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The Gold Price and the Decay of Money

What the Gold Price tells us about the currency system...

THE GOLD PRICE measured in Euros has held between €1,010 and 1,020 for the last couple of weeks, writes Julian Phillips at 

The Swiss Franc Gold Price is doing much the same. However, the Gold Price in Dollars has been rising, hitting new highs at $1,475. Today it jumped to €1,026 and through $1,480. If we follow the suggestion of Robert Zoellik the head of the World Bank – that gold should be a 'value reference' for the Gold Price – then we cannot look at the Gold Price in an individual currency, we must look at the currency's value against gold. 

The reason for this is made clear once you look at the Gold Price chart in each individual currency. It actually should turn out to be a reverse chart of the currency. Thus gold stands as a 'value anchor' measuring the value of the currency more than that currency measures the value of gold. 

So, many investors actually do believe that their currency is measuring the Gold Price, but it isn't.

A price of anything should measure the demand and supply figures of the item expressed as a static currency price. But there is no such thing as a static currency. All currencies move against other currencies and against gold. 

The role of a global reserve currency was supposed to be a currency that was stable and was not printable, expandable or manageable. But the 'powers that be' decided that it should be inflated to match growth, so that money supply expanded at the same rate as the economy, ensuring that the currency's value did not interfere with its use as something used to exchange for goods. 

To clarify, if the amount of a currency was fixed, then it should rise in value the more an economy expanded and the need for money rose. This produced a conflict of interest at the root of the money system. This meant it was manageable by people who would not hold true to the concept gold has had through the ages of being firstly a measure of value and secondly as a means of exchange. 

This has and will result in currencies being less reliable than gold and controlled for the benefit of local economies. Worse still, a global reserve currency, although used by nations all over the world, was subject to its own local economy, central bank and politicians. Yes, this does work, provided the country of the reserve currency is globally dominant, growing and with a balanced Balance of Payments. In the case of the US Dollar this is no longer happening.

While gold makes for an excellent reserve currency, at the correct price, it was rejected as such. Because it could not be printed, it was felt it could not serve as money because that would have restricted the growth of the money supply. 

That's why the Gold Standard was abandoned. That's why gold was revalued (actually it was the Dollar that was devalued) in 1933. 

While there is now little effort made to protect a currency's value, it is not in the interests of government to allow their currency to actually be seen as sinking in value. The concept of currencies devaluing against gold was felt as potentially damaging to that currency so a campaign to relegate gold to solely an important reserve asset in the monetary system took place in the last 15 years of the last century. 

It worked right up to the end of the last century. From the turn of the century gold has made a comeback, as money, outside the monetary system and has shown this in rising prices and changes in 'official' attitudes towards gold. 

But has the Gold Price really risen? It was held down by the world's central banks, but it is now reflecting the loss of value (though not yet in full) of currencies over time. Under the present global system of money, governments want to have gold 'rise' in terms of their currencies, not their currencies 'fall' against gold. 

Bankers, central bankers and governments see currencies as having far superior usefulness than gold because of the control it allows over the monetary system. This cannot be over-emphasized. If currencies were anchored on gold then all such controls would become entirely visible. This would not be in the interests of either confidence in money or in bankers and politicians. If central banks felt that it would be as easily harnessed as currencies they would have used gold as a backing for currencies long ago. 

But their actions do not exclude gold from being money. Whether bankers and politicians like it or not, you can't remove gold from the monetary system – as we have seen so vividly in the last decade.

 In Asia it is real money and always will be. In the developed world, confidence in the monetary system is waning. Once China has matured to the point that its money becomes a global reserve asset, then the Dollar will wane quickly. This will be reflected both in its buying power and its exchange rate.

The Gold Price will show that this has happened. The Gold Price will eventually show its true value by highlighting the value of currencies in exchange rates and Gold Prices in each currency. 

The silence from Mr. Zoellik since he put forward his idea on gold has been deafening. But he is right. Gold will no longer be sidelined. Money cannot have one of its two key functions discarded. 

Any manner of games can be played with gold's function as a means of exchange. But its function as a measure of value will eventually return and assess currencies on an international basis. In the case of the US Dollar that day is coming and the consequences of currency management will be felt and seen. The Gold Price will reflect this. 

Asian gold investors feel this instinctively, which is why it is one of their leading investments for savings. In the West we can say that there is every interest and benefit to bankers and politicians in ensuring that that day is postponed. Meanwhile, the Gold Price can tell us the stage of decay that the currency system has reached.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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