Linking Currencies to Gold -- Not the Gold Standard , by Al Martin

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by Al Martin

Linking Currencies to Gold -- Not the Gold Standard

(11-15-10) (FREE SAMPLE COLUMN - SUBSCRIBE NOW) There is a growing initiative to re-link the dollar and other paper currencies to gold, and it’s gaining momentum. It certainly got a boost last week when World Bank chief Robert Zoellick came out publicly and supported the idea. This is a modified version of what existed after the United States went off the gold standard in 1933. Many do not understand that although the United States currency was no longer redeemable or backed in gold, it nevertheless remained linked to gold – until Nixon closed the so-called “gold window” in 1971.

In a Financial Times op-ed piece called “The G20 must look beyond Bretton Woods II,” Zoellick wrote, “The G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

Zoellick was also quoted as saying, “Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard… Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange.”

The link between gold and the dollar involved effectively pricing dollars in gold and it also involved limited convertibility of dollars into gold. In other words, private citizens no longer had the right to redeem dollars into gold, but foreign nations could turn dollars that they were taking in through commerce and conducting business with the United States and convert them into gold. The “price” was originally pegged at $32 an ounce. The problem and the reason Nixon closed the gold window is that the price of gold in the free market began to rise particularly after 1964 price of gold and silver rose above the so-called official US Treasury benchmark levels.

By the way, that’s why the United States and most other countries stopped issuing silver coinage in 1964 because the value of the silver in the planet’s coinage began to exceed the coin’s face value.

So why did Zoellick come out with this idea? Is it that fiat paper currency has no credibility and people’s trust in government pronouncements has all but disappeared?

It’s really an effort to establish a post-collapse monetary system, and it actually kills many birds with one stone, so to speak. It would give the dollar a fixed benchmark value that everybody could see all the time – by linking the dollar to gold. In other words, the dollar would be worth so many fractions of an ounce of gold.

This would give the dollar a more stable and fixed value in terms of providing some sort of a benchmark, which would provide liquidity and it would provide some stability. It doesn’t mean, however, that the value of the dollar would be stabilized, but it would provide stability in the sense of commercial transactions and value of what’s called “deposited dollars,” wherein governments and business and industry and even the people could then manage the value of the dollar, meaning look at its value into the future and better estimate how many dollars they would need to purchase goods and services in the future.

This linkage is not to be confused with gold backing of paper currencies. The statement last Monday caused a rally in the price of gold because it got purposely misinterpreted by financial media, which are friendly to the gold bugs. Zoellick’s comments got republished, as if he were backing the notion of gold redeemability -- which he’s not – and which is frankly impossible. So the price of dollars priced in gold would obviously be floating, since the prices can not be fixed by governments.

Other central banks are also revisiting this concept of a reinvade between currencies and gold for the purpose of providing stability and liquidity to currencies.

Meanwhile the G20 meeting concluded with a resolution that all of the members will not engage in currency wars which is completely bogus because they all go back home and it’s the first thing they do – they attempt to cheapen their currencies. Those statements are simply meant as pabulum to calm the masses because in fact all the nations are engaging in currency wars.

Also the G20 tried to address the issue of trade wars or trade restrictions which is becoming a problem that hasn’t been seen since the Great Depression. The G20 nation-states are saying that they will agree not to engage in trade protectionism which is another lie because that’s what precisely all of them are doing including the United States. It is always politically popular to defend your own turf even if that is not the economically sound thing to do.

Nevertheless I don’t think there will be any major trade wars on the planet because, even though it’s politically popular, governments understand what happened the last time the planet went into a cycle of trade wars when it caused a devastating global economic collapse, which was due to the infamous Smoot-Halley Act of 1930.

There has always been trade protectionism and there always will be but overt trade wars aren’t going to happen again. The governments are too smart for that now even though the people don’t know the difference, but governments understand how politically popular trade wars are. Nixon tried it in 1972 and you see what happened. He attempted a limited trade war (trade embargo) and with explosive tariffs and the consequences of it in 1973 was that the New York Stock Exchange from September 1972 until September 1974 lost half of its value. Prices of fixed assets began to fall. Rationing of goods like oil began. The price of commodities exploded. Trade wars aren’t workable anymore. This isn’t the 1920s.

But we are still in a bubble. The only thing that happened last week, as we have been consistently warning, is that some air came out of the bubbles – and that created dramatic short selling opportunities. We will see this continue, as the new speculative bubble is built on the planet in equity and commodity markets, prices will continue to rise, but there will be sharp pullbacks. There will be periods where steam is let out of the bubble. That is the very nature of a bubble.

Governments have to manage bubbles. The one thing that Jim Cramer is right about is that in order for bubbles to have their desired effect of wealth concentration, governments have to carefully manage bubbles. As the President of China said – we love our bubble; we caress it; we manage it. And he’s right because he understands the nature of bubbles.

Speculative bubbles are meant to transfer wealth from the hands of the Unwashed into the hands of the Washed. It’s happening across the planet. Governments are proffering a policy to create a final speculative bubble in the final two asset classes wherein a speculative bubble can be created, namely equities and commodities. This is being done to effectuate the final transfer of wealth that can be transferred from the hands of the Washed into the Hands of the Unwashed.

It was governmental action which largely led to the bleeding of air of the bubbles last week when we saw most of the world’s commodity exchanges raise margin rates in order to try to force Joe Six Pack out a little more. That combined with a threat of interest rate increases in China and you’ve got some air coming out of the bubble.

Everybody has a vested interest in nurturing the bubble. The bubble is good because the bubble transfers wealth. The bubble is the ultimate trickle-up mechanism. Reaganomics was supposed to be trickle down economics -- which it never was -- but speculative bubbles were created by governmental action, as this one was, as a trickle-up mechanism.

There’s a good chance that this link will be made between the dollar and gold because it makes sense. If you’re going to keep paper currencies a viable medium of exchange in a post-economically collapsed planet, you need some linkage to something that’s hard. You need some benchmark and reinvade to gold on a fractionalized basis would be a smart thing to maintain the value of currencies. The value of paper currencies would fall and continue to fall but they would still be looked at as the principal medium of exchange.

If people knew that this linkage existed and that governments retained enough gold so that if Joe Six Pack wanted to go to a Federal Reserve district bank and redeem his dollars for gold, he could. And that’s what’s important, and that’s the whole theme.

You can not return currencies to a gold standard. That’s not possible anymore because there isn’t enough gold on the planet. But if you could reline the value of paper currencies to the value of gold, it would act to stabilize the value of paper currencies to continue to guarantee the liquidity of paper currencies and it would provide the psychological sop necessary for Joe Six Pack to know that – yes, if he wants to exchange his dollars into gold, he can. In a way, it’s just like going to the pawn shop.

The practical reality is that the hard money types, the gold bugs, the shills and the patriot types are only a tiny fraction of the population. If the dollar were relinked to gold and the central banks retained enough gold to maintain limited convertibility, enough for the citizenry to know that they can redeem dollars into gold, only 3-4% of the population (who don’t have any money) would actually do that.

So relinking gold with dollars will be done to maintain the credibility of paper currency. People are saying that since central banks have depleted their supply of gold they would have to go out and buy more and that would make the price of gold go up, but of course that is not true. What would happen is the central banks that had to buy gold would have to turn to ready sellers like the IMF, which still has 5,000 tons of gold that it has been unable to sell.

So who else is in favor of this program? Members of the Fed’s FOMC, members of the Bank of England, the Bank of China. This idea, I would be reasonably certain, will actually come to pass because the only real way to maintain not the value, but the credibility and liquidity of paper currencies in a post-economically collapsed environment – since you can not go back to a gold standard. You simply can not use gold as a medium of exchange anymore because it’s not practical.

Also another incentive that central banks have to adopt this plan is that it would be inflationary, or in other words, it would create inflation.

(Despite financial media’s boogeyman called “inflation,” governments will be finally able to create inflation only when they have succeeded in catching the elusive Osama. So don’t hold your breath waiting for inflation.)

All governments now are desperate to create inflation. Why? Because the planet is potentially going to drown in a pool of deflation. Thus in order to maintain deficit spending globally and in order to monetize debt, you have to have some inflation. Otherwise asset prices are going to continue to decline…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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