Anyone who has been paying attention to the global economy the past years can agree with me our central bankers have conducted miserable monetary policy and have taken the insufficient measures to fight crises.
All major economies have embarked in printing unprecedented quantities of money, but the only thing they bought was time. Quantitative easing on such a scale is like kicking the can determined to reach the end of the road. The future looks anything but sanguine.
Where is this going? Are our leaders truly going to allow the international monetary system to implode?
Is there no plan B? And we are supposed to believe gold isn’t of any significance in economics?

Submitted by Koos Jansen, Bullionstar:

In our current highly unstable economic environment the price of gold is relatively low, according to gold proponents like me. In addition, we can see immense flows of physical gold going from West to East that are guaranteed not to return in the foreseeable future. If the price of gold isn’t suppressed, my previous two observations can only be explained as physical supply outstripping demand since April 2013 – when the price of gold declined substantially to its currentrelative low levels. But perhaps there is more than meets the eye.

I would like to share a theoretical explanation for the observations just mentioned, supported by historic diplomatic documents that provide some guidance through the present fog.

Let’s start just before gold was removed from the system:

In the sixties France stepped out of the London Gold Pool, as it didn’t want to waste any more gold on the war the US was waging against Vietnam. The London Gold Pool was a joint effort by the US, the Netherlands, France, Germany, Italy, Belgium, Switzerland and the UK to peg the price of gold at $35 an ounce. But because the US was printing dollars to finance the war in Vietnam – this devalued US dollars – a lot of gold was required to maintain the price at $35. Shortly after France left the Pool it collapsed in March 1968. From the IMF:

While the total number of U.S. dollars circulating in the United States and abroad steadily grew, the U.S. gold reserves backing those dollars steadily dwindled. International financial leaders suspected that the United States would be forced either to devalue the dollar or stop redeeming dollars for gold.

The dollar problem was particularly troubling because of the mounting number of dollars held by foreign central banks and governments: In 1966, foreign central banks and governments held over 14 billion U.S. dollars. The United States had $13.2 billion in gold reserves, but only $3.2 billion of that was available to cover foreign dollar holdings. The rest was needed to cover domestic holdings. If governments and foreign central banks tried to convert even a quarter of their holdings at one time, the United States would not be able to honor its obligations.

The Incredible Shrinking Gold dollar IMF

And that is exactly what happened; in 1971 the US closed the gold window, no longer could foreign central banks convert dollars into gold (except on the open market). As I’ve written before: (i) Europe, most notably France was not amused and wanted to revalue gold, (ii) the US was very persistent to completely phase out gold from the monetary system in order to leverage the power of the US dollar hegemony.

I’ve found documents that connect the past with the present. On February 24, 1970, French President Pompidou met with US President Nixon in Washington DC. The oncoming quotes are from the US minutes of the meeting:

Turning to France, the President [Pompidou] said he wished to emphasize again that – as distinguished from the positions of some of his predecessors in this office – he would not comment on the independent French policy. He might have his own views but he felt that a strong independent France devoted to the same goals as we are is in the interest of the US. A strong Europe in the economic sense might seem not to be in the US interest, in the long term it was. What we need is a better balance in the West. It is not healthy to have just two superpowers; in such a situation there is more chance of a conflict than when there are more centers of power. Greater strength of the European economies, an independent French policy, and, in Asia, a stronger Japan, would eventually make for a more stable world. The position of the U. S. at the end of World War II was not healthy. Twenty-five years had passed and things were changed. This we regarded as a healthy development.

In the final analysis with three billion people on earth if civilization is to survive … this will be decided by the Soviet Union, by China, and eventually Japan, by Western Europe, by that he meant France, Britain and Germany and the United States. Africa is moving along, but it is a century away.

Latin America is also moving but it is fifty years or more away. In Asia, India and Pakistan will have enormous difficulty in simply keeping pace with their increase in population. We have a great responsibility to use the power we have to build the kind of a world that keeps the forces of expansion in check and thus give the forces of freedom a chance to grow in their own way and not like tin soldiers lined up behind the biggest one.

Pompidou’s idea was clearly to spread economic power across the globe for a more balanced, peaceful and prosperous world. We can also read the first signs of a unified Europe between the lines. Pompidou is one of the best forecasters I’ve ever read, what he said 45 years ago has more or less happened by now. However, Pompidou’s ideology could not coexist along the dollar hegemony. The US, therefor, embarked in divide and conquer, a notorious strategy to gain and maintain power. The next quotes are from a telephone conversation on March 14, 1973, between Henry Kissinger, National Security Advisor, and William Simon, Under Secretary of the Treasury:

K: … I’ve just been called to the President. Let me tell you — Shultz has sent me a copy of the cable that Volker gave him – that Volker sent him about the interventions, and he has asked for my views. I basically have only one view right now which is to do as much as we can to prevent a united European position without showing our hand.

S: Okay. Well, I interpret that as less intervention, which is a good idea, and I think George will be very happy with that comment. Do as much as we can to prevent a unified European position.

K: I don’t think a unified European monetary system is in our interest. I don’t know what you think for technical reasons, but these guys are now helping to put it to us.

S: Yes, sir.

K: I don’t know whether that’s true in the short term, but I’m convinced that that’s true in the long.

S: I just agree with you a thousand percent.

K: So I’d rather play with them individually. You know, if it were a question of supporting an individual currency, I’d be much more inclined to do that.

S: Yes, such as the mark.

K: That’s right.

S: Yes, sir.

K: Does that make sense to you?

S: Yes it does.

K: You understand, my reason’s entirely political, but I got an intelligence report of the discussions in the German Cabinet and when it became clear to me that all our enemies were for the European solution that pretty well decided me.

S: Yes, sir. Well, I pass. I’m going to be talking to George on the telephone.

K: Be careful. Everything in Bonn is tapped.

S: I promise you I will.

Next, from Wikileaks, a report of a meeting held by all European Ministers of Finance about gold, written to the American Ministry Of Foreign Affairs on April 23, 1974 (Europe and the US were debating this issue for a few years):

MADE IN A WIDER INTERNATIONAL CONTEXT, WHAT CAME OUT OF ZEIST WAS A CONSENSUS ON CERTAIN SUBSTANTIVE PROPOSITIONS THAT ARE TO BE FURTHER EXPLORED BEFORE THEY ARE SUBMITTED TO A NEXT MEETING OF THE COUNCIL OF MINISTERS OF THE EEC [EU]. IF AT A LATER STAGE THE COUNCIL REACHES AGREEMENT ON A CERTAIN POSITION, THE FURTHER PROCEDURE COULD BE THAT THE EUROPEAN COMMUNITY FORMULATES A FORMAL PROPOSAL ON HOW TO DEAL WITH THE PROBLEM OF GOLD IN THE PERIOD BEFORE THE REFORM OF THE INTERNATIONAL MONETARY SYSTEM.

IN ZEIST, MINISTERS HAVE AGREED ON TWO GENERAL PROPOSITIONS. FIRST, THEY HAVE RE-ASSERTED THAT THE SDR SHOULD BECOME THE PRINCIPAL RESERVE ASSET IN THE FUTURE SYSTEM, AND THAT ARRANGEMENTS FOR GOLD IN THE INTERIM PERIOD SHOULD NOT BE INCONSISTENT WITH THAT GOAL. SECOND, THEY HAVE AGREED THAT SUCH INTERIM ARRANGEMENTS SHOULD ENABLE MONETARY AUTHORITIES TO EFFECTIVELY UTILIZE THE MONETARY GOLD STOCKS AS INSTRUMENTS OF INTERNATIONAL SETTLEMENT.

THERE WAS A CONSENSUS AMONG MINISTERS THAT AN INCREASE OF THE OFFICIAL GOLD PRICE, ALTHOUGH IT MIGHT SERVE THE SECOND OBJECTIVE, WOULD BE INCONSISTENT WITH THE FIRST. IN ORDER TO MOBILIZE MONETARY GOLD AS AN INTERNATIONAL RESERVE ASSET, THEY HAVE AGREED THAT:

1) MONETARY AUTHORITIES SHOULD BE PERMITTED TO BUY AND TO SELL GOLD BOTH AMONG THEMSELVES, AT A MARKED-RELATED PRICE, AND ON THE FREE MARKET. THE MONETARY AUTHORITIES WOULD HAVE COMPLETE FREEDOM TO BUY OR TO SELL GOLD, AND WOULD HAVE NO OBLIGATION WHATEVER TO ENTER INTO ANY PARTICULAR TRANSACTION.

2) CERTAIN DELEGATIONS ARE OF THE OPINION THAT GOLD TRANSACTIONS WITH THE FREE MARKET SHOULD NOT, OVER A CERTAIN PERIOD OF TIME, LEAD TO A NET INCREASE OF THE COMBINED OFFICIAL GOLD STOCKS.

3) IN ORDER TO APPLY THESE PRINCIPLES, VARIOUS PRACTICAL SOLUTIONS CAN BE ENVISAGED. TWO WERE MENTIONED IN PARTICULAR. ONE IS THAT MONETARY AUTHORITIES PERIODICALLY FIX A MINIMUM AND A MAXIMUM PRICE BELOW OR ABOVE WHICH THEY WOULD NOT SELL OR BUY ON THE MARKET. THE OTHER CONSISTS IN CREATING A BUFFER STOCK TO BE MANAGED BY AN AGENT WHO WOULD BE CHARGED BY THE MONETARY AUTHORITIES TO INTERVENE ON THE MARKET SUCH AS TO ENSURE ORDERLY CONDITIONS ON THE FREE MARKET FOR GOLD.

Now we know what Europe was planning in seventies, this explains a lot better what occurred later on. Remember theWashington Agreement On Gold? Just before the euro was introduced in 1999, all European central banks collaborated in a program called the Central Bank Gold Agreements (CBGA), or the Washington Agreement On Gold, to jointly manage gold sales. (note, Eurozone aggregated gold reserves currently still transcend US reserves)

In 1991 the Dutch central bank (DNB) held 1,700 tonnes in official gold reserves, currently it holds 613 tonnes. When the Dutch Minister Of Finance, J.C. de Jager, was questioned about these sales in 2011 he answered:

Question 6: Can you confirm that since 1991 DNB has sold 1,100 tonnes of the 1,700 tonnes it owned…

Answer 6: Since 1991 DNB sold 1,100 tonnes. At the time DNB determined that from an international perspective it owned a lot of gold proportionally. It decided to equalize its gold holdings relative to other important gold holding nations.

Right, so since the seventies Europe wanted to spread economic power across the globe, replace the dollar as the world reserve currency and sold parts of its official gold reserves “to equalize its gold holdings relative to other important gold holding nations”. These types of plans aren’t realized overnight; it can take decades, it can even take more decades than estimated. Who knows? We can be in the final stage right now.

Not so long ago I published a Wikileaks cable from 1976 wherein China expresses its particular interest in gold and SDR’s. Of course this is all just a theory, but it seems as if the redistribution of the chips, physical gold flowing form West to East, is all part of orchestrated preparations for the next international monetary system, anchored by gold. This system would require gold to be spread among the major economic power-blocks proportionally.

Jean-Claude Trichet, former president of the European Central Bank, said on November 4, 2014:

The global economy and global finance is at the turning point in a way, …new rules have been discussed not only inside the advanced economies, but with all emerging economies, including the most important emerging economies, namely, China.

(h/t Freegold)

historic documents:

1970 February 24, Washington DC, US. Pompidou and Nixon.

1971, October 28. Phone call between Nixon and Kissinger on gold.

1971, December 13 & 14, Azores. Negotiations between Kissinger and Pompidou about the value of currencies and gold.

1973, March 14, Kissinger and Simon telephone conversation.

1973, May 18, Paris, France. Meeting Kissinger And Pompidou on value of gold.

1974, March 6, Washington, US. Note From the Deputy Assistant Secretary of State for International Finance and Development (Weintraub) to the Under Secretary of the Treasury for Monetary Affairs (Volcker): GOLD AND THE MONETARY SYSTEM: POTENTIAL US–EU CONFLICT.

1974, April 22 & 23, Zeist, The Netherlands. Meeting European Ministers Of Finance On Gold.

1974, April 25. Minutes of Secretary of State Kissinger’s Principals and Regionals Staff Meeting on gold.

Koos Jansen

The Royal Mint is to produce gold and silver bars under its “refinery” brand, last used nearly 50 years ago.

It is the first time since 1968 that the public will be able to own bars imprinted “RMR”, standing for Royal Mint Refinery.

The Royal Mint Refinery operated in London for more than 100 years, purifying gold and silver bullion from places such as South Africa.

However, production stopped at the end of the 1960s.

The largest bar on offer will be 100g of either gold or silver.

According to current prices, a 100g bar of 24 carat gold costs £2,868.

The 100g bar of fine silver costs £71.

Investment potential
However, buying gold can be a risky investment, since the price has performed poorly over recent months.

Nevertheless, there has been substantial recovery in the gold price since the start of the year.

This week it hit $1,300 an ounce for the first time since August 2014.

The value has increased ahead of the European Central Bank’s decision on quantitative easing (QE), expected on Thursday.

The gold bars do not carry VAT, and in some circumstances can be held as part of a pension fund.

 

BBC NEWS

Gold hit a price low of approximately $1,140 in early November 2014. Since then it has rallied dramatically, possibly because of global fears about the financial system, the Swiss National Bank removing its peg to the Euro, more QE, escalating war in the Ukraine, or simply that gold prices were over-extended and ready to rally.

In my opinion gold reached an important low in November, and in spite of a rising dollar, has rallied since then in dollar terms, and even more in most other fiat currencies.

However gold is still undervalued by about 16% according to my long-term empirical model. Further, gold has potential to rally far higher and is likely to overshoot the 2014 equilibrium price of $1,527 calculated by the gold model. Gold could easily reach $2,000 by late 2015 or 2016.

Examine the graph of annual gold prices since 1971 versus the calculated gold prices from the empirical model. The correlation, as calculated by Excel, is 0.98 for 1971 – 2014.

Gold_Calculated_1971_2014

My empirical model begins in 1971 when President Nixon “temporarily closed the gold window,” allowed the dollar to float freely, and enabled currency in circulation to increase rapidly. The model uses only three macro-economic variables, which are discussed in detail in my book, “Gold Value and Gold Prices From 1971 – 2021”.

What does the model indicate for the next several years?

Since the model is based on two dominant variables and one minor variable we can ask how those two dominant variables are likely to change in the future. National debt is the first variable and has increased since 1913 at about 9% per year. Since 2008 it has risen approximately 10.0% per year. Based on one hundred years of history and current politics, we can safely assume that the U.S. national debt will continue rising, and that expenses for the United States government will substantially exceed revenues for the foreseeable future.

The second variable is the price of crude oil which has fallen dramatically in the last 5 months. Many people have suggested that the price of crude will remain low for the balance of the decade and perhaps far longer because of weakening demand. While I understand the weak demand argument, I believe that the price of crude will erratically rise along with total currency in circulation and total debt, as it has since 1971.

Central banks will use their primary tools – monetizing bonds or “printing money” – to overcome deflationary influences in the global economic system. Japan has given us an indication of what to expect from central banks in Europe, the United States and Great Britain. In my opinion the current low price of crude, whether due to diminishing demand or price manipulation, is temporary and will increase considerably due to the inevitable rise in global debt and currency in circulation.

The two variables, debt and crude oil, will dominate in the calculation for future gold prices. My conclusion is that gold is still undervalued and that my model projects substantially higher prices for gold through the balance of the decade. The model uses plausible assumptions about increasing debt and the price of crude oil over the next six years and indicates that $5,000 gold and possibly $10,000 gold are reasonable and should be expected. Please note that certain events, such as hyperinflation in the United States, a nuclear war, or even a widening Ukrainian war could easily push the price of gold (in U. S. dollars) far higher than the model indicates.

If central banks fail in their efforts to increase inflation, and the world devolves into a global deflationary depression and possibly a nuclear winter, the dollar price of gold could be unpredictable, but the purchasing power of gold will almost certainly increase as paper assets and fiat currencies crash and burn in a deflationary depression.

In my opinion the deflationary depression scenario seems far less likely given that central banks have a one hundred year history demonstrating both their willingness and ability to devalue their currencies, create inflation, and to drastically increase the total debt and currency in circulation.

Conclusions

The price of gold closed on Friday, January 16 at approximately $1,276. My model indicates that price is still too low by about 16% and therefore the probability is that the price of gold will rally substantially in the next several years.

February Gold has reached the highest price levels since early October, leaving the 100 day moving average further behind. More talk that the sharp decline of oil hits severe global slowing have brought safe havens center stage. Metals are gaining despite strength in the Dollar and modest gains in equities in the last days. Seasonal buying has supported gold, as well as increased interest in mining shares over the last days and precious metals ETFs.

Going forward, it is mandatory to watch the effects of lower crude oil prices.

A top manager at one of the most popular funds focused on gold and gold mining shares says that gold will recover from its three-year slump in 2015, but other investment professionals are less convinced, saying that the price of gold will continue to fall.

Evy Hambro who manages the £1bn Blackrock Gold and General Fund told the Daily Telegraph that he believes that having fallen 40 per cent since summer 2011, the gold price has finally “bottomed-out”, and is about to enter a “new stage”.

Hambro argues that the European Central Bank is expected to print billions of new euros to try to prevent deflation and stimulate growth, which in turn is likely to boost European equity markets.

“In periods of uncertainty people reach out for gold as a safe asset. With this loose monetary policy around the world and fears around deflation, people will want to reach out for safe assets and gold is the natural place that people will move to as a store of wealth,” Hambro said.

HSBC also raised its average gold price forecast for 2015, Bullion Desk notes, due to the growing strength of the dollar and global geopolitical fears which support gold’s “safe-haven qualities”.

But not everyone concurs. Stephen Jones, the chief investment officer at fund manager Kames Capital, says that the main reason people tend to buy gold is fear of inflation, but presently the conditions don’t suggest widespread inflation is a threat.

“In fact, the fragility of the global economy remains such that any upward pressure in the form of interest rate rises – which we do not expect to see until the very end of 2015 at the earliest – could easily push economies into deflation,” Jones said. “This is why any move into gold needs to be based on a very long-term view.”

Some analysts say that attempting to forecast markets is simply impossible. Barry Ritholtz, writing for Bloomberg, says that predictions on markets, interest rates, gold, oil, economic growth and unemployment are a “silly waste of time”.

Ritholtz points to the 2014 prediction by Peter Schiff of EuroPacific Capital last April that the “Federal Reserve’s quantitative-easing program will push gold to $5,000 an ounce”.

Rather than seeing the price of gold skyrocket, it closed 2014 just under $1,200, around 80 per cent lower than Schiff’s forecast. Ritholtz concludes with a quote from economist JK Galbraith: “The only function of economic forecasting is to make astrology look respectable.”

Gold’s negative correlation against the U.S. dollar appears to be breaking down as Europeans, in particular, search for safe haven investments, but analysts are mixed as to whether this demand can drive the global gold market higher.

On Monday, gold priced in euro soared through technical resistance at €1,000 an ounce and is currently holding on to those gains, trading around €1,020 an ounce, up more than 1.6% on the day. Colin Cieszynski, senior market analyst at CMC Markets said, describing the move as a “huge breakout” of resistance levels, which has been in place since 2013.

euro_gold.JPG

He added that the problems in Europe that are causing the flight to safety are not going to be going away any time soon and this rally has the “technical momentum to move higher.”

Cieszynski said that looking at chart of gold/EUR, there is room for the yellow metal to hit €1,090 an ounce. At the same time, strong European demand could help ignite gold demand in North America, pushing the price to $1,250 or $1,300 in the medium term, he added.

Not only is Europe on the brink of an economic recession and the European Central Bank expanding its balance sheet to stimulate growth, but Greece is once again a threat as speculation rises that it might leave the eurozone, following the results of its Jan. 25 election.

Cieszynski said the question now remains what is going to have more impact on the gold market: the Federal Reserve hiking interest rates to normalize its monetary policy or the ECB expanding its quantitative easing to loosen its monetary policy.

“A lot of tightening in the U.S. has been priced already and I think this year it will be about Europe,” he said.

Ole Hansen, head of commodity strategy at Saxo Bank, agreed that the diverging economies will lead to further dislocations between gold and the U.S. dollar, with both benefiting.

“If you are worried about stocks selling off, Russia and Greece then gold is a good investment,” said Hansen,.

However, he added that gold priced in euros is a complicated investment so it is difficult to say if a stronger gold demand in Europe will be enough to drive global prices.

“There is still plenty of time to worry but we aren’t in the same position as we were in the previous European crisis,” he said. “This crisis doesn’t yet have a life of its own.”

Hansen said that he would expect gold/EUR to hold around €1,050 an ounce.

George Gero, precious metals strategist and vice president at RBC Capital Markets Global Futures, said that so far it looks like most of the safe haven demand is coming from Eastern Europe but it wouldn’t take much to attract Western investors.

“Gold has become noticeable again,” he said. “Until yesterday, you had four safe havens, oil, stocks U.S. dollar and gold. Now you only have two the U.S. dollar and gold.”