Need a short lesson in money 101, if you have time
Whew!! hmm.. tough one. I'll give it a try and rely on others to step in to flesh out or correct what I leave out.
My premise rests upon the contention that gold, or anything else, only has intrinsic value based upon the perception of those you hold it or consider it a "currency" or vehicle of trade.
Gold at one time backed up paper money as gold/silver used to be the currency of choice. Paper came into increasing use as a "proxy" for gold since metals were difficult to carry and store.
Eventually, CB's began wondering why gold bore any intrinsic value at all, and attempted to have their paper backed by the "full faith and credit" of the respective gov't/Central Band(CB) issuing it. And essentially, I think they're correct. Why base a country's economic expansion upon a metal that is limited in quantity and also is used in industry (thus denying supply/demand criteria for its use as a commodity).
The problem is that Gold is pretty... And gold has a STRONG sentimental value as the original currency from the beginning of recorded history. Gold competes with Fiat paper currency. If gold becomes more expensive, it generally indicates a weakening in faith in paper currency (which is a proxy for the country issuing it).
Some CB's try to appeal to both sides by backing their currency with a percentage of gold. For example, the Euro is apparently backed by 15% in gold as a psychological effort to garner favor for it as a
"hybrid" Fiat/gold-backed currency.
But in reality, for a currency to be REALLY backed by gold dictates that holders of paper are permitted to convert their paper into gold upon "demand", thus the old term "Demand Notes" that I believe used to be the nick-name for metals backed paper.
So CB's, in order to establish the pschological credibility of their currency as the primary form of exchange, must by necessity attempt to demonetize gold. When gold is demanded as the backing for paper, it, by default, signals a collapse in confidence in the ability of CB's to manage economic confidence in their Fiat money.
Thus, the battle that has been going on since we left the gold standard. And the primary reason that the Fed indirectly bailed out LTCM, who apparently was quite short in the gold market. A panic short-squeeze in gold would send the message that the monetarists "emperors" have no clothes shattering their credibility as issuers of reserve currencies backed by nothing more than the psychological goodwill and confidence of the issuing country.
That is why I believe the Euro Central Bank (ECB) will not be adverse to selling off gold stocks in order to preserve their new, but still fragile, currency standard. They have more than enough gold with which to do it with and not to sell this gold would be tantamount to declaring an "unconditional surrender" of their ability to manage their Fiat monetary system.
OK, folks... step up to the plate and take aim... I'm standing by.... <VBG>
Regards,
Ron |
