Eric Sprott On How Central Banks Are Setting The Stage For The Next Big Move In Gold
By Tyler Durden 01/30/2010 14:37
A brief look at the contentious gold/central bank history as it is about to rhyme all over again:
The Federal Reserve System was created in 1913 on a promise of stabilizing the banking system. What followed instead was an unprecedented growth in fractional reserve banking, as well as the money supply, which helped fuel the roaring 20’s. The aggressive money printing created inflated values in bonds and stocks, which peaked in 1929. When the market began its precipitous slide, and the public began to realize that stock and bond values were artificially high, the populace began to convert its cash holdings into gold. The government lacked the ability to satisfy that demand and was thus forced to renege on the currency’s founding promise of gold convertibility. It’s important to point out that without this original promise of convertibility for citizens, the currency may never have been adopted.
In 1933, The Gold Reserve Act was passed by Congress and formalized into law the breaking of the gold standard. This law provided for a controlled-currency issue through the Federal Reserve System which was non-redeemable in gold. Although the link to anything tangible had been broken, the citizens had little choice but to continue using these non-redeemable dollars as a medium of exchange. The currency had already been broadly accepted, proven convenient and a perception of safety had already become entrenched.
After forty years of continued dollar printing, in August, 1971, President Nixon effectively declared the US dollar to be a completely “fiat” currency by refusing to allow foreign governments to convert their US dollar holdings into gold. The right of conversion which had been granted under the post World War II, Bretton Woods agreement could not be honoured because of decades of money supply expansion. The original ‘promise’, which had vaulted US dollar to its status as a global reserve currency and a stable store of value, was now completely broken.
These historical events resulted in a world in which all currencies are fiat; they are not backed by gold or any other tangible asset. The supply is infinite. In fact, the production of today’s newly created paper money in relation to historical commodity-based money is akin to counterfeiting. A US dollar printed today has no ties to anything tangible and as a result carries only four cents of the equivalent purchasing power of a gold-backed dollar of 1913. It is ironic that in a poor choice of wording on Wikipedia, the definition of counterfeiting states that “it is usually pursued aggressively by all governments.” It is only because the evolution of money has occurred slowly over generations that the obvious flaw with fiat currency is not widely understood.
Why Gold, as a consequence of 90 years of paper debasement, will be the next big thing.
We are gold investors because we have made a specific and calculated bet against paper money. Simply put, we are betting against paper money as a store of value. We believe its supply will continue to increase. We do not believe that the world’s major governments have any stake left in protecting it. Government debt loads have grown so massive that printing them away has become obligatory - there is no longer any other feasible option left. In our view, the savers of the world should already be outraged by the dilution they have been forced to suffer at the hands of the Central Banks. Are we to infer that the limited reaction of savers to the combination of zero interest rates and debasement of currency is a result of “learned helplessness”?
In our opinion, the lack of overt inflation to date due to the "successful" implementation of globalization, aka exporting inflation to China and anyone else who needs to purchase US securities, is the sole reason why there has not been an explosion in fiat-denominated prices to date. Yet as Zero Hedge has been pointing out for several months, the global trade picture is now dramatically changed, and China will need to look inward rather than outward. This means, that sooner or later exporting inflation as a fiat policy will fail. When pundits finally comprehend this and start blaring about it every day on CNBC, that is when the rush to gold (plated) safety will finally become acute.
And since in a fiat-debased world, everyone wonders where gold will hit (which in principle is the wrong question, as monetary representation of value will very likely cease should Central Banks finally lose control over the infinite dilution mechanism), here is what Sprott believes:
We also wanted to prepare our readers and clients for the next leg of the gold bull market as it will prove to be extremely volatile. Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons:
1) Central Banks are more likely to be buyers of gold today and
2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt.
Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce.
We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order.
These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not.
And when you are done, here is another just released note from Sprott's John Embry http://tiny.cc/OvPZP in which he expects gold to go up by 30% in the near-term -
ex..don't forget to dd.. :-) .. CQR / CQRLF God Bless
Conquest Resources Limited is a Toronto based mining exploration and development company incorporated in 1945.
Its shares trade on the TSX Venture Exchange (TSX-V: "CQR" / CQRLF).
Conquest has been called "The junior with the best address in the Red Lake district" by Lawrence Raulston.
Situated in the shadow of the Red Lake and Campbell mine headframes (refer photograph above), the Alexander Property is almost completely surrounded by Goldcorp's property holdings.
The Devaluation of the US Dollar - snipped.... Gold is ready for a quantum jump upward in price.
The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did.
Beijing leaders wish to survive the currency wars and the reworking of international finance.
Private ownership of gold is of paramount importance to their entire society at all levels of power.
I believes that holding investor gold in a bank correlates the investor to the banking system, and puts the investor at the mercy of the bankster gangs the very risks which must be avoided.
The conclusion is that grossly insufficient gold exists to back the US Govt debts, and those debts must include US Govt obligations to direct funds into the nationalized Black Holes, thus resulting in tremendous extraordinary pressure for a significant fiat & USDollar devaluation.
Move to the impact on the US Dollar and the official US debt obligations.
In no way can the existing real US Govt debt be paid off without inflating the currency in which the debt is held, even to the point of hyper-inflation.
Rickards regards the risk as unavoidable, since valuation of a national currency must eventually reflect its fundamentals.
Furthermore, if the US Fed's mortgage assets were marked to market, the US Fed itself would be declared insolvent (a point made months ago by the Hat Trick Letter, confirmed by Rickards).
Anything involving paper claims payable in USDollars (stocks, bonds) is a 'Rope of Sand' in his words, a complete illusion that is fraught with risk.
A $5500 gold price per ounce would be sufficient to back up the money supply (M1) as an alternative to hyper-inflation and an inflationary issuance of the currency.
Either powerful price inflation is permitted, or a five-fold rise in the Gold price is permitted, in his opinion.
A great point!! The pressures are unavoidable, and alternative directions might not exist.
He presents a gold target price is $5000 to $10,000 per troy ounce in current issue USDollars.
The break point will be when the US debt can no longer be rolled over, from REPOs or formal USTreasury auctions.
He does not make the comparison. This is the typical Third World debt risk factor, which US Presidents (like Clinton & Bush II) and US Fed Chairmen (like Greenspan & Bernanke) ignored for years.
The Rubin Doctrine calls for putting off today's crisis by mortgaging the future.
At the pace seen, the USGovt will not be in any position to finance its debt or honor its future obligations without taking drastic action on the backing or nature of the currency.
Debt must be discounted via the US$ currency in denomination.
The gold picture in China has turned powerfully positive for the Gold price, in the view of Rickards.
China needs about 4000 tonnes of gold for a proper reserves ratio, but only has 1000 tonnes today in possession.
China cannot fulfill this goal even by taking all of its domestic production for the next 10 years.
They wish to take the IMF gold from pledges, but political resistance is clear.
They wish not to push up the Gold price from open market accumulation in gigantic volumes.
He overlooks that official Chinese gold ownership extends far beyond the Peoples Bank of China and Sovereign Wealth Funds.
My sources tell of the Chinese owning 3x to 5x more gold than 'Officially' proclaimed, something either overlooked or ignored by Rickards.
The Chinese people are showing a strong preference to hold gold personally, not as part of lunatic funds managed and corrupted by fund managers as in the West.
Their public purchase investment is mammoth, a major element of global gold demand, outlined in the Hat Trick Letter.
E.g., compare GG to the khazars 666banksters gangs saving acc. for the people slaves in the khazars chains - ..Goldcorp Au safety since the beginning :-)
Conquest Reports Profit of $1.845 Million for Third Quarter - TORONTO, ONTARIO, Nov. 30, 2010 (Marketwire) --
Conquest Resources Limited - (TSX VENTURE:CQR) reports that it has filed its unaudited financial statements and MD&A for the quarter and nine months endedSeptember 30, 2010. The documents are available under the Company'sprofile at www.sedar.com and on its website at http://www.conquestresources.net.
During the quarter, Conquest's exploration activities continued with a focus on continuing exploration drilling on the Alexander Property at Red Lake, Ontario, where a total of 8,775 metres of drilling has been completed in the 2010 program to date.
The Company completed the sale of its Aurora Property to Detour Gold Corporation ("Detour Gold") for a total of $4,972,000,
including 100,000 shares of Detour Gold,
realizing a profit of $3,451,557 during the quarter.
In addition, the Company granted Detour Gold an option to acquire a 50% joint venture interest in the Sunday Lake Property -
Conquest ResourcesLimited - (TSX VENTURE:CQR)
reports that it has filed its unauditedfinancial statements and MD&A for the quarter and nine months ended September 30, 2010. The documents are available under the Company'sprofile at www.sedar.com and on its website at http://www.conquestresources.net
During the quarter, Conquest'sexploration activities continued with a focus on continuing exploration drilling on the Alexander Property at Red Lake, Ontario, where a total of 8,775 metres of drilling has been completed in the 2010 program to date.
The Company completed the sale of its Aurora Property to Detour Gold Corporation ("Detour Gold")
for a total of $4,972,000,
including 100,000 shares of Detour Gold,
realizing a profit of $3,451,557 during the quarter.
In addition, the Company granted Detour Gold an option to acquire a 50% joint venture interest in the Sunday Lake Property
by incurring $1.0 million in exploration expenditures over two years.
For the three and nine month periods ended September 30, 2010, the Company recorded net income of $1,845,994( .023 per share) and $1,668,192 (.021 per share) respectively,
compared to losses of ($217,198) (.003 per share) and ($526,185)(.008 per share) for the three and nine months periods ended September30, 2009.
Included in the September 30, 2010 income was a gain on the sale of the Aurora property of $3,451,557 and a write down of the KingBay property of $976,204.
The Company had a working capital surplus of $1,222,474 as at September 30, 2010 compared to a surplus of $1,700,190 as at December 31, 2009.
At September 30, 2010, the Companyalso held $3,028,000 in marketable securities, of which $2,972,000represented the market value of the Company's 100,000 shares of Detour Gold.
Exploration Plans for 2010
The Company's focus in 2010 has concentrated on the Alexander Property at Red Lake where the second phase of a planned two year deep drill program is continuing and where assays are pending from drilling of two wedge holes from thesecond parent hole in the 2010 program.
Conquest plans to conducta further 20,000 metres of diamond drilling in 2011 in subsequentphases of exploration on the Alexander Property.
The focus is to continue systematic drilling to test the Balmer Assemblage stratigraphy in untested structures interpreted to extend from the adjacent Red Lake Mine (Goldcorp) within volcanic lithologies below the 700 metre level in the western and central portions of the Alexander Property.
The estimated cost of the planned 2011 program is $4 million,
of which $2 million is estimated for the initial 10,000 metres
and for which theCompany is adequately financed.
The recent sale of the Company's AuroraProperty to Detour Gold has given the Company a net liquidity of approximately $4.4 million, which included $2 million in cash and the current value of the 100,000 shares of Detour Gold, less a $500,000 cashpayment to NVI. Detour Gold will undertake a $500,000exploration program on Conquest's Sunday Lake Property over the next year.
The Sunday Lake Property is located in the northern AbitibiGreenstone Belt, 7 kilometers east of Detour Gold's large open pit gold development project.
Detour Gold has recently completed an MMI (MobileMetal Ion) soil sampling program on the Sunday Lake property.
A total of 552 samples were collected by Detour Gold during the soil samplingprogram, designed to assist in the prioritization of drill targets for the upcoming winter drill season.
The Company anticipates Detour Gold will commence a drill program on the Sunday Lake Property in January 2011.
ABOUT THE COMPANY
Conquest is exploring several gold projects in Ontario.
These include the Alexander Gold Project atRed Lake;
the Sunday Lake property at Detour Lake in joint venture withDetour Cold Corporation;
and the Smith Lake Gold Project at Missanabie.
There are currently 86,838,637 shares of Conquest issued and outstanding.
This news release may include certain "forward-looking statements".-- and from time to time in the filings made by Conquest withsecurities regulators.
Neither the TSX Venture Exchange nor itsRegulation Services Provider (as that term is defined in the policies ofthe TSX Venture Exchange) accepts responsibility for the adequacy orthe accuracy of this release.
Conquest Resources Limited President & CEO 647-728-4126
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