Alchemy of Financial Checkmate - Epilogue

January 19, 1998

I had not intended on adding another chapter to this essay, but Mr. Soros's words have left me restless and fueled a fire in my belly. I have come to respect George Soros for his personal philosophies, his convictions, and his uncanny ability to be on the right side of the financial fence. Simply put, Soros is smart, a master at his craft.

Soros's reappearance on the world stage should not be taken lightly and every comment requires forensic analysis. Soros's remark above was made when commenting on January 14 in an interview with Die Zeit (the weekly German news publicaion) when asked whether investors would continue to flee to the U.S. dollar as a safe haven. These comments follow on Soros's proposal for an International Credit Insurance Corporation as a sister institution to the IMF (Financial Times, Dec. 31, 1997). This authority would, according to Soros, "guarantee international loans for a modest fee" and where the borrowing countries "would be obliged to provide data on all borrowings, public or private." Soros has criticized private merchant banks (no names) as being ill-suited to allocate international credit and incapable of forming a balanced macroeconomic judgement given their lack of sufficient information and their bias towards profit making. His criticism of the banks and his idea of an international credit institution might seem odd considering he is allied with the Rothschild's merchant banking empire. What exactly does Soros have in mind and how does a senior merchant banking colossus like the Rothschilds factor into the equation? Of course, Soros won't tell us neither will N.M. Rothschild & Sons. Nevertheless, Soros's idea merits careful scrutiny as it relates to understanding the resolution of the apparent battle being waged between gold and the U.S. dollar.

That Soros won't reveal more about his position on the fate of fiat currencies (and thus his opinion on gold) is significant. Something is undoubtedly up his sleeve as we have witnessed in his recent positioning in the silver market (Apex) as silver is due to skyrocket (see Ted Butler's recent article). More than any other player in the market today, Soros's every move should be monitored. Given Soros's measurable success in currency markets, and given his alliance with the world's greatest and oldest market makers (the Rothschilds), Soros is undoubtedly beginning to play part of his hand. These two players will undoubtedly be key market makers in resolving the war between fiat currencies (the U.S. $) and gold. Either way, the likes of N.M. Rothschild will succeed regardless of the outcome; they have proven that throughout history.

The key question that remains unanswered is this:

Is Soros (and the Rothschilds) a goldbug (that is, they believe that gold must again be part of a standard for a global monetary system to provide stability and resiliency to the system) or are they part of a fraternity of merchant and central banker alchemists who, since the inception of the U.S. Federal Reserve in 1913 (on Jekyll Island with J.P. Morgan and the Warburgs, as architects), can maintain a fiat currency system, without gold? Are they not capable of engineering a new closed/homogenous system, a single world monetary unit upon the ashes of what undoubtedly will be the demise of the current system of a heterogeneous fiat currency system that all will point to and agree was unsustainable?

As I write these words, I am continually amazed at the complexity of the situation and the lack of clarity as to its potential outcome. I would honestly like to believe in the long term domination of gold as the rational arbitrator over our current counterfeit system of fiat currencies. Yet, in my heart, I feel that the alchemist will succeed, at least in the short to medium term (2-3 years) in laying the final brick in their glorious tower of Babel. Yet, even as the mortar on that final brick is drying, the tower will undoubtedly begin to crumble as, in the words of Soros, a reflexive moment, like a thief in the night, will take the alchemist system to ashes.

With the dominoes in motion in Asia are we witnessing the final brushstrokes of the financial alchemists who since 1913 in the U.S. and 1926 in the United Kingdom have succeeded in turning paper or electrons into gold? Or are we, as goldbugs would hope, witnessing the final gasps of an unsustainable fiat currency system out of touch with the realities of the laws of nature (entropy law)? What is clear after months of analyzing this situation, is that there is never enough information available to confirm or refute either theories.

Oh sure, we can point to our statistics and evidence of demand outstripping supply and the unsustainable and mad policies of central banks who are both selling and leasing gold in a last gasp attempt to avoid the debt guillotine and maintain the illusion of strong paper currencies. Thus far we have not seen gold lease rates rise like Butler has noted for silver. Undoubtedly the Central Banks have been successful in keeping lease rates near the 2.0% (1 year) rate by their bravado of real or contemplated gold sales. How long this con job can go on is anyone's guess. In the absence of reliable statistics on central bank gold supplies, know one really knows the time or the hour when the CON game will be up.

While the history of humankind suggests that gold is the eternal source of monetary stability and resiliency, it is clear that for over 80 years since 1913 the alchemists (the central bankers and the private merchant bankers (Morgans, Rockefellers, Rothschilds, Warburgs)) have succeeded in running a counterfeit monetary system that is based purely on faith and without substance. Certainly since Nixon's term, they have succeeded in maintaining the fiat system without gold. The merchant bankers who first help finance the establishment of the U.S. Federal Reserve Bank system have quietly amassed untold physical assets (real estate, gold, resources), increased their systemic control, and subjugated the masses under "progressive" income taxation systems that have helped line their own pockets. One has to give them credit for creating and maintaining such a remarkable system, having manufactured the consent of the uneducated masses (and mainstream economists) who are incapable of even questioning the legitimacy of the current system. This ignorance of how money is created is the real tragedy of the commons. I suppose after 80 years, just like living in communist Russia, we have come to accept the "system" without question. Are we not at a point in monetary history where we cannot even imagine or remember an alternative to fiat currency?

I recently digested analysts Milhouse's excellent article Currency Turmoil in 1998 which provides refreshing and sobering insights in a world filled with noise and confusion.  Milhouse wisely charts out the likely course for gold in 1998 given the enormous macro economic events unfolding in rapid succession.  The Asian flu may be a dress reheresal of the upheavel that is likely to wash over the shores of both Europe, Canada, Australia, Britain and finally the U.S.  While we live in an information age with instanteous access to knowledge, we are fed illusion and "drags" through the media who, with all their high paid analytical help, seem either reluctant or incapable of analyzing one of the key questions of today's gold market: who is buying the gold that central banks are swamping the world with through leasing and selling?  To this day the question remains unanswered.

I am reminded of the words of A. Greenspan which appear on the front page of Gold Eagle.  "The abandonment of the gold standard made it possible for the welfare statists (government bureaucrats) to use the banking system as an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." Indeed, Greenspan's ears must be burning as he watches a world incapable of stopping the fiat currency Titanic in spite of sonar telling us that the iceberg lies ahead.

I believe Milhouse wisely notes that 1998 may be the most significant year in the world's financial history. Fiat currencies are in the final swan song and the last lady to sing will undoubtedly be the U.S. dollar or the British pound. Indeed, very few commentators have taken a look at the role of the British currency in the upcoming currency crisis. Milhouse wisely notes that the EMU (Euro) will be a weak currency, that is, it will unlikely pose a threat to the U.S. dollar as an alternative reserve currency. Are the British quietly sitting tight watching the fiat domino calamity of Asia like some dress-rehearsal? Milhouse correctly notes that the EMU will only have strength to the extent that it is supported by gold. I believe the British know this as do the Americans. To date neither have liquidated their gold reserves for short term liquidity gains. Gold still apparently plays a strategic importance to them. The Swiss have not yet lost their heads entirely.

As a goldbug my bias is undoubtedly towards gold, not because I am blinded by its brilliance, but simply as an economist and student of history (as is Soros) I know that gold provided stability and rationality to a world which might otherwise have become drunk on its success at alchemy. One need only examine the extraordinary stability a gold standard brought to the relative purchasing power of British pound since 1560 and to the U.S. dollar since 1792 (read "Gold and Liberty" by Richard Salsman (American Economic Institute for Economic Research). Salsman shows that gold's purchasing power has remained relatively constant through four centuries of history and the gold standard provided incredible stability to the United Kingdom's economic growth for over two centuries. Indeed, even today an ounce of gold (back in March 1997) bought a good man's suit as did an ounce of gold in 1930 valued at $35 an ounce, even though the price of a man's suit is now 10 times higher. Furthermore, before OPEC, an ounce of gold bought about 20 barrels of oil ($1.75 per barrel) whereas today an ounce of gold ($290) buys about 19 barrels of oil ($16). What has changed for the worse is the purchasing power of the paper dollar. I have estimated, based on Salman's study, that the purchasing power of gold vis-a-vis the British pound is now roughly 128 times greater. Consider that between 1560and 1926 that the purchasing power of gold versus the British pound were never more than 0.3 basis points apart moving in tandem. In the case of the U.S. dollar, I estimate that the purchasing power of gold vis-a-vis the U.S. dollar is roughly 26 times greater. The gold standard was the ideal monetary policy instrument providing stability and resiliency to economies, albeit economic growth not being nearly as robust as we have become accustomed. We require no further evidence of inflation than these sobering statistics, yet we cannot imagine a world without inflation.

We can romanticise all we want about the history of gold and its sobering impact it has had. We are what we are today given the decisions a few bankers and politicians made in the early part of this century. We have all benefited, including goldbugs from this system. Today we live in a world drunk on liquidity excess fueled by a fiat currency system that simply requires the engagement of the printing press and increasingly simply electrons. We can attribute much of our overconsumption, our degradation of the environment, and depletion of natural capital to the irrational exhuberance of the fiat currency system. Indeed, if one were to imagine the continuation of the gold standard since 1913 in the U.S. and since 1926 in the U.K., our world would undoubtedly be different today. . The only question is can the alchemist party continue?

Are we, as Soros describes, at a "reflexive" moment in history when a thief will come in the night and that brilliant exponential stock market curve will have evaporate. The deflationary ice-berg is coming from Asia (to your nearest car dealership) and undoubtedly U.S. manufacturers will not exhibit "rational expectations", nor will consumers.

On one hand I believe the fiat currency system can continue not in a world with multiple fiat currencies but possibly in a world in which a closed system, a single world currency exists. No economists or financial experts can imagine such a closed system, yet does it not seem conceivable? Is this what George Soros is dreaming of and of which he remains mum? Or is Soros positioning himself in gold as he did in silver only a few months ago? Unfortunately, we won't know until news passes through the filters of our free media. Such a moment would be a "reflexive" moment in history, in the words of Soros. Perhaps the timing of the Asian dominoe flu is a kind of "shelling the beaches" by the currency alchemists who must ultimate consider the impossible dream a seemless, one-world currency transfer system. Or is this a desperate last move by central bankers to keep the illusion going one more hour or one more month? Most certainly, the establishment of a world monetary institution would be consistent with the dreams of J.P.Morgan and Warburg when they conceived the U.S. Federal Reserve system. But perhaps that day will never come to pass.

We should ask ourselves as we watch the social and economic turmoil in South Korea and Indonesia, why now? Was this part of a grander plan or is this simply another "reflexive" moment in history which we cannot avoid, where systemic failure must ultimately occur? I wonder why, after years of supporting these regressive Asian regimes (Indonesia), the powers-to-be have decided to let their Asian brethren be rationalized by currency traders? We must ask the question, why now? Could no one save the Asians from their own influenza or was the decision to reel them in a deliberate chess move? But then again, maybe goldbugs are right in that this is the beginning of the tsunami tidal wave that will bring deflation and ruin to the U.S. economy and an end to the fiat confidence game that began with the establishment of the U.S. Federal Reserve in 1913.

Undoubtedly it is the central bankers who are the alchemists. The likes of J.P. Morgan, Rockefeller, Warburg and Rothschilds have all benefited from the fiat currency system that they conceived on Jekyll Island so long ago. Of their fraternity, the Rothschilds have undoubtedly been the most successful benefiting by trading both sides of the gold (bullion) or paper coin (treasuries). You see, the Rothschilds care less whether gold or U.S. treasuries rules the day; they trade in most. What I have learned as a goldbug these past few months, is that I too should have traded both since one is the antithesis of the other.

While Soros is coy in his commentary about fiat currencies, his other recent actions in silver might support the theory that gold will follow silver. I wouldn't be at all surprised if Soros makes a major announcement of a major move by Soros/Rothschild consortium into gold. When that announcement comes, it will be too late. As in Rothschild tradition, the masses will have already been caught napping. Perhaps all of this cornering has been going on at the LBMA in recent months. Even if I'm wrong, Soros/Rothschilds have had the deep pockets to pick up gold at bargain prices, even as a small hedge against the threat of a default of the U.S. currency. One can never underestimate the uncanny ability of a Rothschild to be on the right side of history. This is the ideal environment in which Rothschilds thrive and smell opportunity. Soros too must be content that the fertile fallacies towards gold are carefully cultivated and nutured by the actions of the central banks, supported by the chorus of the media, and embraced without question by the bias of masses who consume the fertile fallacies.

My only lament as a gold investor is that I sided completely with gold believing in the fundamentals and supply and demand. I am indeed wiser for my experience, although a painful lesson. I am even more convinced that gold, as currency, would again bring stability to an irrationally exuberant world and ensure that the financial systems are aligned with the laws that dictate our natural systems.

If Soros and the Rothschilds are wise it is in their reading of human nature upon which they have capitalized. The Rothschilds have not built their stupendous empire through shear luck. It has come through dogged determination and skilful trading, plus a profound understanding of what Soros calls fertile fallacies and participant bias throughout history.

If history repeats itself, it could be the Rothschilds (and Soros) who in the end find themselves distanced from their other alchemist merchant banking brethren with a warm security blanket of gold as insurance. After all, he who has the gold rules!

We wait and see in hopeful expectation.

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