Gold, Oil, And The $usd - Forex Forum

The Global Monetary System
Gold & Oil - 1971 Until the Future
Part 1: The Rise of the Dollar - The Fall of Gold
by Julian D.W. Phillips
The Gold Forecaster
March 15, 2006


In 1971 Nixon closed the gold window on the $ and turned the European nations away from redeeming Eurodollars into gold at the price of $42.35, thus devaluing the U.S. $ by the extent the gold price rose. This was keenly felt in all the markets across the globe because it was a particularly visible blow for the $ and for the sterling as the "$ Premium" was imposed in the U.K. to prevent a wave of capital exiting the country. Shortly thereafter the oil price shot up to $35 a barrel from the $8 level it had happily sat at before. In those days, even with no gold standard, gold was considered the foundation on which paper money stood.

There being no more effective defense than discrediting your accuser, the States tried to defend the $ through the sale of 500 tonne lots of gold, but terminated these as they saw the gold gulped down by private buyers. They had hoped that gold, as money would lose its reputation as well as its position in the Monetary System. Having failed with their sales. The United States then persuaded the I.M.F. to do the same, but again demand overwhelmed supply but this time with outcries from I.M.F. members over these sales.

The U.S.$ and Oil 1971 +

At the end of the seventies the over issuance of the $ came home to roost and Volcker the Chairman of the Federal Reserve at the time found it necessary to ramp up interest rates in quick time, to the extraordinary heights of 26% to tame the inflation engulfing the U.S.A. then.

What happened then to the $? The world power could not permit the $ to lose its name, after all it was the dominant nation financially in the globe as well. A new role for paper money had to be found. It had to be able to implement the power, political and economic, by itself [as the days of colonization through war had passed into history]. It had to be money in demand beyond the value gold had traditionally attracted. What was used by all right across the globe even reaching part that U.S. ‘might’, could not even reach? One item - oil! By pricing oil in the U.S. $, U.S. power could be imposed across the globe. Even Russian oil outside Russia was priced in the U.S.$. But it was vulnerable to a different choice if selected by opposers, so the U.S. had to use heavy pressure to make this $ pricing non-negotiable. To do this the U.S. made it clear to Russia in the “cold war” that the Middle East was a critical part of its ‘vital interests’ [items over which it would go to total war over]. Whilst the U.S. itself was dependent on Middle Eastern oil for a good portion of its oil, so was the bulk of the world! Only Russia could stand separate.

The U.S. also imposed a grip on global oil producers [except Russia] ensuring that their governments were dependent on U.S. backing to stay in power. With their loss of individual power as well as possible sovereignty at stake it was not big step to comply with whatever the States required.

Thus to this day the Middle East, Indonesia and the States comprising the bulk of the globe's oil supplies are found and under U.S. governmental control. Having formalized this policy of oil priced globally in the U.S. $ it was a short road to the $ becoming the global reserve currency. Gold left the stage as money, but continued quietly in the vaults, of and in particular, the U.S.A.

Apart from the inevitable desire of every Banker to do away with cash and valuables that can trade as ‘cash’ [after all it’s out of their control and fee charging range], so many more powers and control possibilities existed with paper money. After all gold was limited as a currency, disciplining governments and politicians alike, enforcing monetary stability and beyond political control. And with the $ targeting control of the global monetary system, through a reserve currency role, what more satisfying degree of control could be achieved without an army? What better way to bring in the wealth of the globe to the U.S., than through the issuance of the $ to fund global growth, oil needs and the like. As a means of exacting tribute, never has there been a cheaper and more effective instrument!

With oil superior as a form of money, needed and imported by every nation on earth it was accepted as the most eligible commodity on which to carry the $ to dominance! Through this the concept and reality of $ hegemony [Imperialism] was then imposed. The $ then rode the back of oil and grew to be used in 86% of the globes transactions and making up 75% of the globe's reserves.

It must have taken the tacit if not the full support of Europe to support the move from gold to the $, held as they were, to ransom through U.S. power over oil supplies and its pricing as is the case today! But note well, please that the objective was not to thoroughly discredit gold, as it will always prove vital "in extremis", but was to put it in a non-monetary role, as a non-threatening or challenging reserve asset.

Discredit Gold!

Thereafter through the eighties and nineties, gold suffered under a persistent campaign to discredit/ demean it as money, but not through actual sales of gold [although these were constantly threatened], but through the accelerated production of gold into an already oversupplied market. This accelerated production of gold came about by a system whereby Central Banks lent gold to bullion banks, who then on-lent it to mining companies to finance their development.

Today this is still done, whereby the cost of financing development of a mine was raised through the immediate sale of the gold borrowed from the bullion banks, with a promise to repay the gold from future production [called "hedging"] in an operation where gold was sold forward at the forward price [in the futures market] which included the interest to be accrued over the period [the "Contango"] until future production supplied that gold. Much higher than market prices were achieved in this way, particularly as the gold price was steadily falling over the period, aided by threats of gold sales made loudly in the market by Central Banks. But the banks, Central and otherwise, together with the mines went overboard and sold the bulk of their future production forward in this manner. This looked wonderful in a falling gold price market, but became the reverse when the gold price started to rise!

Some Central Banks did sell their gold [Canada, Australia included], in particular Britain who had the dubious honor of selling the bulk of their gold at close to the bottom price of gold seen in the period from 1972 to today. In honor of the eminent Chancellor Mr. Gordon Brown, who initiated these sales, this low point of Central Bank Gold sales is to be known as the "Brown Bottom".

The Advent of the Euro and Gold

In 1999 the European Central Banks, with the impending launch of the Euro in mind, decided that the anti-gold campaign had gone too far and decided to form the Central Bank Gold Agreement, whereby they would restrict gold sales to those already announced to the public and to place a ceiling on such sales of 400 tonnes for the next 5 years. Again gold was placed in a secondary role in the European monetary system in a campaign highlighting its junior role.

But the limitation of gold sales took the fear of dumping of gold onto the open market, away. However, after a full 20 years of such threats the market was slow to fully appreciate the change in "Official" attitudes. Britain was part of this first agreement, but only until it completed its sales and walked away when the second agreement was proposed. Of course, by the time this had happened its sales were complete.

In an environment already created for it, the Euro was launched without gold as a threat to it as a paper currency anymore. A generation had passed by and the average fund manager knew nothing of the world in which gold was money. The European Central Bank could happily announce that it aimed for the Euro to be backed by its reserves of which gold would represent only 15% [a target not a rigid line]. Now gold could enter the monetary scene as a reserve asset in support of fiat currencies, not a challenge for oil was the fulcrum on which the main reserve currency, the $ was now founded. The leading Eurozone Central Banks, Italy, France and Germany held onto their gold which represented in the region of 50% of their reserves, a figure that roughly matched the U.S. level of gold in their reserves still. Thus the real place of gold in the main global reserves had not changed in 30+ years. Therefore, the story was really a continuation of the past with nothing new in the picture. Gold remained and remains a vital feature of the monetary system!

We would speculate that the founding of the Euro with its gold backing received the U.S. and Greenspan's approval, as did the "Washington Agreement" the first Central Bank Gold Agreement in 1999 September 26th. Greenspan was in on the meetings held in Washington, as were the Japanese Central Bank representatives. We repeat that the objective was never to destroy gold as a monetary asset but to reduce it to a minor one, allowing the $ and subsequently the Euro to flourish without challenge.

It would appear that the price to be paid by Europe would be to not challenge the role of the $ in the pricing of oil. History confirms this! Indeed it would appear from the performance of the Euro and the $ that there is a managed approach to the exchange rates of these currencies. Talk of the fall in the $ and rise of the Euro has not been fulfilled in a price that has barely [+5%] moved in the last year. This implies some sort of managed axis on the two sides of the Atlantic. Provided the world stayed as it was with the power distribution limited to the developed world all well and good.




Gold & Oil - 1971 Until the Future
Part 2: The Rise of Gold - The Fall of the Dollar
by Julian D.W. Phillips
The Gold Forecaster
March 30, 2006

“The times they are a-changing.”

In the first part of this article we covered the history of gold from 1971 onwards. The discrediting of gold accompanied the rise of the $ to the almost sole global reserve currency. The Central Bank sales right up to the low point of the gold price, the “Brown Bottom” was followed by the turn around until today’s storming price rise a prelude to new highs eventually. The final part of this three part series will cover the Devaluation of the $ and the future of gold. But in this second part we cover the present and the future of the $ gold and in part oil.

It seems that things change, always, continually. And today it continues with the arrival of two global commercial powers onto the global monetary scene, China and India, representing over half the globe's population. Their development is nothing short of meteoric! But neither of their currencies, the Yuan and the Rupee, have a global presence, nor do they have financial systems that could be regarded as developed, by Western standards.

But both nations have arrived with features that are challenging the present world monetary order. Their threat comes from their ability to manufacture all things, far cheaper and just as well as the West can. And one of the mainstays of a Capitalist world is competition! So we are seeing a seemingly unstoppable transfer of wealth and manufacturing power to the East.

But of far greater importance is the fact that the two huge nations are absorbing resources from oil through the commodities to an ever-growing pile of U.S. dollars. There simply are not enough resources to go around. After all, if rising prices do not result in rising supplies quickly, where will prices go? And what will nations do if they don’t get enough, particularly of oil?

China & the $!

As China arrives on the global scene, not dependent on any other nation, nor controlled by any, it has some basic decisions to make for its own future. It can bow its head and fit in or develop pragmatically in the face of a crowded globe. One of the basic decisions it has to take is, will it accept U.S.$ hegemony? After all Europe has? Will the other newcomer India accept rule by the U.S.$?

We believe India will, quite happily, because of its very nature. India’s government does not have or envisage the same sort of control over its people or geography as is needed to pose any threat to the West. It is happy to be a fellow traveler.

But China is a different kettle of fish. China, from a base of tight Central government control over the far reaches of its nation, is capable of growing to be the largest economic power on earth and is rapidly headed that way. It’s simply a matter of time before it gets there. The cohesion of government and economy is stronger than anything in the developed West, so it alone will decide for itself how to manage its currency despite angry calls for a revaluation from the U.S. More than that, it has an undeveloped currency that it intends to keep for internal use only [as far as is possible] for as long as possible. While it grows it’s gathering a commercial empire of other Eastern nations who are becoming more and more dependent on its phenomenal growth.

Any development of any system or even integration with the present developed world will have to be on its terms, in its interests and with its objectives in mind. Inevitably, at some stage this will bring it head on with the U.S.$.

The government of China does not require a U.S. style of monetary system, exercising, as it does, control through a firm political grip on all the systems in that country. That their monetary system should rely on so developed and powerful a set of banks has to be unacceptable to China as it represents a loss of Central control. Consequently the Chinese banking system is archaic and inadequate compared to Western Banking, but this is not a critical shortfall. Inherently the Chinese are thrifty as they show through their very high savings rate, enormous compared to the U.S. [and its dependence on debt - unthinkable in the East]. This alone makes for a healthy financial base. And this is not lost on the Chinese government, which will harness those savings for the benefit of the nation alone.

Confirming this, the latest announcements tell us that China is to add 650 tonnes of gold to its reserves, to permit Chinese citizens to use $ accounts to trade in gold and to permit massive direct investment overseas to use its $ surpluses more productively, whilst converting them from dollars to assets. But the gold feature of these changes is not a true liberalising of the gold market across China, but only the new rich, [close to government?] who will cooperate in supporting national interests, will benefit from these changes. These changes are designed to lower the risk of too high a level of U.S. dollars in their reserves and turn them to non-$ assets, with a far lower vulnerability to the $ and directly contributing to the sustainable financial health of China!

With growth in double-digit levels and likely to continue that way, against U.S. growth only a third of that of China, China is racing to first place on the global GDP table. India with far less governmental and banking control over its population is growing at a less dynamic rate but still more than twice the U.S. rate. Between the two of them the shifting balance of commercial and financial power is altering the global balance of power steadily already.

This will have deep consequences for the tranquility of the present system and the U.S.$! In turn it will result in a running gold price as individuals, institutions as more Central Banks keep a good grip on the gold they have with the probability of more Central Banks buying more gold.

The Chinese and Indian Gold markets.

Until now the Bank of China has a poor 600 tonnes of gold [1.74% of reserves] in its reserves.

It has been claiming that it is liberalizing the gold market in China, but we do not accept that it has done so yet. It is opening up gold to the wealthy few in the main centers but not across the breadth of China, for the premiums on the gold price rise sharply the further you move away from Shanghai or Hong Kong. We would rate it a very underdeveloped and likely to stay that way. Talk of Chinese demand growing to thousands of tonnes is unlikely, until gold prices are the same in the outer reaches of China as they are in the capital cities.

Nor does the Reserve Bank of India with gold reserves of just under 358 tonnes of gold in their reserves represent a major holder of gold but hiding the fact that India is the most mature gold market on the globe.

With an alternative gold based [together with "Black" money] banking system that Western style banking and government control finds nearly impossible to penetrate, effectively. It is estimated that Indians have up to 20,000 tonnes of gold secured in hidden places across the length and breadth of the Indian sub-continent. But this is well placed beyond the reaches of government regulators or banking control.

China is likely to increase its gold holdings at individual levels whereas in India, if prices keep running the way they are may well produce a dishoarding of gold and its export, despite the government requirement that proof of the 8% Import Duty is produced, a major obstacle to date.


Gold & Oil - 1971 Until the Future
Part 3: The Future of Gold and the Devaluation of the Dollar
by Julian D.W. Phillips
The Gold Forecaster
April 11, 2006


As it becomes clearer that the $ hegemony is going too far, as record after record U.S. Trade Deficits are published, most nations and wealthy individuals are seeking to diversify away from the $. It is clear that despite any present or future exchange rate management [and the Fed has just prepared itself to interfere on the foreign exchanges of the world] and the reality that oil is priced in the $ the exchange rate value of the $ is suspect and likely to fall, eventually.

But where are do you run to from the $? All the world’s other currencies are dependent on the global monetary system of which the $ is the foundation on which other currencies rely, especially the Euro [despite its design as a reserve currency]. Each currency has its place in the currency world and has an enormous dependency on the $. We even suspect that those controlling the Euro do so in tandem with the $, so as to keep the relationship between the two largest global currencies completely stable [as can be seen in the last year’s performance of the $:Euro]. So diversifying out into another currency would hardly solve the problem, would it? In the face of a fall from power of the $, all currencies would follow, like Pilot fish stick to sharks, down to the depths.

The Yuan you may say, yes, but that is not available for such purposes, not yet certainly and only if it eventually suits Beijing.

The Rupee? This currency is well managed so as to ape the U.S.$. The Rupee is committed to be a part of the present monetary order and so not an alternative to the $.

Essentially we are left with hard assets, such as gold and silver. These are too small for governments to turn to, certainly at these present low $ prices. And with individuals able to access this market, the ‘depth’ of the market [ability to buy in volume without disturbing the price] just isn’t there. So gold, unless at prices around 10 plus [?] times the present price, is just is not eligible as stand-alone money in this world, yet!

To explain, a set of nations can sell gold at the rate of between 500 and 1,000 tonnes of gold a year in the present markets without unduly pressing the gold price down. Now take a bank that wishes to buy the same amounts and you have the gold price leaping to four figures in a matter of weeks, unless the purchase is handled most discreetly. Even then, a four-figure price will be reached in a relatively short period of time. Such potential volatility would wreak havoc on gold’s eligibility as the world’s prime money.

Gold as money at the global money system level has been unwelcome, partly because of this but more importantly because it challenges paper money’s performance. But should the U.S. / I.M.F. and the rest decide that its presence should be felt in support of currencies as uncertainty grows, it may find its way back into the every day system, behind currencies, but at much higher prices.

Will Central Banks permit individuals to influence the gold price then? They didn’t in the past in 1933 – 1935, and for the same reasons may not now. But how do they corner the global market now as they did in the States alone, then?

To orchestrate this supposes a heavy dose of global cooperation amongst the leading nations to place it back into the global money system. As gold shows its greatest value where there is no cooperation, should nations try to re-adopt it even in support of currencies, individual national interests will overwhelm such cooperation, leaving it to assist the nations with gold to help themselves alone. After all, gold is the money used when nobody trusts another. So ‘in extremis’ it is the only money around that keeps its convertibility always. In this climate its price will rise, until we no longer price gold in currencies, but price currencies in gold itself! In a fragmented global economy, full of uncertainty gold would be needed for credibility purposes.

The Oil Currency

When we look at the decaying balance of demand and supply in the oil market, we can foresee days when cooperation gives way to caring solely for national interests. This was the one disadvantage of depending on oil to establish $ hegemony. As it is consumed, so a time limit for it to be the platform on which the $ ruled, was set.

Time is now fast running out before it is in crisis and upends its passenger, the $! But the U.S. has and will, brook no opposition to oil being priced in the $, because that may well upend the $ before the oil market, itself does.

With gold seen as no longer a threat to the money system, its role as a support, [being kept on the back burner shoring up the credibility of the paper currency system], is now slowly moving as a possibility, onto our screens. Central Banks themselves are appreciating that the superficial harmony of the present system is not likely to continue for too much longer.

As a reserve asset, backing paper currencies, gold is proving its value as is aptly demonstrated by both the behavior and commentary of Herr Weber, the president of the Bundesbank who said gold is, "a useful counter to the swings in the $" [Germany has an option to sell 600 tonnes of gold under the present Central Bank Gold Agreement] and has chosen not to exercise this option to date and appear unlikely to do so during the tenancy of the present agreement.

The Devaluation of the $.

But the credibility of the U.S. $ is now in question, as it takes the "Tribute" it draws from the globe [a form of taxation], via an over issuance of the $, through its horrendous Trade deficits [$726 billion in 2005 and headed higher]. Most people have not yet realized that the $ has already been devalued by half.

This is because of the way it is expressed. Look back two years ago to those fond memories of $35 a barrel and look today at $65+ a barrel and the expectancy of $70+ per barrel. So, in terms of oil, we have seen, so far, a de facto devaluation of the a U.S.$.

Far from reducing the use of the $, as should happen to a questionable currency, its use has grown enormously as all nations on this earth have to pay so many more $ for their oil. With demand for the $ growing this way, and set to continue to grow as the oil price rises, the globe has to suck up the cheaper $ ad nauseam.

The worst that could happen to the $ is that a fall in the oil price, leaving excess U.S.$’ floating around the world! But this is most unlikely given the present state of the oil market short through to long-term. Quite the contrary, we expect further devaluations of the $, via a rising oil price keeping the $ strong for quite some time yet!

More Gold for China

China was left out in the cold by its own views on gold [HSBC went some years ago to China to persuade them to buy gold, but were seen as trying to push up the price of gold], have only 600 tonnes in their reserves, whereas to have even a low percentage of its reserves in gold would need 3,000 tonnes. They have now begun to increase this to 1250 tones, as we mentioned above. But now it is being accepted not in the simple role of a reserve asset in the western mode, but as another way of diversifying out of the U.S. $.

China, at last has become pragmatic and decided to build its reserves in the currencies of its leading trade partners. Should the bulk of or even a few important oil producers decide to accept currencies other than the $ in payment for oil [Russia, Venezuela?], the $ will have its grip on its role as the main global reserve currency loosened. Should the Chinese Yuanto bring their currency to the global table in this manner, then the Tsunami of $s being sold for other currencies and having to go home will be enormous bringing rampant inflation to the U.S. or having to be blocked from entering the States. The decline of the $ and the ascent of gold will have then been fully established

Hello,

Ca donne quoi in French tout ça?

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