be purchased with less money. This in turn increases the ratio of debts to assets over time. For example, the monthly cost of a fixed-rate home mortgage stays the same, but the value of the house goes down, and the value of the dollars required to pay the mortgage goes up. In essence, deflation rewards cash savings.
- The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons.[16] Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2).[17] Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications.[18] For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce effectively raising the value of gold to $9 trillion. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary[19] whilst others who are not opposed to fractional reserve banking argue that only base currency and not deposits would need to be replaced.[citation needed] The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.[20]
- Many economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns.[21] Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.[22] Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s. Fed operatives simply failed to utilize them. In this case, a causal factor of the Great Depression was not the gold standard but rather a politically usurped monetary system.[23]
- Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease.[24][25] Some hold the view that this contributed to the severity and length of the Great Depression.[18][26]
- Some have contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard). For example, some believe the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after recklessly easy credit policies in the 1920s.[26]
- If a country wanted to devalue its currency it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.[27]
Gold as a reserve today
Main article: Gold reserves
The Swiss Franc was based on a full gold convertibility until 2000. However, gold reserves are held in significant quantity by many nations as a means of defending their currency, and hedging against the U.S. Dollar, which forms the bulk of liquid currency reserves. Weakness in the U.S. Dollar tends to be offset by strengthening of gold prices. Gold remains a principal financial asset of almost all central banks alongside foreign currencies and government bonds. It is also held by central banks as a way of hedging against loans to their own governments as an "internal reserve".Both gold coins and gold bars are widely traded in liquid markets, and therefore still serve as a private store of wealth. Some privately issued currencies, such as digital gold currency, are backed by gold reserves.
In 1999, to protect the value of gold as a reserve, European Central Bankers signed the Washington Agreement on Gold, which stated that they would not allow gold leasing for speculative purposes, nor would they enter the market as sellers except for sales that had already been agreed upon.
A gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders (e.g., paper money), or trading peers, or to secure a currency.
Today, gold reserves are almost exclusively, albeit rarely, used in the settlement of international transactions.[citation needed]
At the end of 2004, central banks and investment funds held 19% of all above-ground gold as bank reserve assets.[1]
It has been estimated that all the gold mined by the end of 2009 totaled 165,000 tonnes.[2] At a price of US$1000/oz., exceeded in 2008 and 2009, one tonne of gold has a value of approx. US$32.15 million. The total value of all gold ever mined would exceed US$5 trillion at that valuation.[note 1]
IMF gold holdings
As of June 2009, the International Monetary Fund held 3,217 tonnes (103.4 million oz.) of gold,[3][4] which had been constant for several years. In Fall 2009, the IMF announced that it will sell one eighth of its holdings, a maximum of 12,965,649 fine troy ounces (403.3 tonnes) based on a new income model agreed upon in April 2008, and subsequently announced the sale of 200 tonnes to India,[5] 10 tonnes to Sri Lanka[6], and 2 tonnes to the Bank of Mauritius.[7] These gold sales were conducted in stages at prevailing market prices.The IMF maintains an internal book value of its gold that is far below market value. In 2000, this book value was SDR 35, or about US$47 per troy ounce.[8] An attempt to revalue the gold reserve to today's value has met resistance for different reasons. For example, Canada is against the idea of revaluing the reserve, as it may be a prelude to selling the gold on the open market and therefore depressing gold prices.[9]
Special Drawing Rights
Special Drawing Rights (SDR) are a sort of "quasi currency".[1] Referred to by the International Monetary Fund (IMF) as "international reserve assets",[2] SDRs are held by nations as foreign exchange reserves[1] and represent a claim to foreign currencies[3] for which they can be exchanged.[2] SDRs allow nations to increase their foreign exchange reserves without money being borrowed or lent.[3]
Although they are denominated in US dollars, each SDR has a value derived from a fixed amount of Japanese Yen, US Dollars, British Pounds and Euros.[3][2] The proportion each of these four currencies contribute to the value of a SDR is reevaluated every five years.[3][2]
Potential pitfalls as a reserve currency
There are potential pitfalls of using the SDR as a reserve currency.- The current SDR is a relatively small basket of currencies, this is both a strong point and weak point of the SDR.
- The US Dollar, Euro and UK Pound are contained in the SDR—these currencies have been losing value against a larger basket of secondary reserve currencies since the late 2000s recession started in 2007.
- The SDR does not contain the Chinese Yuan, Indian Rupee, Australian Dollar, Swiss Franc or Canadian Dollar, which are important benchmark or secondary global reserve currencies.
- The lack of global banking support for consumers (that is to say private persons and businesses) for the SDR.
- The possible loss of national sovereignty of the nations involved.[18][19]
- The potential harm of further centralization of power over monetary policy. See inflation.[18][19]
- China & India's (Gold/Silver/Platinum/Palladium) Physical Reserves are not equivalent in size to those of the US with respect to SDR conversion.
- The Gulf States, that is to say the Petrodollar states, have (Gold/Silver/Platinum/Palladium) Reserves that are potentially undersized for the current recessionary conditions.
- Many other nations that could move over to the SDR have (Gold/Silver/Platinum/Palladium) Reserves that are too small for the size and importance of their economies.
Hyperinflation
In economics, hyperinflation is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value.
Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.In the confidence model, some event, or series of events, such as defeats in battle, or a run on stocks of the specie which back a currency, removes the belief that the authority issuing the money will remain solvent — whether a bank or a government. Because people do not want to hold notes which may become valueless, they want to spend them in preference to holding notes which will lose value. Sellers, realizing that there is a higher risk for the currency, demand a greater and greater premium over the original value. Under this model, the method of ending hyperinflation is to change the backing of the currency — often by issuing a completely new one. War is one commonly cited cause of crisis of confidence, particularly losing in a war, as occurred during Napoleonic Vienna, and capital flight, sometimes because of "contagion" is another. In this view, the increase in the circulating medium is the result of the government attempting to buy time without coming to terms with the root cause of the lack of confidence itself.
Root causes of hyperinflation
The main cause of hyperinflation is a massive and rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run. Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralizing their attempts to stimulate the economy.[7]
Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply: add more zeros to the plates and print, or even stamp old notes with new numbers.[citation needed] Historically there have been numerous episodes of hyperinflation in various countries, followed by a return to "hard money". Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a "run" on the store of value.
Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. An example of the latter occurred in Bosnia-Herzegovina in 2005, when the central bank was only allowed to print as much money as it had in foreign currency reserves. Another example was the dollarization in Ecuador, initiated in September 2000 in response to a massive 75% loss of value of the Sucre currency in early January 2000. Dollarization is the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency.
The aftermath of hyperinflation is equally complex. As hyperinflation has always been a traumatic experience for the area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as was the case with the German Bundesbank, or moving to some hard basis of currency such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation but this does not prevent further inflating of the money supply by its central bank, and always leads to widespread shortages of consumer goods if the controls are rigidly enforced.
As it allows a government to devalue their spending and displace (or avoid) a tax increase, governments have sometimes resorted to excessively loose monetary policy to meet their expenses. Inflation is effectively a regressive consumption tax,[8] but less overt than levied taxes and therefore harder to understand by ordinary citizens. Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months or years later. Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from taxes, government debt, cost cutting, or by other means, because either
- during the time between recording or levying taxable transactions and collecting the taxes due, the value of the taxes collected falls in real value to a small fraction of the original taxes receivable; or
- government debt issues fail to find buyers except at very deep discounts; or
- a combination of the above.
From this, it might be wondered why any rational government would engage in actions that cause or continue hyperinflation. One reason for such actions is that often the alternative to hyperinflation is either depression or military defeat. The root cause is a matter of more dispute. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seigniorage of the monetary authority, and the gains from the inflation tax. In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognized hard currency. This is a quantity theory of hyperinflation.[citation needed]
In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, that is the confidence that there is a store of value which the currency will be able to command later. In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds: governments need to do whatever is necessary to continue fighting, since the alternative is defeat. Expenses cannot be cut significantly since the main outlay is armaments. Further, a civil war may make it difficult to raise taxes or to collect existing taxes. While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question. The banking authorities, whether central or not, "monetize" the deficit, printing money to pay for the government's efforts to survive. The hyperinflation under the Chinese Nationalists from 1939-1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalayas, and then old currency was flown out to be destroyed.
Hyperinflation is regarded as a complex phenomenon and one explanation may not be applicable to all cases. However, in both of these models, whether loss of confidence comes first, or central bank seigniorage, the other phase is ignited. In the case of rapid expansion of the money supply, prices rise rapidly in response to the increased supply of money relative to the supply of goods and services, and in the case of loss of confidence, the monetary authority responds to the risk premiums it has to pay by "running the printing presses."
In the United States of America, hyperinflation was seen during the Revolutionary War and during the Civil War, especially on the Confederate side. Many other cases of extreme social conflict encouraging hyperinflation can be seen, as in Germany after World War I, Hungary at the end of World War II and in Yugoslavia in the late 1980s just before break up of the country.
Less commonly, inflation may occur when there is debasement of the coinage — wherein coins are consistently shaved of some of their silver and gold, increasing the circulating medium and reducing the value of the currency. The "shaved" specie is then often restruck into coins with lower weight of gold or silver. Historical examples include Ancient Rome, China during the Song Dynasty, and the United States beginning in 1933. When "token" coins begin circulating, it is possible for the minting authority to engage in fiat creation of currency.
During a period of hyperinflation, bank runs, loans for 24 hour periods, switching to alternate currencies, the return to use of gold or silver or even barter become common. Many of the people who hoard gold today expect hyperinflation, and are hedging against it by holding specie. There may also be extensive capital flight or flight to a "hard" currency such as the U.S. dollar. This is sometimes met with capital controls, an idea which has swung from standard, to anathema, and back into semi-respectability. All of this constitutes an economy which is operating in an "abnormal" way, which may lead to decreases in real production. If so, that intensifies the hyperinflation, since it means that the amount of goods in "too much money chasing too few goods" formulation is also reduced. This is also part of the vicious circle of hyperinflation.
Once the vicious circle of hyperinflation has been ignited, dramatic policy means are almost always required, simply raising interest rates is insufficient. Bolivia, for example, underwent a period of hyperinflation in 1985, where prices increased 12,000% in the space of less than a year. The government raised the price of gasoline, which it had been selling at a huge loss to quiet popular discontent, and the hyperinflation came to a halt almost immediately, since it was able to bring in hard currency by selling its oil abroad. The crisis of confidence ended, and people returned deposits to banks. The German hyperinflation (1919-Nov. 1923) was ended by producing a currency based on assets loaned against by banks, called the Rentenmark. Hyperinflation often ends when a civil conflict ends with one side winning. Although wage and price controls are sometimes used to control or prevent inflation, no episode of hyperinflation has been ended by the use of price controls alone. However, wage and price controls have sometimes been part of the mix of policies used to halt hyperinflation
Hyperinflation and the currency
As noted, in countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more.- By late 1923, the Weimar Republic of Germany was issuing two-trillion Mark banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 billion on the long scale).[9][10]. At the height of the inflation one U.S. dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28×1019, or 33 quintillion) Marks.[11]
- The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or 1020; 100 trillion on the long scale). image (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The banknotes however did not depict the numbers, "hundred million b.-pengő" ("hundred million billion pengő") and "one milliard b.-pengő" were spelled out instead. This makes the 100,000,000,000,000 Zimbabwean dollar banknotes the notes with the greatest number of zeros shown.
- The Post-WWII hyperinflation of Hungary held the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016%) for July, 1946, amounting to prices doubling every thirteen and half hours. By comparison, recent figures (as of 14 November 2008) estimate Zimbabwe's annual inflation rate at 89.7 sextillion (1021) percent.[12], which corresponds to a monthly rate of 5473%, and a doubling time of about five days.
Some banknotes were stamped to indicate changes of denomination. This is because it would take too long to print new notes. By time the new notes would be printed, they would be obsolete (that is, they would be of too low a denomination to be useful).
Metallic coins were rapid casualties of hyperinflation, as the scrap value of metal enormously exceeded the face value. Massive amounts of coinage were melted down, usually illicitly, and exported for hard currency.
Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:
- Outright lying in official statistics such as money supply, inflation or reserves.
- Suppression of publication of money supply statistics, or inflation indices.
- Price and wage controls.
- Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or something similar.
- Adjusting the components of the Consumer price index, to remove those items whose prices are rising the fastest.
http://en.wikipedia.org/wiki/Gold_standard
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