An Open Letter to Congress on the Euro, the Gold Market, and the Dollar

February 14, 2000

Final Part

Birth of the Euro

Jelle Zijlstra said, while with the Bank of the Netherlands in regard to the 1971 severing of Gold from the dollar, "When we left the pound, we could go to the dollar. But where could we go from the dollar? To the moon?"

This would suggest that the Euro was created not as competition to the dollar, rather as a replacement for it. As hard as this might be to swallow, one must consider the possibility. Foreign nations having seen the dollar twice defaulted, once internally and once externally, may have simply concluded that "once burned, never again." When the Euro was created in January of 1999, it represented the culmination of years of planning. Further, it was backed by 15% gold – backing in the sense that the gold set aside as backing wouldn't be available for trading Euro's for gold. Rather, the gold would be held in reserve (not sold) and would be marked to the market value of free-trading gold on a quarterly basis. When viewed in this light it becomes clear that the Euro is potentially being staged as the place to go from the dollar and not the moon as Mr. Zijlstra suggested.

Is the dollar really in threat of default? Evidence of that can be seen in the above paper gold chart. If total gold holdings of the world's Central Banks totals 32K metric tons and forward contracts amount to 10k to 14K metric tons, with annual production at 2500 tons and annual demand at 4,000 tons, then one can see the paper gold scheme is in extremis. In other word, the music is playing and the Central Banks are looking for their seats and who will be left standing when the first one runs to gold when the music stops. The dollar is subjected to risk as the bullion banks involved in these contracts are some of the largest in the world (J.P Morgan, Goldman Sachs, Credit Suisse/First Boston, Republic). LTCM was bailed out on advice of the Federal Reserve by 12 creditor banks. This was a few years ago when LTCM was on the wrong side of currency hedging. What would be the risk of one or more or all of these banks finding that they can not pay their gold loans because the gold to repay them will remain in the ground for 10 more years? LTCM almost brought the entire US financial system down. It was but one hedge fund. The gold lease shortage of 10K to 14K tons threatens the entire dollar-based economy as these contracts are all in dollars. The Euro may offer the only alternative to the dollar that won't cause a systemic failure.

Current Events

Is there proof of the above in terms of a grand plan or written scheme that could be produced? No. In terms of indicators that in the intelligence field would be called OPSEC indicators? Absolutely. The below list in order of importance the indicators that strongly suggest that the Euro (with 15% gold backing) is being positioned as a potential replacement of the dollar as a reserve currency. The implications for the US are immense.

  • EMU (European Monetary Union) Washington Agreement to only lease (leasing is the terms often used to describe the paper gold market) 2000 tons of gold over five years and subsequent rise in the price of gold $85 from its 20-year low just after the announcement.
  • Ever increasing debt burden of the Euro in bond issuance now surpassing the US bond market.
  • Ever increasing long-term US bond yield now above 6.70%
  • Ever increasing price in dollars of crude oil now above $29.00 per barrel.
  • Ever increasing monthly trade deficit now above $26Billion. Leading export sought from US is now physical gold. Ode de 1933 and 1971.
  • Recent practice of IMF to loan gold at $42 per ounce to third-world countries, remark same gold to the market value of $290 and take back the newly valued gold. The difference is used to wipe the debt off the books. This is significant because it is the first time since 1973 that gold has been used in direct payment of international debts.
  • Ever increasing M-3, which was increased by $76Billion in last year.
  • Extremely negative press on the Euro and gold last two years (a counter indicator).
  • Increasingly bullish reports (recent) on gold and the Euro.
  • Robert Mundell was given the Nobel Prize for Economics in 1999. He is known as the Father of the Euro.
  • Alan Greenspan's comments regarding the difficulty to predict the new economy and his discussion of the Euro ten years from now will be looked upon as having been good for the dollar (possibly meaning "saving the dollar?")
  • Increasing stock market bubble that is likely liquefied by excess balance of trade dollars from overseas.
  • Increasing verbiage of the European Central Bank leaders who speak of the Euro as a reserve currency (see their web pages).
  • Inflation is rearing its ugly head. Common measurements of inflation such as the CPI appear to be improperly measuring the effect of the gold-lease position and the excess printing of dollars to provide stock market liquidity.
  • Bank of England auction of one-half of all their gold over a period of a few years. Some pundits believe this is an attempt to hold the gold market down while more important banks unwind their paper gold or gold leases. This provides liquidity while this takes place.
  • Kuwait's recent lease of 79 metric tons of gold in exchange for $200million of military aid. This is believed to have bought time for the paper gold market, also.
  • The near bankruptcy of two major mining companies (Cambior and Ashanti) upon the recent $85 rise in the price of gold who were convinced by Goldman Sachs to hedge production with margin requirements.
  • Rumors of a large Swiss gold sale, whose real reason appears to be to make the Swiss Franc more competitive in world trade and possibly allow time for a smoother transition to the Euro. The Swiss sale is likely to be done through the Bank for International Settlements.
  • Recent rumors that the Euro might become the defacto payment standard for oil vice the dollar.
  • The complete lack of visibility of the gold market (not on anyone's radar screen), so if the paper-gold market did collapse and physical gold were then to trade in a purely physical market, we could see an even more severe rise in the price of gold than we saw in 1979-80.
  • Bank for International Settlements (BIS) office opened recently in Hong Kong.
  • China's recent announcement to purchase 1000 tons of gold.

The physical supply of gold to satisfy large gold contracts appears non-extant. The gold market is one on edge. Certain gold pundits believe that the London Bullion Market Association and COMEX are in immanent danger of default. The ratio of physical gold to COMEX gold contracts on the NYMEX gold exchange is 100:1, that is 100 contracts for every 100 ounce of gold (100 ounces per contract). If the paper gold markets in London and in New York default on their dollar gold paper contracts, this may be the ammunition to move SA oil into the Euro for settlement. Certainly it will cause a major banking failure or require a major banking bailout, whose minimum net effect would be higher inflation. If the dollar has to convert to Euro's for oil purchases then by default the Euro will have become the world reserve currency. The ramifications for US would be a loss of the use of dollars without first converting to Euro's except for US-made products. This would make US an equal bidder for Euros equal to all other countries. The defense implications of this are immense.

The Future

"The ECB can now slowly phase out dollar reserves as the Euro assumes more of the world trade settlement function. A function in and of itself, that will further lower the dollar's world need, use, and therefore, value. Because the US still runs a trade deficit, it still ships a surplus of dollars to most countries. In tomorrow's potential new Euro world, the dollar exchange rate will eventually be forced to fall enough to balance this flow. Further, a falling dollar will release ECB dollar reserves as fair game to buy physical gold from any and all entities. However, this buying will most likely be through the BIS and member CBs, not the over leveraged LBMA [London Bullion Market Association] or world gold paper [market]. In addition, because the Euroland external debt is very low compared to the US and they posses a positive trade balance, a rising price of gold reserves (in Euros or dollars) will support their currency with extra reserve value. Their policy of marking gold reserves to market (on a quarterly basis) and eventually establishing a "true physical" marketplace offers every enticement to get the dollar (and Euro) price of gold higher. Because this process creates a unique reserve benefit, not used in the old gold standard, they will never officially back the Euro with gold. Rather, allow a new "free market" in physical gold (not paper) to supplement their currency operations. The efficiency of modern trade requires a digital currency. That need alone will always support the use of a currency. If gold can trade beside paper money, neither will drive the other out of circulation (as old money gold coins did to paper gold money) as long as they can each seek their own values…."

Conclusion

This paper's goal was to inform the reader of the potential of the Euro becoming the world reserve currency. The author believes it represents a high enough possibility to make the US Government aware. The Euro and its relation to gold is on very few of our radar screens. Because the dollar has defaulted twice in the last century on its debt, first internally and lastly externally, the Euro may have been developed to replace the dollar, when it became too burdened with debt. The paper gold market or gold leasing scheme that developed after the Jamaica Accords in the late 70's was a way for gold and oil to remain inexpensive for the cheap-production oil countries, while keeping the dollar from defaulting a third time. The time would appear to be drawing near in which the dollar may default a third time against the very paper-gold scheme that saved it after the second default. The implications to the US are immense because it purchases most all its goods, including oil in dollars. Were the Euro to become the world reserve currency in place of the dollar then the US would compete with the rest of the world for Euro's. Should that happen, the cost of defense just rose dramatically. In planning for the future, one can not allow the US to be side-blinded by a similar monetary phenomena that surprised pundits when the USSR disbanded or when the Berlin Wall fell. If even a remote chance exists for the Euro to replace the dollar in world commerce, which appears to be well along that path already, then plans should be made now accordingly.

Certainly, the following are factors to consider.

  • Strategic precious metals should be hoarded not sold, perhaps increased.
  • Oil stockpiles need to be topped off.
  • Foreign strategic parts, commodities, or goods considered essential should be stockpiled.

Finally, the Achilles' heal of the US dollar would appear to be the international gold market practice of paper gold excessive forward hedges (estimated at 14K metric tons) and the record supply-demand deficit of 1,500 tons per year. That physical gold was the largest US export in dollars in December 1999 (103 metric tons) reminds one of the large exports of gold before the 1971 external gold default. Everyone's eyes are on the stock market. No one is watching the gold markets. The Euro is down from its initial offering and so people believe it is week. All may appear not what it seems.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.