Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
The significance of August
by Professor von Braun
May 31st, 2006
That was the day that President Nixon closed the gold window, ending the ability of other central banks to convert their dollars into gold at the fixed price of $35.00 per ounce.
It did not end the convertibility of US $'s into gold as the ability of other Central banks to buy gold using their US $ holdings remained. What this event did do was free the US from ever having to provide a redeemable alternative to their paper currency, which in effect was the complete opposite from why it had become the world's reserve currency in the first place. The Bretton Woods agreement saw the adopting of the dollar as the worlds reserve currency precisely for the reason that it was convertible into gold, gold already held by the US and other countries could hold the dollar knowing that this was the case.
No doubt it was the redemption by countries such as France, Italy, Germany, Holland and others that created the reduction in US gold holdings from 20,000 tonnes to 8,300 tonnes that had a hand in Nixon's decision, but the actuality was that the US now had created, by the stroke of a pen, the world's first officially non-redeemable reserve currency, giving it a monopoly on the world's banking system that has lasted to this day.
Needless to say the gold price increased 24 fold over the next few years, from $35 to $850 per ounce. The official benchmark as to the value of the dollar was removed; the unofficial one, the price of gold itself, remained. As we all know, the gold price declined during the 1980's and 1990's as the US managed to maintain the myth that their currency had value, and part of the maintenance of this myth was a declining gold price. Other central banks signed on to the maintenance of this myth, slowly at first, but countries like Japan, which really had no choice as they needed the US as a customer for their industrial manufacturing base, were quite happy to play the game. The Europeans were slower, with the Germans in particular, along with the French, being wary of this newfound ability of the US to run a 'deficit without tears.'
What a great game we now have! It's the 'you take my paper' game with a twist, which is of course the fact that officially it can never be redeemed. Meanwhile we have supposedly happy citizens, bent politicians, faulty monetary systems and seriously flawed promises to pay pensions and medical expenses in the future, all because of a reserve currency that is now the complete reversal of what it was when it became the reserve currency back in 1944.
The US's co-conspirator in this monetary exercise has been, and still is, the Bank of Japan -- the original producer of cheaper goods, from auto's to electrical goods to heavy machinery, ships and whatever else they duplicate. One of the costs to the US of this has been the gradual decline of the US manufacturing base, something the banking system does not seem too concerned about.
Now the problem with sustaining the myth of the US $ is that China has to a large degree usurped Japan's role as the major trading partner with the US and now it, too, is playing the same game as Japan, accumulating considerable non-redeemable US $ reserves, which is quite amusing. At what point do they begin to realize that they are being conned? And if they do what are their options?
Needless to say, any collection of large or small numbers of people, in any location -- whether it be China, Russia, the US, or India -- need commodities. They all need to eat, have shelter and preferably be gainfully employed producing something to assist in the consumption of food and the maintenance of basic facilities such as roads and housing.
But the key ingredient is commodities, whether it be trees, water, metals or fuels. Historically this has always been the case and most periods of expansion since the start of the industrial revolution have been related to the search and acquisition, often by force, of commodities. Prior to this time most empirical expansions, most often militarily backed, also involved commodities, from gold to salt to fine silk cloth.
Rarely have we seen expansions involving non-redeemable currencies and its unlikely that we will. The US is not trying to take over the Iraqi banking system for instance, nor was Germany looking for a banking system prior to World War II.
Commodities come first, always have and always will. Nations and individuals can't exist without them, and China does have a shortage of commodities and it has a surplus of credits in the US banking system, a surplus that can't be redeemed but can be swapped for commodities.
Today's dollar is not a commodity, it is however still an accepted means of settling transactions, a role given to it at the Bretton Woods conference in 1944, when it was a commodity by virtue that it could be exchanged for gold. That changed with President Nixon's closing of the gold window back in 1971. The dollar could still be used to purchase gold but now there were no restraints on the amount of dollars that could be issued. Perpetual monetary freedom was now at hand.
Perhaps if the gold supply had only increased at the same pace as the US monetary supply, which is now an ad infinitum supply, but this is of course not possible, and basically the official sector gold reserves are still about the same as they were back in 1971. It is even possible that they are less as we don't really know who holds what these days, given the leasing of Central Bank gold to various parties, and the sale of this gold to assist in suppressing the price by meeting the shortfall in supply and demand, estimated by some to be in the vicinity of 1200 to 1400 tonne per annum for at least the last 10 years. This is in addition to reported outright sales by CB's including Australia, the UK, Canada, Belgium and Holland and others.
From 1971 through to 1998 nearly 6000 tonnes of official sector gold were sold while official sector buying, mostly by Muslim countries, was about 900 tonnes with Taiwan, the non-Muslim exception, accounting for 350 tonnes.
There may still be family jewels in the vault but the amount remaining may well be considerably diminished.
So what does this mean for the gold price which has been rising in all currencies over the last few years? Are their any currencies that are gold backed? Not anymore! Today most currencies are faith-backed, depending only on the goodwill of the holders, which is a belief in the fact that they are worth something. But is it true?
How long can this game go on? At what point do holders of US $'s finally get the idea that they do need to swap out of paper into commodities? Or is this now what's taking place re the rising prices of all commodities?
Or are commodity prices rising because the US $ is depreciating in terms of its purchasing power by the fact that the world is awash with them? This is what happened in the late 1970's and I suspect it is what is happening now, but to a much larger degree.
What is of interest also is that way too many commentators are calling for a top being in place for commodities, saying that this is another bubble not dissimilar to the tech boom of the late 1990's and that we can expect a substantial lowering of current prices. Now I seem to recall hearing the same thing about tech stocks back in 1996 and yet they kept rising through to March of 2000.
Perhaps the relevant question is, how much physical metal is there remaining to meet rising demand as a result of profits from rising oil prices and an increasing reluctance to hold US dollars?
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
Return to the The Gilded Opinion Index Page
The Rocket School of Economics -- The Lecture Series Index
Centennial Precious Metals
Gold coins & bullion since 1973
Denver, Colorado 80246-0009
and purchase information.