Financial market letter writer Adam Hamilton's
Bank Gold Agreement," is a fairy tale. Hamilton writes that central
banks are just investors in gold like everyone else.
What Hamilton and most people overlook in analyzing
central bank gold sales is that they are a farce that beats the best Monty
Python sketches. The central banks have printing presses and now computers
that can generate loads of fiat money. It is beyond side-splittingly funny
that we should take central banks seriously that they need to sell gold in
exchange for the stuff they manufacture for free.
Can you imagine the Saudis selling oil in exchange
for sand, or Eskimos selling fish in exchange for ice, or Paul McCartney
selling an apartment in London in exchange for a Beatles poster autographed
by himself? Yes, you think those examples are funny,
don't you? So why not have a big fat laugh at a central bank selling its gold
for the funny paper it produces in infinite quantities?
Central banks run the world's biggest Ponzi scheme,
issuing bits of paper that people will accept in return for real goods and
services. If you enjoyed this privilege to the tune of a few trillion dollars
that finance an empire, expending a few tonnes of gold to keep it going would
be a no-brainer.
Central banks do not sell gold to get a few
billion of their own fiat money in return, money they probably would throw on
top of the stack of half a trillion freshly printed notes that rolled off
their presses just that morning. No, central banks sell gold to make it
appear that the paper stuff is more desirable than its true supply and demand
fundamentals would allow. And when the game looks like it's coming to an end,
the central banks can always buy back the gold.
It is not a problem to buy back the gold at even
$50,000 per ounce when any amount of paper currency can be printed.
What is a big problem is if the currency
loses its value so fast that no one will sell the central banks any gold for
any amount of paper. (Try buying gold with Zimbabwean dollars.)
If that happens, the central banks lose and the
people win, because when the music stops the people have the gold and the
central banks are stuck with the depreciating paper.
Central banks have to use their gold to support
their Ponzi paper creation, but they have to control the destruction of their
currency's purchasing power so they can still buy their gold back with their
own paper before the game ends and they have to start a new one.
When the paper currency has little purchasing power
left but the central banks have bought back their gold, they can introduce a
new currency and start the cycle all over again.
In this way they leverage their gold instead of
having something honest like one-for-one backing in a classical gold
standard. They have even found ways of having more leverage by selling paper
promises for gold to make it look as if they have 10 or 20
times as much gold as they really have.
There is another problem. What if someone else with
a large amount of worthless paper currency gets the idea to buy back your
gold before you do?
Do you ever wonder why China kept so quiet about the
450-tonne increase in its gold reserve over the last five years? Clearly
China would not want to tip off the Western central banks that it was going
to beat them at their own game. If China has admitted to acquiring 450 tonnes
of gold, it probably has a lot more than that.
This is all about world dominance. Whoever has the
most gold is king.
Adrian Douglas is proprietor of the
Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.