The Dollar Decline

Alasdair Macleod writes the blog FinanceAndEconomics.Org. His research aims to explain the relationship between the dollar and gold, and to warn investors about the biggest threats to their wealth from macro-economic events.

Besides what the Fed is doing by printing money, there is another big threat to the dollar, said Alasdair. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.

He also warned that credible allegation of misconduct at the London bullion exchange could accelerate the trend of Shanghai becoming the world’s trading hub for gold.

“There is a thing called the Shanghai Cooperation Organization, an agreement principally between China and Russia, whereby they tie up the whole of Asia as their backyard. Other members are the countries north of Tibet, Tajikistan, Kyrgyzstan, Uzbekistan, and so on. In or soon after September, four new members will join – India, Pakistan, Iran, and Mongolia. That’s almost half the world’s population. The objective of the SCO is basically to settle international trades between these countries without using the dollar. I’m not saying they will necessarily achieve that, but that’s what they want to do. They don’t want to see trade settlements reflected in bank accounts in New York.

“It’s not just members of the SCO, either, that could eschew the dollar. The Middle East, for example, now principally sends exports to China and India, so there’s no pressing reason to use the dollar there.

“You can see that, if they succeed, the whole Asian continent, at some point in the future, will be off the dollar. They’ll use their own currencies, gold, or something else. That’s a very big change, and I don’t think people fully appreciate what that means for the dollar.

“Apart from everything the Fed is doing, there’s an awful lot of dollars held in foreign corporate accounts, principally because they’re required for trade. If the world stopped using the dollar, then those dollars will need to find their way back home.

“What that’s likely to do for the dollar relative to other currencies, I don’t know, but I do think it’s likely to affect the relationship between the dollar and gold.

“While the value of the dollar depends on confidence, gold is different, because gold is accepted everywhere. They might no longer accept dollars in some parts of the world – just like they wouldn’t accept my British Pounds in California – but they’ll accept gold. In Asia, that’s particularly true. People might place a different value on gold depending on the geographic region, but gold is more or less accepted as a form of payment anywhere.”

What do you make of allegations of manipulation within the London Bullion Market?

“It’s an interesting question. The problem with the London Bullion Market is that it’s an over-the-counter market, which means people are free to behave as they like in terms of interacting with the market. That’s not to say people automatically behave dishonestly, but there’s no way to disprove an allegation that someone is behaving dishonestly, and that’s very bad.

“In the 1980s’, during the ‘big bang,’ when they decided to regulate certain types of investments in London, stocks, bonds, futures, and options were all designated as regulated investments. Physical bullion, however, was not considered a regulated investment. You could trade these without regulatory supervision, any way you liked.

“Today, in the LBMA over-the-counter market, nobody knows what’s going on. We have a fix twice a day, which is fairly opaque – you don’t see how it’s carried out. So there is reason to doubt the integrity of the London market, and that’s not good for London. It especially isn’t good for London when other bullion markets have now evolved, such as the physical market in China, which is doing a very large amount of business and is transparent. You can see turnover, and you can see the ten largest traders in each commodity – whether it’s gold, silver, or platinum, for instance. It’s all out there.

“So you can see what goes on in those markets, but you can’t see that in London. It’s even been suggested, based on mathematical analysis of the bullion market, that the London gold fixing process is rigged about 10 to 30 percent of the time. That’s quite an indictment.

“The regulators in London have been told by the politicians to clean up the gold market. I would really be surprised if they don’t institute some major changes. I doubt they’d make it a regulated market, but I can see that they would put pressure on the member banks – which they do regulate. I think they will try to make the London bullion market a lot more transparent. I think the members might scream and kick against it, but there really is no other way.

“If it doesn’t, we’re not going to retain the business that places like China, Dubai, and Singapore want to develop. I’d say that changing the fix is the first step to a long road of reform that London needs to undertake.

“So much gold has already gone from Western vaults to the Far East – China, India – and the Middle East going back to the 1970s’. We probably don’t understand that this is one of the greatest wealth transfers in history. Relative to the amount of fiat currency in circulation, gold is probably as cheap as it was in 2000 or 2001 – incredibly cheap.”

- Henry Bonner

On June 4, Oklahoma joined Utah, Texas, and Louisiana in affirming that gold and silver coins are (as they always have been under the Constitution) legal tender in the payment of debts in the state. On the surface this seems almost nonsensical: affirming a right that already exists in Article I, Section 10 of the U.S. Constitution. But it is much more than that.

Senate Bill 862, which Oklahoma Governor Mary Fallin signed into law this week, says,

Gold and silver coins issued by the United States government are legal tender in the State of Oklahoma.No person may compel another person to tender or accept gold or silver coins that are issued by the United States government, except as agreed upon by contract.

The new law also exempts all state-level taxes that Oklahoma residents would otherwise have to pay when exchanging gold or silver back into paper money:

For taxable years beginning on or after January 1, 2015, there shall be exempt from Oklahoma taxable income, or in the case of an individual, the Oklahoma adjusted gross income, any amount of net capital gains ... which result from the sale or exchange of gold or silver for another form of legal tender.

All this appears to do is affirm the language from the U.S. Constitution: "No state shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts."

But it does much more. Sean Fieler, Chairman of American Principles in Action, one of the bill’s primary supporters and promoters, came close to explaining why:

I commend the people of Oklahoma, particularly Senator Clarke Jolley and Governor Mary Fallin, for asserting their state’s constitutional right to declare gold and silver legal tender.

With the Federal Reserve actively suppressing interest rates and eroding the purchasing power of the U.S. dollar, it is welcome news to see one more state give its citizens free access to money that holds its value over time.

It’s about options. When citizens become comfortable with using money that retains its value over time, it will mark the beginning of the end of paper currency backed by nothing. This would be the inevitable end point of the process that began on August 15, 1971 when then-President Richard Nixon unilaterally ended the dollar’s convertibility into gold. For the past 43 years the world has been subjected to floating currencies pegged to nothing other than future promises to pay in more paper money. As Ron Paul noted in his book The Case for Gold, first published in 1982,

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But [today’s] government bonds are not backed by tangible wealth [but] only by the government’s promise to pay out of future tax revenues....

In the absence of a gold standard, there is no way to protect savings from confiscation through inflation....

This is the shabby secret of the welfare states’ tirades against gold. [Unlimited] deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process.

Paul was referring to the "shabby secret" revealed by former Federal Reserve Chairman Alan Greenspan before he was assimilated by the monetary Borg of the Federal Reserve. In July of 1966, Greenspan wrote in Gold and Monetary Freedom about that secret:

In the absence of a gold standard there is no way to protect savings from confiscation through inflation. There is no safe store of value....

If everyone decided, for example, to convert all his [paper] bank deposits to silver [or gold] ... bank deposits would lose their purchasing power and government-created bank credit would be worthless....

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process....

If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

That confiscation has been accelerating exponentially since 1971, as seen by clicking here to view price levels in the United States from 1965 through 2013. Once the gold standard was abandoned by Nixon in 1971, the price level in the United States has risen by a factor of six! Put another way, citizens’ paper money has lost almost 80 percent of its value in just 43 years.

That Oklahoma has joined with other states in its affirmation of gold and silver (with still others considering similar measures) could mark the beginning of the end of the paper machine itself — the Federal Reserve. William H. Greene is an economics professor at New York University’s Stern School of Business. While a seemingly unlikely spokesman for the abolition of the Fed, his view of the coming inevitable end of the Fed is remarkable:

Over time, as residents of the state use both Federal Reserve Notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve Notes do will lead to a “reverse Gresham’s Law” effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve Notes). As this happens, a cascade of events can begin to occur, including ... an influx of banking business from outside the state ... and an eventual outcry against the use of Federal Reserve Notes for any transactions. [Emphasis added.]

This is most encouraging to the Tenth Amendment Center, which noted, "Once things get to that point, Federal Reserve notes would become largely unwanted and irrelevant for ordinary people. Nullifying the Fed on a state-by-state level is what will get us there."

That’s what makes Oklahoma’s affirmation of a right so important. If every state would affirm their rights under Article I, Section 10, the end of the Fed would merely be a matter of time. Federal Reserve Notes would become irrelevant — a relic of a failed statist experiment in organized, sophisticated theft.

Gold sales are expected to rise by 15 per cent to 20 per cent this festive season from year-ago levels, said Bachhraj Bamalwa, director of the All India Gems and Jewellery Trade Federation.

Next month Indians will celebrate Dhanteras, associated with Lakshmi - the goddess of wealth, when buying gold is considered auspicious, followed by the festival of lights Diwali and then the wedding season that will extend into early next year.

But the stronger demand could squeeze supplies in the domestic market and push up local prices.

"In the short-term, gold prices are expected to rise to Rs. 28,500 per 10 grams," said Kothari.

Indian gold premiums to the global benchmark are also expected to jump to about $12-$15 an ounce, from the current $7-$10 an ounce, industry officials said.

Total 2014 imports are, however, likely to fall to about 700-750 tonnes from 900 tonnes a year ago because of thin arrivals earlier this year, said Mr Kothari, helping to keep a lid on the country's current account deficit.

Last year, a ballooning deficit prompted India to put curbs on gold imports, including a 10 per cent duty. While the government has allowed private jewellery exporters to import again, it is reluctant to lower the duty.

Jewellery forms a big part of Indian gold demand, accounting for about 75 per cent of the total in the second quarter, World Gold Council data showed. India's investment demand for gold slumped 67 per cent on year in the June quarter.

"The likely rise in demand is not expected to hurt the country's deficit because gold imports are under control and international prices are also lower," said Mr Kothari.