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From South Africa: How the U.S. herds the ‘sheep’ away from the gold market

Section: Daily Dispatches

"There are no markets anymore, just interventions."

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By Rex Van Schalkwyk
Business Day, Johannesburg, South Africa
Monday, April 8, 2013

With Cyprus, the plan has become obvious. With each succeeding intervention, the practice of statecraft becomes ever more insidious. The state has now turned its attention to the incremental enslavement of the individual: How will this be achieved? Through socialism and coercion; by the overt and covert control of the last vestiges of individual financial freedom.

The US Federal Deposit Insurance Corp. and the Bank of England released a "position paper" in December that introduced the concept of the "bail-in", as opposed to the "bail-out." In the case of a bail-in, the state will not stand in as the rescuer of last resort. That obligation will in future be imposed upon the unsecured creditors and the shareholders of the failing institution (the bank). The "unsecured creditors" are principally the depositors whose deposits represent a liability on the books of the bank.

If, by government decree, the depositors are required (as in Cyprus) to surrender a portion of their bank deposits to save the institution, and if that decree will determine which category will lose, and how much, that introduces into the institution of banking an element of caprice that could never have been contemplated by the depositor or the bank.

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If, by government decree, the depositors are required (as in Cyprus) to surrender a portion of their bank deposits to save the institution, and if that decree will determine which category will lose, and how much, that introduces into the institution of banking an element of caprice that could never have been contemplated by the depositor or the bank.

It has always been well understood that an uninsured depositor might lose a portion or the whole of his deposit if a bank fails. The implicit contract, however, is that all depositors will be treated equally. Since Cyprus, this is no longer the case. Those with the larger deposits were required to share a greater proportion of the loss, and those with smaller deposits emerged unharmed. Under the new dispensation, the large deposits might in effect be confiscated.

A fundamental principle of law and of the rule of law is that legal relationships cannot be changed retrospectively. The Russian oligarchs who relied on this principle when they made their deposits have become seriously disillusioned. There may be little international sympathy for the victims on this occasion and that, no doubt, is how the strategy was conceived. However, this consideration gives little comfort for the future. To paraphrase Martin Niemoller: First they came for the oligarchs, but I was not an oligarch, so I was not concerned. ...

The tacit indemnity granted on this occasion to the small depositors is, of course, part of the socialist grand plan: If matters are so contrived as to protect the interests of the majority, then the politicians and policy makers will have the majority on their side; the more so if, in the process, the oligarchs get what they so richly deserve. However, the majority should consider that, at some time, there will not be enough money to "bail in" the egregious banks by raiding only the substantial depositors, and that the small depositors will surely be at risk in future.

It has already been speculated that Portugal, Italy, or Spain may be next. It has even been suggested that this affliction may next contaminate the banking industry of France, the UK, or even the US. Surely the depositors are getting nervous. Strategists of central banking will have considered this possible outcome. The question they will have asked is: What are the alternatives to bank deposits and how can these best be marshalled to the benefit of central banking and the state?

US Federal Reserve chairman Ben Bernanke has made it clear that the recovery of the US economy and the reduction of unemployment depend on the recovery of consumer spending, which requires a robust stock exchange and a return of confidence to the housing market. That is where he would want to see the money go. It may also be that he does not want to see it go elsewhere.

Where else might it go? The exponential rise in demand for gold and silver coins and bullion bars tells the story of a loss of confidence in conventional banking and money. How is it, then, that in the face of rising demand; a banking system in disarray; and the "printing" of trillions of dollars, that the prices of gold and silver bullion remain subdued? Is it only in the East that the lessons of the Weimar Republic have been learned? Or have the laws of economics been reversed?

It has been said that there are no free markets any longer, only interventions. The world's most prominent intervener, by far, is the Fed. It intervenes in the interest rate structure; it intervenes in the housing market by buying mortgage-backed securities, undertaking to continue to do so until the anticipated recovery in unemployment statistics occurs; and it intervenes in the supply of money with its regular purchase of US Treasury bonds (which is to say, it creates money "out of thin air"). The US Treasury intervenes regularly to prop up the stock market through "the Working Group on Financial Markets", also known as the "Plunge Protection Team," established under former President Ronald Reagan.

Now it is contended that these serial interveners do not intervene in the bullion markets which, it is asserted, operate entirely according to free-market principles. Gold has been described as the antidollar. It is the ultimate "canary in the coal mine" on matters of banking and financial wellbeing. Is it conceivable that the compulsion to intervene will have departed in the case of gold (and silver) and will leave these commodities in splendid isolation? This proposition seems improbable if the price were to tell a story that the US officials did not like. Would they, for instance, leave the gold price to find a level of $5,000, which would cause every investor to abandon the US stock and housing markets in favour of the far more lucrative gold market? Does this scenario fit the character of the beast?

It is said that gold has no practical use other than for the frivolous purpose of adornment. This asinine proposition is especially current within the investment community. The real value of gold is not as a commodity, but as an abstraction: it imposes a discipline upon politicians and bankers alike; two activities in which discipline is conspicuously absent and ever more urgently needed. Is it conceivable that then US president Richard Nixon would have persevered with the Vietnam War, if his administration was subjected to the discipline of gold?

Fortunately, we know the answer to that question because, in 1971, under pressure from the exchange of dollars for gold, Nixon defaulted on the undertaking at Bretton Woods that the US would, in its international dealings, exchange gold for dollars. If Nixon had not defaulted, the continuation of the war would have become unaffordable.

Would presidents George Bush senior and junior have undertaken their respective Iraqi adventures? What of the "global war on terror," which has been described as a war on an abstract noun? This multitrillion-dollar adventure could never have occurred if the successive administrations had been subjected to the discipline of gold.

The egregious conduct of the giant banking establishments could never have been allowed to occur if they had been subjected to the discipline of gold. Those who consider that gold has use only as adornment suffer from a conspicuous lack of imagination.

It cannot be seriously disputed that the US administration intervenes to suppress the price of gold. In this way, investors are to be herded, like sheep, into the investment forms the administration has chosen for them. Sociologist Max Weber observed that the state was in essence a criminal institution with the power of law. His pronouncement appears as apposite now as ever.


Rex Van Schalkwyk is a former supreme court judge and the author of "Panic for Democracy."

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