The Case for a Gold Standard
Foreign Confidential....While Russian officials weigh introduction of a gold-backed ruble, as reported here, an American economist, Walker Todd, makes a convincing case for bringing back the gold standard. A consultant with 20 years' experience at the Federal Reserve Banks of New York and Cleveland, Todd is a research fellow and conference organizer for the U.S.-based American Institute for Economic Research.
He writes:
Too much credit and easy money. Those were the biggest culprits behind this financial crisis. Yet, apallingly, the government's rescue attempt is built on more credit and even easier money. That's like giving a procrastinator a deadline extension. By choosing this course, Washington has steered us on to the "road to Weimar" – the road to runaway inflation.
It didn't have to come to this. And it still doesn't. But the proper remedy will take tremendous political courage: Bring back the gold standard. That, more than any byzantine regulations that emerge from the Bretton Woods II conference this weekend, would provide stability and safety for nations and individuals around the world.
Sadly, current policy seems to reflect a desire to weaken the dollar as quickly as possible.
The Federal Reserve's own data tells the story. The headline is the doubling of Federal Reserve credit, the main component of the US monetary base. Since Labor Day 2008, it's risen from $894 billion to $2.2 trillion.
That's the greatest monetary expansion in the Fed's 95-year history. How the Fed is doing it matters almost as much. It has nearly abandoned its traditional instrument for monetary policy, open-market operations, which involves the purchasing and selling of full-faith-and-credit US Treasury securities. With increasing frequency and amounts, it has relied primarily on "discount window operations" – lending to specific institutions for specific purposes instead of general injections of funds into an open market – since August 2007. This shift may weaken its ability to "tighten" monetary conditions should inflation reach dangerous levels.
A gold standard offers exactly the kind of discipline that's missing from the Fed. But its impact would be wider: Both in substance and in symbolism, gold provides integrity to the entire global financial system. Governments, however, have historically bridled at the constraint and accountability a gold standard brings. After all, when currency can be exchanged for gold, it's harder for governments to inflate the money supply, which they're tempted to do in order to spend beyond their means or cheat on their debts.
Click here to continue reading Todd's essay in The Christian Science Monitor.
Another View
Reuters correspondent Frank Tang reports a return to a gold standard is unlikely because of fear of a panic, among other reasons.
The gold standard, a monetary system of fixed exchange rates in terms of gold, had been the cornerstone of Bretton Woods, which created the International Monetary Fund and the World Bank, until President Richard Nixon took the U.S. dollar off the standard in 1971.
Bullion, seen as a safe haven in market turmoil, has staged a $50 per ounce rally from Thursday's intraday low, as funds bought heavily ahead of this weekend's meeting, which includes leaders of the Group of 20 advanced and emerging economies.
"I think the anticipation of something from the G20 meeting is helping gold," said George Gero, vice president of RBC Capital Markets Global Futures.
World leaders, including British Prime Minister Gordon Brown and French President Nicolas Sarkozy, have recently vowed to change the international monetary system created at the Bretton Woods, New Hampshire conference in 1944, which helped draw up the post-war financial order.
Shaken investor confidence amid a bear stock market and the prospect of a protracted global recession have prompted some corners to call for a return to the gold standard.
The standard had been in place with minor modifications since Bretton Woods fixed the conversion rate for one troy ounce of gold at $35.
However, fund managers and commodity analysts said that the G20 meeting would not result in any agreement that resembles a new Bretton Woods agreement or the gold standard.
"That's basically a 19th century device that was repackaged in Bretton Woods, where the dollar was linked to a physical gold price," said James Steel, chief commodity analyst at HSBC.
"I don't think that's happening at all because the gold market is far too small to be able to play any role in that dimension. That is not to say, though, gold won't reflect changes in the economy and currency value," Steel said.
But it seems that central bankers and governments around the world have already put a stop on a comeback of the gold standard as they prefer monetary policies without being restrained by gold reserves.
In August, then presidential candidate Barack Obama said he did not think a return to the gold standard was a good idea and noted that the U.S. currency was strong in the 1990s, even though there was no gold standard.
Obama was speaking in response to a question about if he thought the country should return to the gold standard, given that the weak dollar is exacerbating the rise in oil prices.
"I don't think they want to do that. I think that would panic the world," said COMEX gold options floor trader Jonathan Jossen.
Jossen said that gold could receive a boost if news out of the G20 meeting would stem the dollar's resurgence.
"Everybody wants the dollar to be weakened. A lot of people think the dollar has moved way too fast," Jossen said.
Caesar Bryan, portfolio manager of the GAMCO Gold Fund, said that funds have bought gold to position for possible favorable outcomes from the G20 meeting.
"There has been some talk about the Far Eastern countries increasing their gold holding. We have that speculation from time to time," said Bryan, who manages $280 million in mutual fund assets.
Bryan, however, said that he did not expect any substantial agreement from the G20 meeting that was only prepared in weeks and without the participation of the U.S. president-elect.
"I have been positive on gold because of the extraordinary measures that central banks have been taking. I would expect gold to do better without any G20 meeting," Bryan said.
Yet Another View of Gold
Brian Bloom, a venture capitalist-turned-novelist, believes humanity has just begun to scratch the surface in terms of understanding gold's true value. Click below.
# posted by Confidential Reporter @ 10:42 AM 
Iran Converting Cash Reserves to Gold
Foreign Confidential....Iranian newspapers are quoting Mojtaba Hashemi Samareh, a top advisor to President Mahmoud Ahmadinejad, as saying the country has converted its financial reserves into gold.
The papers did not specify how much of Iran's estimated $120 billion in reserves would actually be converted into gold.
The daily Jahan-e-Eghtesad, or Economy World, quoted Samareh on Saturday as saying the decision to buy gold was carried out on Ahmadinejad's order.
The decision comes after a dramatic fall in oil prices. About 80 percent of Iran's foreign revenue comes from oil exports.
Reuters reports:
Before oil prices plunged by more than 60 percent from a peak of $147 per barrel in July, Iran made windfall gains from its crude exports and in April estimated its foreign exchange reserves at about $80 billion.
Iranian officials in July denied reports Iranian banks were moving funds from Europe, with one report suggesting as much as $75 billion had been withdrawn and converted into gold or placed in Asian banks, because of a threat of tightening sanctions.
The International Monetary Fund said in August that if the price of Iranian crude fell to $75 a barrel, Iran would face a current account deficit in the medium term that would be tough to sustain due to Tehran's financial isolation.
On Friday, U.S. crude fell $1.20 at $57.04.
Gold futures ended more than 5 percent higher on Friday and bullion ended the week about $10 higher compared with its last Friday's close of $735.95 as investors covered short positions.
# posted by Confidential Reporter @ 10:17 AM
Gold Market Manipulation Exposed
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
New Orleans Marriott Hotel
Thursday, November 13, 2008
A year ago it was still a struggle to persuade some people that the gold and silver markets were being manipulated by Western central banks. Now, after months of financial turmoil around the world and constant central bank intervention in the markets, to believe that the gold and silver markets are not being manipulated by central banks you have to believe that those markets are the only markets not being so manipulated.
Why are the gold and silver markets manipulated by governments and the financial houses that serve as their agents? Because gold and silver are competitive currencies and because their value greatly influences interest rates, which ordinarily governments like to keep low.
Last year at this conference I reviewed in detail the official documentations and admissions of the gold price suppression scheme. Those documentations and admissions remain posted at GATA's Internet site. Today I'd like to review some evidence that has turned up more recently, as well as some related developments.
Maybe most interesting have been the studies of the U.S. Commodity Futures Trading Commission market reports done by silver market analyst Ted Butler and by Gene Arensberg, a market analyst for ResourceInvestor.com. Butler and Arensberg reported that as of August just two banks held more than 60 percent of the short positions in silver on the New York Commodities Exchange. This was an unprecedented and seemingly illegal concentrated short position, and it implied that the smashing down of silver was very much a manipulation by one or two very rich and powerful market participants, a destruction of the free market. Complaints about this concentrated short position prompted the CFTC to undertake still another investigation of the silver market, this time by a different division of the commission, its enforcement division. Further, CFTC Commissioner Bart Chilton has told GATA that the agency is investigating the gold market as well.
This week Arensberg found that the CFTC's latest report shows that just three or fewer banks now hold half the short positions in gold on the Comex and more than 80 percent of the silver short positions.
Also this week Butler obtained a copy of a letter from the CFTC to U.S. Rep. Gary G. Miller, R-California, that sought to explain the concentrated short position in silver. The CFTC's letter implied that this extreme short position resulted from JPMorganChase's acquisition of Bear Stearns in March. If we construe the CFTC's letter correctly, that would make MorganChase the big short in silver now and imply that, in financially underwriting MorganChase's acquisition of Bear Stearns, the Federal Reserve was also underwriting MorganChase's assumption of that short position in silver.
Of course MorganChase was also the bullion banker to Barrick Gold, the biggest gold shorter over the last decade. In 2003 Barrick told U.S. District Court Judge Helen Berrigan right here in New Orleans that, in shorting gold, Barrick had become the agent of the central banks in regulating the gold market and thus should share their sovereign immunity against lawsuits.
MorganChase is also the world's biggest issuer of interest-rate derivatives, instruments by which interest rates are suppressed.
All this causes GATA to believe that MorganChase is in effect an agency of the U.S. government, or rather, perhaps, that the U.S. government is an agency of MorganChase. In any case, MorganChase has had an intimate relationship with the U.S. government since the days of J. Pierpont Morgan himself.
Incidentally, Jean Strouse's 1999 biography of Morgan, which won the Bancroft Prize for American History and Diplomacy, recounts that Morgan's first big triumph in finance was to corner the gold market in New York in 1863 during the Civil War. Nearly 150 years later there really may be nothing new under the sun.
Also lately raising suspicion about surreptitious government intervention in the precious metals markets has been the refusal of the Federal Reserve and the Treasury Department to release to GATA hundreds of pages of government documents about the disposition of the U.S. gold reserve. The Fed has told GATA's lawyers that the documents are being withheld in part because their release might compromise information that is proprietary to private companies. Why anything about the U.S. gold reserve should be considered proprietary to anyone is beyond those of us at GATA -- unless, of course, the reserve is being used to manipulate markets surreptitiously.
But we at GATA do not feel picked on by the Fed and the Treasury. For the Fed and the Treasury seem to be treating everybody as if the disposition of public assets is nobody's business but Wall Street's. This week Bloomberg News Service reported that the Federal Reserve is refusing to disclose how much it has lent to particular banks and exactly what sort of collateral the Fed has accepted for those loans, which have reached hundreds of billions of dollars. For example, is the Fed valuing the same kind of collateral from different borrowers the same way, and lending against it at the same rate? Or is the Fed giving advantages to certain borrowers and not others, depending on their political influence and straitened circumstances? That is, are the Fed and the Treasury Department now being operated as the greatest patronage and market-rigging schemes in history? The government is concealing the evidence.
Since we last gathered here in New Orleans many of us been cowering under the prospect of more official-sector gold sales, particularly gold sales by the International Monetary Fund, which has approved a plan of selling gold to raise cash to replace the income it is no longer getting from interest on loans to developing countries. But despite more than a year of loud talk about it, the IMF has not sold any gold yet, and GATA suspects that the IMF really does not have the 3,200 tonnes it says it has, only a tenuous claim on the gold reserves of its member nations, particularly the United States, which has a veto on any IMF gold sales and has not approved any yet.
Back in April I tried to engage the IMF in a dialogue about its gold and I had an exchange by e-mail with an IMF publicist, Conny Lotze.
My first question was: "Your Internet site says the IMF holds 3,217 metric tons of gold 'at designated depositories.' Which depositories are these?"
Conny Lotze of the IMF replied, but not specifically. She wrote: "The fund's gold is distributed across a number of official depositories," adding that the IMF's rules designate the United States, Britain, France, and India as depositories.
My second question was: "If you'd prefer not to identify the depositories for security reasons, could you at least identify the national and private custodians of the IMF's gold and the amounts of IMF gold held by each?"
Conny Lotze replied, again incompletely: "All of the designated depositories are official."
My third question was: "Is the IMF's gold at these depositories allocated -- that is, specifically identified as belonging to the IMF -- or is it merged with other gold in storage at these depositories?"
Conny Lotze replied, still not very specifically: "The fund's gold is properly accounted for at all its depositories."
My fourth question was: "Do the IMF's member countries count the IMF's gold as part of their own national reserves, or do they count and identify the IMF's gold separately?"
Conny Lotze replied a bit ambiguously: "Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund [the IMF] in their international reserves."
This sounded to me as if the IMF members are still counting as their own the gold that supposedly belongs to the IMF -- that the IMF members are just listing the gold assets in another column on their own books.
My fifth question was: "Does the IMF have assurances from the depositories that its gold is not leased or swapped or otherwise encumbered? If so, what are these assurances?"
Conny Lotze replied: "Under the fund's Articles of Agreement it is not authorized to engage in these transactions in gold."
But I had not asked if the IMF itself was swapping or leasing gold. I had asked whether the custodians of the IMF's gold were swapping or leasing it.
This prompted me to raise one more question for Conny Lotze. I wrote her: "Is there any audit of the IMF's gold that is available to the public? I ask because, if the amount of IMF gold held by each depository nation is not public information, there doesn't seem to be much documentation for the IMF's gold, nor any documentation for the assurance that its custody is just fine. Without any details or documentation, the IMF's answer seems to be simply that it should be trusted -- that it has the gold it says it has, somewhere."
And Conny Lotze ... well, she never wrote back to me again. After all, I had uttered the dirtiest word in government service: A-U-D-I-T.
That the International Monetary Fund refuses to account for the gold it claims to have should be potential news for the financial media. It would be nice if the financial media pursued that issue before their next attempt to scare the gold market with stories about IMF gold sales.
But even if such sales by the IMF should be undertaken, they might not be much for gold investors to worry about. For a month ago I happened to attend in New York City the annual fall dinner of the Committee for Monetary Research and Education, and it had an unscheduled speaker, Columbia University Professor Robert Mundell, who, as you may recall, won the Nobel Prize in economics in 1999 and is regarded as the father of the euro. Through great luck I got to sit next to Mundell on the platform and so heard him clearly as he went out of his way to join the discussion of my topic, gold. Mundell remarked that if the IMF sold any gold, China should buy all of it to diversify its foreign exchange reserves. Since Mundell is a consultant to the Chinese government, the Chinese government surely heard this advice from him long before the CMRE meeting did.
You can do a lot of market rigging when you can print legal tender to infinity, pass out huge amounts of it to your friends, and induce them to use derivatives to siphon speculative demand for real stuff away from actual possession of that real stuff. But in the end printing legal tender and contriving promises to deliver real stuff don't produce real stuff. With infinite legal tender and derivatives you can push the futures price of a commodity below its production costs and below its free-market price for a while, but you risk causing shortages. And of course that's what we have in gold and silver right now -- falling prices for the paper promises of metal even as little real metal is to be had and the spread between the futures price and the real price grows. Last night a GATA supporter in Bangkok, Thailand, who long has been in the silver business e-mailed me that real silver there is prices at $18 per ounce for orders of 1 kilo or more and $23 per ounce for smaller orders. Our friend in Bangkok added that when he shows silver dealers there the New York silver futures price on the Internet, they laugh at him. Shortages can have various causes but generally they are their own cure. When shortages persist, they well may result from government intervention in markets.
Of course prices always have been determined to a great extent by the volume and velocity of money and credit, and so the creation of money and credit is, all by itself, inevitably an intervention into markets. But lately money and credit have been disappearing and reappearing in a flash in the billions and trillions. How can so much come and go so quickly? Maybe because what passes for money and credit today is a bit too ephemeral, having little connection to reality and a lot of connection to politics.
That is why market advice today is more doubtful than ever: Markets have become more politicized than ever. Supply and demand and profitability are no longer the primary determinants of markets. No, the primary determinant of markets is now politics: Which countries will cut interest rates the most? Which countries will subsidize their banks and corporations the most? Which countries will get IMF and World Bank loans? Which countries will be given unlimited currency swap lines and which won't? Which companies will get bailed out and which won't? How much more dishoarding of gold will central banks do to keep the price down, and which central banks? When will central banks run out of gold or decide to stop spending it this way? Most importantly, when will the world decide to stop financing the wild irresponsibility of the United States by lending the U.S. money that can never be repaid?
These are all political questions, and only political decisions will answer them. Some of these questions may be answered as soon as this weekend at the international conference in Washington. Answers to some of the other questions probably will be conveyed in advance to certain insiders -- like the financial houses that serve as the market agents of the central banks -- and those insiders will get richer. As good as this conference is, you will not be hearing from any of those insiders here.
But we may gain some confidence from politics too, since we know that governments are no longer shy about intervening in the markets and since central banking was invented precisely to inflate, to avert debt deflation, to devalue the currency when that is deemed necessary or convenient by those in power -- which is most of the time. We know that the world is now drowning in debt, and in a research paper published in May 2006 a British economist, Peter W. Millar -- founder of Valu-Trac Research in London, formerly an executive with the Abu Dhabi Investment Authority -- forecast that to avert debt deflation and to increase the value of their monetary reserves, central banks would need to increase the value of gold by at least 700 percent and maybe by as much as 2,000 percent. This could be done easily, for to increase the value of their monetary reserves central banks need only to stop selling and leasing gold and to stop subsidizing the sale of gold derivatives by their agents, the financial houses. Revalued high enough, gold could cover all government debts and let the world start over again.
Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
New Orleans Marriott Hotel
Thursday, November 13, 2008
A year ago it was still a struggle to persuade some people that the gold and silver markets were being manipulated by Western central banks. Now, after months of financial turmoil around the world and constant central bank intervention in the markets, to believe that the gold and silver markets are not being manipulated by central banks you have to believe that those markets are the only markets not being so manipulated.
Why are the gold and silver markets manipulated by governments and the financial houses that serve as their agents? Because gold and silver are competitive currencies and because their value greatly influences interest rates, which ordinarily governments like to keep low.
Last year at this conference I reviewed in detail the official documentations and admissions of the gold price suppression scheme. Those documentations and admissions remain posted at GATA's Internet site. Today I'd like to review some evidence that has turned up more recently, as well as some related developments.
Maybe most interesting have been the studies of the U.S. Commodity Futures Trading Commission market reports done by silver market analyst Ted Butler and by Gene Arensberg, a market analyst for ResourceInvestor.com. Butler and Arensberg reported that as of August just two banks held more than 60 percent of the short positions in silver on the New York Commodities Exchange. This was an unprecedented and seemingly illegal concentrated short position, and it implied that the smashing down of silver was very much a manipulation by one or two very rich and powerful market participants, a destruction of the free market. Complaints about this concentrated short position prompted the CFTC to undertake still another investigation of the silver market, this time by a different division of the commission, its enforcement division. Further, CFTC Commissioner Bart Chilton has told GATA that the agency is investigating the gold market as well.
This week Arensberg found that the CFTC's latest report shows that just three or fewer banks now hold half the short positions in gold on the Comex and more than 80 percent of the silver short positions.
Also this week Butler obtained a copy of a letter from the CFTC to U.S. Rep. Gary G. Miller, R-California, that sought to explain the concentrated short position in silver. The CFTC's letter implied that this extreme short position resulted from JPMorganChase's acquisition of Bear Stearns in March. If we construe the CFTC's letter correctly, that would make MorganChase the big short in silver now and imply that, in financially underwriting MorganChase's acquisition of Bear Stearns, the Federal Reserve was also underwriting MorganChase's assumption of that short position in silver.
Of course MorganChase was also the bullion banker to Barrick Gold, the biggest gold shorter over the last decade. In 2003 Barrick told U.S. District Court Judge Helen Berrigan right here in New Orleans that, in shorting gold, Barrick had become the agent of the central banks in regulating the gold market and thus should share their sovereign immunity against lawsuits.
MorganChase is also the world's biggest issuer of interest-rate derivatives, instruments by which interest rates are suppressed.
All this causes GATA to believe that MorganChase is in effect an agency of the U.S. government, or rather, perhaps, that the U.S. government is an agency of MorganChase. In any case, MorganChase has had an intimate relationship with the U.S. government since the days of J. Pierpont Morgan himself.
Incidentally, Jean Strouse's 1999 biography of Morgan, which won the Bancroft Prize for American History and Diplomacy, recounts that Morgan's first big triumph in finance was to corner the gold market in New York in 1863 during the Civil War. Nearly 150 years later there really may be nothing new under the sun.
Also lately raising suspicion about surreptitious government intervention in the precious metals markets has been the refusal of the Federal Reserve and the Treasury Department to release to GATA hundreds of pages of government documents about the disposition of the U.S. gold reserve. The Fed has told GATA's lawyers that the documents are being withheld in part because their release might compromise information that is proprietary to private companies. Why anything about the U.S. gold reserve should be considered proprietary to anyone is beyond those of us at GATA -- unless, of course, the reserve is being used to manipulate markets surreptitiously.
But we at GATA do not feel picked on by the Fed and the Treasury. For the Fed and the Treasury seem to be treating everybody as if the disposition of public assets is nobody's business but Wall Street's. This week Bloomberg News Service reported that the Federal Reserve is refusing to disclose how much it has lent to particular banks and exactly what sort of collateral the Fed has accepted for those loans, which have reached hundreds of billions of dollars. For example, is the Fed valuing the same kind of collateral from different borrowers the same way, and lending against it at the same rate? Or is the Fed giving advantages to certain borrowers and not others, depending on their political influence and straitened circumstances? That is, are the Fed and the Treasury Department now being operated as the greatest patronage and market-rigging schemes in history? The government is concealing the evidence.
Since we last gathered here in New Orleans many of us been cowering under the prospect of more official-sector gold sales, particularly gold sales by the International Monetary Fund, which has approved a plan of selling gold to raise cash to replace the income it is no longer getting from interest on loans to developing countries. But despite more than a year of loud talk about it, the IMF has not sold any gold yet, and GATA suspects that the IMF really does not have the 3,200 tonnes it says it has, only a tenuous claim on the gold reserves of its member nations, particularly the United States, which has a veto on any IMF gold sales and has not approved any yet.
Back in April I tried to engage the IMF in a dialogue about its gold and I had an exchange by e-mail with an IMF publicist, Conny Lotze.
My first question was: "Your Internet site says the IMF holds 3,217 metric tons of gold 'at designated depositories.' Which depositories are these?"
Conny Lotze of the IMF replied, but not specifically. She wrote: "The fund's gold is distributed across a number of official depositories," adding that the IMF's rules designate the United States, Britain, France, and India as depositories.
My second question was: "If you'd prefer not to identify the depositories for security reasons, could you at least identify the national and private custodians of the IMF's gold and the amounts of IMF gold held by each?"
Conny Lotze replied, again incompletely: "All of the designated depositories are official."
My third question was: "Is the IMF's gold at these depositories allocated -- that is, specifically identified as belonging to the IMF -- or is it merged with other gold in storage at these depositories?"
Conny Lotze replied, still not very specifically: "The fund's gold is properly accounted for at all its depositories."
My fourth question was: "Do the IMF's member countries count the IMF's gold as part of their own national reserves, or do they count and identify the IMF's gold separately?"
Conny Lotze replied a bit ambiguously: "Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund [the IMF] in their international reserves."
This sounded to me as if the IMF members are still counting as their own the gold that supposedly belongs to the IMF -- that the IMF members are just listing the gold assets in another column on their own books.
My fifth question was: "Does the IMF have assurances from the depositories that its gold is not leased or swapped or otherwise encumbered? If so, what are these assurances?"
Conny Lotze replied: "Under the fund's Articles of Agreement it is not authorized to engage in these transactions in gold."
But I had not asked if the IMF itself was swapping or leasing gold. I had asked whether the custodians of the IMF's gold were swapping or leasing it.
This prompted me to raise one more question for Conny Lotze. I wrote her: "Is there any audit of the IMF's gold that is available to the public? I ask because, if the amount of IMF gold held by each depository nation is not public information, there doesn't seem to be much documentation for the IMF's gold, nor any documentation for the assurance that its custody is just fine. Without any details or documentation, the IMF's answer seems to be simply that it should be trusted -- that it has the gold it says it has, somewhere."
And Conny Lotze ... well, she never wrote back to me again. After all, I had uttered the dirtiest word in government service: A-U-D-I-T.
That the International Monetary Fund refuses to account for the gold it claims to have should be potential news for the financial media. It would be nice if the financial media pursued that issue before their next attempt to scare the gold market with stories about IMF gold sales.
But even if such sales by the IMF should be undertaken, they might not be much for gold investors to worry about. For a month ago I happened to attend in New York City the annual fall dinner of the Committee for Monetary Research and Education, and it had an unscheduled speaker, Columbia University Professor Robert Mundell, who, as you may recall, won the Nobel Prize in economics in 1999 and is regarded as the father of the euro. Through great luck I got to sit next to Mundell on the platform and so heard him clearly as he went out of his way to join the discussion of my topic, gold. Mundell remarked that if the IMF sold any gold, China should buy all of it to diversify its foreign exchange reserves. Since Mundell is a consultant to the Chinese government, the Chinese government surely heard this advice from him long before the CMRE meeting did.
You can do a lot of market rigging when you can print legal tender to infinity, pass out huge amounts of it to your friends, and induce them to use derivatives to siphon speculative demand for real stuff away from actual possession of that real stuff. But in the end printing legal tender and contriving promises to deliver real stuff don't produce real stuff. With infinite legal tender and derivatives you can push the futures price of a commodity below its production costs and below its free-market price for a while, but you risk causing shortages. And of course that's what we have in gold and silver right now -- falling prices for the paper promises of metal even as little real metal is to be had and the spread between the futures price and the real price grows. Last night a GATA supporter in Bangkok, Thailand, who long has been in the silver business e-mailed me that real silver there is prices at $18 per ounce for orders of 1 kilo or more and $23 per ounce for smaller orders. Our friend in Bangkok added that when he shows silver dealers there the New York silver futures price on the Internet, they laugh at him. Shortages can have various causes but generally they are their own cure. When shortages persist, they well may result from government intervention in markets.
Of course prices always have been determined to a great extent by the volume and velocity of money and credit, and so the creation of money and credit is, all by itself, inevitably an intervention into markets. But lately money and credit have been disappearing and reappearing in a flash in the billions and trillions. How can so much come and go so quickly? Maybe because what passes for money and credit today is a bit too ephemeral, having little connection to reality and a lot of connection to politics.
That is why market advice today is more doubtful than ever: Markets have become more politicized than ever. Supply and demand and profitability are no longer the primary determinants of markets. No, the primary determinant of markets is now politics: Which countries will cut interest rates the most? Which countries will subsidize their banks and corporations the most? Which countries will get IMF and World Bank loans? Which countries will be given unlimited currency swap lines and which won't? Which companies will get bailed out and which won't? How much more dishoarding of gold will central banks do to keep the price down, and which central banks? When will central banks run out of gold or decide to stop spending it this way? Most importantly, when will the world decide to stop financing the wild irresponsibility of the United States by lending the U.S. money that can never be repaid?
These are all political questions, and only political decisions will answer them. Some of these questions may be answered as soon as this weekend at the international conference in Washington. Answers to some of the other questions probably will be conveyed in advance to certain insiders -- like the financial houses that serve as the market agents of the central banks -- and those insiders will get richer. As good as this conference is, you will not be hearing from any of those insiders here.
But we may gain some confidence from politics too, since we know that governments are no longer shy about intervening in the markets and since central banking was invented precisely to inflate, to avert debt deflation, to devalue the currency when that is deemed necessary or convenient by those in power -- which is most of the time. We know that the world is now drowning in debt, and in a research paper published in May 2006 a British economist, Peter W. Millar -- founder of Valu-Trac Research in London, formerly an executive with the Abu Dhabi Investment Authority -- forecast that to avert debt deflation and to increase the value of their monetary reserves, central banks would need to increase the value of gold by at least 700 percent and maybe by as much as 2,000 percent. This could be done easily, for to increase the value of their monetary reserves central banks need only to stop selling and leasing gold and to stop subsidizing the sale of gold derivatives by their agents, the financial houses. Revalued high enough, gold could cover all government debts and let the world start over again.
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