Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘inflation’

• Gold and Silver Rise Again as History’s Chosen Currencies

Posted by Ron Robins on March 13, 2011

By Ron Robins. First published February 25, 2011, in his weekly economics and finance column at alrroya.com

Gold, “the ancient metal of kings,” is reasserting itself as the currency of choice as it has done again and again since the earliest of human times. In our modern era, as central banks and governments fight to devalue their currencies to gain purported trade advantages, gold rises in value against them all. And central banks are buying gold again amidst serious doubts as to the size of some of their real physical gold holdings. Silver too is experiencing a similar re-emergence. The reasons for gold and, to a lesser extent, silver acting as currencies, are easy to understand.

Gold’s history as a currency extends back thousands of years. The western world’s first known standardised minting of gold currency took place in 564 BCE by King Croesus of western Asia Minor. However, it is also believed that China in the fifth and sixth century BCE, minted the Ying yuan gold coin as well. In the great Gupta Empire of India, from 320 to 550 CE, gold coins were used throughout its domain. And in the early Islamic world around the time of the Prophet Muhammad, the gold dinar coin led as its currency. In Europe, gold coins became an important or central monetary unit for the Greeks, Romans, Venetians, Dutch, Spanish and British.

During approximately 1870 to 1910 all major countries linked their currencies to gold, thereby adopting the gold standard. However, China was the exception preferring a silver-based standard. The first silver coins are reported as being minted by King Pheidon of Argos around 700 BCE.

Gold and silver have historically asserted themselves as monetary mediums due to their intrinsic value. They are consistent, divisible, durable and convenient, and they are nobody’s liability.

Unlike paper money, gold, particularly, has proven itself in maintaining its value over many centuries. The World Gold Council (WGC) says that, “since the 14th Century, gold’s purchasing power has maintained a broadly constant level… an ounce of gold has repeatedly bought a mid-range outfit of clothing… in the fourteenth century… in the late 18th century and… at the beginning of this century (2000 to 2008)… On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact… [whether] in the face of financial turmoil… [as] a crisis hedge… [or] as an inflation hedge.”

Since their origins, central banks have realised the importance of gold, and sometimes silver, as a strategic part of their reserves. Commenting on the rapidly rising price of gold, Alan Greenspan, former chairman of the US Federal Reserve, said in a Bloomberg report on September 9, 2009, that, “[the rising gold price is] an indication of a very early stage of an endeavor to move away from paper currencies… What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.”

And this is also because, “[the central banks] no longer trust each other… [and] there’s this perception that different countries are trying to weaken their currency in order to get a competitive advantage,” said Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch at a New York City November 2010 conference, reports Fastmarkets. Among the countries whose central banks are increasing their gold reserves are China, India, and Russia—all countries with mammoth trade surpluses and foreign exchange reserves.

However, as throughout history, he who owns gold and how much he owns is often shrouded in secrecy. For a central bank, covertly selling and buying of gold and its currency can be used to secretly manipulate the value of its currency. Some indirect proof of this comes again from Mr Greenspan during testimony to a US Congressional committee in 1998. He remarked that, “central banks stand ready to lease gold in increasing quantities should the price rise.” Therefore, declaring the precise gold holdings of a central bank might be akin to giving away ‘trade secrets.’

Central banks worldwide supposedly hold around 30,000 tonnes of gold, perhaps 20 to 25 per cent of all the gold ever mined. But true independent verification of their holdings is not available. The US based Gold Anti Trust Committee (Gata) has compiled extensive and critical information concerning western central bank gold holdings. Their information and that from other sources suggests the actual physical gold holdings of some western central banks could be 30 to 50 per cent lower than publicly reported.

As an example, the US boasts official gold holdings of 8,133.5 tonnes. However, it is known that some, perhaps a significant portion of these holdings, have been leased out to various financial entities and might not be returned without huge financial losses. Ron Paul, the chairman of the influential US Congress’s Domestic Monetary Policy Subcommittee of the House Financial Services Committee, is so concerned about such activities that he is calling for a full public audit of US gold holdings.

Additionally, gold is possibly set to play a reinvigorated role in the international monetary system. The International Monetary Fund (IMF) as well as most members of the G20 are seeking alternatives to the US dollar as the world’s principal reserve asset. And in this regard, gold—perhaps silver too—could be included in a basket of currencies and commodities that create the basis for a new international unit of exchange (currency).

Moreover, an RBC survey of global financial executives and business leaders reported on Yahoo! Finance on February 3 that “just 52 per cent of respondents expect the dollar to be the world’s currency in five years,” and that “gold is coming back as a reserve currency ‘of sorts,’” says Marc Harris, head of global research at RBC Capital Markets.

Probably since the beginning of civilisation, gold especially, but silver as well, have served as monetary vehicles. Gold has demonstrated itself to hold its value over centuries and in many diverse cultures. And despite today’s sophistication with paper money, gold is still seen by central banks as the ultimate source of payment. Concerns are growing that the real physical gold holdings of some major central banks might be substantially lower than they have reported, and as they unabashedly devalue their paper money, gold and silver rise once again as history’s chosen currencies.

Copyright alrroya.com


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

• 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

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!


© Ron Robins, 2010.

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

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