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Could
a Private Firm Force the Government to Do It?
How
to rebuild the shattered credit system
People
ask: "Isn't the Mint already open to gold, producing Gold Eagles and
Buffaloes?" Opening the Mint to gold has a technical meaning, namely,
opening it to the free and unlimited coinage of gold on private account. The
Gold Eagles and Buffaloes are produced on Treasury account in limited
quantities and sold at a premium as souvenir coins. It is a ploy to show that
gold coins would just not circulate as money. Well, they would if there was
no premium and the market was saturated.
Not
until that happens do I see any hope for the world's
greatest and most permanent asset, wealth tied up in gold, to leave its
hiding place, get mobilized and start discharging its duty for which it is so
superbly suited: rebuilding credit and refinancing world trade on a sound
basis. Irredeemable promises to pay by default-happy governments can under no
stretch of the imagination serve as a sound basis for world credit and world
trade.
Unless
the ice is broken and one country does open its Mint to gold, the same
pattern that was established in 1971 (when the U.S. Government defaulted on
its international gold obligations) would continue to the further detriment
of the world's prosperity. The output of the world's gold mines, plus
whatever gold trickles down from the public sector, will go into hiding and
will not benefit society. The world economy is literally bleeding. It is
bleeding credit that keeps factories humming and cargo ships sailing. There
is no other way to stop the hemorrhage than opening
the Mint to gold. The battle cry should be: put gold back into circulation
to save our civilization and to save the world! People must be aware what
the malady is and what the remedy should be.
The
full meaning of 1971
Apart
from the enormity of a great government reneging on its solemn obligation,
sealed by international treaties, confirmed by several sitting Presidents, to
pay holders of its short-term debt gold at a fixed rate of exchange, we
should remember another aspect of the 1971 default. It triggered the
world's greatest deflation ever to take effect with a lag lasting about one
generation.
The
world prospered before 1971 because it had the U.S. Treasury as its residual
supplier of monetary gold. The wholesome effect of this arrangement was that
people were willing to pay out gold. They were confident that they could get
back their gold exactly on the same terms. Confidence permeated producers,
banks, trading houses, shipping lines, right down to the lowliest consumer.
They could make deals with one another in the belief that the world's
monetary system is not run by tricksters. It is run by upright men who know
the meaning of the word 'honor'.
But
once the commitment to redeem dollars in gold was broken, people became
reluctant to pay out gold. They were no longer certain that they could get
their gold back on the same terms. This froze the stock of the world's
monetary gold. More ominously, newly mined gold started to go into hiding,
and the world economy had to be financed through the creation of synthetic
credit.
For
those of us who do not subscribe to the Quantity Theory of Money, this was
deflation waiting to happen. The synthetic credit was - what else? - the broken promise of the defaulting banker. People with a
logical mind knew that this arrangement had to be temporary. Only a deranged
man would reward default by promoting the dishonored
monetary instrument from the bottom of the garbage heap to the position of
the highest-powered money of the international monetary system. After all,
the U.S. government did have the gold it needed to run the world's credit
system. What it did not have, but could easily get with incorruptible
politicians, a matching foreign policy free from entanglements, and a
matching social policy free from the 'free lunch' mentality.
The
present deflation is open-ended, as it is not known how much devaluation the
dollar will have to undergo before it can be tethered once more to gold - as
it was done exactly 75 years ago. To stop deflation, the flight into gold
must be stopped first, as it was done by the U.S. in January, 1934.
President-elect Obama has already named his candidate to run the Treasury. An
historical opportunity has been missed. The very same people who engineered
and orchestrated the present crisis will be put in charge to rectify it. They
are dyed-in-the-wool Keynesians or Friedmanites.
America's
antagonists are just as helpless
Of
course, the Arab countries, the Muslim countries, as well as the Asian powers
(including Russia), which do not have carry the heavy Keynesian and Friedmanite ideological baggage, would love to start a
new currency based on gold, and then take credit for saving the world. If
they could, that feat would pass the torch of human civilization back to the
Orient, and thereafter the Western governments could be deservedly castigated
as the selfish and stupid satraps that landed the world in this incredible
economic mess. They would hardly be invited to sit in the councils of
nations, let alone to lead them. Worse still, the fear is that without the
free flow of gold the world may get lost in the quagmire of a New Dark Age,
in which law and order disappears, along with the disappearance of gold and
silver.
Yet
all the attempts of the Arab, Muslim, and Asian powers to put gold back into
the monetary system have misfired, precisely because they have 'forgotten' to
open their Mint to gold, which is the key to a New Golden Age.
Why
gold?
I
have dealt with that question several times in my earlier writings, but I
shall say it again. Gold is absolutely indispensable for reconstruction, far
beyond the limits imposed by gold's present valuation in the markets. The
reason is that, once remobilized gold, and only gold, could carry a weight
thousands of times greater than its nominal value. Gold, once put back into
circulation, will regenerate credit which, under Western tutelage, has been
allowed to disintegrate. The Western powers have fallen
victim to the most inept and stupid Ponzi-scheme
ever inflicted on people who are otherwise not illiterate: the Ponzi-scheme of Keynesian and Friedmanite
economics. The 'miracles' that these two so-called economic systems can work
depend on what I have described as a check-kiting scheme between the Treasury
and the Central Bank. They conspire to accept each other's irredeemable
promises to pay. For a time the shills could whip up sagging gambling spirit
by their spectacular off-take at the gaming tables. But, ultimately, this Ponzi scheme, like any other, depends on an infinite supply
of new fools. While the supply of fools in the world is very great indeed, it
is not infinite. That is the only weak point in Keynesian and Friedmanite economics.
Without
rebuilding credit on a gold foundation there is no hope for reconstruction,
president-elect Obama's grandiose reflation plans
notwithstanding. The U.S. Treasury is empty, nay, it
is in a hole, of the size of several years' GDP. Government revenues are
fading. American industry has been dismantled. Foreign creditors of the U.S.
have had enough of the make-belief world of giving up real goods and real
services in exchange for irredeemable promises to pay. Even if you put them
under duress using military blackmail, they badly need those goods at home
because they are themselves in deep trouble.
De
facto opening of the Mint
I
have been greatly discouraged and dismayed that the Western governments, in
their dogged stubbornness, have refused to listen to the voice of reason and
allowed their antagonists to advocate the return to a gold standard. The
Western governments should have taken the initiative and made a coherent
statement on their own position.
But
then something unexpected happened, which gives us a ray of hope. Canada has
been my adopted country for over half of a century. In many ways it is a
decent country in this world of indecent governments. Canada has not used
conscription to coerce young men to become cannon-fodder in foreign imperial
and colonial ventures. It did not succumb to the 'Roosevelt-syndrome' in
confiscating the citizens' gold. While taxes are high, on balance it may be a
price worth paying in exchange for clean cities, sane banks, safe streets, and
universal health care.
Canada's
gold policy was free of the neurotic aspects of the American. Gold has never
been declared contraband in Canada. While it is true that fools were put in
charge of government-owned gold, and they sold it for a pittance to invest
the proceeds in irredeemable obligations of the U.S. government, the Royal
Canadian Mint started issuing gold coins as early as 1967 (to commemorate
Canada's centennial.) Later, in 1979, with the issue of the Canadian gold
Maple Leaf coin of one Troy ounce, 9999 pure, the Royal Canadian Mint created
a coin that may well become the standard coin of a new emerging international
gold standard. By now, 30 years later, many other countries are issuing gold
coins to the same standard of weight and purity. As I shall explain below,
the world treats these coins as being as perfectly fungible as only money can
be, and refuses to treat them as souvenirs, keepsakes, or as a
conversation-piece, which was the intention of their designers.
To
be sure, the Royal Mint of Canada is not open to gold in the legal sense of
the word. If it were, it would have made a commitment to convert gold, 9999
pure, free of seigniorage charges, into
Maple Leaf coins, ounce for ounce, in unlimited quantities, to all comers. If
there is no de jure commitment, is there a de facto commitment
to the same effect?
That's
what a Canadian firm decided to find out in 2007, and so far the results are
encouraging. They show that the Royal Canadian Mint has taken upon itself the
burden to provide the world with a reliable source of gold coinage at an
acceptable cost. This firm buys the standard international "good
delivery gold bar" of 400 Troy ounces or about 12.5 kg, 999 fine and
exchanges it at the Mint for 400 Canadian Maple Leaf coins, paying a premium
that, according to the firm, is small enough that it can sell the Maple Leafs
profitably at the normal 7-9% premium, even during this latest rush into
gold coins. As soon as the coins are sold, the firm is buying more
good-delivery bars and converts them into Maple Leafs at the Mint. It keeps
doing this. This is the exact opposite of the great coin melt of F.D.
Roosevelt's fame, who confiscated the citizens' gold coins only to melt them
down and to mark up the dollar value of the resulting ingots - a symbolic
gesture to show that gold has been demonetized.
This
Canadian firm leads the way to gold remonetization.
It uses the agency of the Royal Canadian Mint to do it. Needless to say,
there will be imitators both at the Mint level and at the arbitrage level. In
particular, the premium on coined gold will decline. There will be a race of
governments to offer the same service on a competitive basis. (Remember how
the Kugerrand has found imitators in all major
countries of the world?) Willy-nilly, the Mints are going to do what they
have been conceived to do in the first place: put the citizens in charge
to decide what the money supply should be. By the U.S. Constitution the
power to create money is reserved directly to the people themselves, and
should not be delegated.
As
you can see, the Royal Canadian Mint is open to gold de facto. As more
imitators enter the field, the de facto commitment to monetize gold
will become permanent.
Reason
for optimism
I
think it is impossible to exaggerate the importance of this fact. While the
7-9% premium is an eyesore and takes away from the purity of the scheme, and
the lack of a de jure commitment to keep this facility open through
thick and thin is deplorable, the bottom line is that the first tentative
steps have been taken by a Western Country (blessed with a strong gold-mining
industry, and with an unbroken history of gold trading and sound banking) to
opening the Mint to gold. This gives plenty of reason for optimism.
A
new stage in gold's evolution?
Two
professors at Prince Sultan University in Riyadh, Saudi Arabia, H. Assenov and K. Petrov, have
published a paper with the title: A New Stage in Gold's Return to Money
(see References below.) In this paper they put forward the hypothesis that
the market monetizes the one ounce standard gold coins regardless of shape
and country of origin, as long as they have the right weight and fineness, as
witnessed by the uniform price at which they are traded. They say that this
is a new phenomenon that first appeared in December, 2008, the same time when
gold backwardation first appeared as a threat to close down Comex warehouses. It means a great leap in the
marketability of these coins due to perfect fungibility.
Now a much larger pool of coins backing the trade is available. Both buyers
and sellers dismiss the coins' idiosyncracies that
would be of interest to numismatists and collectors. The authors suggest that
this is a proof that gold's remonetization is in
progress. Gold is not yet money, but it has cleared one of the most serious
hurdles towards becoming money. The market for the standard gold one-ounce
coin, 999 fine, is no longer fragmented.
The
authors make no reference to the fact that the Royal Canadian Mint is de
facto open to gold as shown by the activities of a private Canadian firm.
This fact, in my opinion, plays a large part in the phenomenon the authors
describe: the uniform valuation of all standard gold coins. However, it is
significant that they noted the simultaneous appearance of backwardation in
the December gold future contract at the Comex.
They also quote Carl Menger's theory on the origin
of money, that is, the rise of indirect exchange. Both the ugliest and the
most beautiful gold coins are traded in indirect exchange strictly by the
quantity and quality of metal content, completely disregarding the outward
appearance of the coin. Whether the coin features the effigy of a bearded man
or a kangaroo is of no consequence. The authors conclude their paper as
follows:
Under
the current financial order we use paper tickets with the picture of a
bearded man that are currently printed in the trillions by another bearded
man. Those tickets have had no backing for many decades, so there has been no
restraint in their printing. Up until recently there has been a modicum of
self-restraint in the printing process. However, since the Summer of 2008 all
restraint has been thrown out of the window by the bearded man, a.k.a.
Bailout Ben, who has indulged Congress and the Bankers in an historic
multi-trillion dollar printfest. In response,
common-sense people have rushed into gold as a store of value. Now that the
value of gold is driven entirely by its purity and quantity, it is only a
matter of time before gold is used again as a medium of exchange. Gold coins
are no longer a numismatic delight, nor do they appear to be a Barbarian
Relic. Gold is becoming money once again. Dollar holders beware!
Sprott Money Ltd.
I
tease my readers' curiosity no longer. I disclose that the Canadian firm that
has harnessed the Royal Canadian Mint to change the course of history is Sprott Money Ltd., established in 2007. The inspiration
came from its founder, Mr. Eric Sprott himself. I
salute him here as a man of great insight and courage. He firmly believes
that gold should again be the international currency, by the choice of the
people. He believes that the U. S. economy is in a state of total systemic
failure. He says that we are in a depression today. He points out that the
average bank is leveraged 25 or 30:1. He does not beat around the bush: he
says that in a true mark-to-market, probably no bank would have any tangible
capital left. He does not think that any economy that is paper-based can be
insulated against the contagion of debasement that is the hallmark of the
U.S. dollar.
In
a recent interview (see References below) Sprott
stated that during the past three years his organization has converted a lot
of gold bars to gold coins at the Royal Canadian Mint, and then he went on:
We
have lots of inventory; we are not seeing any signs that we are going to eat
through our inventory of coins. But I always do worry that I've got to be
able to buy the 400-ounce bars back, too. So we'll see. If it happens that
I can't buy the bars back, I don't think I'll be selling the coins.
(Emphasis added.)
I
have included this quotation for its value as it so closely relates to the
problem of backwardation in gold. When Sprott
cannot buy any more 400-ounce bars, that's it: the
curtain has fallen on the Last Contango in
Washington. Backwardation is here to stay. And you will know it immediately
because Sprott Money Ltd. will simultaneously
withdraw its offer to sell Canadian Maple Leaf coins to retail customers. Not
for sale at any price quoted in dollars, whether Zimbabwean or U.S.
We
need lots of imitators for Sprott and lots of
imitators for the Royal Canadian Mint, if we want to shorten the painful
death-watch of this reactionary episode in the history of money, the
experiment with the paper dollar backed, as it is, by the greatest collection
of weapons of mass destruction: debt and thermonuclear warheads - if not much
else.
Antal E. Fekete
Professor,
Intermountain Institute of Science and Applied Mathematics, Missoula, MT
59806, U.S.A.
Gold Standard
University
DISCLAIMER AND
CONFLICTS
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.
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