Let's Call the Bankers' Bluff
I am a miner. I own a small gold deposit in the U.S. At present I cannot mine it because of the artificially low gold price. I am concerned because bankers and politicians have conspired to push the price of gold down as part of their scheme to foist ultra-liberal "values" on countries around the world. They promote themselves as benign providers of stable economic growth. However, they are in fact self-deceived, perjuring hypocrites who are destroying the proper values of ordinary people. They have created an unstable economic bubble which is doomed to burst. Gold miners around the world have been made to bear the brunt of this self-deceived hypocrisy. I'm tired of it.
As far as I can see, since Alan Greenspan's declaration of "war on gold," miners have unwittingly become their own worst enemies. In response to the war being waged against them, miners ought to form a cartel analogous to the OPEC cartel which governs oil production. Furthermore, bankers have forced miners into a game of bluff. Sophisticated bankers (like lawyers and politicians) become competent bluffers by virtue of their business. Miners, however, appear not to understand the dynamics of bluffing.
According to statistics published elsewhere on GOLD-EAGLE, annual worldwide consumption of gold is about 2800 tons whereas annual mining output is only about 2400 tons. Therefore, central banks only need to dump about 400 tons on the market per year to keep gold low. Since the banks hold about 17000 tons of gold, at the present rate, they can plan to keep gold at a low price for perhaps 42 years. However, if world mining production were cut in half then banks would be forced to dump about 1600 tons per year just to keep supply even with the present level of demand. Furthermore, if aggregate gold production were limited by a cartel, worldwide demand for gold would AT LEAST double. Central Banks would be forced to divest over 4400 tons per year and would only be able to perpetuate their fraud for 3 or 4 more years. As gold miners we have a choice between: (1) wasting our rare resource by producing it and selling it at (a pathetic) $260 per oz, or (2) we can cut our aggregate production in half which would increase our aggregate income AT LEAST tenfold. Presently miners produce too much gold. We have become our own worst enemies.
Furthermore, the "war on gold" has made gold producers unwilling participants in a game of bluff – a poker game, if you will. The bankers have made their bluff. So far, gold miners have been intimidated by the bankers. Miners have stood by while bankers have conspired to artificially reduce the price of gold. Gold producers have fallen for a bluff in this poker game. What gold miners fail to recognize is that they hold the stronger cards. All we need do is to call the bankers' bluff.
Let's take a look at the bluff. Bankers imagine that the real money is paper currency (or merely numbers recorded in banks' computer memories). They imagine that gold is an ancient superstitious artifact with no significant role in modern banking. Miners know (but may have forgotten) that gold is the real money and that paper, plastic or electronic currency can only remain money as long as it is credibly backed by gold. Today, bankers even exercise the self-deceiving audacity TO DUMP THEIR GOLD, threatening to dump more. This has the intimidating, short-term effect of driving the price of gold down, appearing to justify the banker's shallow world view. This is the bankers' bluff. Miners have fallen for the bluff by maintaining high gold production. Naively, miners have played into the bankers' hand. The greater the amount of gold produced by mines, the less gold bankers need to liquidate, appearing to grant to bankers the fraudulent power to maintain low gold prices for decades to come.
Gold producers ought to learn what the oil producers have learned. High production means much lower prices and very, very much lower profits.
Two points about games of bluff
Firstly, when you are forced into a poker game – when someone bluffs you – the proper way to proceed is not to complain about the bluff or to pronounce opposition to its motive. It is best simply to call the bluff. If miners would merely cut their production, their act would call the bankers' bluff, exposing it as baseless.
Secondly, when a hypocrite, such as a banker or liberal politician, issues a baseless bluff, the proper way to proceed is to voice agreement with him by providing him with precisely what he says he wants. (When the demon demanded to inhabit the herd of pigs, Christ didn't argue, he granted the demon's request, saying simply, "Go.") Now, for example, the English bankers have announced that they wish to dump 400 tons of gold and replace it with "productive assets" (such as interest bearing notes denominated in euros and yen). Miners should not voice any opposition to the bankers' policies. Rather, we should voice cooperation with the English bankers' wishes by reducing mine output. On the face of it, lower mine production would facilitate the bankers' plan to divest themselves of the "superstitious relic" more quickly, allowing them more quickly to amass a hoard of "productive, interest-bearing assets."
But picture this: if world gold production were cut in half, speculators would buy gold instead of shorting it – effectively producing a higher aggregate demand for gold. If banks nevertheless continued their avowed folly of dumping gold to keep the price of gold artificially low, their gold reserves would be exhausted in just a very few years. If central banks would divest themselves of virtually all their gold, so that (1) everyone knew that no paper money was backed by gold; and (2) everyone knew that no bank could dump more gold to maintain its low price; would you (or anyone else on the planet) prefer to hold gold as a store of value, or a "productive, interest-bearing asset denominated in the yen, the euro or the dollar?"
The CEO's of the major gold producers must choose between 2 different ways of valuing their assets – two different ways they can fulfill their fiduciary responsibilities to their shareholders. Firstly, they can view their mineral assets in terms of a scheme which maximizes the amount of ore they annually transform into dollars in their corporate checking accounts. Or secondly, they can view their gold deposits as assets which are worth more under ground than above ground. If CEO's viewed their assets thusly, world markets would quickly recognize how valuable they are. CEO's can choose to operate their mines at a minimal level of production – modestly aiming only to maintain solvency even at a low gold price. If miners continue with the first view, they shall continue to play into the bankers' hand -- enabling bankers to maintain a low gold price for decades to come. But if a certain critical mass of miners would select the second view, a new dynamic would come into play. The worldwide speculative selling of gold would be transformed into speculative buying; the bankers' scheme of dumping gold would either be abandoned or would become short-lived; and mining companies would quickly generate far more annual income. But miners should carefully adopt the bankers' lingo and publicly agree that gold is a superstitious relic in the domain of modern banking. Miners should not declare war on banks. Any reduction of gold output should be characterized as a scheme to assist bankers in their "wise" divesting of gold. There is no sense arguing with the devil. Give him what he demands and say, "Go." What the devil demands would destroy the devil himself.
Even in the absence of a gold mining cartel, the situation is becoming ripe for a hedge-fund "gold grab." When an individual citizen wants to possess one, ten or a hundred ounces of gold, he or she has to pay for it in full. But if a sufficiently powerful hedge-fund (fictionally, a "Zorro fund") wished to possess ALL of the world's readily available gold, such a fund could acquire it all FOR FREE. Zorro would create a short squeeze -- a strategy which might proceed like this:
First, Zorro would acquire a large contract position on the commodities markets. This would be a relatively cheap down payment for all of the readily available gold because commodities contracts only require a small percentage of margin and because there are so many eager short-sellers. This step wouldn't affect the gold price too much because short sellers imagine that they are contracting only with parties who are idly speculating that the price of gold will rise by itself. Short-sellers don't consider the possibility that they shall have to deliver real gold on the contracts they write.
Secondly, Zorro would buy most of the readily-available gold bullion for cash. This step would be very expensive. But it would represent a fully refundable down payment for all the world's available gold. This step would begin to force the price of gold to rise. At this point the bankers would probably fall for their own bluff by shorting more gold --desperately trying to keep their enormous short positions viable. But now the bankers' bluff would play into Zorro's hand, enabling it inexpensively to acquire another large long position on the commodities markets. Only as the available supply of real gold bullion began to disappear would it begin to dawn on the short sellers that they shall have to deliver real gold in accord with their contracts. Now the price of gold on commodities markets would skyrocket.
The dynamics of the short squeeze wouldn't stop there, however. Most of the gold which central banks intend to dump has already been leased to the gold bears who have long since sold it. However, in the presence of a skyrocketing gold price, these speculative short-funds would fall into bankruptcy. Furthermore, having lent their gold to bankrupted entities, the central banks shall have forfeited their gold, having GIVEN it away FOR NOTHING. Today's perceived overhang of gold supply, would, under that circumstance, evaporate all at once. (Elsewhere on GOLD EAGLE it is reported that Portugal forfeited its gold in the Drexel Burham bankruptcy.) Finally, Zorro would demand delivery of real gold on its contracts (gold which wouldn't exist). Zorro could easily make enough profit by selling a portion of its commodities contracts to fund delivery on the entire, readily available supply of the world's gold – therein receiving a full refund of the entire down payment – in effect having acquired the gold FOR FREE.
It might take a hundred billion dollars or more to begin this short squeeze in gold. The bankers' bluff affirms that this sufficient critical mass won't form. But the prize becomes more accessible every day. If the critical mass does form, it would produce the mother of all short squeezes.
Ordinarily, if someone possesses a valuable asset, he or she wouldn't want to force its market value down for the purpose of selling it for minimum value. Yet this is precisely what the banks are doing with their gold reserves. It is by foisting their faithless bluff on everyone else, that they foist it on themselves. Bankers imagine that by driving the price of gold down, paper currency would become money in and of itself and that they could thereafter create real wealth out of thin air simply by printing more currency (all for the purported, ultra-liberal goodness of their world, of course). But it is the devil at work when the world affirms belief in what is unbelieveable. Paper currency not backed by gold affirms the unbelieveable. The real value of gold in its role of backing stable currency shall only be exposed as the central banks forfeit their gold reserves.
Regarding a possible gold cartel: Obviously, if a singular mining CEO, acting on his own, adopted the policy of operating a minimal, break-even mine, it would become as ineffectual as if a singular OPEC nation had reduced its own oil production. Miners have to conspire to reduce worldwide gold production in opposition to the bluffing conspiracy which already opposes them.
Robert E. Gregory, email@example.com
Also by Robert Gregory
The Articulation and Resolution of Paradox
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