Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘derivatives’

• Gold Lust Re-Emerges

Posted by Ron Robins on December 9, 2010

By Ron Robins. First published May 22, 2010, in his weekly economics and finance column at alrroya.com

Why the emerging lust for gold? Concerns of excessive debt and potential inflation are mostly influencing gold’s rise. But other factors are in play too. These include ancient and new cultural and spiritual attitudes towards the metal, as well as apparently failing manipulation schemes.

Cultural and spiritual reasons for gold’s rise
In China, which is fast becoming the world’s largest gold market, gold historically and culturally stands for good luck. The very symbol of Chinese culture, the golden dragon, represents happiness, procreation, and immortality. In India, which likely still has the world’s biggest private hoards of gold, the Vedic tradition associates the metal with purity of life, immortality, truth, magnificence—and has long been revered as money and the store of wealth. In ancient Persia, Egypt, and throughout the Middle East, gold is often referred to in divine terms and considered the only true money.

In recent years, a possibly rapidly growing (though of unknown magnitude) new source of gold buying has arisen. Respected sociologist Paul Ray has identified a group he labels ‘Cultural Creatives’ (CCs). These CCs form the backbone of most New Age movements and other spiritual groups, many of whom buy gold for purported spiritual benefits. According to Dr. Ray, CCs probably number around 25-30 per cent of adults in most developed countries and are likely to form majorities in those countries in the next ten to twenty years.

Alleged failing gold market manipulation increases gold price
A major factor influencing the gold market is alleged gold market manipulation. Gold market manipulation has existed since the earliest of times. Its deep cultural and historical significance has been the bane of kings, emperors and modern day central bankers. Monetary systems based on gold tended to be restrictive, therefore inhibiting the ability of kings and governments to finance wars, etc. By contrast, paper (fiat) currency systems are able to create credit and debt at will, hence all modern societies have chosen paper-based currencies and attempted to reduce and suppress the role of gold.

The attempt to control the role of gold in the modern world has, according to the Gold Anti Trust Action Committee (GATA), been onerous. GATA claims the U.S. Treasury, The Federal Reserve and other governments and central banks have collaborated to suppress its price. GATA has extraordinary documentary evidence of this. One instance of how gold suppression has been working is a quote from the former head of the U.S. Federal reserve, Alan Greenspan. In testimony to the Committee on Banking and Financial Services, U.S. House of Representatives, on July 24, 1998, he said that “… central banks stand ready to lease gold in increasing quantities should the price rise.” Evidence by James Turk, Dimitri Speck, Eric deCarbonnel, and others suggests that they have done that and more over the past decade.

Also, backing up GATA’s claim, Michael Gray wrote in the New York Post, May 9, 2010, ”Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market.” JPMorgan Chase has very close ties with the U.S. Treasury and Federal Reserve. Considering the fact that a major New York daily has published this story, it has received remarkably little attention. Why the media silence? I believe it exhibits an ingrained cultural bias to keep a lid on gold suppression so as to minimize the increasing loss of confidence in major currencies.

However, as is obvious from the rising gold price, if price suppression had been working it does not seem to be functioning too well at present. Central banks may have lost too much gold in loaning and selling into the gold markets to keep its price down. Also, they are now realizing it may well be the best asset to hold. Incidentally, nobody knows for sure how much gold the U.S. government has as the last public audit of its gold reserves was in 1971.

Gold as currency
In the time of the Prophet Muhammad the gold dinar was the currency of exchange. In Europe, the Greeks, Romans, Venetians, Dutch, Spanish and British, all found gold to be the ideal currency. As a currency, gold has the advantage of having a value in and of itself. It is also durable, divisible, convenient, relatively rare, and cannot be ‘manufactured.’

In recent years, the Gulf Cooperation Council proposed a common currency, which some key supporters want backed by gold. Throughout the Muslim world a cultural monetary renaissance is occurring as a return to the ancient gold dinar as a principle form of currency is debated. The Emirates Palace, Abu Dhabi’s top hotel, has even introduced an ATM offering gold bars. Internationally, the proposed revised Special Drawing Rights of the International Monetary Fund may also have a commodity component that includes gold.

The re-emergence of gold as the alternative currency is gaining momentum. This appears to be not only because of the current monetary debacle affecting paper currencies, but also due to purchasing of the metal by those re-discovering its cultural underpinnings, by those valuing its purported spiritual properties, and the increasing failure of central banks in suppressing its price. As the lust for gold gains momentum, it again reveals itself as the ancient metal of kings.

Copyright alrroya.com

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Posted in Finance & Investing, Gold & Precious Metals, Monetary Policy, Personal Finance | Tagged: , , , , , , , , , , | Leave a Comment »

• The Allure of Gold: Now and through the Ages

Posted by Ron Robins on February 10, 2010

While respected sociologist Dr. Paul Ray reveals the rise of higher consciousness in society today, we also note the rise of something else unparalleled in our modern epoch: the declining confidence in developed countries’ paper currencies. This is clearly evidenced by that eternal barometer of currency health—gold.

Having seen gold’s U.S. dollar price rise four-fold over the past decade and with substantial gains in all currencies (while outperforming every other major asset class), gold is resuming its historical monetary role.

Why is this happening? Mainly because of our gradual realization of what I call the Really Bad Three ‘Ds’ of the developed world:

1) Debt (The Global Debt Bomb, Forbes);

2) Derivatives (… the new ‘ticking bomb,’ Marketwatch); and,

3) Demographics (The 81% Tax Increase, by Bruce Bartlett, and Global Ageing Population–Financial and Economic Crisis Brewing, by Niels Jensen.

Also supporting gold’s ascent and paralleling Dr. Ray’s thesis of a rising higher consciousness globally, is the increasing appreciation of gold’s age old and alluring spiritual, cultural, and healing qualities.

Gold through the ages
Gold has enthralled people from time immemorial. In ancient Egypt, Egyptians ingested gold for spiritual, mental, and bodily purification. In India’s Vedic tradition gold is associated with the sun, light, fire, purity, life, immortality, truth, splendour—and long revered as money and wealth. In China, traditionally gold is owned for good luck. The golden dragon, the symbol of Chinese culture, stands for happiness, procreation, and immortality.

In Europe, the Greeks, Romans, Venetians, Dutch, Spanish and British, all found gold to be the ideal currency. Gold has historically been chosen as currency due to it being “durable, divisible, consistent, convenient, and have value in and of itself.”

In our modern era New Agers call gold “the Master Healer’… Gold symbolizes the purity of spirit and they attribute the power of cell regeneration, energy conductivity, communication transmission and energy purification to the metal… In the world of spiritual healing, gold has the emotional power to ease tension, feelings of inferiority, and anger as well as encouraging the realization of one’s potential and bringing comfort.” (From: jewellerysupplier.com)

Growing practical uses of gold today
Gold also has new and rapidly growing practical applications. It is used in electronics and computers as an extraordinary natural conductor of electricity which will not rust or degrade. In medicine, it is used to treat arthritis, and gold nanoparticles are central in much of biological research. In aerospace, NASA uses gold in a film to reflect infrared radiation and as a lubricant for mechanical devices operating in space.

Gold alloys are utilized in dentistry for fillings, crowns, bridges, and orthodontic appliances. Dentists find gold easy to work with, nonallergenic, and chemically inert. (See geology.com)

Perhaps the oldest and best known use of gold is for jewellery. Analysis of GFMS Ltd.’s third quarter, 2009 report, shows gold used in jewellery represented about 59% of usage and that gold for investment purposes accounted for 28% of demand; electronics 9%; other industrial demand for 2%; and dentistry 2%.

Inflation/hyperinflation/deflation fears increase gold’s attraction
However, it seems that for 2009 as a whole, something extraordinary happened: for the first time in decades investment demand for gold exceeded that of jewellery use. Gold is being purchased as a hedge against the anticipated currency chaos resulting from the Really Bad Three D time-bombs of uncontrollable Debt, explosive Derivatives, and aging population Demographics.

The fears are that the governments and central banks of the U.S., E.U., U.K., and Japan, may of necessity create high inflation to alleviate the burden of their unsustainable debts and obligations. Unfortunately, inflation can get out of control, increase rapidly, and result in hyperinflation causing huge loss of confidence in the affected currency.

Central banks can generate inflation by printing money. Put simply, they flood the economy with almost free, ‘excess’ money, which forces a decline in value of each monetary unit, thus producing inflation. Countries (or anyone in debt) can then pay off their debts with money that buys a lot less—thus cheating their lenders. This has been common practice of indebted governments throughout time and is what ignites the lust for gold as the safe haven from the ensuing monetary and economic maelstrom.

However, renowned economics’ professors Carmen M. Reinhart and Kenneth S. Rogoff, as well as Dr. Lacy H. Hunt, and others, believe that deflation will rule. In deflationary periods, as in the 1930s, the money supply contracts, prices fall, debt deleveraging occurs, major financial system defaults occur, the economy shrinks, and government deficits and debts explode upwards. Even in deflationary episodes, investors fearing losses or government failure buy gold for protection. (See The Long Wave Analyst.)

Therefore, central banks in the developing world possessing the world’s largest reserves of developed countries’ currencies and debt are fearful of losses arising from any of the above potential conditions. So, to protect the value of their assets they do what central banks have always done—they buy that ancient metal of kings—gold. The central banks of China, India, and Russia, are among the biggest buyers of gold today.

Furthermore, as these developing nations grow they are investing increasingly in their own locales where investment returns are higher than in developed countries. Thus, their reduced buying or outright selling of developed countries’ debt and currencies is further lowering the value of those currencies and debt.

Gold’s new role
These developments are creating mounting instabilities in the world’s financial system and are encouraging discussions of a new global currency that might compete with or replace the U.S. dollar. Already, Brazil, Russia, India and China (the so-called BRIC nations) as well as developed countries such as France, are demanding the establishment of a new world currency order.

To accommodate these demands the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs—a ‘basket’ of currencies used as money between central banks) may well be re-formulated to include new currencies and commodities. Theoretically, the re-formulated SDRs could even become the world currency.

Top gold analysts like Jim Sinclair see the linking of gold to both the SDRs and to the U.S. dollar money supply. By anchoring the dollar to a rising gold price the U.S. could likely stem the dollars declining value.

The downside of gold production
If proper safety and environmental rules are not followed the mining and production of gold can mean ill health for miners and mining communities, and environmental degradation. Mining and processing of gold ore usually requires the use of the highly toxic chemicals such as arsenic and mercury.

The ore after processing is left in tailings ponds, and if the ponds are not carefully designed, built, and maintained, the water from these ponds can contaminate water sheds, rivers, and farm fields. If not properly managed, there are real downside risks in the mining of gold.

However, there are two reasons why I feel more optimistic about gold mining in the future. Firstly, non-governmental organizations (NGOs) around the world are bringing to light those gold mining activities that are doing harm. In some cases NGOs have caused abusive mining operations to shut-down or to make major changes in their operations. Secondly, governments are implementing ever tighter health and environmental controls concerning mining.

These factors are slowing the amount of gold mined, as well as making the mining itself more expensive. Hence, as gold demand increases and the above factors help to restrain its supply, gold prices are likely to receive even further support. Incidentally, since the 1990s, global gold demand has substantially exceeded what is mined, while the amount of new gold found is unable to replace that mined.

To summarize, gold is re-incarnated
In the next few years the probability of currency and economic turmoil due to the Really Bad Three Ds—Debt, Derivatives, and Demographics of the developed world—will be greater than at any time since the 1930s. Similar turmoil has occurred innumerable times over countless millennia, and can be seen from the ancient civilizations of Egypt, India, China—to modern Europe. As turmoil occurs, gold becomes the store of wealth and assumes its role as the currency of choice.

However, gold is not only rising due to currency and economic instabilities. It is also rising because of its many fast growing commercial applications and particularly because of the allure of its age-old spiritual, cultural, and healing characteristics. In the era of higher consciousness where Enlightened Economics reigns, gold serves many key functions. The future is indeed golden!

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© Ron Robins, 2010.

Posted in Consciousness/Psychology, Economics, Finance & Investing, Gold & Precious Metals, Personal Finance, Spiritual | Tagged: , , , , , , , , , , , , , , , , | 1 Comment »

• Debt/Bailout Bubbles May Burst. Brighter Future Beyond 2012!

Posted by Ron Robins on July 19, 2009

A stressed American consciousness focusing on material acquisition to the virtual exclusion of satisfying higher inner values has given rise to an unwieldy debt mountain. Now the U.S. government is borrowing and spending massively as it tries to pump-up the economy while backstopping much of the countries debt.

Consumers and companies have largely hit a ‘debt wall.’ And with a possible derivative meltdown and the recognition of enormous unfunded U.S. liabilities, we may see the U.S. government itself hit the debt wall in the not-so-distant future. The subsequent reaction would topple the debt mountain and pop the bailout bubble. But I believe a new higher consciousness will arise from these extraordinary events creating a truly enlightened economy mirroring our higher, inner human values.

Bailouts, guarantees, and write-offs galore
So far in this phase of the crisis the U.S. federal government and Federal Reserve have already guaranteed or spent around $13 trillion! And the current 2009 U.S. federal budget deficit will top $2 trillion, or about 14% of U.S. GDP. More stimulus packages are likely and massive deficits for years into the future are projected as it is unlikely that the economy will gain self-sustaining traction to stop unemployment from increasing. Economists such as 2008 Nobel Laureate Paul Krugman and others in the Obama administration are already discussing the possibility of another huge stimulus package.

Furthermore, the International Monetary Fund (IMF) on April 21, 2009, estimated global financial system write-offs to exceed $4,100 billion. The write-offs to-date are not anywhere close to that figure therefore, enormous additional financial system losses are yet to come.

A two-phased crisis
I see two phases to the U.S. financial crises. Each alone is capable of bursting the bailout bubble. Phase 1, which we are currently in, involves the write-offs of bad mortgages, loans, deleveraging, extraordinary U.S. government and Federal Reserve guarantees and financing, and a potential derivative implosion. Any sudden interest rate hikes and/or currency movements could trigger an implosion in the $450 trillion (ISDA April 22 press release) derivatives market and cause further financial chaos.

To enable U.S. government bond sales, it is probable that the U.S. federal government will, if it is not doing so already, pressure the banks with whom it has ‘invested in,’ to purchase considerable amounts of its bonds. The banks in turn will get substantial loans from the Federal Reserve for these purchases. In essence this is back-door ‘monetization’ (read ‘quantitative easing’) of U.S. government debt. Monetization simply means the printing of new money by central banks to purchase assets, in this case, U.S. government bonds.

Of course the U.S. Federal Reserve, the Bank of England, and other central banks have already engaged or have announced significant monetization efforts. The central banks claim that they will be able to drain this liquidity (excess money) out of the system as their economies recover. Unfortunately, historical examples do not give much reassurance that this can be done, especially in a global trading environment and where the major countries have amassed such extraordinary levels of debt.

Deeply indebted governments and societies have the choice of trying to reduce their debt levels—which can produce a potentially deflationary recession/depression—or they can encourage central bank monetization efforts that offer a ‘chance’ to get the economy rolling and create sufficient inflation, thus lessening the relative debt load. However, once started hefty monetization efforts often prove impossible to contain, leading to uncontrollable inflation—and even hyper-inflation. Subsequently, interest rates soar, the countries currency plunges in value, its debt mountain topples, and bailout bubbles burst.

Adding to the impetus for monetization will be when Phase 2 of this crisis kicks-in in 2010 as the U.S. begins to face its looming, huge, unfunded liabilities for medicare and social security. These are estimated by Shadowstats at $65.5 trillion. To properly fund this liability would require the U.S. government to put aside trillions of dollars yearly. Clearly, the U.S. government has no possibility or desire to put aside such funds. In addition, the current proposals for health care reform may add considerably to these numbers.

Taken together, these two phases of economic crisis make it unlikely that the U.S. can escape its fate of the bursting of its debt and bail-out bubbles.

Beyond 2012 a brighter future
I believe the underlying collective consciousness of U.S. society is moving toward higher values, and the more balanced approach to consumption and savings is evidence of this. However, in the course of these changes the likelihood of the debt mountain toppling, the bailout bubble bursting, and the onset of high or hyperinflation are real possibilities. By the end of this process, sometime around 2012, the American collective consciousness will have sufficiently evolved to begin the path of developing a truly sustainable economy mirroring the values of an economics based on our higher inner human values and consciousness—and that path is the realm of Enlightened Economics.

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© Ron Robins, 2009.

Posted in Economics | Tagged: , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment »

 
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