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Can Gold Be Suppressed Indefinitely?

By James West      Printer Friendly Version
Sep 10 2008 3:15PM

www.midasletter.com

Recently a subscriber wrote to me and inquired, "if gold has been subject to manipulation by the dark forces at the top of the economic pecking order, then why couldn’t they continue to do so ad infinitum?"

Arriving at an answer to that has taken me several weeks of noodling it around in my head while observing developments in the gold market and the housing market and the global economy.

It seemed obvious to me, as it does to many of the writers lobbing missives into the blogosphere on the subject, that the continuous printing of currency would cause a proportional devaluation of said currency in line with the excessive representation of ersatz wealth it theoretically should be backing. And that’s the bottom line for a currency, isn’t it?

A dollar is supposed to represent a share in the collective wealth of a nation. And in a truly democratic and fair society, the citizens and the government should all be genuinely and sincerely motivated to ensure that the valuation accorded to its dollar is indeed a fair and accurate expression of the appropriate portion of its wealth. They would seek to thwart at all costs any over-supply of dollars, for otherwise, the purchasing power of their collective wealth would diminish, and its ability to borrow might be encumbered, as those in a position to lend would regard the borrower’s integrity questionable, if it wasn’t even able to manage an accurate representation of its balance sheet, which the value of a dollar inevitably does.

But that is not the case for the United States.

Instead of clear and level-headed financial stewardship by the country’s "leaders", we have a situation where the government, at an ever increasingly transparent level, seeks to enrich itself at the cost of its citizenry, a situation they at the same time claim to be in the position of defending against. Its George Orwell’s doublespeak enshrined in a political system.

The nationalization of Fannie and Freddie, both "government sponsored" corporations, presents just such a perversion of language designed to confound and anesthetize a general public already muddled with the continuous bombardment of juvenile and conflicting messaging from both public and private enterprise.

I watched an hour of television last night (a rarity) and was stunned to realize that of the 9 commercials being aired at each break, all but one were for medications of one type or another.

But, to stay on topic, note that in the mainstream newswire description of the nationalization announcement on Sunday, Fannie and Freddie had been placed under “conservatorship?.

Conservatorship?!

Searching through Google News, the use of the word "conservatorship" prior to Sunday is limited primarily to references to the "conservatorship" of Brittney Spears’children by her father Jamie, with one notable excpetion.

It turns out the collapse of IndyMac in July was actually succeeded by its placement under Federal Deposit Insurance Corporation (FDIC) conservatorship. Under this arrangement, the accounts of deposits up to $100,000 are guaranteed by the FDIC, and the $58 Billion fund that backs the FDIC is accessed to cover any shortfall from the illiquid bank’s cash on hand as customers withdraw those deposits.

There have been 11 bank failures so far this year where the banks have been placed under FDIC "conservatorship", while the banks affairs are unwound, its assets sold, and all insurable deposits are returned to customers who had deposited them.

In 2007, there were 3 bank failures for the entire year.

At this point, there are 117 banks in the United States that are deemed as troubled by the FDIC, and the news is that the FDIC will be seeking funds from the U.S. Treasury to shore up the depository insurance fund as banks fail and the $58 billion that was left after IndyMac dwindles.

Now that Fannie and Freddie are under conservatorship, and not by the FDIC but by the United States Treasury, the federal bank account of the United States of America is now acting as the FDIC for the trillions of dollars of mortgages, among which even the default rate on primes is accelerating.

The only way for the U.S. Treasury to continue to provide bailouts to the backers of these mortgages, which for the most part are sovereign treasuries of other nations, is to print more money, or else sell assets to raise money. What assets does the United States have that it can sell to raise money?

T-Bills? Well, it doesn’t take a rocket scientist to see that T-Bill is just a new word for common share of Freddie and/or Fannie, and we’ve seen how those are being valued by the market.

What about the U.S. inventory of gold?

Well, according to the International Monetary Fund’s Official World Gold Holdings report, the U.S., at December 2007, held 8,133.5 tonnes of gold, or 75.3% of the world’s central bank holdings. That’s 261.5 million troy ounces, valued at $209.2 Billion at US$800 per ounce.

Never mind the Gold Anti-Trust Action Committee’s assertion that that gold has long been surreptitiously leased out and subsequently sold, thereby suppressing the price of gold while claiming to have this gold still intact in its vaults. In the discussion as to the solvency of the United States treasury, that’s really a trifling amount.

So why would the United States even care what the price of gold is. You’d think they’d want it to go up, if they are in fact as broke as all evidence seems to suggest.

Ah, but here’s the rub. Historically, a nation’s currency was valued according to how much it took to buy one troy ounce of gold. When the United States government confiscated all the private gold and pegged the price at $35, it became a question of how many U.S. dollars could your currency buy. The U.S. currency was governed by how much gold it held in reserve, which limited the amount of currency it could issue. From that period in 1933 until the abolition of this "gold standard" in 1971, was the foundation from which the U.S. Dollar as the official Foreign Reserve

Currency usurped gold’s historic hold on that position.

Since 1971, when the U.S. dollar was representative of whatever others were willing to pay for it, there has been a pervasive and subversive conflict inherent in holding U.S. Dollars in your coffers as primary foreign currency. The further the dollar declines in price, the less value your own currency has, because your entire foreign holdings are in U.S. dollars. If, for example, it took 5,000 U.S. dollars to buy an ounce of gold, what would that say about the value of the rouble, the yuan, the yen or the British pound?

And so, if one asks, could the price of gold be suppressed indefinitely, the answer is YES! Sure it could! If central bankers around the world are so profoundly incentivized to protect the value and purchasing power of their own currencies by continuously mis-representing how much gold they actually had, and how much they had in the past sold and were presently selling, then the answer is yes.

And here’s the scary part. There is no way of knowing how much gold is actually bought or sold in a single day. Apart from official central bank disclosure documents, which are released quarterly, there’s no daily tally of what anybody has bought or sold.

Three things should now be abundantly clear to the investing public:

  1. Mainstream media acts as PR and Image Perception Management for big business and government;
  2. The government acts in the interests of itself primarily;
    and
  3. If the information issued by any of these entities is suspect in its integrity, then its impossible to know what’s coming next.

Chris Powell from GATA says, “Governments may be able to suppress the gold price forever but only if, first, their own gold reserves are infinite and the governments are prepared to dishoard them indefinitely, or if governments are prepared to put legal restrictions on gold ownership.

Unless such restrictions can be enacted worldwide -- in every major country -- it's unlikely that the gold price can be surpressed forever.

James West
Publisher
Tuesday, September 9, 2008

 

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James West is the publisher of the Midas Letter, a financial advisory service that identifies promising resource industry equities at the earliest stages of their existences. Visit the Midas Letter online at http://www.midasletter.com.