Gold is more and more turning into the most wanted commodity. The Russian State Depository for Precious Metals and Gems, Gohran, which at one time transferred all its gold to the Central Bank of Russia, now, according to Interfax, is again accumulating its own gold reserve, which may point to the fact that during this uneasy time the yellow metal is considered to be a “quiet haven” for state assets as well. Having burnt their fingers on speculations with all kinds of derivatives, private investors are also “fleeing” into the metal, which brings additional and considerable pressure on the gold market. The price for this metal was recently fixed at $837 per troy ounce and according to experts displays an upward rather than downward trend. The 20 analysts surveyed by Bloomberg produced a median forecast saying gold would go up to $910 per troy ounce in 2009, while four of them predicted it would be as high as $1,000 by the year’s end. The gold market turnover in 2008 increased 58%, while total gold sales last year, according to International Financial Services London (IFSL), reached their record high of $20.2 trillion. All this is an indication that after the apoplexy of the U.S. financial system, the dollar and the dollar-tied world financial system ceased to be trusted, which resulted in a global gold fever.
This process proves that currently there is covert maneuvering of resources underway whereby national currencies are trying to take the most advantageous position towards the dollar in expectation of further developments. It virtually means weaker currencies to maintain export abilities, or in other words the chance to pass one’s own problems to others instead of importing them. However, this kind of rustle in the end makes everyone exchange paper money for gold to be on the safe side. The Russian rouble is no exception here. Any further developments, including the fate of dollar assets accumulated around the world and that of the entire global dollar payment system, will depend on the economic policy chosen by the new U.S. administration. For Russia it is of utmost importance now not to find itself among the countries which will be used – not without the dollar’s help – to curtail the U.S. budget deficit.
Meanwhile, as IFSL points out in its report, although the physical market for gold and silver is distributed globally, most wholesale over-the-counter trades are cleared through London. The average daily volume of gold and silver cleared at the London Bullion Market Association (LBMA) in November 2008 was 18.3m ounces (worth $13.9bn) and 107.6m ounces ($1.1bn) respectively. This means that an amount equal to the annual gold mine production was cleared at the LBMA every 4.4 days, and to the annual silver production every 6.2 days. Reported volumes significantly understate actual volume of London market turnover which is probably three to five times the reported turnover because transactions are increasingly netted out and cleared without appearing in the statistics.
The situation generates quite a few would-be moves on the current economic chess-board. Analyst Lawrence Williams offered two scenarios in this respect recently posted on Mineweb where among other things he says the following:
The first of these ‘solutions' is that China starts buying substantial amounts of gold in place of U.S. dollars for its huge currency reserve surplus, the logic being that long term dollar parities are likely to fall against most other currencies and this would be a way for China to protect its reserve position. The second is that the U.S. Treasury and world Central Banks will impose a huge revaluation of gold vis a vis the dollar as a contributory element in easing the world's economic ills - a neat solution according to some well respected economic theorists. The China point would seem logical to the investment community as this sector is so geared to material growth that it cannot see that other institutions do not necessarily think the same way. Politically, buying large sums of gold to replace the dollar would further destabilize the dollar and the U.S. economy, but this would undoubtedly also impact adversely on Chinese industry. To some extent this option has already been overtaken by events as the U.S. economy has contracted, and is still contracting, dramatically and China is catching a severe cold as a result. If anything may convince the Chinese not to further destabilize the U.S. economy by buying huge sums of gold and thus add another major element to dollar devaluation too, then this would be a strong sign that it might be very foolish to follow this route. The second theory which has surfaced is that, after years, so the theory goes, of conspiring to hold the gold price down, the U.S. Treasury and Central Banks may now be looking to very substantially revalue gold and control its sale. This may not be as far fetched as it may sound to those used to operating in a supposed free market economy as it mirrors steps taken by President F.D. Roosevelt to end the Great Depression. Roosevelt ordered U.S. citizens to sell all their gold to the U.S. Treasury in 1933 - and then in 1934 ordered a 70 percent increase in the gold price from $20 to $35, with the U.S dollar fully backed by the U.S. gold holdings. With President elect Obama a keen student of Roosevelt's policies, so the theory goes, he may well consider the same kind of dramatic move which would put huge amounts of cash into the U.S. economy, at the expense of printing more money, and huge amounts of gold into the U.S. treasury in return which should help prevent further dollar destabilization despite the potentially inflationary impact of the enormous money supply increase. The subsequent gold revaluation would, at a stroke, substantially improve the U.S reserve position. For this to have an effect globally would require other Governments and their Central Banks to do something similar. It is doubtful whether a number other countries, though, could quite follow suit in terms of gold ‘confiscation', although there might be some kind of consensus in terms of gold price revaluation.
To an extent one would consider these ideas as ‘clutching at straws' by the gold bull theorists, however economically neat the latter solution may be as a help in curing the world's financial ills. Given the recent unprecedented, and seemingly unsuccessful, moves by governments worldwide to try and kick start economies again, Lawrence Williams says, one cannot rule out such a dramatic move by an Obama administration looking for another financial experiment to try and stimulate the economy. As for Russia’s economy captains, there is no way of telling for sure how much ready they will be for such a turn of events.
Vladimir Malakhov
