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  • Gold, Euro And Political Risk  7 comments
    Jan 17, 2013 6:35 AM

    Jim Sinclair has recently asserted that Gold is not at risk ofconfiscation. I disagree and will explain why in the following post.

    Sinclair is overlooking the fact that the purpose of Gold is to give essential meaning to a currency. Central Banks have taken a keen interest in the metal in the past few years for its virtues as a settlement mechanism and its use in assuring the legitimacy of their respective sovereign currencies.

    This is precisely what makes it a target for confiscation.

    With no gold-backing whatsoever the exercise of printing money for trade is near to pointless with so much risk currently in play and this is particularly so for nations without alternative reserves of wealth to support the money it offers abroad. Lets keep in mind that most Western countries have continued to carry gold on their books despite the fact the gold standard was eliminated.

    Now why would they have bothered to do that?

    This is not the case for every Western nation of course. Canada for example has virtually no Gold holdings whatsoever however this problem is overcome as that country is well endowed with both oil and agricultural production for export. These indirectly serve the purpose of Central Banks needs for holding collateral against any potential default risk to other nations.

    Lets also recall that the purpose of Gold in the past was to facilitate trade between nations. In the absence of any other mechanism or product to exchange gold has served the purpose of payment to satisfy creditors. The alternative of course is the direct exchange of food, industrial commodities, energy or specialized services.

    In more modern times however fiat currencies have substituted for gold as the fluid to make the system work but as we are seeing cracks appear in exchange mechanisms a new interest in Gold has arisen. A country that can meet the capital needs of the market where trade is concerned by supplying alternative resources that are in demand does not need Gold as backing nor its collateral for external purchases and imports. In this case fiat suffices and it is accepted on face based on a nations resource strengths.

    Gold (or Gold backing) merely makes the exchanges simpler and more transparent.

    Fiat in this case is more than adequate where a nation is not questioned regarding its solvency. The US itself is well endowed in the worlds most essential and demanded resources which include energy, food and minerals. All these it has available for export. In the case of Corn and Soy it may be the global leader. Its currency is thus not in doubt despite heavy indebtedness in the same way we question European solvency.

    The point though is that balancing trade between nations is of much greater significance than how a country exchanges goods and services within its borders. The currency issue is one of international relationships and as gold is borderless it is where Central Banks will turn to insure those trade relationships carry on without regard to risk while proving it can collateralize its currency for trade.

    As a medium of settlement there are few simpler alternatives than Gold but it is not the only choice as I have already noted above.

    So when we also consider that other Central Banks around the world are now bolstering gold stocks against a backdrop of widespread currency devaluations then it should be clear to even the children in the room that moves are afoot to stabilize trading relationships and reduce currency risk while also insuring transaction liquidity is sufficient in a worst case scenario.

    A worst case situation would be the collapse of the European Union and the possible dissolution of the Euro with the concomitant risk of multiple sovereign defaults and bond failures. This is not just a possibility in the minds of some economists but an inevitability although I seriously doubt the Euro is truly at risk.

    So how do you protect yourself against such a scenario at a time when social discord may overrule current political dictates? Let us not forget the ballot box and how it may bring less cooperative elements to the forefront as a disenfranchised electorate chooses those with more radical solutions to our collective problems.

    The world is clearly becoming more discordant as job losses mount and living standards decline during this period of deleveraging (particularly in Europe) and this presents stability risks on both a Sovereign and global level. Witness the rise of Neo-Nazi parties in Greece, separatist movements in Spain and anti-Euro groups in the Northern countries as just a few examples of more divergent political movements in Europe that present hazards to the current group of policy makers and leaders.

    Any prudent Central Bank would naturally look to Gold under these circumstances as a backstop against potentially serious fiat losses (in a default scenario) and as a means of providing insurance in preserving the viability of its banking system while protecting the real gains their country may have achieved through past trade activities. Indeed, we are seeing exactly this scenario unfold much to the delight of many in the Gold investing community who perceive CB buying as a primary impetus behind future price rises in the yellow metal.

    Let me assure you though that what lies at the heart of this exercise is not greater price volatility but rather price stability in metals versus currencies. Investors should bear in mind that we will likely never see the more extreme valuations that some people have proposed as discipline is gradually brought back to our money production processes. We are now discovering again what value is where a currency is concerned and as regards resource strength I have few doubts about the sanctity of the Dollar as a global reserve currency.

    How deeply it may yet fall is another question but there is now a widespread acknowledgement that we may be reaching the end of the thin branch that permits nearly unlimited printing to resolve the shortfall in genuine economic activity. The resolution to the dilemma will likely come about as inflation pressure mounts and velocity bounces off its historical lows. It is then that some of the excess liquidity must be withdrawn. No doubt Gold prices in US Dollar terms will benefit in the meantime but a price point of 5 or 10 thousand dollars per ounce is just preposterous and probably spells the end of the currency in our lifetime were it to occur.

    As Basel III seeks to make Gold tier one we cannot help but note this suggests moves are afoot to reduce unpredictability and volatility in Gold's price movements which is actually contrary to the thinking in the Gold community that seeks speculative gains.

    And so it is this money, (that which is earned abroad that I discussed above) that has come through exports and the honest efforts of its citizens which needs protecting as opposed to the internally generated transactions and cash accounts. Internal transactions in a country are much less relevant than external trade where the issue of Gold-backing is concerned.

    Do we not measure our success versus other counties in terms of our relative trade in goods and services? If the cash reserves we hold in our balance of trade accounts in another nations currencies are being devalued sharply are we not at risk of loss?

    Lets keep in mind we need to pay our bills to others as well. Will they continue to accept our word that we are good for the invoice or should we not be showing evidence of solvency via a backing mechanism whether it be oil, corn or metals? Gold as a first order is proof to others that we can collateralize and meet our obligations when necessary.

    From this perspective it becomes easier to understand why China, Russia, Brazil, Mexico and many others are in the process of bolstering gold holdings. This is no casual event. Billions upon billions are being spent by the various nations on an object with no intrinsic use. Now why would they be doing that? Furthermore, why would they be doing so in such numbers and volumes? Part of the answer of course is that gold makes up for deficiencies in other areas of their respective economies although that is really a topic for another day.

    It should be clear though that Gold has been the object of serious interest to some Central Banks for a number of years now and that this interest is growing as global currency uncertainties evolve. At some point though there will not be adequate sources of supply for all Central Banks with a desire to accumulate and this is where the rubber hits the road.

    Confiscation is all but assured on this basis although where it happens first is unclear. It is worth considering that the price of Gold will subsequently become mutually managed by the collective will of our banking community for the good of preserving and stabilizing trade exchange and value between nations.

    The unfortunate use of the word "confiscation" is a misnomer in my opinion and it has been over used by those who fear government with an eye to accumulating reserves. Simple trading bans and offers to purchase from private holders are sufficient to achieve the goal of acquisition without causing alarm. This is not a forced move but an offer to exchange where no other reasonable offers exist. I also believe we are evolving towards a hybrid system of currency valuation and that all the major players including China will play a role in the development of this new regime. Gold has a keystone position in the new hierarchy and so it will not be overlooked.

    Take note though that these activities we are witnessing where Central Bank acquisitions are concerned are quite outside the needs of the individual who pursues Gold for personal or speculative purposes and therefore the collective needs of the global community of nations will take precedence over the private desire of individuals. Put more simply, Gold is heading back to the vaults of nations and its use in private transactions will therefore be diminished.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Euro
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Comments (7)
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  • perplexedtex
    , contributor
    Comments (667) | Send Message
     
    Thanks for a well thought out article.

     

    I can't think of another word that would have defined what happened in the '30's except confiscation.

     

    Since FDR, the only Presidents we've had that would consider gold confiscation are LBJ and BHO imho.
    17 Jan 2013, 09:29 AM Reply Like
  • cannon fodder
    , contributor
    Comments (736) | Send Message
     
    China's encouraging its population to own and India has attempted the no gold ownership except for jewelry so they all converted their bullion to jewelry. That accounts for a 1/3 of the world's population who have a ~30% savings rate.

     

    As far as the U.S. goes, with the overruling of criminal sanctions for gold ownership, which to date hasn't been overturned, I don't see an issue here either. In fact looking at the nature of young Americans, I think if you told them they couldn't own it, then they would go out and buy out of rebellion.
    17 Jan 2013, 01:17 PM Reply Like
  • Tom Luongo
    , contributor
    Comments (1314) | Send Message
     
    I can agree with you up to a point. Confiscation is not necessary with mark to market gold reserves. The national currencies of those who mark to market are working at market prices for gold and there is no need for gold to do anything other than settle trade. In this respect the Free Gold guys have it right.

     

    Ones gold savings bet they personal or national become your collateral for holding said fiat currency against risk of default or fraud.

     

    Confiscation is unnecessary as the price of gold is free to float in that currency. The problem lies in this fantasy of fixing gold to a price and expecting anyone to keep their word. That's when the threat of confiscation takes over... as government's plunder their people to pay for their profligacy. So, I do see confiscation of various soft forms entering the system as the U.S. government attempts to hold onto power but I also see it as a losing proposition.

     

    Interesting post however. enjoyed it.
    17 Jan 2013, 01:44 PM Reply Like
  • Abegaz
    , contributor
    Comments (3741) | Send Message
     
    Author’s reply » Thanks Tom. By the way, we have been hearing plenty about pension plans being seized by governments as a means to pay the bills, prop up domestic bond issues and balance the budgets. Proposals are in the works to utilize private pensions to reduce deficits elsewhere. It might not really be a long shot to imagine Gold coming under increased scrutiny if that is what CB's want (and need). I rather suspect Central Banks will get what they require if the going gets tough. Revaluation higher after the fact would bolster their reserves nicely.......except private Gold holders will probably never get to enjoy the windfall.

     

    My reference to confiscation and revaluation is a historical note of course.
    17 Jan 2013, 01:52 PM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
     
    The USA has food and energy ready to export ... you must be joking. The biggest US export and it is worth $600 billion is the greenback. Due to its negative current account, the US exports that number of dollars. The good news is that the FED prints, sorry ''produces'', more than $1 trillion per year so exporting about $600 billion of that is ok. What a joke.
    19 Jan 2013, 01:37 PM Reply Like
  • Abegaz
    , contributor
    Comments (3741) | Send Message
     
    Author’s reply » Wrong again. The WTO differs with your imagination as the facts state the US is the worlds second largest exporter of food after the EU in dollar terms. Yes it is a big deal. Energy exports meanwhile are climbing and the US is now on track to be amongst the top 5 in just a few years time.

     

    Why would you even argue those points?
    20 Jan 2013, 04:54 AM Reply Like
  • Nickyforex
    , contributor
    Comments (20) | Send Message
     
    Best post i have read on here. We could be seeing the start with Cyprus but as you mention in another post its a very small population maybe just a small toe in the water for the european union to see how it goes.
    17 Mar 2013, 06:28 AM Reply Like
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