Even the most rabid silver bugs
admit the possibility that the Chinese are the Big Silver Shorts. This
suggests that the Big Gold Shorts are also governments. Neither are naked by any stretch of the imagination. The double
whammy of gold and silver accumulation by unnamed governments is the big
puzzle of the present financial crisis in the world as it holds the key to
For a better understanding of the
Chinese silver picture you have to know a little background of the role of
silver in China. The facts are as follows. China has been on a silver
standard since time immemorial. China stayed on the silver standard after
other trading nations of the world demonetized silver and embraced the gold
standard at the end of the 19th century. China's external trade was
insignificant, but the volume of silver currency for domestic use must have
been enormous. In addition, there was an avalanche of silver from abroad
raining on China. As the silver price fell over 75 percent from $1.29 in 1873
to $0.25 by 1932 (with a brief spike back to $1.29 at the end of World War
I), other governments were dumping silver on China mercilessly. China was the
only country on the silver standard and the Chinese central bank had to take
all the silver offered to it at a fixed price. This situation lasted right up
to 1949 when the Communists took over the government. In fact, several
Western historians blame the Communist victory on the unprecedented silver
inflation that Western governments inflicted on the Chinese economy by their
insane silver dumping policy before World War II.
Nobody knows how much silver the
Chinese Communists found in bank vaults and in the safe deposit boxes of
Chinese merchants who fled the country, when they took over the mainland.
Nobody knows how much silver is still hidden in the mattresses of Chinese
peasants. The amounts must be enormous. The best estimate is that most of
that silver has never been consumed and still exists in monetary form.
China's primitive economy under Mao was in no position to put that silver to
industrial use. All that silver is now at the disposal of the Chinese
government that could easily buy up silver coins scattered around the cities
and in the countryside, at the present rising price of silver.
China is the only country in the
world that has consistently run trade surpluses since 1950. As far as it is
known, silver never figured in China's exports (except re-exporting
foreign-owned refined silver.) Why should the Chinese export silver, when
they could export almost anything else? Silver to the Chinese mind is money.
You don't export money unless you are forced to cover your trade deficit, of
which China has none. China has always paid for its imports with exports, a
smart thing to do, too.
The Chinese are alive to the fact
that escaped the silver bugs in the West, that you can derive a silver income
from your pile of silver by covered short selling, even while retaining
physical control of your silver hoard. THIS IS AN UNPRECEDENTED BONANZA
IN THE HISTORY OF MONEY. It has never before happened that you earn interest
while retaining physical control of your money. Typically you have to release
control of money in order to earn interest income, that is, you have to
assume risk. Lending money necessarily involves risks: the borrower may
default. But if you don't give up physical control, then you will escape the
monetary debacle unscathed. Because of the imbecility of the managers of the
paper dollar standard there exist durable risk-free profit opportunities in
holding monetary metals in the balance sheet. The trick is: covered selling.
That's possible because the price of monetary metals has been allowed to
fluctuate. The price fluctuation of a monetary metal, like the flow-and-ebb
of the oceans, represents energy. Energy that can be harnessed. Energy that can
be harnessed only by those who understand monetary economics.
The Chinese are not stupid. They
looked askance at the silver and gold demonetization farce perpetrated on a
gullible world by Western governments. (Gold was demonetized 100 years after
silver had been, in 1973.) They are not falling for the cheap trick. They
hang on to their silver. They make most of the stupidity of their
adversaries. Nor are they in a hurry to push the silver price to three or
four digits in order to sell their silver for a quick profit in irredeemable
dollars (which is what the get-rich-quick crowd plans to do). Rather, it is
in their interest to derive constant and consistent income in silver from
covered writing, or using other dynamic hedging strategies. Why should they trade
their silver for dollars, when they have far more dollars already than they
From the point of view of the
Chinese, a slow rise in the silver price (and a gradual rather than an abrupt
depreciation of the irredeemable paper dollar) appears more desirable than an
overnight jump in the silver price to three digits that would put an end to
their lucrative silver income from covered writing. They certainly have the
clout to dictate the pace of silver price appreciation, and probably also of
paper dollar depreciation.
The Chinese are inscrutable. They
don't show you their blueprint for the new international monetary system
which they plan to impose on the world after the inglorious end of the paper
dollar era. It may be a born-again silver standard. The Chinese are using
their cash silver and the silver income derived from covered writing as a
hedge for their exposure to irredeemable paper dollars to the tune of $1.3
trillion, by far the largest accumulation of dollars the world has ever seen.
What they will lose on their paper portfolio they will gain on their cash
silver position. They will probably gain much more. While the finance-capital
of the world denominated as it is in paper dollars is programmed to
self-destruct, the Chinese will control much of the liquid capital in the
world after the dollar-debacle. They will be a great source of capital
exports, if you can pay their price, that is.
The Chinese can earn their way in
the world. They can work when work is necessary, and they can save when
saving is called for. They are doing fine, thank you very much. You need not
worry about the Chinese losing their kitty of $1.3 trillion invested in U.S.
T-bills and T-bonds.
However, you had better start
worrying about America which is no longer in control of its economic and
financial destiny. It has let world monetary leadership slip out of its
hands. America's industrial capital is in shambles. From the largest creditor
it turned itself into the largest debtor. The light has gone out at the great
American universities as far as monetary science is concerned. Through bribe,
blackmail, and attrition all upright and serious monetary economists were
bumped from their academic chairs. The Great Chinese Cultural Revolution was
a picnic in comparison to the Great American Cultural Revolution eliminating
monetary economics from the curriculum. Courses on money presently taught
consist of pure Keynesian and Friedmanite bunk.
It is a farce to blame the present
financial crisis on lax lending standards and rogue traders. What we see is
the return of the chickens to roost. This crisis has been in the making for
over a century, involving the so-called demonetization of both monetary
metals. The move was inspired and led by the United States. In particular,
the so-called demonetization of gold was designed to camouflage the default
of the U.S. Treasury on its gold-obligations. The industrial nations of the
West did not even say 'ouch' when America's default caused them losses
measured in hundreds of billions on their holdings of dollars in 1971. They
became accomplices eager to start milking their own savers and producers by
joining the paper-money farce. The day of reckoning dawns.
America's plight is
self-inflicted. Yet America could still turn the train of monetary events to
its advantage, reclaiming monetary leadership, if it opened the U.S. Mint to
gold and silver. It should do it before China or Russia opened theirs.
Unfortunately, there does not seem to exist one grain of wisdom in Washington
to see this, let alone to do this. It would take the election victory of the
maverick candidate, Dr. Ron Paul, Minority of One in the House of
Representatives, to pull it off. It is certainly a proof of the American
genius that great crises produce great men who are capable of dealing with
them. If the Chinese beat America to the finish line by opening their Mint to
silver, then the silky metal would be the international currency of the
Next to the Chinese the Russians
are the most inscrutable players, ganging up against America's monetary
hegemony. Their turf is gold. Perhaps it will be the Russians who will beat
America to the finish line by opening the Russian Mint to gold, even before
the Chinese open theirs to silver. Either way, America would be left in the
lurch, denuded of its industrial capital, its savings, but left with a pile
of worthless paper, and paper-worshippers in charge of the Treasury, and in
charge of teaching monetary economics at all levels.
America can then embark on the
arduous path to accumulate capital from scratch, while Russian and Chinese
capitalists will be producing goods in spanking new plants, aided by spanking
new equipment, complemented by shiny gold and silver pieces to trade their
products world wide.
It is past wake-up call. To save itself, America had better listen to the message of Ron
Paul who, in a counter double whammy, would open the U.S. Mint to both
gold and silver if elected President.
GOLD STANDARD UNIVERSITY LIVE
Session Three, will be held in
Dallas, Texas, February 11-17, 2008. For details, go to www.professorfekete.com.
Antal E. Fekete
Intermountain Institute of Science and Applied Mathematics
Missoula, MT 59806, U.S.A.
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL
ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND
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IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.
Copyright © 2002-2008 by Antal
E. Fekete - All rights reserved