If the Gulf Co-operation Council (GCC) marks its Gold reserves to market, whereas the US dollar, to which the GCC single currency would remain pegged (in a basket), marks them to the model of $42 or so an ounce, we would have a contradiction in the GCC single-currency system. Does that explain why the launch of the GCC single currency should be postponed until … ?
1.
The governors of the central banks of the Gulf Co-operation Council (GCC) will meet on 15 September 2008 in Jeddah, Saudi Arabia, in order to put the final touches on the proposed Monetary Union Agreement (MUA) or Monetary Union Charter (MUC) which was approved by central bank governors in Doha, Qatar, in June 2008. They will also decide the location for a planned Gulf Central Bank (GCB). As a prelude to the GCB, the Gulf Monetary Council (GMC) or Gulf Monetary Authority (GMA) will be set up. The GMC will have only limited monetary policy decision-making power.
On 17 September 2008, the governors of the central banks of the GCC and the GCC finance ministers will study a proposal to get the GMC started one month after three states ratify the MUA.
The MUA should then be endorsed by the heads of state of the six GCC countries (Saudi Arabia, the United Arab Emirates (UAE), Qatar, Kuwait, Bahrain and Oman) at their November 2008 summit in Muscat, Oman.
The six GCC states have yet to iron out differences on the value of that currency against other major currencies. Others are arguing that it would be up to the GCB to decide whether the single currency is pegged to the dollar, to a basket of currencies or freely floated.
The question is: “How will the value of the GCC single currency be determined?”
2.
This is the environment within which the question has to be answered:
With last week’s nationalisation of Fannie Mae and Freddie Mac, or Phony and Fraudie, the country’s biggest mortgage lenders, by the USA Treasury in order to keep the system as a whole functioning, we are sure to encounter even larger budget deficits in the USA, thus more money printing.
Still, we are told that inflation fears are fading in the USA and that the Federal Reserve, the central bank of the USA, is likely to keep its key interest rate at 2% at its 16 September 2008 meeting, although expectations are growing for a rate cut before year’s end.
We are also told that the US dollar’s rebound dampens speculation of immediate reforms to the GCC countries’ dollar pegs and that it would therefore be necessary to restore momentum to the GMU project.
We are told that the nationalisation of Phony and Fraudie was to avoid moral hazard.
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions, says Wikipedia.
Through its monopoly of printing the world reserve currency out of thin air, the government of the USA is insulated from any risk. What that government will do now is printing more US dollars. That’s why we are told that as long as central banks control inflationary expectations, they can now shift focus towards the recessionary forces sweeping the globe.
Lucas Papademos, Vice-President of the European Central Bank, said however on Thursday 11 September 2008 that the world’s central banks need to make concerted efforts to tackle global inflation and apply monetary policy effectively.
Just like the dollar can be created out of thin air, so can commodity derivatives. As the numbers of these derivatives can be infinitely increased, so can their price be infinitely pulled lower.
Physical commodities, like oil, gas and Gold, are no longer physically being traded. No contracts directly buying and selling these commodities are concluded. Only contracts embodying wagers as to the price of these commodities are concluded. The individuals concluding these contracts are not interested in the possession of the commodities, but only in concluding wagers over the price these commodities, paper contracts about the price of the commodities, in order to pocket the monetary surplus value.
It is however still the prices on these derivatives markets which are determining the prices on the markets for the physical things.
The supply of these derivatives can be inflated infinitely. The price of these derivatives and thus prices on the markets for the physical things can therefore also infinitely be pulled lower.
Simply put, derivatives-based pricing of tangibles is very much akin to a child playing with fire and gunpowder. It doesn’t end well because the physical things which are the object of the contracts are simply not available.
Just like at some point, the winds of deflation will be displacing the inflationary forces, so at some point, there will be a derivative sell-off.
And just like before a deflationary depression occurs, governments will debase their paper currencies, so before the derivative sell-off occurs, there will have to come a point of price separation of the physical markets from their paper frauds.
3.
The question is: “How will the value of the GCC single currency be determined?”
To answer it briefly:
The GCC must define the GCC single currency not like the old Gold standard as a certain quantity of Gold, but must use Gold as a freely trading financial reserve so that each increase in the price of Gold brings about an increase in the value of the currency’s reserves and thus an increase in the value of that currency itself.
In that way, the GCC will achieve FreeGold, a freely floating price of Gold.
FreeGold means the marking of the Gold reserves to market like the European Central Bank (ECB), not on the basis of assumptions and guesswork, that is, not to model like the US Treasury.
The GCC single currency should have a Gold component and a paper component, but should put a “firewall” between the two so that Gold’s valuation as a wealth-preserving asset cannot be pulled lower by the inevitable inflation of the paper component of circulating currencies.
It is the marking to market (MTM) of Gold reserves which should provide that wall.
Advocating the marking of these reserves to market is arguing that the accurate price of these reserves can only be found through the actual price of Gold and oil on the Gold and oil markets.
The opposite of marking to market is marking to model. Marking to model is marking on the basis of guess work, marking on the basis of assumptions.
There are indeed other Monetary Unions than Monetary Unions which fit into the International Monetary Fund (IMF)-straitjacket.
I understand that the IMF has not yet severed the link between currency and Gold and is still defining the US dollar as a certain quantity of Gold.
If the GCC marks its Gold reserves to market, whereas the dollar, to which the GCC single currency would remain pegged (in a basket), marks them to the model of $42 or so an ounce, we would have a contradiction in the GCC single-currency system. And since Aristotle the principle of non-contradiction says that it is impossible to be an not to be at the same time and in the same respect.
4.
“How will the value of the GCC single currency be determined?”
The International Monetary Fund (IMF) and the European Central Bank (ECB) hold diametrically opposed views on the subject.
Whereas before 15 August 1971, when USA President Richard Nixon broke the Bretton Woods system, the US dollar was a Gold derivative, current IMF rules (article IV, section 2, (b), of the IMF Articles of Agreement) prohibit members from linking their currencies to Gold.
Since that date, the IMF has no more reason of existence.
If the IMF continues to exist, this is in order to support the bankrupt dollar regime, thereby making of Gold a dollar derivative.
The ECB wants FreeGold as an alternative to the IMF-supported dollar regime.
The ECB does this by letting Gold remain an important element of the euro’s reserves, but by severing the euro’s link not only link to Gold, but also its link to the nation-state.
The ECB views Gold as a wealth reserve.
The IMF prohibits the linking of a currency to Gold.
By viewing Gold as a wealth reserve, the ECB has severed the link of the euro to Gold.
The ECB’s and others’ FreeGold concept, a freely floating price of Gold as an alternative to the dollar regime, makes Gold the natural vehicle to temporarily or eternally store one’s wealth in, in order to be able to later convert it into tangible wealth.
FreeGold in the central banks’ strong-rooms has the same role to fulfil as the Mona Lisa in the Louvre-museum in Paris, a wealth reserve which would now be in the strong-room (the Louvre) of a monetary union.
5.
The ECB was established in 1998.
On Sunday, 26 September 1999, on the sidelines of an IMF-meeting in Washington D.C., the ECB and the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England jointly announced, in what has since then become known as the “Washington Agreement”, that Gold will remain an important element of global monetary reserves. The Agreement, which covered the five years from 27 September 1999 and was renewed for five years on 8 March 2004, went on to limit Gold sales by the signatories. (1) (2)
In his 09 May 2002 Acceptance speech of the International Charlemagne Prize of Aachen, Germany, for 2002, the ECB’s first President, the late Dr. Willem F. Duisenberg, did however say that the euro is the first currency that has not only severed its link to Gold, but also its link to the nation-state. (3)
quote:
The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to Gold, but also its link to the nation-state.
It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of Gold five hundred years ago — that it was made for men and that it had its value by them — applies very well to the euro.
unquote
As Erasmus said, in “The Praise of Folly”, which he dedicated to his friend Thomas More,
http://www.gutenberg.org/dirs/etext05/8efly10.txt
SNIP
Is there any of you so very a fool as to leave jewels and gold in the street? In truth, I think not; in the most secret part of your house; nor is that enough; if there be any drawer in your iron chests more private than other, there you lay them; but dirt you throw out of doors. And therefore, if you so carefully lay up such things as you value and throw away what’s vile and of no worth, is it not plain that wisdom, which he forbids a man to hide, is of less account than folly, which he commands him to cover? Take his own words, “Better is the man that hideth his folly than he that hideth his wisdom.” UNSNIP
Duisenberg could not possibly refer to the Praise of FOLLY.
Yours truly can.
The European Central Bank shall leave its gold in the most secret part of its house. But that is not enough; if there be any drawer in its iron chests more private than other, there the ECB lay them; but dirt the ECB throws out of doors,
said Erasmus.
6.
The IMF was established by the Bretton Woods Agreements during the first three weeks of July 1944, says Wikipedia. (4)
The goal of IMF was to supervise the Bretton Woods system which linked the US dollar to Gold and all other currencies to the said dollar.
The US dollar was linked to Gold.
The value of the US dollar could thus be derived from Gold.
The dollar was a Gold derivative.
The international supply of two key reserve assets — Gold and the US dollar — proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore Special Drawing Rights (SDRs) were created in 1969, says the IMF. (5)
An SDR is a potential claim on the freely usable currencies of IMF members. It is neither a currency, nor a claim on the IMF. SDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are the euro, the pound sterling, the Japanese yen and the United States dollar.
SDRs are “paper Gold”, they eliminate the logistical and security problems of shipping Gold back and forth across borders to settle national accounts.
A few countries peg their currencies against SDRs, [… but …], the euro is displacing the SDR as a basis to set values of various currencies, continues Wikipedia. (6)
On 15 August 1971, that is, two years only after the introduction of SDRs, US President Richard Nixon broke the Bretton Woods system. He “closed the Gold window”, making the dollar inconvertible to Gold directly, except on the open market.
Article IV, section 2 of the IMF Articles of Agreement now provides under (a) and (b) concerning general exchange arrangements:
(a) Each member shall notify the Fund, within thirty days after the date
of the second amendment of this Agreement, of the exchange arrangements it intends to apply in fulfillment of its obligations under Section 1 of this Article, and shall notify the Fund promptly of any changes in its exchange arrangements.
(b) Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a
member of a value for its currency in terms of the “special drawing right or another denominator, other than Gold”, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice. [inverted commas mine] (7)
Article IV, section 2, (b), (i) of the IMF Articles of Agreement thus mentions Gold and SDRs in the same sentence.
Nixon did never explicitly say that he severed the link of the US dollar with Gold.
He only repealed its “redeemability”, thinking that from the moment you have a claim to Gold, you possess that Gold, even though there is no way in which that debt could by settled by the debtor through a physical transfer of Gold.
“Monkey see, Monkey do!” As I said in section 2, so-called Gold bugs then became only interested in paper Gold, that is, contracts embodying wagers as to the price of Gold. They were not interested in the possession of Gold as a wealth reserve, but only in concluding wagers over the price of Gold, paper contracts about the price of Gold, in order to pocket the monetary surplus value.
As I also said in section 2, at some point there will be a derivative sell-off, but before that point, there will have to come a point of price separation of the physical markets from their paper frauds.
We seem to be, ever faster approaching the day when we shall find out what happens when a non-redeemable currency meets a real demand for “redeemability”. The so-called Gold bugs are also going to find out that their contracts embodying wagers as to the price of Gold are not even worth the paper they are written on.
Since 15 August 1971, the USA is in the possession of a blank check to print as much green paper, also known as the US dollar, as it wants.
Since that date, the present monetary system has no more link to Gold and the IMF has no more reason of existence (the IMF has to maintain the Bretton Woods system which is no longer in force).
If the IMF continues to exist, this is in order to support the bankrupt dollar regime.
The IMF thereby makes of Gold a dollar derivative, whereas the Bretton Woods system made of the dollar a Gold derivative.
The IMF has been described by some as a tool of “neo-colonialism”. That is too mild, as 19th-century British or European colonialism, however harsh, never managed to accomplish the extent of devastation and destruction of health and living standards the IMF has done since the 1970s. (8)
THE QUESTION
7.
Whereas the 1999 Washington Agreement did say something about re-establishing the link between Gold and the euro, which the IMF prohibits, the 2002 Duisenberg statement says that the link has been severed. The 2004 renewal of the 1999 Agreement confirmed that Gold will remain an important element of global monetary reserves.
What could have replaced the severed link?
What is it that actually comes in the place of the severed link (2002), Gold remaining an important element of global monetary reserves (1999 and 2004)?
That’s the question which must be tackled before the question “How will the value of the GCC single currency be determined?” can find an answer.
That question as to what replaced the severed link is so crucial that nobody dares to talk about it in the open because even if one only vaguely refers to it, it may become obvious to intelligent listeners.
8.
The answer has to start by clearly distinguishing between Gold as a “currency” or Gold as a “hedge” against inflation and other economic and political disorders, on the one hand, and Gold as a “wealth reserve”, on the other.
Both views are diametrically opposed and cannot be reconciled.
Either, one holds the view that Gold is a currency and hedge against inflation and other economic and political disorders.
Or, one holds the view that Gold is a wealth reserve.
It is impossible for Gold to be considered at the same time and in the same respect both as a currency and hedge against inflation and other economic and political disorders, on the one hand, and as a wealth reserve, on the other.
If Gold is to be a wealth reserve, it cannot be any kind of paper-(non-)Gold (hedging) derivative.
Indeed, since Aristotle, the principle of non-contradiction says that it is impossible to be and not to be at the same time and in the same respect. Contrary to what many authors argue, this principle, or law, is not applicable to reality, only to thought. Thought is submitted to it. Reality is not. (9)
It may be that in reality Gold is both a hedge/currency and a wealth reserve, but you must make up your mind (thought) as to whether you consider it as either a hedge/currency or a wealth reserve.
Please be aware that if you make up your mind so as to think that “Gold is money” and thus that Gold is a hedge/currency, you are giving bankers full licence to treat it like money, thus throwing open the door to lost purchasing power of the metal, thereby nullifying its value as a wealth reserve.
9.
In the old days before 15 August 1971, the dollar/Gold was a currency and a hedge against inflation and other economic and political disorders.
That was the dollar regime.
On 15 August 1971, the dollar and Gold have been disjoined.
The said regime has thus no more link to Gold.
The regime is however still being supported by the IMF whose sole purpose is precisely to maintain/uphold the link between the dollar and Gold.
FreeGold is an alternative to the dollar regime. It is the opposite of the absurd IMF paper-SDR situation.
FreeGold views Gold in possession as “wealth”, not as currency, nor as hedge.
FreeGold is the view of the ECB, of many Gold saving individuals in India and other countries, of many oil producers in the Member States of the GCC, and of many others, who have severed the link between Gold and currency and are holding Gold wealth as a “constant” and reliable store for what they possess as property.
The accounting standards of the two views differ.
The IMF-supported dollar regime values Gold reserves at fixed price.
FreeGold values Gold reserves on a mark-to-market (MTM) basis.
The ECB is therefore not defining the euro like the old Gold standard as a certain quantity of Gold, but is using Gold as a freely trading financial reserve so that each increase in the price of Gold brings about an increase in the value of the euro’s reserves and thus an increase in the value of the euro itself.
This FreeGold concept, a freely floating price of Gold as an alternative to the dollar regime, must be wringed out of the dollar regime.
FreeGold makes Gold the natural vehicle to temporarily or eternally store one’s wealth in, in order to be able to later convert it into tangible wealth.
FreeGold puts a “firewall” between the Gold component and a paper component of the currency so that Gold’s valuation as a wealth-preserving asset cannot be pulled lower by the inevitable inflation of the paper component of circulating currencies.
FreeGold in the central banks’ strong-rooms has the same role to fulfil as the Mona Lisa in the Louvre.
Just as the Mona Lisa never was the backing of the franc (nor is the Mona Lisa at present the backing of the euro), and just as the French government never was concerned with the Mona Lisa’s actual currency value, so do FreeGold advocates think about Gold.
FreeGold advocates are therefore not concerned with exchange rates, stock market crashes, interest rates, financial collapses, devaluations, inflations.
They do not view Gold as a hedge.
They view Gold as Gold metal, not Gold paper (the wagers about its value).
They do not view Gold as a derivative, but they re-establish Gold metal in its status as an official and private wealth reserve.
A wealth reserve which would now be in the strong room (the Louvre) of a monetary union.
The first view, the view of Gold as a currency and a hedge, still has its supporters and Gold can for some people and some central banks continue to be a dollar derivative, because the USA Federal Reserve, the central bank of the USA, is able to create as much dollars as it wants and is still able to keep the price of Gold (Gold exchange value) in close connection with the dollar exchange value.
With last week’s nationalisation of Phony and Fraudie, the country’s biggest mortgage lenders, by the USA Treasury in order to keep the system as a whole functioning, we are sure to encounter even larger budget deficits in the USA.
Things seem to have entered into a whirlpool of transition.
As I said in section 2, at some point there will be a Gold derivative sell-off, but before that point, there will have to come a point of price separation of the physical markets from their paper frauds.
The FreeGold concept is being wringed out of the dollar regime.
More counter-parties in paper Gold contracts seem to be insisting upon Gold being actually delivered to them.
FreeGold is thereby gaining more and more respect.
When will the IMF, the USA Treasury, and the rest of the dollar regime (be forced to) surrender?
When will you, Dear Reader, realise that in order to permanently consolidate your wealth so that its purchasing power can be maintained, you should invest your wealth in the unified currency which is being used since ages – GOLD?
Or do you think that’s a four-letter word?
Or that the GCC is not part of Gold’s “optimal currency area”?
Gold is a wealth reserve, not a hedge, nor a … currency, remember?
The euro is the “first” currency that has not only severed its link to Gold, but also its link to the … nation-state, remember?
10.
The European Central Bank (ECB) on Thursday 4 September 2008 refined its collateral framework by which banks can make use of the emergency ECB funds which are guaranteed, collateralised, with/by ABS (asset backed securities).
At the press conference following the decision, Jean-Claude Trichet, President of the ECB, spoke at length about the way in which the eurogulf-currency will achieve FreeGold in the course of 2010. (Trichet speaks of course only of, for, and in name of, the euro.)
Here’s a summary of what Trichet had to say about how the eurogulf-currency will achieve FreeGold during the course of 2010. (10)
The ECB’s primary goal is delivering [and then maintaining] price stability over the medium term (the necessity to avoid broad-based second-round effects stemming from the impact of higher energy and food prices on price and wage setting behaviour should however not be overlooked.)
Price stability will be delivered in the course of 2010.
Ivo repeats:
Price stability will be delivered in the course of 2010.
Trichet again:
This means that during the course of 2010, the ECB will be back to its definition of price stability and the ECB is credible when it is says that.
I, Trichet, have noted with extreme attention that the USA authorities have said that a strong dollar is in the interests of the United States of America.
Trichet: what the USA authorities say is important, I was therefore attentive, even though market participants were less attentive.
In the recent past / very recently,
(and taking the risks to price stability and the necessity to take broad-based second-round effects
stemming from the impact of higher energy and food prices on price and wage setting behaviour into account) we [the Governing Council of the ECB] increased rates in order to reach the goal of achieving price-stability over the medium term, that is, in the course of 2010.
This means that during the course of 2010, inflation will be in line with price stability.
Ivo: this means that FreeGold will be achieved in the course of 2010.
I do not want to be more precise, but this is the moment, said Trichet.
Ivo:
Trichet did not want to elaborate on how this would be achieved.
And nobody from the independent press found it necessary to ask the FreeGold-question.
FreeGold will be achieved in the course of 2010.
But the independent press is only interested in how the refining by the ECB of its collateral framework will save the existing European financial system, just like the nationalisation of Phony and Fraudie in the USA is supposed to save the US financial system. What is so good about the US financial system that it must be saved at all cost – cost especially to the tax payer?
In Kuwait, the stock-exchange recently collapsed, so the GMC or GMA will have an opportunity to build something new. (11)
This something new will consist of the GMC marking its Gold reserves to market like the ECB, not to model like the US Treasury.
If the GCC marks its Gold reserves to market, whereas the dollar, to which the GCC single currency would remain pegged (in a basket), marks them to the model of $42 or so an ounce, we would have a contradiction in the GCC single-currency system. Does that explain why the launch of the GCC single currency should be postponed until … ?
When you think about it, the ECB would like nothing better than for the dollar to get stronger as it inflates. If the USA can keep the game going just a little longer while the GCC can get on board of FreeGold and while everybody also gets what he wants, that’s good for everybody, right?
Ivo Cerckel
Siquijor, 13 September 2008
ENDNOTES
(1)
1999 – The European central banks declare their confidence in Gold
“Press release – joint statement on Gold, 26th September 1999”
http://www.reserveasset.Gold.org/central_bank_agreements/
(2)
ECB PRESS RELEASE
8 March 2004 “Joint Statement on Gold”
http://www.ecb.int/press/pr/date/2004/html/pr040308.en.html
(3)
“International Charlemagne Prize of Aachen for 2002
Acceptance speech”
by Dr. Willem F. Duisenberg, President of the European Central Bank,
Aachen, 9 May 2002.
http://www.ecb.eu/press/key/date/2002/html/sp020509.en.html
(4)
“Bretton Woods system”
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Bretton_Woods_system
(5)
A Factsheet – April 2008
“Special Drawing Rights (SDRs)”
http://www.imf.org/external/np/exr/facts/sdr.htm
(6)
“Special Drawing Rights”
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Special_Drawing_Rights
(7)
“Articles of Agreement of the International Monetary Fund”
http://www.imf.org/external/pubs/ft/aa/index.htm
(8)
F. William Engdahl, “How the IMF Props Up the Bankrupt Dollar System”
http://www.serendipity.li/hr/imf_and_dollar_system.htm
(9)
Fernand Van Steenberghen, (F.-X. de Guibert, ed.), “Philosophie fondamentale”, Longueuil, Québec, Editions du Préambule, 1989, footnote p. 296:
Contrairement à ce qu’affirment beaucoup d’auteurs, ces principes [the principle of non-contradiction, the law of the excluded-middle and the law of identity] sont des lois logiques ou des lois de pensée comme telle et non des lois de l’ordre réel.
(10)
“Introductory statement with Q&A”
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 4 September 2008
http://www.ecb.int/press/pressconf/2008/html/is080904.en.html
(11)
“Part 1: The Collapse of the KSE”
http://chartsandnumbers.com/2008/09/07/part-1-the-collapse-of-the-kse/
“Part 2: The Collapse of the KSE”
http://chartsandnumbers.com/2008/09/08/part-2-the-collapse-of-the-kse/
“Part 3: The Collapse of the KSE”
http://chartsandnumbers.com/2008/09/09/part-3-the-collapse-of-the-kse/