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When
George Soros stated that gold was the “Ultimate Gold Bubble,” we
believe that he was not saying that it is now in a price bubble, but that it
would one day get there. This is backed up by his accumulation of gold
and gold shares since then. So we are not looking at a
‘gold bubble’ even with gold at this price.
The only
way that the G-20 or the I.M.F. could burst any gold bubble would be to
reform the monetary system in such a way as to restore confidence in the
global monetary system and currencies returning to them the stability that
reliably prices goods internationally over the long-term. That is
not on the table yet. With today’s foreign Exchanges seeing
rising confrontation between nations that want weaker currencies and those
that are fighting the strengthening of their currencies we need to know what these
two ‘global’ bodies think of gold and what they may do as the
future of money darkens in the face of the coming storm.
Who runs the
I.M.F.?
There is a popular assumption that the I.M.F. is a
global body representative of all and equally so. The perception
includes the belief that their recommendations are independent of
government. The body is empowered by its members to address all matters
affecting the world’s monetary system. Included in this
perception is the money sponsored by the I.M.F. called “Special Drawing
Rights”, a money creation that allows it to lend to distressed nations
facing Sovereign Debt crises, such as we have seen of late. If
this were true, there is no doubt that it would have the competence and power
to fix the global monetary system.
But these
perceptions stray significantly from reality. For instance,
let’s look at the voting structure in the I.M.F. Each
member is entitled to a percentage of the voting power from less than 1%
upwards. It takes 85% of all members’ votes to pass any
I.M.F. resolution. The largest holder of voting rights is the U.S. which
holds 16.74% of the votes. This allows it to veto any resolution it
wants to. While this does not make it a pawn of the U.S., it does
prevent any resolution being passed that it alone does not want
passed.
The U.S.
effectively controls the actions of the I.M.F., so when Timothy Geithner put
forward the idea that China’s place at the I.M.F. would be enhanced if
it was tied to an appreciation of the Yuan, we saw a strong-arm demonstration
of that power. China has made it clear that it will not be
pressured on the Yuan, but feels it deserves a greater say at the I.M.F. than
its present 3.65% of voting rights. China’s central bank Governor
Zhou Xiaochuan specifically noted that this weekend.
Next year, the
I.M.F. has to review the make-up of the Special Drawing Rights, currently
composed of the U.S. dollar, the Yen, the Pound Starling and the
Euro. A huge issue that goes far beyond politics is the make-up
of a ‘currency’ that reflects world economic power and influences
between currencies. Between now and then, we expect the
international presence of the Yuan to be felt considerably more than it is
currently. It would seem imperative that the Yuan be a sizable
component of the make-up of the S.D.R. and of such a size that reflects it
global economic presence and ongoing growth.
Is the G-7 an
effective body in itself?
The G-7 comprises
the top seven, most economically powerful nations in the world.
China is not included. Of course, it should be. It
was formed in 1976, when Canada joined the Group of Six: France, Germany,
Italy, Japan, United Kingdom, and United States.
To date, the G-7 has discussed its own interests behind
closed doors, but rarely has it come out with any action to rectify global
issues. It is not expected to now, either. .
The most recent
meeting was held last weekend and the media hoped to hear some policy
statement that would address the ‘currency’ issues causing so
much damage right now. None came except an instruction to the
I.M. F. that it looks deeply into capital and trade flows with the purpose of
proposing some ‘rules’ over them. No mention of who
would likely impose them or enforce them. With national interests
a far greater priority than international ones, the proposals are unlikely to
be implemented but simply remain ‘recommendations’ when they
come. After all, the U.S. will have to abide by
them as well as China. Is this going to really happen?
What we do expect
is for the I.M.F. to follow the lines of its previous paper [issued by the
I.M.F. in February] on capital inflows, capital controls and financial crisis
put forward on the 10th February 2010. In this paper,
capital controls are suggested in certain circumstances. [Gold
Forecaster has been predicting the potential for these for two years now.]
The effect of both inflow and outflow capital controls is to render an
exchange rate suspect, with the commensurate drop in confidence in that rate
alongside the prospect of severe speculation against the exchange rate.
So the G-7
postponed and passed the ‘buck’ on global imbalances for at least
one month, in which time we will see several currency pressure
points. These started today with the Yen reaching historic highs
against the U.S. dollar, despite the Bank of Japan’s confirmation that
it would attempt to lower the value of the Yen. It is likely that
we will see 78 against the Yen and huge inflows into Japan. Will
they impose capital controls soon? It is most likely.
Are they against
Gold?
While the I.M.F.
is completing the only sale of gold we expect them to make now and in the
future, here is what the I.M.F. feels about gold:
“In 1995
the Executive Board reviewed the role of gold in the Fund. The Board
concluded that use of the Fund’s gold must take account of the
overriding need to maintain and, where possible strengthen the Fund’s
financial base. In this regard, there was broad agreement that
the Fund’s policy on gold should be governed by the following
principles:
1. As an
undervalued asset held by the Fund, gold provides a fundamental strength to
the Fund’s balance sheet. Thus, any mobilization of the
Fund’s gold should avoid weakening the Fund’s overall financial
position.
2. The Fund’s
gold holdings provide the Fund with operational maneuverability both as
regards its policies on the use of its resources and through adding
credibility to the level of the Fund’s precautionary
balances. In these respects, the benefits of the Fund’s gold
holdings are passed on to the membership at large, to both creditors and
debtors.
3. The
Fund should continue to hold a relatively large amount of gold among its
assets, not only for prudential reasons, but also to meet unforeseen
contingencies.
4. The Fund
has a systemic responsibility, given that it is the second-largest official
holder of gold in the world, with about 10% of total official gold stocks of
member countries.”
As you can see
here, there is no thought in the mind of the I.M.F. that gold should not be
firmly held as a reserve asset. This leaves them with the only
way to “burst gold’s bubble” is to ensure that the global
economy is healthy, cooperative to the extent that a rosy future exists,
based on a sound global economy with financially sound, healthy economies
using a sound well regulated currency system making up the global
economy. As we all know, this looks like a utopian dream at this
moment in time. So the I.M.F. will no longer act against
gold. Once its present sales of gold are complete they will no
longer sell gold.
As for the G-7,
gold is not on their mind. Their retentive actions on gold
demonstrate that they too see it as a reserve asset to be used in unforeseen
circumstances. There is no doubt in our minds that the G-7 will
treat gold as an alternative source of value to currencies, when push comes
to shove. So neither of these two bodies will “burst
gold’s bubble”, but will they support it now?
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
Is your
wealth effectively structured to avoid the pernicious effects of the
regulatory climate that we have moved into? It should be and we can help you
to do so professionally and within the law. Please contact us for any help
regarding this at: gold-authenticmoney@iafrica.com.
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