Special Report: Gold Sends Failure
Signal To Western Policymakers
by Paul Craig Roberts
Gold traders detect the hands of Western central banks in large gold sales into a rising market on September 6 during evening hours when trading is thin. (See Trader Dan's Market Views)
No rational seller would sell gold in this way. This has led traders to the conclusion that central banks are trying to stop the rise in the gold price that indicates a lack of confidence in their policies.
Gold had broken the $1,900 per ounce barrier and appeared to be on its way to $2,000 in the early days of September. With US and European economic policy in disarray, such a high price of gold screamed: FAILURE, FAILURE!
In Europe there is concern with the solvency of private banks that took hard hits from Wall Street’s junk derivatives. Now these banks face problems from their holdings of Greek, Spanish, Italian and other sovereign debt. The bailout organized in order to protect the private banks itself raises concerns, because it involves new money creation and violates the charter under which the European Central Bank operates, thus introducing lawlessness into the European Union. Everyone in Europe sees that protecting the profits or solvency of private banks is taking precedence over the monetary constitution of the European Union. In other words, debt monetization in Europe has raised its ugly head.
In the US debt monetization has been the rule for a couple of years. Although the Federal Reserve announced an end, at least for the moment, to the policy, the Fed guaranteed the private banks that it would keep the short term interest rate at its current level for the next two years. In other words, the Fed will continue to buy Treasury debt or otherwise supply liquidity to prevent any rise in the interest rate.
The result is that on both sides of the Atlantic people are worried about currency depreciation. Those seeking a safe haven from dollars and euros created such a demand for Swiss francs that the currency’s value rose dramatically, threatening the country’s exports, which are a large part of the Swiss Economy. The Swiss National Bank announced that it would print as many new francs as necessary to fix the exchange rate with the euro at 1.2 francs to 1 euro in order to prevent the rise in the value of the franc.
With this safe haven closed down, people would naturally turn to gold and silver. To disrupt a rapidly rising market that appeared on the verge of breaking through $2,000 per ounce of gold, central banks apparently dumped supplies of gold on the market. To achieve maximum impact, the gold was sold in large volume during evening hours when the liquidity in the market is low.
If central banks did orchestrate the drop in gold’s price, especially if they continue such sales, it indicates desperation on their part and, thus, is likely to fail. Such a desperate act signals that Western governments have no confidence in their policies and are fearful that the world will interpret a rapidly rising price of gold as evidence of Western economic failure.
The money-printing proclivity of the US Federal Reserve Bank, now joined by the European Central Bank, has alarmed governments around the world, because their monetary reserves consists of US dollars and euros, primarily dollars. China and Russia, citing US monetary and fiscal irresponsibility, have called for a new reserve currency that would consist of a basket of currencies along with gold as a replacement for the US dollar as the single reserve currency of the world economy.
It is unlikely that such a basket could hold together when both the US and EU are committed to printing money in order to bail out private banks. The dollars and euros in the basket would depreciate as gold and the other currencies rose in value. The basket of currencies, as a measure of value, would be driven down by the depreciation of the dollar and euro, and the basket would fail.
A new Bretton Woods agreement would require a currency to be pegged to gold. That currency would become the new reserve currency. With the US dollar and euro pegged to the printing press, those options are out. What currencies remain that are large enough to fill the role? Only China’s and Japan’s, and neither country, at this time, wants the role.
The lack of an alternative has sustained the US dollar in the role of reserve currency. Few appreciate the contribution made to US international power by the dollar being the world reserve currency.
How then can the West fix the price of gold and prevent its rise from signaling a lack of confidence in Western economic policy?
The answer is that the gold holdings of the US and its Western allies, along with those of the International Monetary system, can be used to stop a rise in gold prices by selling into thinly traded markets during off-hours.
Depending on the supply of gold in Western institutions and the demand for safe haven on the part of the public with assets that is aware of the implications of debt and money creation for fiat paper currency values, a policy of suppressing gold’s price could work until the central banks realized that it was fruitless and that they were selling gold, which is rising in value, for fiat paper, which is declining in value.
In other words, if Western central banks and the IMF band together to use sales from their gold stocks to put a ceiling on gold’s price while they continue to print money, they would eventually run out of gold. Manipulation is not a basis for a successful policy in the long-run. If the West’s gold supplies are dispersed to the world, Western governments would lose the option of using gold to rebase run-away fiat currencies. Unless Western governments can devise and enact policies that restore confidence, the demand for safe haven will exceed their supply of gold.
What about silver? Is it a safe haven? Silver has many industrial uses, and, therefore, the demand for silver and its price depend in part on how well economies are doing. Nevertheless, silver is a precious metal. Its supply, unlike fiat paper currencies, is not infinite. It cannot be printed. Silver was the medium of exchange in the Roman Empire. Until the latter 1960s, silver was the basis of US coinage and $1 and $5 Federal Reserve notes.
Silver has tripled in price in the last several years, and not because of a booming economy’s industrial uses. Silver is the poor man’s gold. At $42 per ounce, it is an accessible haven for those with little wealth to protect.
What would it take to turn gold and silver into bubbles?
The EU would have to say that it will not print money to bail out the private banks and that the banks would have to eat the losses from restructuring the loans that they improvidently made to Greece, Spain, Portugal, and Italy. If the losses are so heavy that the private banks fail, the ECB could help successors take over and recapitalize the failed banks.
In the US, economic policy would have to move from protecting private banks from failure to protecting the economy from failure. This would mean an end to unaffordable wars and an end to financial bailouts that protect the mistakes of financial deregulation.
Banks “too big to fail” would have to fail and be reorganized or be taken over by new owners, and put on a sound footing in place of the romantic theory that, in the words of the architect of America’s financial disaster, former Federal Reserve Chairman Alan Greenspan, banks are best left to self-regulation.
Since the Clinton administration, regardless of its party colors, US foreign and domestic policy has been insane. It has violated every precept we learned from the FDR administration during the Great Depression and has unleashed greed as the most powerful force in the economy. The result has been junk “securities” given AAA ratings, debt leverage beyond anything previously imaginable, and bailouts of the greedy totaling $16.3 trillion, a sum larger than the GDP of the US economy.
The world is flooded with fiat money. Unless Western policymakers can find a different solution to the printing press, the West, as an economic and world power, is finished.