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Some
years ago I penned a paper with the title "The Supply of Oxen at the
Fed". I am indebted to Alan Greenspan for a great line in one of his
speeches, entitled The History of Money, from where I borrowed my
title. He wrote: "If fiat money falters, we may have to go back to oxen
as our medium of exchange. In that event, I trust, the Federal Reserve will
have an adequate inventory of oxen." My article was designed to reassure
Mr. Greenspan that the supply of oxen at the Fed was very secure indeed, in
no small measure due to his stewardship.
In my
missive I related a story my father was fond of telling us about his
geography professor lecturing on Switzerland. A short fellow, he was
extolling the agriculture of that country as he would say: "In our
country oxen are not even as tall as I am. In some countries you will see
oxen as big as I. But, ladies and gentlemen, believe it or not, on the fat
mountain pastures of Switzerland there are oxen even greater than
myself." For the sake of emphasis the good professor stood on his
tiptoes and stretched his arm to reach above his head. "We don't believe
so!" -- someone shouted from the back benches of the lecture theater.
The story
bears repeating because, as events of the intervening years have proved, the
prize specimen of the supply of oxen at the Fed is the chairman (past and
present). When the faltering of paper money looms large on the horizon, his
first thought of an alternative is not gold. It is oxen. Nor is it a nick of
time too early, as fiat money is faltering as never before. But even if the
Fed should get caught short-handed, it can always rely on a backup. The
supply of oxen at the International Monetary Fund is infinite.
The
IMF is trotting out its old war-horse, the threat of auctioning off its
monetary gold. This time it appears to be for real. The IMF is making
preparations to get rid of a sizeable chunk of that part of its capital that
has no counterparty liability attached in the form of central bank
IOU-nothings, or government bonds alias certificates of guaranteed
confiscation.
The
IMF sounds very emphatic about its intentions of doing the self-mutilation in
such a delicate manner as not to disrupt the gold markets. Pity the IMF. It
is worried about upsetting the gold market, not about frittering its capital
away. The IMF promises to do the auctions in a "transparent"
fashion. It is true that the gold market is small in todays' metric where the
trillion-dollar unit will soon appear inadequate. Still, the IMF's sting
operation, and the accompanying soothing words sound more like the mosquito
saying to the elephant before the blood-meal: "baby, my darling, it
won't hurt".
It is
abundantly clear that the IMF and its puppet-masters behind the screen want
to hurt the gold bugs, and hurt them badly. As paper currencies without
exceptions are engaged in a game of "all fall down", and do it
impulsively and competitively, gold is the only money that stands up. It must
be clubbed down, or else. That has been the rule of the game ever since
president Nixon on the advice of Milton Friedman "made the gold markets
free" in 1971. In the beginning it was US Treasury gold that was
auctioned off in order to club down the rising gold price. But then the
managers of the paper dollar found it cheaper to auction off other people's
gold for that purpose through arm-twisting tactics. The
selling of paper gold through futures markets and the leasing of gold through
bullion bank intermediaries has been thoroughly discredited. Only fools
believe that those outstanding forward contracts will be settled in specie.
Holders of paper gold will be lucky if their contracts will be settled in
paper. The market is crying for physical gold. Nothing less will pacify it.
By now the US Treasury has run out of arms to twist, after it has twisted the
arms of smaller countries holding gold such as Belgium, the Netherlands, and
Switzerland making them to sell their gold reserve. The recalcitrant
Congressmen who had blocked the IMF gold sales in the past have been bought
off. The IMF gold is now ripe for the picking. Not to see the life-and-death
struggle of the managers of global paper money fighting gold -- the stern
taskmaster of all banks, real or virtual, and of all governments -- is
tantamount to turning a blind eye to reality.
The question is whether the
IMF -- like the proverbial kid in the forest playing false alarm on the
lumberjacks -- "has cried wolf" once too many times. The wolf
around the corner may be real this time, ready to devour the prankster. To be
sure, the gold price will fall on the news that the gold auction has started
in earnest. The market will obligingly bring down the price to make it easier
for the IMF to unload its burden. But after the IMF relieved itself, the
price will go back and on to new records. It's inevitable. It can be
predicted with the certainty of science.
Why will the price of gold
reach new highs after the IMF gold auctions have been completed? There is a
very simple reason: the assets backing the dollar, against which the gold is
being sold, has been diluted. The IMF is exchanging its hard asset, that is
nobody's liability, for the soft: the liability of the Fed printing money as
if there is no tomorrow. Under these circumstances it is suicidal to sell
hard assets. Yet there it is: IMF gold is on the block.
The excuse the IMF uses to
justify the gold sale is to raise funds for bailing out over-indebted
countries. It is a lame excuse indeed. A bank, if it is run on a rational
basis, will worry about its capital structure before embarking upon a course
of extended lending, especially lending to bankrupt governments. You never
ever dilute your capital base.
This does not mean that gold
bugs will not be fooled -- again. Some, perhaps many, will be. They will sell
their gold into weakness making it look like the bloom is off the golden
roses. But all what this game of hoopla means is that gold is passing from
weaker into stronger hands. The weak hands are fading into oblivion, as they
must.
To really understand gold and
its true strength one must see that it is not the speculative leveraged
segment of the market that is animating it. Of course, speculators will ever
be ready to sell off at the sound of the whistle from the IMF. But time is
coming when they will be unable to replenish their supply. The IMF tells them
to sell their cash gold, but it will not tell them how to buy it back. That's
the catch. The unemotional holder of gold follows the gold basis, rather than
the gold price. Only the gold basis will tell you whether you can reasonably
expect physical gold to be available tomorrow and the day after. Or whether
it is more likely that one day, soon, we wake up to find that "gold is
no longer for sale at any price". Gold mines will hang out the notice:
"Holders of dollars need not apply". This is going to be the exact
replica of what happened to holders of assignats, mandats, Reichmarks and,
more recently, of Zimbabwe dollars. These finely embellished bank-notes were
once exchangeable for gold at a variable price -- for awhile. People took it
for granted that they would always remain so. Then one day, when least
expected, the supply of gold against paper went dry. The music stopped on
this particular game of musical chairs. Those who had the paper in hand were
out of luck. There is nothing in monetary science that would make the future
outlook for the US dollar more rosy than that of the Zimbabwe dollar. Of
course, there are more tricks that can be pulled out of the hat of the Fed
than those available to the managers of the paper mill in Harare. But a paper
mill is just a paper mill. The fact that it is on the Potomac river won't
make its product immune to rotting, that congenital disease of all paper
currencies.
The IMF has been around
scarcely for sixty-five years. By its original charter it was supposed to
make foreign exchange rates fixed, and currencies gold-backed, albeit
indirectly. It was supposed to be the linchpin of the international monetary
system. In less than twenty-five years it has managed to go through the
goodwill that was its endowment. One-by-one the obligations of the IMF were
shed, leaving the institution without a mission or a purpose. The IMF should
have been scrapped and its gold returned to the original subscribers in full
when corrupt politicians, following advice from corrupt economists, abandoned
the regime of fixed foreign exchange rates in 1971. But the IMF was left in
place, and it stood there as a bombed-out air-raid shelter. It continued to be
used as a bully-pulpit from which the gospel of monetary rectitude is still
being preached -- making it the laughing stock of the world.
This is not to say that this
clown of the US Treasury has not done enormous damage to the economies of
Soviet-occupied countries as they were regaining independence after the
crumbling of the Berlin wall. The IMF has earned eternal shame as the chief
agent "to make the world safe for fiat money". If it did not
succeed in its mission, it was not for lack of trying.
One of the first things the
IMF did as an agent of the US Treasury, after the inglorious collapse of the
Soviet Union in 1990, was to force countries formerly under Soviet occupation
to dispose of their gold reserve in exchange for IMF membership. Fancy the
enormity of this crime. Even under the harshest of Soviet military occupation
these unfortunate countries were allowed to keep their gold reserve, and with
it some faint promise of a better future. Then come freedom, American style,
for which these countries have been yearning for half a century. Lo and
behold, the first thing they have to give up is their gold reserve -- in the
defense of the dollar system that had gone bankrupt twenty years earlier! The
IMF will never be able to live down what amounts to the monetary rape of
Eastern Europe and its "captive nations". The IMF was the shepherd
dog, shepherding these people under American auspices from one slave labor
camp into another.
The miserable 65 years of
history of the slave-driver IMF must be compared to the superb history of
five millennia of gold as money and indestructible agent of freedom. The
world's understanding of gold and its role in human history is very imperfect
indeed, to say the least. People are in the habit of watching the gold price
and trying to interpret its zigzagging as you would try to decipher messages
from an oracle or the predictions of a false prophet. They keep talking about
gold being 'weak' or 'strong'. But when it comes to the rock of Gibraltar,
all talk about strength or weakness is entirely out of place. The only
question is whether the boat of paper money, and its voyageurs, can survive
the shipwreck when their boat is smashed against the rock of Gibraltar.
The outstanding fact about gold
is that during the past half-a-century mines have disgorged an amount equal
to all the gold previously produced during the course of history. And all
this gold has disappeared without a trace. It has been devoured by an
insatiable private demand -- a stark reminder that politicians after two
world wars have failed miserably to re-establish the financial and social
order and security of the nineteenth century that the world had hoped for, in
order to be able to function properly. Yet the gold that has disappeared in
private hoards, the fruits of half-a-century mining effort, an amount
matching in size what the world has produced since the dawn of civilization,
is not lost completely. It has just gone into temporary hiding. It does not
like the floating foreign exchange rate system. It abhors the swinging rate
of interest. It hates the style of banking adopted after bank reserves were
insulated from any influence of the saving public. It does not like the
conspiracy of the banks and the government against the public good.
Vanishing gold -- measured by
its vanishing basis -- shows the greatest vote of no-confidence ever
registered in all history, as far as confidence in the political and monetary
leadership of the world is concerned. The gold will re-emerge triumphantly
when the global regime of irredeemable paper money bites the dust -- as it
most certainly will in this century, probably during the next decade. When
that happens, the paper tower of Babel will come crashing down. All paper
fortunes will be wiped out. The world will stand denuded of its capital. It
will be unable to pay wages to the workers, to say nothing about paying
pensions to the retired segment of the population. We shall witness the
greatest change of guards ever. Bankers will deny their profession and will,
like John Law of Lauriston fleeing from Paris, put on female garments and
leave town under the cover of the night. Only those with gold in hand will be
able to provide capital to re-boot the productive apparatus of society and to
rebuild the financial system necessary to support it.
Those who seek refuge in gold
today have no reason to be ashamed, in spite of the scorn heaped upon them by
the media and academia. Rather, they should be proud. They have an historic
mission to accomplish -- to save our civilization from total extinction. They
are the inhabitants of Noah's Ark. They carry the seed corn, and they are the
custodians of the gene bank, with which they will have to start from scratch
when the water recedes. Let the Nervous Nellies sell their gold into
weaknesses in trying to turn a paper profit. Those strong in faith know that
they are part of the select few, taking a voyage in the Mayflower to the
Promised Land.
And
herein you find the historic significance of the IMF gold sales. It is good
news, very good news for those with a proper appreciation of history as it
unfolds before our very eyes. Permanent gold backwardation as a threat to
society has been temporarily removed. The Last Contango in Washington has
been postponed. There is a little more time to prepare for Armageddon. Those
who want to vote on how the world should be rebuilt and governed, those who
believe in peace, progress, and prosperity under the gold standard after the
coming collapse of the paper system, can still secure their ballot in the
form of a gold coin. Just ignore the gold price. Gold is still cheap, thanks
to the supply of oxen at the Fed and the IMF. And, lest injustice be
done, also thanks to the supply of oxen at the US Treasury.
Ignore
the gold price, yes, but keep your eyes peeled for the gold basis. It is your
only reliable guiding star in these treacherous financial waters. It will
tell you in advance when gold will cease to be offered for sale at any price,
whether quoted in Zimbabwe dollars, or in US dollars, Swiss franks, Euros,
Ameros, or in whatever monetary cocktail the 'experts' may come up with in
the future.
The
last gold coin ever sold in exchange for paper will go to someone who is
fully conversant with the concept of the gold basis. Is it
going to be you?
Antal
E. Fekete
San Francisco School
of Economics
aefekete@hotmail.com
Read
all the other articles written by Antal E. Fekete
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
SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT
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
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