Debt, Manipulation, and the Gold Standard

Our readers often ask tough questions about the economy, monetary policy and precious metal markets. During a recent interview, Gold Standard Institute USA president Keith Weiner provided some insightful and clear-cut answers to some of the complex issues facing us today.

Weiner was first asked to pinpoint the root of today’s economic mess. He summarized it in one sentence.

The short answer is: rising debt. It’s not only rising, but rising exponentially—the debt doubles about every eight years.”

Weiner then breaks the question down with medium and long term analysis.

In 1971, President Nixon defaulted on the US government’s gold obligations. This plunged us into a worldwide regime of irredeemable paper currency. Gold was banished from the monetary system, no longer allowed to fulfill its function as extinguisher of debt. The dollar was turned into a mere IOU. You cannot pay off your debt by issuing IOUs, as you cannot get out of a hole by digging deeper. At the same time, the interest rate was unhinged. It was free to shoot the moon, as it did until 1981. It was equally free to fall into the black hole of zero, which it has been doing since 1981. Falling interest causes massive, but mostly hidden, capital destruction. The longer answer is: we have central planning…Even if you concede that the central planners are really smart, wise, and incorruptibly honest, they have no idea what they are doing.”

Weiner goes on to address the possibility of a gold standard, saying that it could certainly help resolve many of the deep-seated economic problems.

Debts can be paid off, which is important. Otherwise they accumulate until they bury us alive. Also, under gold, the interest rate is set in the free market, and it’s a simple process. ..If savers feel the rate is too low, they withdraw their gold coin and take it home. Or if entrepreneurs find the rate too high, they stop borrowing. The rate of interest is stable, within these lower and upper bounds, respectively… All this without central planning.”

Weiner does a fantastic job of addressing the issue of manipulation in the gold market, explaining that the current theory doesn’t fit the evidence.

When you try to study the mechanics of how this manipulation is supposed to work, it falls apart. The manipulators are supposed to sell paper gold—i.e. futures contracts. They can’t be selling metal, at least not in silver. And the silver price has dropped far more as a percentage. So it must be futures. OK, well, if this is so, how would it work? It would drive the price of a futures contract way below the price of real metal. There would be a total divorce of these two prices. I study the spread between spot and futures gold, and I can tell you that it just isn’t so. The data we see in the market does not fit the theory.”

He goes on to propose a new theory.

I propose that, to start, one should look at gold as money and the dollar as failing credit. (More on this HERE) You cannot measure money in terms of the dollar. This would be like measuring a steel meter stick using rubber bands. How long is the meter stick today? 3.8 bands long. And tomorrow it is 3.9 bands long. Why did it get longer? You have to measure the dollar in gold. Very few people do this…This is a paradigm shift, to stop thinking of gold in dollar terms and start thinking of the dollar in gold terms. As with all good paradigm shifts, things get sharper and clearer.”

So, why is the dollar going up?

I think the answer is that debtors are squeezed by the weight of their debts. And of course, speculators are wildly bullish on the dollar. I have to emphasize here that I do not refer to the price of the dollar as measured in euros or pounds. I mean in terms of gold. This is simply the same phenomenon of the mainstream dismissing gold as a “pet rock” (as one Wall Street Journal reporter did recently). These folks are telling you to go all-in on the dollar. That’s self-serving advice, at best. However, while it holds sway, people buy the dollar (i.e. sell gold) who would not otherwise. I have developed a model to calculate the fundamental price of gold. This model shows this sentiment, and it is saying that the gold price should be around $1,200. I think something is going to change, something in the world of credit. A major default could occur almost anywhere, from shale oil junk bonds to a larger sovereign debtor, to a major bank. If governments cannot or will not bail out depositors, and they take real losses, sentiment will turn. People could begin to realize that, unlike a dollar or euro or yuan, gold has no counterparty. It’s a lump of metal, and it cannot default. When that happens, I suspect the price of the dollar will rapidly move towards its former low of 16mg and there’s no reason why it couldn’t plunge right through and make new lows.”

Weiner moves on to explain a technical term “backwardation.”

It is when the price of the metal in the futures market is below the price in the spot market. In an ordinary commodity, like wheat, it means scarcity. However, it should never occur in gold or silver. It is a sign that the monetary system is in decay, failing.”

As far as protecting yourself from a coming economic collapse, Weiner said we should not think in terms of 1929, but 476 AD – the collapse of Rome. He said every person needs to be prepared to subsist on their own. But he also has some simple, practical advice.

It is, of course, better to own gold than not when living through a collapse.”

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