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    The Gulf Dinar – The New Oil-Standard

    Posted by Ivo Cerckel on September 21st, 2009

    In the real world, some people know that gold and oil are real wealth no matter what currency price is put on it.
    It is the movement of gold in the hidden background that has kept oil at these low prices.
    Oil must be billed at its correct “value” which must be reflected in FreeGold.

    I said in my 09 September 2009 “Gulf dinar to be backed by gold hiding in oil”-post that the Gulf oil-wealth will back up the Gulf dinar, the Gulf Co-operation Council (GCC)’s single currency (1)

    In my “Why use dollar for int’l trade? – former Malaysian PM”-post of 16 September 2009, I quoted former Malaysian prime minister Tun Dr Mahathir Mohamad as asking last week why the planet should continue to use the dollar in international trade and as saying that the new reserve currency, the new currency settling international trade, will have to be gold backed. (2)
    Dr Mahathir is thereby departing from his earlier proposal to use the Islamic gold dinar in trade between countries.

    Now I want to examine how the GCC’s gold and oil reserves backing the Gulf dinar will determine the dinar’s value.

    People erroneously believe that the dollar has the power to buy oil, just like US president Barack Obama thinks that at this week’s G20 summit in Pittsburgh, he can safeguard “our” global financial system by enacting another batch of regulations.

    THE ARCHITECTS

    The architects of the New Oil-Standard know that it is the movement of gold in the hidden background that has kept oil at these low prices. Not military might, not a strong dollar, not political pressure, no it was real physical gold. In very large amounts. Oil is the only commodity in the world that was large enough for gold to hide in. (3)

    The architects of the New Oil-Standard know that the fact that the dollar is still being used as the intermediary numéraire for oil-trade settlement, as the intermediary basic “standard” by which values are measured for oil-trade settlement, gives this dollar-paper the backing of oil becomes an indispensable valuable.

    The architects of the New Oil-Standard know that once oil will see no more reason to support/back the dollar, oil will “openly” shift towards gold and back it (through demand for gold) so as to create the new market for physical gold in association with the gold-friendly numéraire which the Chinese yuan or renminbi is.

    The architects of the New Oil-Standard long-suspected that China is increasing its gold reserves in order to achieve FreeGold, a free-floating price of Gold as an alternative to 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.
    More recently, China became alarmed by the money printing by the Federal Reserve, the US central bank, (4) and said it will continue to buy gold on the dips as a systematic policy. (5)

    The Chinese want the world to know that they are increasing their gold, not euro (6), reserves so that the product (the “fruit”) of their wealth be consolidated with a view to further fructifying.

    In the real world, some people know that gold and oil are real wealth no matter what currency price is put on it.

    THE OLD GOLD-STANDARD

    The old gold-standard could not change human nature which dictates that no ruler can withstand the pressure to print more receipts than he has gold in reserve. (7) The old gold-standard did moreover not provide for the possibility that an increase of the ounces, kilograms, or tonnes of gold held in reserve would lead to an increase in the currency’s value. Its chief weakness was however that it could be repealed by the politicians. (8)

    Before 15 August 1971, when US president Richard Nixon broke the 1944 Bretton Woods agreements which linked the US dollar at fixed parity to gold and all other currencies to the said dollar, oil producers accepted the ease of trading oil for dollars because these “casino chips” could be exchanged at the cashier window (the gold window). Then, in 1971 the “cashier” was closed for good. Hence, the 1973 (first) oil crisis. (9)

    Before 15 August 1971 the dollar was backed by gold. Since then, the dollar is backed by demand for the “subjective use-value” of the dollar for oil (the Gulf dinar), oil (the Gulf dinar) still being priced in dollar. People need to use the dollar to buy oil (the Gulf dinar). The dollar is thus being backed by this need, the buyers of the dollar demanding dollars in order to be able to buy oil (the Gulf dinar).

    As Ludwig von Mises points outs:
    Use value in the “objective” sense is the relation between a thing and the effect it has the capacity to bring about. It is to objective use-value that people refer in employing such terms as the “heating value” or “heating power” of coal.
    “Subjective” use-value is not always based on true objective use-value.
    There are things to which subjective use-value is attached because people erroneously believe that they have the power to bring about a desired effect. On the other hand, there are things able to produce a desired effect to which no use-value is attached because people are ignorant of this fact. (10)

    THE NEW OIL-STANDARD

    The old gold-standard was not perfect, but at least it disciplined the monetary authorities in some way.

    In order to return to some discipline, the Gulf dinar should have a gold component and a paper component, but 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 the gold reserves of the GCC Central Bank (GCB) which should provide that wall.

    Nothing prevents the GCC Monetary Union (GCC MU, GMU in short) from copying what the Chinese are doing and keep gold (the Mona Lisa) in the strong rooms (the Louvres) of its central banks and mark it to market (MTM) price
    (not to the model of 44 dollar an ounce or so like the Fed, the US central bank)
    on a regular basis.

    Every individual of the planet would then be free to copy the concept of FreeGold.

    In that case, every increase in the price of gold, would lead to an increase in the value (of the reserves) of the central bank and/or the individual.

    Just like it would never enter the mind he owner of the Mona Lisa daily to organise a “test-action” to establish what today’s value of his wealth is, neither do the Chinese organise test auctions. Once FreeGold will have arisen, gold will continuously be auctioned … freely and on a global basis.

    MTM of oil means that the objective use-value of oil in FreeGold must correctly reflect the wealth which oil produces for the planet.

    Oil must be billed at its correct “value” which must be reflected in FreeGold whereby the exchange rate between the objective use-value of oil and the objective use-value of FreeGold remains constant or stable whatever the currency, that is, whereby the objective use-value of oil is “pegged” to the objective use-value of FreeGold.

    That’s how the GCC oil-wealth will back up the Gulf dinar.

    In the real world, some people know that gold and oil are real wealth no matter what currency price is put on it.

    For the moment, the movement of gold keeping oil at these low prices is occurring in the hidden background. There is however no more reason for oil to back the dollar. The time has come for oil to “openly” shift towards the Gulf dinar and back it.

    Ivo Cerckel
    honestmoney@maktoob.com
    http://twitter.com/ivocerckel/

    NOTES

    (1)
    Gulf dinar to be backed by gold hiding in oil
    Posted by Ivo Cerckel on September 9th, 2009
    http://bphouse.com/honest_money/2009/09/09/gulf-dinar-to-be-backed-by-gold-hiding-in-oil/
    [If the link does not work, try to copy it and to paste it in your browser.}

    (2)
    Why use dollar for int’l trade? – former Malaysian PM
    Posted by Ivo Cerckel on September 16th, 2009
    http://bphouse.com/honest_money/2009/09/16/why-use-dollar-for-int%e2%80%99l-trade-former-malaysian-pm/
    [If the link does not work, try to copy it and to paste it in your browser.}

    (3)
    ANOTHER (THOUGHTS!)
    Foundational Gold Trail Commentary
    The Inside Story on the Gold-for-Oil Deal that could Rock the World’s Financial Centers
    “Think now, if you are a person of “great worth” is it not better to acquire gold over years, at better prices? If you are one of “small worth”, can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!” –ANOTHER (THOUGHTS!) 1/10/98

    http://www.usagold.com/goldtrail/archives/another1.html

    Date: Sun Oct 05 1997 21:29
    ANOTHER ( THOUGHTS! ) ID#60253:
    SNIP
    oil is being partially used to pay for gold! We are going to find out that the price of gold, in terms of real money ( oil ) has gone thru the roof over these last few years.

    (4)
    China alarmed by US money printing
    The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
    By Ambrose Evans-Pritchard, in Cernobbio, Italy
    Published: 9:06PM BST 06 Sep 2009
    http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html

    (5)
    China, Bernanke, and the price of gold 
    By Ambrose Evans-Pritchard
    Last updated: September 7th, 2009
    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/
    SNIP
    Mr Cheng was until recently vice chairman of the Communist Party’s Standing Committee and is now a sort of economic ambassador for China around the world […}
    What he said about US monetary policy and gold — this bit on the record — would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.
    He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.
    “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.
    In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.
    Investors long-suspected that it was China.

    (6)
    contrast this to
    European-Union Economic and Monetary Affairs Commissioner Joaquin Almunia who said on Friday
    that China would rush into euros
    and that this would have negative consequences for Europe by pushing up the value of its single currency,
    adding that he thought a Chinese proposal to base a new global currency on the International Monetary Fund’s Special Drawing Rights was inevitable.
    (UPDATE 1-EU’s Almunia hopes China won’t rush into euros
    09.18.09, 08:22 AM EDT   
    By Jason Webb
    MADRID, Sept 18 (Reuters) –
    http://www.forbes.com/feeds/afx/2009/09/18/afx6903084.html

    No, Mr Almunia, China doesn’t want SDRs. China wants the yuan to be gold backed.

    With Chinese Freegold from a reserve currency to a world standard
    by Ivo Cerckel
    Tuesday, 2 September 2003
    http://www.free-europe.org/english/2003/09/with-chinese-freegold-from-a-reserve-currency-to-a-world-standard/
    [replace “derivates” in the text with “derivatives”]

    Only Iran shifts its reserves towards and sells oil in euros.

    Iran shifts currency reserves to euros
    Sep 20, 2009 at 21:20
    http://business.maktoob.com/20090000375246/Iran_shifts_currency_reserves_to_euros/Article.htm
    SNIPS
    Iranian President Mahmoud Ahmadinejad has issued an order to shift the oil-rich Persian Gulf nation’s foreign currency reserves from dollars to euro, the semiofficial Mehr news agency reported Sunday.
    +
    The Persian Gulf country has said it had stopped conducting crude trading in dollars and started using euro instead, Mehr said.

    (7)
    Roland Leuschel and Claus Vogt, “Das Greenspan Dossier, Wie die US-Notenbank das Weltwährungssystem gefährdet. Oder: Inflation um jeden Preis”, www.finanzbuchverlag.de, 2006, 3rd ed., p. 300

    (8)
    Leuschel and Vogt, op. cit., p. 304

    (9)
    DEAD END
    WEDNESDAY, JUNE 17, 2009
    Posted by FOFOA at 3:11 PM   
    http://fofoa.blogspot.com/2009_06_01_archive.html

    (10)
    Ludwig von Mises, “Human Action – A Treatise on Economics”, Chicago, Contemporary Books, 1966, (originally published 1949), 3rd. rev. ed., p. 120