Gold up-date

Last week the price of gold made another record high hitting $1475 an ounce. The break above $1440 an ounce indicates that the price of gold could be targeting $1480 and then $1500 an ounce.

Fears of rampant inflation, further weakening of the dollar, the Eurozone debt crisis and general uncertainty around the world all helped push the price of gold to a record high last week. On Friday the gold market ended on a high note with the price of spot ending up $16.60 an ounce to make a new fresh all time high of $1475 an ounce.  Then, on Monday, in Asian trade the price of the yellow metal traded as high as $1478 an ounce before sliding back.

With three of the most important global currencies all heading down a slippery slope, not even George Soros will be able to save the world.  In an event that has gone practically unnoticed, billionaire, George Soros organized a major economic conference with the purpose of discussing ways to “establish new international rules” and “reform the currency system.”  The event sponsored and funded to the tune of some $50 million by Soros’ Institute for New Economic Thinking (INET), brought together more than 200 academic, business and government policy leaders.

The four-day conference which began on Friday April 08 took place at the Omni Mount Washington Resort, Bretton Woods, New Hampshire.  The hotel was the scene of a historic conference in 1944 that laid the groundwork for the International Monetary Fund and the World Bank.

According to Soros, the current international monetary system cannot survive in its present form. Soros argues that it could and should be revamped so that American leadership would be “re-established…in a more acceptable form.” It should also “engage the larger European Union, as well as the emerging economies of Eastern Europe, Latin America, and Asia.”

The list of famous attendees included ex-Fed Chairman Paul Volcker, former British Prime Minister Gordon Brown and World Bank executive and Nobel Prize winner in economics Joseph Stiglitz.  (I wonder if Mugabe was invited as he could sure give a few pointers on how to totally destroy a country’s financial system as well as its currency).

In case you are not aware, in 1999 the then UK Chancellor of the Exchequer, Gordon Brown decided to sell off more than half of the country’s centuries-old gold reserves.  The decision to sell the gold is now regarded as one of the Treasury’s worst financial mistakes and has cost taxpayers almost £14 billion.

Mr Brown and the Treasury have repeatedly refused to disclose information about the gold sale amid allegations that warnings were ignored. Evidently, in May 1999 and after the gold price had stagnated for much of the decade, senior executives from at least two big investment banks — warned that Brown, who was not at the meeting, could barely have chosen a worse moment. They cautioned that gold traditionally moved in decades-long cycles and that the price was likely to increase.

“The timing of the decision was ludicrous. We told them you are going to push the gold price down before you sell,” said Peter Fava, then head of precious metal dealing at HSBC who was present at the meeting. “We thought it was a disastrous decision; we couldn’t understand it. We brought up a lot of potential problems at the meeting.”

Martin Stokes, former vice-president at JP Morgan, who was also present, said: “I was surprised they had chosen the auction method. It indicated they did not have a real understanding of the gold market.”

Nevertheless, Brown nicknamed the “Brown Bottom” by dealers offloaded the gold (395 tons) at a 20-year low in the market.  The 17 auctions achieved prices for the gold of between $256 and $296 an ounce, with an average of $275. Since then gold has risen sharply in value and last week hit $1475 an ounce. .

When Brown became chancellor in 1997, Britain held 715 tons of gold — an amount that had remained unchanged since the 1970s. “It [selling gold] was something that was not contemplated. I remember no discussion of such a move under the previous Conservative administrations,” said a senior Bank of England official.

In Victorian times the Bank of England stored gold equivalent to the value of all banknotes in circulation — the so-called gold standard. This ensured that money had an intrinsic value and that governments could not simply print banknotes at will, which could quickly devalue sterling. However, the gold standard was suspended during the first World War as the country required huge sums of money to fund the military campaign. It was finally abandoned in the inter-war period.

It was abandoned because governments had been entrusted with the task of keeping their monetary promises, of ensuring that pounds dollars, and francs, etc., would always be redeemable in gold as they and their controlled banking system had pledged.  It was not gold that failed, but it was the actions of governments that failed. In order to finance their costs of waging World War I, each government had to inflate its own supply of paper money. These costs were so huge and inflation was so severe, that it became impossible for the warring governments to keep their pledges, and so they conveniently went “off the gold standard.” i.e., declared their own bankruptcy shortly after entering the war.

Then, in 1944 a new monetary order was conceived at a conference at Bretton Woods, New Hampshire. As World War II was still raging, 730 delegates from all 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods for the United Nations Monetary and Financial Conference. At this conference, not only was a new monetary order conceived, but institutions such as the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development, (IBRD), which today is part of the World Bank, were established.

The new monetary system was essentially the gold exchange standard of the 1920’s but with the dollar replacing the pound as the major currency. The dollar was then valued at 1/35 of an ounce of gold, and the dollar was no longer redeemable in gold to American citizens. However the greenback was redeemable in gold only to foreign governments and their central banks.

On August 15, 1971, the United States unilaterally terminated the convertibility of the dollar to gold and as a result, the Bretton Woods system officially ended and the dollar became a fully fiat currency  backed by nothing but the promise of the US federal government.

While I very much doubt we will see any drastic changes in global monetary policy as a result of the latest conference held in Bretton Woods, especially as most in attendance favour  a monetary system which resembles the current one, not one of the past, for me the conference is a symbolic acknowledgement by many of our current global financial experts that the global monetary system is failing and a solution needs to be found relatively soon. And, before Soros finds a way to rule the world or in case Brown suddenly discovers the value of gold, I will continue to I will continue to urge investors to accumulate physical gold and silver bullion.

TECHNICAL ANALYSIS

About the author

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.