GOLD PRIMER 1: RELATIONSHIP BETWEEN GOLD & THE USD

[pywong]

For perspective, I started this thread on 1 May 2008. It is helpful to see how the financial situation evolved over the past 5 months.

In this posting here: The Rat Race Part IV - The Pyramid (http://www.usj.com.my/bulletin/uploa...ad.php?t=22660), I made some references to how money has been manipulated and why inflation is a form of hidden tax.

If there is interest, I propose to post a few articles relating to finance, money and gold that could be of interest to those starting their careers. The first one today is:

1. What does the Gold price tell us about the USD?

1. History of money: Please refer to the article above. Understand that the USD is the world reserve currency. It is the most widely used form of currency in international trade. Our ringgit is linked to it, although the % of USD in our reserves is not disclosed by Bank Negara. Like it or not, the health of our RM is linked to the health of the USD.

2. What has happened to the value of the USD?
This article here shows a graph depicting the decrease of value of the USD from 1913 to 2001 by 96%!
Your U.S. Dollar Ain’t Worth A Plug Nickel!. That is also the story of the RM!

Take note of the year 1913. That was the year the US Federal Reserve (US Fed in short) was set up.

3. In Jul 1944, through the Bretton Woods Agreement, the USD was accepted as a global reserve currency by 44 Allied countries of WW II, with an exchange value of USD 35 = 1 oz of gold. This worked well until 1958. Because of her increasing deficit and over-printing of money, the US could not sustain exchanging her notes for gold at this rate. On 14 Aug 1971, President Nixon broke the peg. The USD became unredeemable, ie there is no assets backing the USD. The price of gold started moving up after that.

4. To preserve the perceived value of the USD, US Secretary of State, Henry Kissinger, persuaded Saudi Arabia to price her oil in USD, effectively anchoring the USD to oil - countries wanting to buy Saudi oil had to procure USD to pay for it, thus creating a demand for USD.

5. Because the US was no longer obliged to redeem her notes with gold, she was under no restraint in printing USD notes. And this was exactly what she did. But gold was the canary in the mine. If the value of USD dropped due to loss of confidence by the holders of the USD, the price of gold would go up. Therefore, it was in the interest of the US Fed to suppress the price of gold.

This started in 1978 and for more than 20 years, they were very successful in manipulating the gold price with the connivance of the bullion banks and heavily-hedged gold companies. By the end of 1998, some gold traders noticed a pattern in the price of gold and suspected that it was manipulated. So, in 1999, they formed the Gold Anti-Trust Action (GATA) committee to investigate and expose this conspiracy. The results of their investigations is shown here: http://gata.org/node/6242.

After you have read the report, you may want to ask yourself:

How much gold does the US government hold?

How much gold does the Malaysian government hold?

What is the significance to the value of the USD?

What is the significance to the global financial market?

Why is the oil price shooting up these past few years?

We will try to explore this in the future postings. Stay tuned.

[pywong]

Part 2: HOW MUCH GOLD DOES THE US GOVERNMENT HOLD?

Before we proceed further, let’s address a question that is frequently asked:
Why do we want to know this?

Useful principle to bear in mind:
Asking the right question often leads us to the right answer.
Check out QBQ! The Question Behind the Question: http://www.qbq.com/

This brings us to the issue of Rat Race again - The Rat Race Part IV - The Pyramid

Do we want to get out of the Rat Race?
How do we do it?
Does it involve money?
Are we the slave or the master of money?
How do we get money to work for us?
To do so, do we need to have an understanding of money?
What is money?

Those questions will lead us to the answer of how to get out of the Rat Race and how to develop financial literacy. Many of us are not aware that financial illiteracy lie at the root of much of our financial difficulties in life.

Specifically, what is the USD – US Dollar, which is the global reserve currency?

Here is a quick explanation of a reserve currency - http://en.wikipedia.org/wiki/Reserve_currency

If we refer to the table on foreign currency composition in the link, the USD constituted 63.3% of the official foreign exchange reserves in 2007. Absent Bank Negara data (maybe someone can help me here), we will assume that is Malaysia’s USD holding ratio.
Please note: This is just an assumption.

The Treasury Department released U.S. reserve assets data for the latest week ending 14 May 2007:

US International Reserve Position as at 14/05/07
Gold, USD million = 11,041
Gold Million oz = 261.499
Implied Gold price/oz = USD 42.221959
Note: gold (including gold deposits and, if appropriate, gold swapped)

Gold, tonnes 8,133.5281
So, we know that the US Government hold 8,133 mt of gold at an assumed price of USD 42.22 per oz.

Note: gold holding include gold swapped)

Note the phrase: Gold swapped.

What does this mean?

Has the US Govt leased the gold to outside parties, specifically gold bullion banks? One of them is JP Morgan, who we learned from "The Rat Race Part IV - The Pyramid" have very close links to the US Federal Reserve. In fact, J P Morgan was instrumental in the setting up of the US Federal Reserve. There is a bit of poker game here. Watch the fun later when we reach this section.

In the next part, we will address the question: Why is gold important?

[pywong]

Part 3: Why is gold important?

Gold has been proven to be the most reliable and long lasting money. Gold is the same everywhere, it lasts forever, and most importantly, it cannot be created out of thin air.

Gold has the following characteristics which makes it very attractive for use as money:

It is chemically quite inert, almost totally immune to decay. It can appear as a pure metal in its natural state, and as such was easily discovered by early civilizations.
It is extremely rare, averaging 0.005 parts per million in the Earth’s crust. After the initial easy exploitation of surface gold, it became expensive to mine and refine.
It is very dense, 19.3 metric tonne/m3, which is nearly 20 times as dense as water and 2 ½ more dense than steel. Because of its high density, large amounts of gold can be stored in relatively small spaces, like bank vaults. Its compactness made it a useful form of monetary exchange
Its shiny yellow colour is attractive.

Because of its popularity, it became a much-sought after metal and was highly valued. Early civilizations adopted it as a form of money. And this has been the practice for more than 3000 years.

Traditionally, Central Banks backed their currency notes against gold. The USD was initially pegged to gold at USD 35/oz. The US Government could not sustain this rate due to its trade deficit with other countries and foreign governments kept on exchanging the USD for gold. Eventually on 14 Aug 1971, rather than exhausting all the gold stock in the US Reserve, President Nixon broke the peg. Now the USD became a floating currency relative to the other major currencies – Sterling, Deutsch Mark, Franc, Kroner, etc.

But the emotional linkage with gold is still there. People intuitively perceived the value of a paper currency through the price of gold – the higher the price, the weaker the currency. Since the Central Banks can print money but cannot “print” gold, they had an incentive to promote paper money as the cost of production was so low and they could create lots of money this way. Using paper money without a gold backing removed a restraining factor on the Central Bankers’ behaviour.

Although recognized, gold is not perceived the same way everywhere. We all view it through the unique lenses of our own home currencies. Most of us are born, reared, and socialized in a single country. By the time we reach investment age, our minds are hardwired to judge value exclusively relative to our particular country’s currency.

Figure 2 of this article explains why gold is important very clearly:

Maintainance of purchasing power with respect to oil.
http://www.sfomag.com/homefeaturedet...MonthNameID=Ja

To conclude, gold is important as a measure of the worth of our currency - the higher the gold price, the lower the purchasing value of our currency. Effectively, you can say that gold is the canary in the mine with respect to the economic policies of the Central Banks and the government.

Here are some links to follow if you wish to explore more.
http://www.galmarley.com/FAQs_pages/...rties_faqs.htm
FUNDAMENTAL PROPERTIES FAQs - QUALITIES & ABUNDANCE
**************
http://www.galmarley.com/framesets/f...money_faqs.htm
Gold : prices, facts, figures & research
****************
http://www.zealllc.com/2007/glogold3.htm
Global Gold 3
**************
http://www.zealllc.com/2005/glogold2.htm
Global Gold Breakouts
****************
http://www.zealllc.com/2006/goldfund.htm
Gold Fundamentals
*******************
Next we will explore:

Part 4: How do the Central Banks suppress the price of gold?

[pywong]

This is going to be a bit heavy.

Part 4: How do the Central Banks suppress the price of gold?
In the previous article we discussed why Central Banks wanted to suppress the price of gold. Now we want to examine how they do it.

Before we start, let us consider the issue of money.

What is money? Traditionally, it was gold. Today, people have been conditioned to believe that paper currency issued by the Central Banks is money. It is part of the Rat Race System.

What is the Function of Money:
http://william-king.www.drexel.edu/t...oney/funx.html
1. Store of value
2. Medium of exchange
3. Unit of account
4. Standard of deferred payment

Paper money is very useful as it is compact, easily transportable and can be sent electronically. Then you can do fancy stuff with it like currency hedging, bonds, derivatives, etc.

Central Banks love it because the cost to them is only paper and ink and they can get the Rats to work for those pieces of paper – a form of modern slavery. But the Bankers were greedy and wanted to make the Rats work more for less paper. The way to do it is to suppress the price of what has always been accepted as real money – gold!

Here is a history of the evolution of gold in finance from 1914 to date.
This is a summary: http://gata.org/node/4843
(Here is the full article: http://gata.org/files/PeterMillarGoldNoteMay06.pdf
- The relevance and importance of Gold in the World Monetary System.)

The summary is good enough for our purpose. Basically, the analysis states that we are entering an unstable phase which will lead to deflation due to excessive debt of the US.

In Phase 5, there could be a massive revaluation of the value of gold to as much of twenty times the present value, to reduce the debt burden.

Note: It doesn’t make you richer if you hold gold, although in dollar terms there will be more zeroes to your wealth. The purchasing power will be the same or slightly better.

This article explains how the gold price is manipulated:
The Manipulation of The Gold Market - http://gata.org/node/11

The stuff is a bit complicated and the scheme that was used was so massive and audacious that it boggled the mind. The conspirators are the central banks and their agents, the bullion banks.

A few tricks:
1. Sell gold from the bank stockpile to increase the supply and depress the price. This is straightforward.
2. Use hedging to short the price of gold. Never mind the details. It is too complicated.

These mining companies, Barrick Gold Corp, Ashanti and Anglogold Ltd sold their gold forward. That means they are collecting money now to finance their operations on the promise to supply the gold later when they mine it. Currently, they are exposed to gold hedges to the tune of more than 30 million oz (933 mt). Together with the other gold mines, it is estimated that the hedge book is more than 50 million oz (1555 mt of gold). That is 5 times the total volume of gold owned by the all the Western world Central Banks! And based on current production will take 65 years to clear!

That means they have sold a lot of gold that they do not possess to suppress the price of gold.

3. Next you have a few hundred billion USD worth of derivatives that served to press the price of gold further. http://www.goldensextant.com/comment...tml#anchor3776

4. Finally, you have the Gold ETF’s (Electronic Traded Funds) which were used to absorb the funds of those investors who were interested to invest in gold. But these funds did not really own all the physical gold, only part of it. Effectively, it reduced the money going into the gold market.

Here you can see the result of the suppression in this chart of the gold price from 1975 to 2008:
http://www.kitco.com/scripts/hist_ch...rly_graphs.plx.
Click Historical Charts, gold. At the bottom, select Multi-year gold, 1975 - 2008

You can also google to get a 100-year gold price chart also. The inverse of that shows how the USD has depreciated. That depreciation is about 97%.

(You can see another one at the bottom of this article.
http://www.amergold.com/library/gold1700.shtml By the way, this article is worth reading.)

What the graph shows is that from 1980 to 2001, the gold price was pressed down very severely. Those who bought gold during that period lost money. A lot of the smaller gold mines went bankrupt. This affected production.

Conclusion:
As we can see above, through a very elaborate scheme, the Central Banks managed to suppress the price of gold for more than 20 years.
But something had to give. And this is what we are going to consider in the next part.

Part 5: What happened after that?

[pywong]

Part 5: What happened after that?

It is useful to review some numbers to have a better appreciation for this segment.

Ref 1. Au A Look at Central Bank Gold Reserves cpowell 160505.doc
Ref 2. AU CitigroupGoldReport092107.pdf
Ref 3. Au WGC Central Bank Gold Reserve Historical Perspective Since 1845 Nov 99.pdf

Print out the tables and figures referenced below.

For Ref 1, see Table on page 2 – Muslim Bloc Gold Reserves.. Bank Negara sold off our gold from 1998 at 73.1 m tonnes down to 36.4 m tonnes in 2003 during the Asian Financial Crisis. We have less than ½ of our gold reserves before the financial crisis. But a new crisis is coming up very soon.

For Ref 2, see Figure 10 on page 8. The information here is a veritable gold mine. It shows us:
a. Gold Supply/Demand Model from 1997 to 2008
b. Historical Price Chart
c. Recent Prices
d. Official Sector Holdings – this is important and we will discuss this in more detail later.
e. World Gold Holdings by sector
f. Gold Fabricating Countries
g. Gold Producing Companies
h. Top Gold Mining Companies

For Ref 3, see Tables 1 – 4, pages 17 – 21.

What information can we extract from these tables?
a. All the gold that was ever produced since the beginning of civilization is less than 130,000 mt (126,930 mt, Fig 10 of Ref 2). Important number to remember in case someone offers you an opportunity to buy 50,000 mt of gold stashed in a Swiss bank by a tin-pot dictator.
b. The top part of Fig 10 Ref 2, shows that there is a shortfall in supply of 415 mt in 2008 that has to be met by Central Bank sales. The figure also shows that the US presently have only 8,134 mt of gold. It is believed that actual holding is less than 4,000 mt due to gold leasing, meaning that her gold can cover less than 8 years of nett demand.
c. Ref 1 page 10 Table for Central Bank Gold Reserves total 31,023.2 mt. It is believed that the IMF figures represent only the commitment of the member countries to contribute gold from their own gold reserves to the IMF. Basically, there is double-counting. The Central Banks hold less than 15,000 mt due to gold sales and leasing to Gold Bullion Banks.

The weak link in the chain is the US.

Because of her budget deficit and trade deficit, the US has accumulated a debt of USD 13 Trillion! To get an idea of the magnitude of this figure, if we were to stack USD 100 bills on the ground, it can reach from Kuala Lumpur all the way to London!

The American banks have been greedily creating trillions of dollars of financial derivatives in the hope of making more profits – more than USD 700 trillion to date. Again, stacking those USD 100 notes can take us to the moon and back. The prices of these derivatives are now crashing pulling the big banks down with it. Bear Sterns is the latest victim and it is believed that the top 25 banks are in a precarious position.

The US Federal Reserve and the European Central Bank are desperately printing money to try and bail out the banks. Day by day, new problems keep cropping up. http://tindakmalaysia.com/tm_forums2...opic,10.0.html

This is the current situation:
1. US has less than 4,000 mt of gold, which she is trying to keep from the public. GATA and her partners are challenging in court for the figure to be published.
2. The US is in deep financial trouble.
3. The rest of the world have their currencies tied to the US with 63.3% of their foreign reserves in USD.
4. She has been trying to suppress the price of gold for the past 20 over years through manipulation and gold sales.
5. World Gold production is falling. The time lag from gold discovery to production is 10 years.
6. There is a shortfall in supply of 415 mt which can only be met through Central Bank sales. The US is not in a position to make any more sales. The Eurobanks are reluctant to sell as they realize that they are now too exposed. Currently, they are trying to fool the public by claiming that the IMF will sell 400 mt of gold (which they do not have).

Meanwhile, in the background, food prices are shooting through the roof due to hot money flooding the futures market. That is another sign of the incipient crisis building up.

Imagine you are in a poker game. On one side is the US and her allied Central Banks. On the other side are the Arabs, Iran, Russia, China, India, GATA and the gold buyers. Which side would you prefer to be on?

In a worst case scenario, there will follow a severe depression in the economy combined with hyper-inflation in the price of products and commodities.

Here are some closing thoughts:
http://seekingalpha.com/article/7557...source=d_email

Fading Glory: The Dollar as the World's Reserve Currency

Conclusion:
We have discussed the danger of the US economy crashing along with the USD. We estimate that the Central Banks have sold off at least half of their gold holdings. When this information is officially confirmed, there will be a panic and the price of gold will shoot up.

With the expected financial turmoil in the economy and the gold market, we should buy gold to protect ourselves.

[pywong]

Part 6: What do we do next?

So, here goes.

Capitulation:
The gold manipulation by the Central Bankers had reached a critical stage by 2005 so much so that Rothschild decided to pull out of the gold market after 200 years of operations. This is a very significant event as it indicates that gold trading is not a viable business. Companies which have been in the same business for 200 years do not quit just like that. As an indication of its major role in gold trading, it is the investment bank that has chaired the London meetings setting the world gold price since 1919.
…. Rothschild Quit
http://www.telegraph.co.uk/finance/m...200-years.html
It is also useful to bear in mind that Rothschild has an investment time-frame of centuries. Often times, they see things we don't, especially given their access to secret information that is not normally open to the public.

Still the US Gold Cartel is not ready to give up. Listen to this interview:
KE Report http://www.kereport.com/DailyRadio/Daily050908-1.mp3

Gold Holdings:
Because the significant majority of people currently believe that our governments and our central banks have sufficient skill to manage the supply of money, gold’s use as a monetary material has waned, especially over the last 70 years. It is believed that the Central Banks hold about 15,000 mt of gold. At a price of USD 880/oz, the value of this gold is about USD 424 billion.
The Fed and ECB printed about $1 trillion in the last 9 months just to contain the sub-prime collapse. All those bailouts create moral hazards. These moral hazards combining with record commodity prices and fear of inflation are the recipe for a fierce gold market. This is why it is right to focus on precious metals, in particular, gold.

Here are 2 articles that are of interest.

Has Europe declared war on the weak dollar?
http://www.usagold.com/amk/usagoldma...ate050108.html

The Gulf's Currency Solution - Gold Dinar http://atimes.com/atimes/Middle_East/JE09Ak01.html

These are the SEVENTEEN REASONS TO OWN GOLD

1. Alarming Financial Deterioration in the US
2. Global currency Debasement
3. Investment Demand for Gold is Accelerating
4. Negative Real Interest Rates in Reserve Currency (USD)
5. US Federal Reserve Policies in the Event of Increased Deflationary Pressures
6. Ongoing Proliferation of Financial Derivatives
7. Existence of a Huge and Growing Gap Between Mine Supply and Traditional Demand
8. Mine Supply will Likely Decline in the Next Three Years
9. Large Short Positions
10. The Central Banks are Nearing an Inflection Point where they are unable to provide more gold to the market
11. Increasing Likelihood of Central Bank Gold Purchases
12. Large Increases in Outstanding Gold Derivatives despite major reduction in Producer Hedging
13. Gold is very cheap compared to oil price
14. The China Factor
15. Gold as Money Continues to Gain Credence
16. Rising Geopolitical Tensions
17. Limited Size of Total Gold Market provides tremendous leverage (total gold in existence <130,000 mt)

Long-term USD 5 x 3 Gold Chart http://www.the-privateer.com/chart/gold-pf.html

Buying Gold: Here are a few possible places to buy gold. Please do your own due diligence

Maybank http://www.maybank2u.com.my/rates/gold_rates.shtml physical & investment a/c

Public Bank http://www.bernama.com/bernama/v3/news.php?id=328150 investment a/c

UOB Bhd www.uob.com.my site map, gold prices: physical gold

www.goldmoney.com

www.perthmint.com.au

All the best.

[pywong]

This is one scholar I have a lot of respect for.

http://www.drschoon.com/media.asp

There are 5 more podcasts that are worth listening.

Common theme - the US army bankrupted them.
Govt gave up power to print money to the private bankers so that they could get unlimited amounts of money based on debt to fund their wars.

1. The Fix Is In
2. England, China & Opium
3. Capitalism, Communism & Schnapps
4. The Path to the Future is a Cliff

[pywong]

We discussed:
What is the Function of Money:
1. Store of value
2. Medium of exchange
3. Unit of account
4. Standard of deferred payment

As individuals, our most important consideration is the function of money as a store of value. Let's look at the USD since there is more public information available.
1913: US Federal Reserve set up - USD 1 = 100 cents
2008: USD 1 = 4 cents (1913 value). Devaluation of 96%

1971: 1 barrel of oil = USD 3
2008: 1 barrel of oil = USD 120. Devaluation of 97.5%

1971: 1 oz of gold = USD 35
2008: 1 oz of gold = USD 860. Devaluation of 96%

Do you see a pattern there?

That is what we want to protect - our purchasing power. I am not interested in what currency system is going to replace the USD. Neither am I interested in whether gold can replace the USD in a new currency arrangement. That's not my problem. That is the problem of the govt in trying to figure out what new system they want to come up with to exploit the Rats.

So, while the Central Bankers are frantically trying to bail out their cronies, the best favour we can do ourselves is to take ourselves out of the paper money system and hide in commodities. I am fine with oil but it is too bulky and messy. Precious metals serves that function of store of value admirably.

http://mcalvany.com/articles-04.php

For the Past 6,000 Years, the most sought-after form of asset protection has been gold.

Gold is the most liquid financial asset in the world. It has knows no borders, is recognized throughout the world, and can easily be transported or hidden. For this reason, owning gold represents financial privacy and independence. Gold frustrates the attempts of governments to completely control of the finances and lives of their citizens.

Gold performs the role as the only true money. Tyrants, dictators, can’t undermine its value nor politicians who print paper money at will, making their currencies worth less and less each year. Unlike paper money, gold hold its value over the long run.

[pywong]

Dated 16 May 08 (for perspective)

The Ultimate American Dollar Collapse
http://www.youtube.com/watch?v=3RhnHo3RDfg

On average 63.3% of the foreign Central Banks reserves are in USD. A collapse of the USD will have a corresponding effect on the RM.

[pywong]

Is the Dollar Doomed?
This is a very important article that provides a global over-view of the outlook for the USD, gold and commodity prices. Dr Benn also gives some hints on what steps we should take to protect our assets.

What Dr Benn Steil is saying about Gold, USD & Commodity Prices

http://www.resourceinvestor.com/pebble.asp?relid=42919

If you don't like to read and prefer to listen, click on the audio at the bottom of the right hand column.

Suggestion: Read and then listen. It will reinforce what you learn - use 2 parts of your mind instead of one only.