Written by 24 carat
Publicly the so called authorities remain in a state of denial about the systemic debt crisis. The idea for the need of a new monetary order already lives very silently in the big shadow of the false perception buildings for the past 20 years. It all started in 1993/1994 with the implementation of the Gibson Paradox (Summers/Rubin). The National Bank of Belgium (with 1,350 tonnes of gold reserves) was the first to start, in the coordinated program of central bank gold reserve sales, leading to the birth of the ECB and €. Most of the European central bank (CB) gold reserve sales went to China, through the BIS as the globe’s CB gold settlement organizer. 1993-2003 was another decade of CB gold reserve distribution, that already started before and during the London Gold Pool period when the US’ as greatest world gold reserve holder (28.000 tonnes) was drained from gold by the EU (and Middle East). The European system of central banks sold some of its gold to China for the purpose of the multilateral development of a new monetary order. China now demands its righteous place in the international organizations (IMF, WB, BIS) that govern the world’s monetary affairs. That’s why so many gold-facts took place in the recent 2 decades after 15 years of relative gold calm (1980-1994).
The existence and survival of the euro and China’s growing economic force are the two main obstacles for the $-regime to agree on a new monetary order. These obstacles didn’t exist in the 1944 Bretton Woods and not in 1971 when Nixon closed the gold window, unilaterally. Now, the $-regime cannot take the absolute world leadership anymore on a new monetary order. The ECB and the PBoC must have their say.
The third obstacle is the petro-$ and its replacement. Oil will have to accept settlement also in other currencies than the dollar. That’s why the € and RMB want free floating gold reserve valuation as to strengthen their credibility. That’s why the Gulf Cooperation Council organizes a monetary union on the EMU/ECB model. They will certainly include central bank gold reserves to be marked to market, just like the ECB does.
The US goes for shale oil/gas. The rest of the world is not following this development. Maybe because the petro-$ will soon not be needed anymore to buy oil/gas/commodities. One might be able to buy oil with one’s own currency, hardened by gold reserves that are allowed to float freely in value,… what oil owners, with plenty of gold reserves, do appreciate. Gold wealth as a store of wealth, replacing depleting oil/gas wealth. Exactly the same that China wants for storing the produced surpluses.
A steady rising gold price is reinforcing all states that have gold on their CB balance. Ask yourself why the € (/RMB) remains strong against the $. What exactly is driving the strength of the euro’s exchange rate. Imagine other countries/currencies having the same pro free-floating-gold attitude like the ECB. What if this concept must be part of the new monetary order.
The US’ main defense for maintaining the $-reserve status is breaking the steady gold price revaluation (2011) and postponing the needed new monetary order. Note, that even the abolishing of the Glass Steagall Act could not prevent gold to rise double in value versus the Dow Jones (since 1971/1973). What does this say about the system of debt-driven economies!
What happened to gold’s status as CB collateral?
In 2010 the Basel Committee on Banking Supervision presented the first official version of its new recommendations, which was called Basel III. Basel III abolished the Tier 3 capital class – all assets fell either under Tier 1 or Tier 2 capital. Under these recommendations gold remained eligible collateral with a haircut of 15% just as it was under Basel II. Moreover, the announcement of the US Federal Deposit Insurance Corporation (FDIC) made on June 18, 2012, stated that gold bullion is a “zero percent risk-weighted item” (an item perceived as risk less, similarly as Tier 1 capital), but brought “no change to banking capital rules with respect to gold”, as the FDIC spokesperson claimed. So gold was considered risk less in the U.S. under the Basel II recommendations and it will remain considered this way under Basel III provisions. No change has been brought about.
Despite the BIS not yet making gold a Tier 1 asset now, it will be at some point in the future when China conquers its righteous place in the international institutes. For the time being, one must continue to buy and hold US Treasuries and Eurobonds as to keep interest rates down to zero (Gibson Paradox).
The present declining gold price, functioning as B. Zoellick’s international reference point, signals loud and clearly deflationary market expectations which are not at all pro growth oriented. A very paradoxal central bank policy, indeed! Are the CB gold reserves, marked to market, making currencies too strong and disturbing the wanted exchange rates with the dollar? What if the UST/FED has very little gold reserves left? Does the dollar have dumping fears when weakening because of its systemic deficits which cannot be stopped and turned around. Is the present $-system still capable of coping with a new monetary order, a cooperative international monetary system, with an internationalizing (convertible) renmimbi? This boils down to the infamous exit question: what to do with the gigantic inflated monetary bases and record low velocity of money!?
The gold price rise into 2011 was increasingly interpreted as a lack of confidence in national policies and central bankers’ policies! The gold price must now serve a dualistic purpose as reference point. Producing inflationary growth expectations and at the same time not signaling lack of confidence. What a terrible catch-22 situation. How much time can they buy to develop policies that finally create the foundations for durable/abiding economic growth?
By letting the gold price produce the wrong conflicting signals, the initiative to start a new monetary internationally balanced order is being postponed. A convertible RMB would break the back of the dollar’s world reserve system with many far reaching consequences.
Today, not one monetary block can enforce the other to accept any new monetary order as happened in 1944 Bretton Woods, when the entire devastated world had to accept the US$ dictate. Today’s catch-22, economic-monetary-financial-political situation, has first to deteriorate much further before it is opportune for all parties (EU/US/China) to agree on a new monetary order.
In the mean time the positive perception building goes on unabated as to avoid a sudden dramatic fall in the animal spirits of the consumption economies and cause unacceptable sudden economic deterioration.
Today’s conflicting gold price management is recognized and understood as such by those with deep system insights. That’s what the ongoing private gold metal accumulation is all about. It will continue and eventually go parabolic up until the circumstances for a new monetary order are in place. The chances that further economic deterioration can be avoided are now extremely thin.