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An article by
Professor Lew Spellman has caught the attention of the sharp-eyed, and may indeed be
important. Spellman, who in the past has been an economist at the Fed and
served as an assistant to the Chairman of the President’s Council of
Advisors, makes the point that gold is quietly becoming a core banking asset
for collateral purposes, at a time when the alternative, sovereign
obligations, is becoming dangerously unstable as a bedrock of value. This is
an establishment economist suggesting that gold is being chosen by markets as
an alternative to money issued by government diktat.
He even suggests that ownership
of gold would allow banks to increase leverage of their balance sheets. The
London Bullion Market has been lobbying for this for the last six months, and
at government level the Chinese have long pressed for gold to have a monetary
role on a supra-national basis. Powerful forces recognise
the benefits, and if the Basel Committee which is considering the matter
agrees to banks using gold as Tier 1 Capital, it would create substantial
demand for physical bullion, for any such gold would have to be physically
held on an allocated basis.
Anyone who understands
gold’s historic role will grasp the importance of the argument behind
extra bank leverage. Direct ownership of bullion by a bank is superior to
holding the fiat money issued by a central bank. It should increase
confidence in any bank and the system as a whole. Given relative values, bank
purchases of bullion will drive the value of gold as Tier 1 Capital up
relative to other qualifying assets, increasing its desirability for
regulatory purposes further without a gold-owning bank doing anything.
The fly in the ointment is
politics. Ever since the Nixon shock in 1971, the US Government has tried to
convince the world that gold has no monetary role. It would require the US
Treasury to accept that gold might be superior to the paper dollar after all.
No doubt that U-turn can be performed, but the concern would be that gold
being officially recognised as a form of money
would disadvantage the dollar and hand substantial power to the Chinese, who
have been accumulating gold from their own mines.
This raises the question about
how much gold the Chinese actually own. They have been mining the stuff for
over a thousand years, and if Marco Polo is to be believed, seven hundred
years ago there were enormous quantities of gold throughout both the Chinese
Empire and Japan. This is certainly under-recorded by the World Gold Council,
and while it and subsequent production may be tucked away, it won’t
have been destroyed. It is a fair bet that some of it is still in China,
under the control of the government, the ultimate inheritors of the dynastic
legacies.
Why does this matter? It matters
because if gold is accepted as the ultimate collateral, the balance of
monetary power shifts from the US to China. China is already angling to
conduct Asian trade settlements without using the dollar, and is ready to
start using gold for settling her trade balance with Iran. This is an
important development, the predictable result of US attempts to dictate terms
of trade.
China is ready to use gold for
monetary purposes, as is much of Asia and the Middle
East. Europe is falling apart and needs gold as collateral for its banking
system. Central banks everywhere, from Mexico to the Ukraine, are adding to
their gold reserves, and according to the IMF in March alone twelve of them
added 58 tonnes to their reserves, presumably in
anticipation of its monetary return. The official price of $42.22 is an old
joke that no longer amuses. How about it, Mr
President?
Originally published at www.Goldmoney.com
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