- OroyFinanzas in English - https://www.oroyfinanzas.com/en -

The rise of the Dollar – The fall of Gold – Part 1

(OroyFinanzas.com) – In 1971 Nixon closed the gold window on the $ and turned the European nations away from redeeming Eurodollars into gold at the price of $42.35, thus devaluing the U.S. $ by the extent the gold price rose.

This was keenly felt in all the markets across the globe because it was a particularly visible blow for the $ and for the sterling as the “$ Premium” was imposed in the U.K. to prevent a wave of capital exiting the country. Shortly thereafter the oil price shot up to $35 a barrel from the $8 level it had happily sat at before. In those days, even with no gold standard, gold was considered the foundation on which paper money stood.

There being no more effective defense than discrediting your accuser, the States tried to defend the $ through the sale of 500 tonne lots of gold, but terminated these as they saw the gold gulped down by private buyers. They had hoped that gold, as money would lose its reputation as well as its position in the Monetary System. Having failed with their sales. The United States then persuaded the I.M.F. to do the same, but again demand overwhelmed supply but this time with outcries from I.M.F. members over these sales.

The U.S.$ and Oil 1971 +

At the end of the seventies the over issuance of the $ came home to roost and Volcker the Chairman of the Federal Reserve at the time found it necessary to ramp up interest rates in quick time, to the extraordinary heights of 26% to tame the inflation engulfing the U.S.A. then.

What happened then to the $? The world power could not permit the $ to lose its name, after all it was the dominant nation financially in the globe as well. A new role for paper money had to be found. It had to be able to implement the power, political and economic, by itself [as the days of colonization through war had passed into history]. It had to be money in demand beyond the value gold had traditionally attracted. What was used by all right across the globe even reaching part that U.S. ‘might’, could not even reach? One item – oil! By pricing oil in the U.S. $, U.S. power could be imposed across the globe. Even Russian oil outside Russia was priced in the U.S.$. But it was vulnerable to a different choice if selected by opposers, so the U.S. had to use heavy pressure to make this $ pricing non-negotiable. To do this the U.S. made it clear to Russia in the “cold war” that the Middle East was a critical part of its ‘vital interests’ [items over which it would go to total war over]. Whilst the U.S. itself was dependent on Middle Eastern oil for a good portion of its oil, so was the bulk of the world! Only Russia could stand separate.

The U.S. also imposed a grip on global oil producers [except Russia] ensuring that their governments were dependent on U.S. backing to stay in power. With their loss of individual power as well as possible sovereignty at stake it was not big step to comply with whatever the States required.

Thus to this day the Middle East, Indonesia and the States comprising the bulk of the globe’s oil supplies are found and under U.S. governmental control. Having formalized this policy of oil priced globally in the U.S. $ it was a short road to the $ becoming the global reserve currency. Gold left the stage as money, but continued quietly in the vaults, of and in particular, the U.S.A.

Apart from the inevitable desire of every Banker to do away with cash and valuables that can trade as ‘cash’ [after all it’s out of their control and fee charging range], so many more powers and control possibilities existed with paper money. After all gold was limited as a currency, disciplining governments and politicians alike, enforcing monetary stability and beyond political control. And with the $ targeting control of the global monetary system, through a reserve currency role, what more satisfying degree of control could be achieved without an army? What better way to bring in the wealth of the globe to the U.S,, than through the issuance of the $ to fund global growth, oil needs and the like. As a means of exacting tribute, never has there been a cheaper and more effective instrument!

With oil superior as a form of money, needed and imported by every nation on earth it was accepted as the most eligible commodity on which to carry the $ to dominance! Through this the concept and reality of $ hegemony [Imperialism] was then imposed. The $ then rode the back of oil and grew to be used in 86% of the globes transactions and making up 75% of the globe’s reserves.

It must have taken the tacit if not the full support of Europe to support the move from gold to the $, held as they were, to ransom through U.S. power over oil supplies and its pricing as is the case today! But note well, please that the objective was not to thoroughly discredit gold, as it will always prove vital “in extremis”, but was to put it in a non-monetary role, as a non-threatening or challenging reserve asset.

Discredit Gold!

Thereafter through the eighties and nineties, gold suffered under a persistent campaign to discredit/ demean it as money, but not through actual sales of gold [although these were constantly threatened], but through the accelerated production of gold into an already oversupplied market. This accelerated production of gold came about by a system whereby Central Banks lent gold to bullion banks, who then on-lent it to mining companies to finance their development.

Today this is still done, whereby the cost of financing development of a mine was raised through the immediate sale of the gold borrowed from the bullion banks, with a promise to repay the gold from future production [called “hedging”] in an operation where gold was sold forward at the forward price [in the futures market] which included the interest to be accrued over the period [the “Contango”] until future production supplied that gold. Much higher than market prices were achieved in this way, particularly as the gold price was steadily falling over the period, aided by threats of gold sales made loudly in the market by Central Banks. But the banks, Central and otherwise, together with the mines went overboard and sold the bulk of their future production forward in this manner. This looked wonderful in a falling gold price market, but became the reverse when the gold price started to rise!

Some Central Banks did sell their gold [Canada, Australia included], in particular Britain who had the dubious honor of selling the bulk of their gold at close to the bottom price of gold seen in the period from 1972 to today. In honor of the eminent Chancellor Mr Gordon Brown, who initiated these sales, this low point of Central Bank Gold sales is to be known as the “Brown Bottom”.

The Advent of the Euro and Gold

In 1999 the European Central Banks, with the impending launch of the Euro in mind, decided that the anti-gold campaign had gone too far and decided to form the Central Bank Gold Agreement, whereby they would restrict gold sales to those already announced to the public and to place a ceiling on such sales of 400 tonnes for the next 5 years. Again gold was placed in a secondary role in the European monetary system in a campaign highlighting its junior role.

But the limitation of gold sales took the fear of dumping of gold onto the open market, away. However, after a full 20 years of such threats the market was slow to fully appreciate the change in “Official” attitudes. Britain was part of this first agreement, but only until it completed its sales and walked away when the second agreement was proposed. Of course, by the time this had happened its sales were complete.

In an environment already created for it, the Euro was launched without gold as a threat to it as a paper currency anymore. A generation had passed by and the average fund manager knew nothing of the world in which gold was money. The European Central Bank could happily announce that it aimed for the Euro to be backed by its reserves of which gold would represent only 15% [a target not a rigid line]. Now gold could enter the monetary scene as a reserve asset in support of fiat currencies, not a challenge for oil was the fulcrum on which the main reserve currency, the $ was now founded. The leading Eurozone Central Banks, Italy, France and Germany held onto their gold which represented in the region of 50% of their reserves, a figure that roughly matched the U.S. level of gold in their reserves still. Thus the real place of gold in the main global reserves had not changed in 30+ years. Therefore, the story was really a continuation of the past with nothing new in the picture. Gold remained and remains a vital feature of the monetary system!

We would speculate that the founding of the Euro with its gold backing received the U.S. and Greenspan’s approval, as did the “Washington Agreement” the first Central Bank Gold Agreement in 1999 September 26th. Greenspan was in on the meetings held in Washington, as were the Japanese Central Bank representatives. We repeat that the objective was never to destroy gold as a monetary asset but to reduce it to a minor one, allowing the $ and subsequently the Euro to flourish without challenge.

It would appear that the price to be paid by Europe would be to not challenge the role of the $ in the pricing of oil. History confirms this! Indeed it would appear from the performance of the Euro and the $ that there is a managed approach to the exchange rates of these currencies. Talk of the fall in the $ and rise of the Euro has not been fulfilled in a price that has barely [+5%] moved in the last year. This implies some sort of managed axis on the two sides of the Atlantic. Provided the world stayed as it was with the power distribution limited to the developed world all well and good.

Julian D. W. Phillips

© OroyFinanzas.com