When ever I see a guy sitting with three cups in front of him and he wants me to guess which cup the walnut is under, I just know that I am going to get $crewed.
Supposedly there are folks who want a guaranteed supply of physical gold at some point in time in the future. If Barrick or any other producer reached a contract for future delivery at X price, who would have any reason to complain?
When the transactions get so complicated that you can no longer keep your eye on the ball, or clearly explain who has the ball, us old farm boys get nervous.
When gold was used as a currency, if the gold was pure and of the right weight you knew that you had something of value. If the gold was in a vault at the bank you could issue a note on the gold that someone could present to the bank and retrieve the gold.
When state central banks introduced paper currency the idea was that you could exchange the paper for a certain amount of gold for each note. Paper was more convenient than bags of gold. If you had an account at the bank with gold or currency deposits or a line of credit based upon collateral you could write a check or note and the bank would honour it.
There has always been a temptation and tendency for private banks and central banks to lend more money than they have security for. The private banks make their money on the interest. The more they lend the more they earn. The state central banks get to spend the new money first so they are least effected by the inflationary effect of having too much currency floating around.
Money is not neccesarily created by printing currency or doing work.
Money can be created by reducung the ratio of real reserves that a bank has in relation to the money lent out by the bank. This is not a simple linear ratio because of the way we use money.
Suppose that you are the only bank in a small town. You open up the bank with a million dollars that is available to loan out. Of course you offer savings accounts, checking accounts, bonds etc. And of couse you encourage people in town keep their money in the bank and use checks for their transactions.
If for the sake of example the regulations state that you must have 10% of you initial million in reserve and you can loan out the rest, we may follow a few transactions to see how this works.
Fred approaches you for a loan to buy a house from Jack. You take the house as security and lend $50,000.00 to Fred to buy a $75,000.00 house. In reality you write the $50,000.00 in the ledger and do the paperwork. Fred writes a check to Jack for the house. Jack brings in the check and deposits it to his account at your bank.
Although you have loaned %5 of your money, you actually have more money to loan than you did before....The $50,000.00 was not loaned by you it was loaned from the house which is now a further asset which you have claim on till Fred makes all his payments. And of course you can lend out 90% of the money from Jack's account.
Clever bankers were doing the same thing with gold the minute that they convinced people to keep their gold in the bank and accept a note for it. Unless everyone called for their gold at once, who would know that there was not enough there for everyone at the same time.
Can you see why electronic money is even better than paper money? Electronic money never leaves the bank or rather the banking system- so theoretically it could be lent to someone else no matter whose account it was in and even if it changed accounts five times during the day.
Which brings us back to Gold. Because of the tendency of politicians to make more promises than they can keep and to print more notes than the economy can justify it has been found desireable to have something real in the bank for the event that no one wants to take your paper but you have desparate need to pay or buy an army to fend of your creditors. Gold will do it--providing of course that you have not leased it out or otherwise encumbered it so you cannot use it.
So let us suppose that you are a prudent fellow and knowing the tendencies of your fellow men you decide to buy some gold. Some will advise you of the terrible inconvenience of actually taking possession of your gold. It will be suggested that all you really need to do is exchange a check for a paper gold certificate which may be exchanged at any time you want for your physical gold- providing of course that not everyone wants their gold on the same day.
So how is Britain funding their war effort anyway? My bet is that their gold is already gone and that they are doing some financial wizardry at the moment to cover it up. It is more likely that they have already made their sales (or otherwise committed it)and have arranged financing so that they announce they are selling when they are really buying it back cheaper at lower prices and will sell it later after the impact of their sale announcement (and actual buying)has already past.
That is as good of an explanation as the Barrick hedging program in my opinion. The Brits were not born yesterday when it comes to the gold trade. |
