IMF Gold - Bring It On!
Darryl Robert Schoon
If history repeats itself, we will soon be recipients of the biggest windfall of the new millennia. Not since the Bank of England sold 400 tons of its gold in 1999 at the very bottom of the market have gold investors been presented with such good fortune. Ladies and gentlemen, get your pens and checkbooks ready.
Representatives of the world's industrialized nations, the G7, have recommended that the IMF sell 401 tons of its gold to help meet operating expenses. If the sale of IMF gold proceeds, gold investors should be prepared to buy as much as they can - and then some for this will be one of the last opportunities to buy gold at current prices.
THE US DOLLAR AND GOLD
After WWII when the US agreed to redeem US dollars with gold, all currencies were tied to the US dollar and therefore to gold. This system, called Bretton-Woods, continued until 1971 when the US unexpectedly announced it would no longer exchange gold for its dollars held by other nations.
When this happened, the US dollar and consequently all currencies became fiat currencies, currencies no longer anchored to anything of value, historically gold or silver. In 1971 with the announcement of the US default on its gold obligations, all currencies became fiat currencies, i.e. government issued coupons.
After WWII, the US possessed 21,775 tons of gold, 75 % of the world's monetary gold. No nation had ever owned that much gold. But by 1971, the US had only 7200 tons left and owed other nations over 38,000 tons.
When the US officially cut all ties between the US dollar and gold in 1973, the era of floating exchange rates began. This marked the beginning of FX (foreign exchange) markets where from negligible sums in 1973, $3-4 trillion per day is now bet on the probable value of tomorrow's currencies. For the first time in history, speculators, not gold or silver, determine the value of money.
Every system based on irredeemable paper money has failed. This has been true throughout history. The fact that we now have the internet, cell phones, FX markets and indoor toilets in addition to nonconvertible paper money does not change this fact.
The question is then, when will the present system of irredeemable paper money collapse? A question perhaps whose answer was set in motion when credit markets contracted in August 2007
The contraction of credit markets in August 2007 caught the wizards of Wall Street off-guard. That spring, after a dizzying run of profits, the global financial sector appeared unstoppable. Billion dollar bonuses were no longer unheard of and betting on the future appeared to be the safest bet of all.
But the wizards of Wall Street were wrong. Suddenly the momentum and luck of Wall Street soured in July 2007 when Wall Street investment bank Bear Stearns unexpectedly announced the collapse of two of its billion dollar hedge funds, the Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.
Global credit markets have been in turmoil ever since. The wizards of Wall Street then hoped autumn would bring a needed rebound after summer's contraction. They were wrong. October, November, and December were all to bring more bad news.
Previously unheard of acronyms - SIVs (structured investment vehicles), ABCP (asset backed commercial paper), CPDOs (constant proportion debt obligations), and VIEs (variable interest entities) - emerged and overwhelmed the markets with new news of short-term debt vehicles unable to fund long-term commitments. The day of reckoning - the collapse of credit markets based on paper money - had arrived.
IF THE RICH BORROW SHORT TO LEND LONG THE RICH WILL NOT REMAIN RICH VERY LONG
In January 2008, instead of the hoped for rebound expected by hedge funds managers based on their latest algorithms, world financial markets staggered and fell, losing an estimated $6 trillion of wealth in January alone.
The wizards of Wall Street and their enablers (the central banks) are now seriously worried. Their short term solutions haven't worked and they're afraid their long term solutions may not work either. Everyone should now be worried too.
US POLICY AND GLOBAL MARKETS
The global economy has been deeply affected by past and present US economic policies. No longer having to exchange gold for its dollars, in 1975 the US balance of trade went negative and has been increasingly negative ever since - and the longer the deficits have continued, the larger they have become.
Much of Asia (the world's top exporting nations) and the Middle East (the world's oil producing countries) are now holding increasingly excessive amounts of irredeemable US dollars. These dollars must either be absorbed into their economies (at the risk of fanning domestic inflation), or held in the form of US dollar assets such as US treasuries (now depreciating in value).
IF THE US WON'T BACK ITS DOLLAR, WHOSE
DOLLAR IS IT?
When the US refused to exchange its gold for its dollars in 1971, US Treasury Secretary John Connally stated, "It may be our currency but it's your problem". In 2008 as the US dollar is on the edge of losing even more value, it's now also become the problem of the US. The chickens have come home to roost.
GOLD, THE US DOLLAR & THE IMF 1974
The following is excerpted from my book, How To Survive The Crisis & Prosper In The Process, pp 33-34, (www.survivethecrisis.com):
GOLD, THE US DOLLAR & THE IMF 2008
What happened in 1976 is about to happen again except in far greater measure and with far greater consequence. Again, the IMF is preparing to sell a large amount of gold (401 tons) as it did in the 1970s (781 tons). But this time, much more is at stake. This time the global economy built on a foundation of irredeemable paper money and leveraged credit is about to collapse.
Then as now, the price of gold was rapidly rising as inflation threatened to get out of control. The price of gold increased eight-fold in only four years as inflation almost tripled. Inflation fell only after the US Federal Reserve raised interest rate to 21.5% in December 1980.
If the Fed did the same today, the US along with the global economy would plunge into economic chaos from which recovery would be problematic. Since September 2007, the US Fed has cut rates from 5.25 % to 3.00 % in the hopes of reliquifying credit markets still contracting since August. The US Fed is desperately trying to stabilize the US economy and global credit markets which are now in a state of triage.
Credit, the engine of growth of capital markets under capitalism, is being poured into the world economy by central banks in Asia, Europe and the US at an unprecedented rate in the desperate hope of reversing the continuing collapse of credit markets. Their attempts will be in vain.
Hyman Minsky, the late American economist whose predictions about capital markets were once ignored, foresaw the current state of economic disarray - where credit based capital markets become increasingly fragile as increasing amounts of credit based capital chase fewer and fewer opportunities leading to a situation where capital is increasingly invested in highly leveraged unsafe investments in the search for greater returns, voila global markets 2005/2006/2007/2008.
This extraordinary and unprecedented mountain of credit and debt is about to collapse upon all of us - Caucasians, Asians, Africans, Latinos, etc. alike; and while we are not holding hands as the collapse approaches, we are certainly chained together at the waist.
Thank God the IMF is contemplating selling 401 tons of its gold at this time. We - all of us - are going to need all the gold we can get in the days ahead. Throughout history, when a monetary collapse occurs, gold and silver are the only safe havens. Ladies and gentlemen, get your pens and checkbooks ready.
About Darryl Robert Schoon
In college, I majored in political science with a focus on East Asia (B.A. University of California at Davis, 1966). My in-depth study of economics did not occur until much later.
In the 1990s, I became curious about the Great Depression and in the course of my study, I realized that most of my preconceptions about money and the economy were just that - preconceptions. I, like most others, did not really understand the nature of money and the economy. Now, I have some insights and answers about these critical matters.
In October 2005, Marshall Thurber, a close friend from law school convened The Positive Deviant Network (the PDN), a group of individuals whom Marshall believed to be "out-of-the-box" thinkers and I was asked to join. The PDN became a major catalyst in my writings on economic issues.
When I discovered others in the PDN shared my concerns about the US economy, I began writing down my thoughts. In March 2007 I presented my findings to the Positive Deviant Network in the form of an in-depth 148-page analysis, "How to Survive the Crisis and Prosper In The Process."
The reception to my presentation, though controversial, generated a significant amount of interest; and in May 2007, "How To Survive The Crisis And Prosper In The Process" was made available at www.survivethecrisis.com and I began writing articles on economic issues.
The interest in the book and my writings has been gratifying. During its first two months, www.survivethecrisis.com was accessed by over 10,000 viewers from 93 countries. Clearly, we had struck a chord and www.drschoon.com, has been created to address this interest.