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Tuesday, 23 October 2012

Global economics made simple

Gold, and gold alone, is money. The news that the US had confiscated all the gold from a refiner under the 'proceeds of crime' and sent the $1.4 billion company into liquidation had the effect of lowering the gold price over the weekend.

Why? Well simply put the United States government now has more gold to underwrite its printing press...

UNITED STATES OF AMERICA

The US is bankrupt, the US has been bankrupt for the past 40 years so the aim for the United States is to lessen the debt through inflation. The United States has 8,000 tonnes of gold (although whether this is actually held remains a mystery). In 1934 the United States arbitrarily re-valued gold from $20 per ounce to $35 per ounce, so why can it not simply repeat this today?

It can and it will, but there are some other people who might not like this.

The outstanding liabilities of the United States stand at around $74 trillion, simple mathematics therefore pegs the value of gold at $9,250 per gram.

Libya's gold was stolen last year, as was Egypt's - they will get it back when some 174 conditions are met... in other words never.

The United States is building its gold reserves.

CHINA

China (and other nations such as Brazil) have pegged the value of its currency to the US dollar and like many other nations it intervenes in the market to maintain the exchange rate that it wishes to have. The exchange rates are kept low so as to maintain competitive prices on the exports which mainly head to the US

So as the US prints more money and floods the market, China has to do the same the difference is that China is stockpiling more and more gold.

Currently therefore the US is not experiencing the hyper inflationary effects of its money printing because nations such as China and Brazil are dealing with it instead.

China is of course building its gold reserves, quietly away from publicity but estimates put the increase at over 1,000 tons this year.

EUROPEAN UNION

There are massive gold reserves in the European nations, Portugal, Italy, Germany etc. So whilst there is money printing continuing in Europe, the combined reserves of the European Union exceed those of the United States.

It is this gold which is underwriting all Germany's loans which cannot be repaid by the southern European nations... Germany is building its gold reserves.

UNITED KINGDOM

On the other hand the United Kingdom has sold most of its gold reserves and yet is continuing the same program of money printing, with an ever increasing holding of US dollars (see above the very US dollars which the US government is desperately trying to de-value).

The UK has a paltry 310 tonnes of gold. The UK has some £12 trillion outstanding liabilities setting the price of gold at approximately £39,000 per gram.