Gold: The Next Reserve Currency Player 34 comments
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The subprime crisis initiated and perfected in the United States has morphed into a full blown liquidity crush that has infected nearly every corner of the financial world. The one corner that can remain functioning in a largely rational economic way are the Persian Gulf states known as the Gulf Cooperation Council (GCC). These include Kuwait, Saudi Arabia, Bahrain, the UAE, Qatar and Oman. Not all of these oil players are of equal consequence, but they all have a common geologic inheritance and a cultural unity. All except Bahrain are ranked in the top 20 oil producing nations and Saudi Arabia alone made over 200 billion US$ in exports in 2008. They represent the great players and the only viable swing producers.
The parabolic rise last year in oil prices gave them daily billion dollar payouts. The drastic fall has still left them able to pay off substantial social committments to their populaces and have enough left over to make forays into the Sovereign Wealth Fund arena. However, there is a future to consider and oil will not be around forever. The twin conundrums the Kuwaitis and Saudis have faced in particular is how to protect themselves from the fallout of either unacceptably low or high oil prices and (critically) depreciating value of the currency they receive for their precious oil - US Dollars.
The solution to the two great concerns for the future - "What to do after oil?" and "How do we retain value from our Dollar payouts?" may rest with gold. It most certainly doesn't lie with an alternate paper currency. The EURO is rife with issues, not the least of which is reconciling drastically different nation states to a common economic vision and financial execution. The YEN is as dramatically leveraged as the US$, burdened by debt and a flagging international heft.
The answer? Initiation of a new payment regime - a 10% gold payment share between 2009 and 2012, 20% thereafter. The rest of the bill? Payable in US$. Gold has a long and very respected history in the Middle East. It is already held in very sizeable amounts by the Saudis and Kuwaitis. New gold, however, could be used to satisfy the region's concern for its following generations. It would form, literally, the foundation for mega banking centers and the stabilization of the currency they will still need to receive in mountain like proportions in the future.
The GCC states have developed some of the most lavish and technologically advanced cities in the world. They have shown the capacity to attract the most sophisticated financial and engineering work forces from around the world. They share a religious based society that values discretion and long term business relationships. Banking and gold are naturals for them, and the infrastructure and patience to realize this seismic shift in financial integrity are already in place.
Will this actually happen? The tipping point lies in the eventual landslide of liquidity, perhaps as much as the equivalent of 10 trillion US$ when various currencies are included (Euro, Yen, etc.) that will burst on the markets by Spring 2009. No matter what price gains oil delivers to the Kuwaitis and Saudis, at that point oil will be tainted by a realization it's being tallied in rapidly depreciating fiat money. My guess is they'll cautiously begin to take ever larger physical gold positions and seriously plan their strategic options. Those holding ETFs such as GLD, DGP and even silver ETF SLV could see enormous profits. Miners will doubly prosper, as they always do in strong metal uptrends. Look to GDX for diversity and individual equities like Yamana (AUY) and Freeport-McMoRan (FCX).
Disclosure: Long DGP, AUY, SLV.
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This article has 34 comments:
Is an international inflated gold price the way to give all the surplus cash a home????
Could this spill over to Silver as its reacted like a base metal - much to my disgust as Im was more into Silver than gold much to my financial disadvantage.
I bought physical gold and silver recently as its the one thing that cant be deleted with a push of a button like my shares have done...
Nothing wrong with the ETF metals funds...a physical position is always the best foundation but sometimes not the easiest to trade. If any of this gets further than speculation..and it has a very good chance of doing so...silver could e the biggest winner yet.
Most truly seem to believe the lie that "it can never happen here"...this is the YOOOnited States of America, after all!! And oh, BTW, there never was a Great Depression either...nor hyperinflation in Venezuela or Germany within the last century. Those were just myths to these people, conspiracy theories thot up and stuck into textbooks by the "nuts" to scare people...or if they were real, it's only b/c they were stoopid furreners and not us smart Amuricans. I say give him another beer...let ignorance be bliss as long as possible for him and them...b/c as much as they are ignorant blowhards before the fact, they are even bigger whiners and complainers after...so keep them happy blowhards for as long as possible.
And I can only agree about the ETFs being useful in terms of VERY short term investment vehicles...almost akin to futures trading. Who knows how fast the dollar will drop over the cliff when it does, or how fast the global devaluation or revaluation of the dollar could happen, or when force majeure could be declared on the COMEX. If those things happen fairly closely together, there's a chance those in the ETFs would get back only paper money that is very rapidly devaluing at the same time the prices of silver and gold are skyingrocketing. Best have a good hoard of real money first...physical silver and gold...before putting needed funds, for now or the future, into the ETFs...or really paper equities of ANY kind. jt
On Nov 30 12:59 PM Georealist wrote:
> Interesting comments..especially Mr. Lathrops..apparently he thinks
> we should stupidly stare at trillions in potential liquidity andmay..well..go
> play golf. The Gulf States taking steps to protect themselves sounds
> very reasonable to me...their geographic location is enviable and
> they have the monetary heft to carefully pull it off.
> Nothing wrong with the ETF metals funds...a physical position is
> always the best foundation but sometimes not the easiest to trade.
> If any of this gets further than speculation..and it has a very good
> chance of doing so...silver could e the biggest winner yet.
Hi Bill!
I have been trying to understand why there is no great sense of outrage among the general public over what has been ongoing for so long. The lifestyles for all of us are subject to decline as a result \of the actions of a few. Why have so many chosen to respond like sheep to the slaughter?
I now believe it is a question of mass denial. People understand that things are not good in the overall economy. But so far it is the other guy that has been hurt. Most people still have their jobs. Most people are still paying their mortgages. Credit card balances are high for the average person, but most bills are still getting paid. Our highways are still choked with SUVs. Overall, things are still pretty good on the surface. And even while the government announces one massive bailout plan after another, and the printing presses are running around the clock to pump money into the system, people are still not seeing any of the consequences from that. Yet... People still choose to believe the lies that are the official inflation numbers. It is easy to pretend that all of that debt that has been created on the national level will not have to be repaid, will not have a direct impact on individual lifestyles. Today, as the great annual treck to the mall is underway, I wonder how many people have begun to question how much longer this sort of thing can go on for?
The mainstream media have been telling us exactly what we want to hear, and we all really want to believe them. How many times have we been told that the problems are going to be contained? How many times were we advised that the markets had found a bottom? How many senior people from individual companies have appeared on TV to tell us their companies were in great shape? No matter how many times we hear all of these lies, we want to believe them and so no one is going to be too concerned. A new president has been elected on the basis of telling people exactly what they want to hear. He sold change, and somehow implied that the good times would be preserved without any cost. People loved it and really want to believe.
Sooner or later however the fallout is going to start hitting closer to home. Eventually, every one of us is going to be negatively affected by all that is going on, whether we are told the truth or not. No matter how much we all want to believe the lies, the consequences are the elephant in the room that cannot be ignored forever. And then, I think all that outrage is going to be expressed.
As long as it is only the minority that is facing the loss of their jobs, their homes, bankruptcy, etc. then its easier for the rest of us to pretend that things will be okay. When things have degraded to the point where the majority of us are tightening belts and facing serious financial problems; when inflation is forcing the average person to make difficult choices on what they can afford; when unemployment is running at double-digits; when the compounded interest of an ocean of debt has pushed people to the point where they can no longer make payments on their bills; when it finally dawns on the average person that all of that bailout money injected into the system did not make the big problems go away... THEN, we will see a collective sense of outrage that has been sadly lacking all the way through this mess. Unfortunately, I suspect it will be too late.
So here we are today. I cannot count the number of times that the gold spot market tried to rally above $815 and was severely pushed back down over the last 2 days. When a serious terrorist event occurs in the largest gold-friendly country in the world, one would expect that gold prices would surge. And that is exactly why gold has been so obviously and firmly capped. And since so few of us are willing to rise up and denounce the market rigging right now, and no one wants to see what is happening in real time in full view, and we all want so badly to believe the lies that they are telling us on TV, then nothing is going to change.
Now people like Dennis Gartman want to chuckle and suggest that goldbugs want to see bad things happen. What he fails to understand is that things are going to happen whether we want them to or not. We can choose to run with the herd and pretend that everything will be just fine. Or we can assess the situation and take appropriate steps now while there is still an opportunity to buy a degree of protection. The outrage is coming. Drawing a line in the sand and capping gold may keep the sheep in denial for a while longer but it will not halt the fallout from a decade of economic and financial stupidity on an unprecedented scale.
It is refreshing to see that Peter Schiff is now getting some measure of respect for having called the market correctly. Remember how they laughed at him early on when he tried to warn people what was coming? Now there is a video on YouTube where his comments have been highlighted along with the rebuttal from the bozos on CNBC and they are not laughing now. The denial phase is coming to an end soon Bill, and I hope then you may also get a measure of respect for your work to expose the gold manipulation scam. Gartman and Co. will eventually find that the smug arrogance they directed towards the goldbugs was misplaced. For now, its just groundhog day again.
cheers!
MexicoMike
I am not convinced how bad a future we are headed for. But I must say that a doomsday economic future appears to be a strong likelihood.
One thing I have long believed- Americans have become complacent from having had a society of material abundance and lack of war (on our own territory) for many decades.
This has lead to a widespread view of "it can't happen here".
Another way to put it is that in the United States, the concept of "American exceptionalism" prevails. I guess the concept is based on some feeling that we have a special blessing from God, or that somehow our constitutional system of government (which has deteriorated greatly in recent years, but is still far better than that of virtually any other country) somehow makes us immune from the laws of nature to which all other human beings are subject.
Unfortunately, I see no reason why "it can't happen here".
Actually, even before the current financial crisis, you could see some of the initial signs of such a breakdown in dysfunctional places like California. The quasi-Marxist regime in Sacramento has for many years had the state's economy on the early stages of a death spiral- by jacking up taxes and spending at every opportunity, and welcoming the world's poor to flood into the state and be supported by the taxpayers. Utterly insane public policy, but bought into not only by the sheeple but by the dimwitted "journalists" who run a news media based on the grand concept of "don't worry be happy".
As the national economic downturn gets worse, one small positive side effect may be that the leftist buffoons who run places like the state of California may be thrown out of office by the populace. All that will do, however, is perhaps allow California to not deteriorate much faster than the rest of the nation.
We face a likely economic death spiral in the United States, and much of the rest of the world. Misgovernment in places like California have created parallel terminal economic illnesses. In other words, California would have destroyed itself even if the rest of the country were economically healthy. However, all evidence seems to indicate that all of us, at least in the United States, Britain, and a number of other countries, are headed for economic oblivion.
More than I can say for my stocks :(.My question is when are people gonna see the "bailout" for what it really is. The biggest golden parachute in history,brought to us by rethuglacons for rethuglacons ?
I hope you are right, I wish I could believe this was the bottom. It takes guts to call bottom, but my gut tells me that we aren't there yet....not be a long way.
Mexico mike you are right on ! . Folks who are still employed are in steep denial re what is happening now + going to continue to be much worse . The great depression will seem like a walk in the park . No way , no how does the US government have the funds to house feed + clothe 300 + mil people . A new huge war is coming , you'll see !
arabs are traders and merchants. they will buy gold and silver when they can - but they will be purchasing it privately so not to drive the price up. they will do nothing to drive the value down of fiat currencies.
On Nov 30 09:37 AM relmor wrote:
> Dont buy the GLD. Its an end game scam. When a rush of investors
> ever demand there gold, they will be in for quite a surprise. Also
> could crash any day because of that. Physical gold cant crash. Gold
> stocks will outperform gold for a while anyway, as the charts are
> dipicting.
Do you have the same feeling about CEF?
Thanks
You may find this suprising, but some people will accept gold in exchange for currency, food, farmland, machinery, etc. You can exchange gold for lots of useful things. Maybe even an airplane to fly you out of the desert! So no need to worry about the Saudi's sitting on their piles of gold.
Nikhil- a comment from James Turk will help explain why many people worry that GLD exists only to soak up money that would otherwise support the physical gold market: "Thus, for example, when GLD adds a gold bar, there is no assurance that the gold bar really exists unless it is in the vault of the custodian, HSBC. But the prospectus discloses that HSBC uses subcustodians and even sub-subcustodians, and what's worse, "the Custodian is not liable for the acts or omissions of its subcustodians". In other words, if the subcustodian does not have the gold, GLD "Shareholders cannot be assured that the Trustee will be able to recover damages from subcustodians...for any losses relating to the safekeeping of gold by such subcustodian". This means that "Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may hold the Trust's gold, failure by the subcustodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust." To be blunt, these disclosures mean that there is no certainty that the gold supposedly owned by GLD really exists. After all, if there was complete certainty that the gold did exist, the objective of GLD would be to provide investors with the opportunity to own gold bullion by investing in shares of an ETF, rather than its stated objective to just track the price of gold."
Maybe we should go for the ride.
www.jimrogers-investme...
Perhaps I could just write a check transferring my rights to an amount of oil held in reserve out of my bank account and into the seller's account? That's how a commodity-backed currency works anyway.
Of course, this example also illustrates the problem with commodity-based currencies. As oil production rose and fell, the value of that oil in terms of goods, labor, and services would vary too. Gold has the same problem, as the US realized in the late 1800's.
On Nov 30 09:37 AM relmor wrote:
> Dont buy the GLD. Its an end game scam. When a rush of investors
> ever demand there gold, they will be in for quite a surprise. Also
> could crash any day because of that. Physical gold cant crash. Gold
> stocks will outperform gold for a while anyway, as the charts are
> dipicting.
always nice to find a positive/factual viewpoint among the clutter. thanks.
On Nov 30 09:11 PM The hand wrote:
> i would be happy if gold became a currency - or even a true reserve
> currency. however, Saudi Arabia and Bahrain (or the rest of the GCC)
> do not worry about what happens after oil as there are significant
> mineral deposits also.
>
> arabs are traders and merchants. they will buy gold and silver when
> they can - but they will be purchasing it privately so not to drive
> the price up. they will do nothing to drive the value down of fiat
> currencies.
>
On Dec 01 03:33 AM Vancan wrote:
> I have a second question: Why would anyone buy CEF which is selling
> at a15% premium over its NAV, instead of buying GLD?
Mexico Mike: Amen!
Oil will not be "tainted" - that's a meaningless statement. Everything else will be tallied in the same fiat money, so they can still buy whatever imports they need.
If they want to accumulate gold, there are two ways they could do it. One way is to do what you suggest: require customers to pay gold for oil. This would call attention to what they are doing and drive the price of gold up. The other way would be to sell their oil for fiat money, and then use the money to buy gold without telling anybody. The second way would have less effect on the price of gold, so they could buy more gold for a given amount of oil.
The most important point in this article has nothing to do with gold: "The tipping point lies in the eventual landslide of liquidity, perhaps as much as the equivalent of 10 trillion US$ when various currencies are included (Euro, Yen, etc.) that will burst on the markets by Spring 2009." You are right about that. The $10 trillion is coming. It's in the pipeline. The burning question is: how is that money going to appear in the economy, and what effect will it have?
The MD said gold is gonna double to $2000 coz of hyperinflation.
www.youtube.com/watch?...
As always, caveat emptor and be prepared for a few more deflationary implosions during the next year or so.
I am waiting for one of these as my new entry point.
On Nov 30 10:13 AM Jimmy Lathrop wrote:
> Rip your gold fillings out of your teeth, melt them down, put on
> your hairshirt and run through the streets of your town ringing a
> bell yelling about how the end is near.
On Dec 02 03:25 PM Lyle wrote:
> "No matter what price gains oil delivers to the Kuwaitis and Saudis,
> at that point oil will be tainted by a realization it's being tallied
> in rapidly depreciating fiat money."
>
> Oil will not be "tainted" - that's a meaningless statement. Everything
> else will be tallied in the same fiat money, so they can still buy
> whatever imports they need.
>
> If they want to accumulate gold, there are two ways they could do
> it. One way is to do what you suggest: require customers to pay gold
> for oil. This would call attention to what they are doing and drive
> the price of gold up. The other way would be to sell their oil for
> fiat money, and then use the money to buy gold without telling anybody.
> The second way would have less effect on the price of gold, so they
> could buy more gold for a given amount of oil.
>
> The most important point in this article has nothing to do with gold:
> "The tipping point lies in the eventual landslide of liquidity, perhaps
> as much as the equivalent of 10 trillion US$ when various currencies
> are included (Euro, Yen, etc.) that will burst on the markets by
> Spring 2009." You are right about that. The $10 trillion is coming.
> It's in the pipeline. The burning question is: how is that money
> going to appear in the economy, and what effect will it have?
>