In this month of presidential elections in France, where any question of re-organizing a stable monetary system is not being debated, ongoing geopolitical events continue to prove we are moving progressively toward an unstoppable return of gold as an international monetary base, notwithstanding gold’s consolidation within the last seven months.
Contrary to what certain analysts are saying, the financial crisis (which will soon become an international monetary system crisis, as currencies are loosing purchasing power), is ahead of us. It will only get bigger after the elections.
We are back to a multi-polar world where three powers, USA, China and Russia, albeit indirectly, are practically guaranteeing the emergence of a new monetary system, because exporting countries are starting to refuse “paper money” for international exchanges.
The implications of China paying for Iranian petroleum with gold constitute the most significant event in recent gold history, said recently Jim Sinclair, the legendary American investor :
1) One could reasonably consider that China would have been threatened with exclusion from the SWIFT international money transfer system, had it chosen to pay for its Iranian petroleum in any international currency.
2) China then decided to use gold for its massive international imports, being de facto free from any constraint from the SWIFT system.
3) Other Asian and Mid-East countries will now see their gold reserves as real money, free from SWIFT constraints.
4) Gold is not only the sole form of money that has no counterparty risk, but is also the only form of money not influenced by the West.
5) The SWIFT system (via which all international transfers are being made) is being more and more viewed as a weapon serving Western political interests (Iran has just been excluded from the SWIFT system).
6) In case of war, gold is the only form of money with which to provide vital raw materials. The SWIFT system can only deal with non-convertible paper money.
7) Far from being a barbaric relic, gold is actually the only form of money that can help a State survive in case of conflict.
8) It is almost certain that the small quantity of physical gold available will make it impossible for the massive naked short position holders, i.e. certain Western banks, to cover themselves. Those short positions won’t be covered at a satisfying price, because no one will want to sell the physical gold required to cover those positions at the actual price. Those who know the implication of those short positions on the gold price (artificially low) will not sell at this actual spot price… they will sell much, much higher.
9) Traditional technical analysis may fail in estimating the future price of gold. If the USA decided, in a totally illiquid physical gold market, to wage an economic war against China by excluding it from the SWIFT system, there is no telling where gold could go.
Another study, from R. Peter W. Millar, is showing that, historically, a return to gold as the standard for the international monetary system is gaining ground.
Millar explains that re-evaluating gold is periodically necessary to counter the debt deflationist depression at the end of an economic cycle.
The first cycle went like this:
- Phase 1 : stability until 1914, with the gold standard
- Phase 2 : inflation until 1921, with debt growing considerably
- Phase 3 : slight deflation leading back to a certain stability, but not enough to encourage any reduction of the growing debt, leading in turn to the inflation of certain assets until 1929
- Phase 4 : instability, starting in 1929, due to a severe deflation of all financial assets, which were highly over-evaluated because of too much debt. That instability materialized into an economic depression.
- Phase 5 : monetary system reform made possible by re-evaluating gold to counter the deflationist spiral.
In the latter part of the 20th century we’ve seen a repetition of the first three phases of the cycle:
- Phase 1 : economic stability, with the gold standard from 1944 to 1968
- Phase 2 : from 1968 to 1981, inflation caused by an augmentation of the debt
- Phase 3 : deflation from 1981 to 2000, possibly to 2006/2007
It would seem that, since 2007, Phase 4 (instability and deflation due to excessive debt) is under way. Phase 5 (re-evaluating gold in order to fund a world monetary base and reduce the debt load) becomes probable, if not unavoidable.
As a reminder, the debt load becomes more important in a deflation phase.
That re-evaluation of gold, taking into account the astronomical quantity of fiat money in circulation, should be very important, from 7 to 20 times the actual price of gold (using May 2006 $800/oz price would give us a price between $5,600 and $16,000/oz).
Dominoes are falling one after the other leading us to a return to the gold standard.
The latest proof of that would be the State of Utah, USA: the State has just recognized legally that gold and silver can be used to make financial transactions.