Aggregated Awareness

In being curious as to matters concerning monetary inflation, and by extension, currency devaluation, due to the ongoing global 'competitive currency war' amongst the world's central banks, and the concomitant "quantitative easing" (aka 'money printing' aka 'Queasing'), we went about researching a few items in this area of monetary concern, from an Australian perspective.

We look at the devaluation of the Australian Dollar (AUD) vis a vis, gold, and the sovereign gold sales of Australia's gold, by the then Treasurer Peter Costello in 1997. A disastrous decision, and ultimately, a failure of fiduciary responsibility of the nations finances by the once Treasurer, with the ramifications of that action in light of Article 115 in the Australian Constitution...

 

Background

Due to the ongoing global 'competitive currency war' amongst the world's central banks, and the concomitant "quantitative easing" (aka 'money printing' aka 'Queasing'), we went about researching a few items in the area of monetary concern known as currency devaluation, focusing on a mostly Australian perspective.

Our goal was to start by looking at the devaluation of the US Dollar (USD) vis a vis, gold since Dec 1983. Since it is the global reserve currency in our Bretton Woods II system, when this system came into being after Richard Nixon closed the window to gold convertibility in August 1971 for redemption of US Dollars in gold to foreign central banks holding US Dollars, we thought to include it here since it's value determines the value of other currencies, such as the AUD.

We chose December 1983 because it was a time when the Australian Federal Government made the decision for the Australian Dollar to float against other fiat currencies. Then we looked at the devaluation of the Australian Dollar (AUD) vis a vis, gold, from the same time frame.

The resultant data outcome of that, led to looking at Australia's sovereign gold reserves, as held by the RBA & Treasury, which led to looking at the sovereign gold sales of Australia's gold, by the then Treasurer Peter Costello in 1997, which occurred near the very bottom of the 20 year gold bear market.

That has proven, with hindsight, to have been a disastrous decision, and ultimately, a failure of fiduciary responsibility of the nations finances by the once Treasurer. The highest fiduciary position for a public bureaucrat in the nation. Certainly not a good look for the man's ability to manage finances.

We then come full circle, whereby the outcome of those sovereign gold sales led to the uncovering of Article 115 in the Australian Constitution. And the realisation, upon reading it, that the monetary system we have today is Unconstitutional.

But let us back up, and start from the beginning.

 

US Dollar Devaluation versus Gold

Back on the 12th December 1983, 4 days after the AUD starting floating against other fiat currencies of the world, the London PM Fix price for 1 troy ounce of fine gold in USD was US$391.25. This is the equivalent of US$12.58 per gram. Or alternatively stated as US$1 was the equivalent of 7.95% of a gram of fine gold.

So, one US Dollar got roughly 80 milligrams of fine gold back on the 12th December 1983.

Move forward almost 24 years to the 25th August 2007, and gold is US$672.46 per troy oz. Making it US$21.62 per gram or US$1 was the equivalent of 4.63% of a gram of fine gold, which is 46 milligrams.

This is a 42% reduction in the implied gold content of one US Dollar in 24 years.

With some sarcasm, if one were to judge success in devaluation, by the percentage cut, in implied gold content for one US Dollar, then one would be inclined to say that this 24 year period was a successful period of devaluation of the US Dollar versus gold.

Looking ahead again to the 12th October 2010, just over 3 years since 25th August 2007, and gold is around US$1346 per troy oz, or US$43.28 per gram or US$1 being the equivalent of 2.31% of a gram of fine gold, which is 23 milligrams.

This is a 50% reduction in the implied gold content of one US Dollar in 3 years and 2 months.

So, the rate of devaluation of the US Dollar against gold is increasing. That is, the US Fed is increasing the rate of US Dollar decline against gold.

With gold ending this week of Friday 5th November 2010, at another all time high in US Dollar terms at US$1394.10/troy oz, or US$44.82 per gram, or US$1 being the equivalent of 2.23% of gram of fine gold, which is 22 milligrams. We've had a 4.35% reduction in implied gold content of one US Dollar in 25 days. A reduction of 0.174% of gold content in the Dollar per day.

So, the trend for the devaluation of the US Dollar, vis a vis, gold, is clear. And there is nothing in the offering to suggest that this trend is going to reverse in the near future. In fact, there is every indication to suggest that this trend will accelerate.

 

Australian Dollar Devaluation versus Gold

For the 12th December 1983, the London PM Fix price for 1 troy ounce of fine gold in AUD was A$426.43. This is the equivalent of A$13.71 per gram. Or alternatively stated as A$1 was the equivalent of 7.29% of a gram of fine gold.

So, one Australian Dollar got roughly 73 milligrams of fine gold back on the 12th December 1983.

On the 25th August 2007, gold was A$819.57 per troy oz. Making it A$26.35 per gram or A$1 was the equivalent of 3.795% of a gram of fine gold, which around 38 milligrams.

This is a 48% reduction in the implied gold content of one Australian Dollar in 24 years.

On the 12th October 2010, 3 years & 2 months since August 2007, gold is around A$1374.69 per troy oz, or A$44.20 per gram or A$1 is the equivalent of 2.26% of a gram of fine gold, which is just under 23 milligrams.

This is another 40% reduction in the implied gold content of one Australian Dollar just over 3 years.

So, the rate of devaluation of the Australian Dollar against gold is not as bad as that of the US Dollar. But it is still accelerating, but just at a slower pace than the US Dollar.

With gold ending this week of Friday 5th November 2010, at A$1372.44/troy oz in Australian Dollar terms, or A$44.125 per gram, or A$1 being the equivalent of 2.27% of gram of fine gold, which is almost 23 milligrams. We've had a 0.442% increase in implied gold content of one Australian Dollar in 25 days. The A$ has strengthened against gold in the past 25 days, since one Australian dollar now buys an extra 0.442% of a gram of gold than 25 days ago.

This recent behaviour in the A$ versus gold, is divergent, relative to the recent behaviour of the US$ versus gold.

It will be interesting to monitor this going forward, to see if this divergence widens or converges back again to the same trend of both currencies devaluing against gold.

 

Former Treasurer Peter Costello, the RBA, and Australia's Sovereign Gold

The RBA announced on the 3rd July 1997, that it had sold 197 metric tonnes of gold in the previous 6 months, with the then Treasurer Peter Costello's approval that the proceeds of the sale were not to be returned to the government, but instead kept by the RBA and re-invested in "other assets". Whatever "other assets" means, it's obvious that the public are not to know.

The difference that was left in Australia's sovereign gold hoard was a mere 80 metric tonnes.

In a prepared press release at the time, Costello said:

"The Bank has decided that it was no longer appropriate to hold a significant part of the RBA’s international reserve in the form of gold".

"As Australia is a significant gold producer with large reserves, there are negligible diversification benefits from holding gold".

"Gold no longer plays a significant role in the international financial system".

"Given that the re-invested proceeds will yield higher annual profits for the Reserve Bank than if they had been retained as gold reserves, this should mean a better stream of dividend payments to the government over the longer term".

All of the above statements by Costello have, at best, proven themselves horribly wrong and at worst, proven themselves to be idiocy laced with chicanery, with the passage of these past 13 years. For those 197 metric tonnes sold for an average price of A$14,213,000 per tonne back in the first 6 months of 1997. For a total of around A$2,799,961,000 or A$2.8 Billion.

Whereas today, those 197 metric tonnes would sell for A$44,124,000 per tonne, for a total of around A$8,692,428,000 or A$8.7 Billion. Over 3 times as much.

Where's the "higher annual profits" in missing out on A$5.9 Billion worth of capital gain or about 20% per year Mr. Costello? No where, that's where. Because the RBA did not invest the proceeds in something that gained 20% per year for the last 13 years. Since it was all a ruse by Costello and the RBA from the beginning of the scheme to sell the ultimate monetary reserve asset at the bottom of a 20 year bear market in the monetary metals.

Two further statements from the World Gold Council archive need highlighting:

From the official RBA press release:

"Over the past five years, a number of central banks have sold gold from their reserves, the most prominent being the central banks of Austria, Belgium, Canada, the Netherlands, Portugal and South Africa. The Australian sales program followed a review by the Bank of the costs and benefits of holding a significant part of international reserves in the form of gold. Following the review, the Bank’s Board concluded that, while there was a case to hold some gold as a contingency against unforeseen events, the previous holdings (which amounted to about 20 per cent of international reserves) were no longer justified. The principal reason for this conclusion was that a country in Australia’s position, with large gold reserves in the ground and high annual production, derives negligible diversification benefits from holding a significant proportion of its international reserves in the form of gold.".

From the WGC article:

"Further statements widely seen as damaging to gold’s reserve role were made by senior officials. These included a Reuters interview with Mr Ric Battelino, Assistant RBA Governor for financial markets. He revealed that the RBA had wanted to sell gold for some time; 'the actual sales were in 1996' - apparently contradicting the press release - and added that at least for the present no further sales were planned. 'For the moment we’re quite happy to have a bit of gold around'. A bit!"

Perhaps now in 2010, with global gold production in a secular decline, the RBA really did put its foot in the mouth with the above statements from 1997, since there is absolutely no way for the Australian Federal Government or the RBA, to replace the 197 tonnes without a monetary loss on the part of taxpayers.

The co-ordinated gold sales by most of the western world's central banks during the period from 1995 - 2001 in world history, will be looked back upon in the future as the worse example of fiduciary madness & monetary chicanery ever attempted by megalomaniacal central planners, in their attempt to weaken the sovereignty of the nation-state, at the behest of their global masters.

 

Article 115 of the Australian Constitution

It is clearly stated in Article 115 of the Australian Constitution that "A State shall not coin money, nor make anything but gold and silver coin a legal tender in payment of debts.".

 

It is also clear from this statement, that our present monetary system is unconstitutional, since it consists of legal tender laws propping up an irredeemable fiat currency system, with nothing but faith & confidence backing it. Faith & Confidence are ephemeral things that can blow away as swiftly as the wind. Our present monetary system DOES NOT consist of gold & silver coin as the only legal tender in the payment of debts.

 

References

 

1 oz(troy) = 31.1034 grams - Source: http://www.metric-conversions.org/weight/troy-ounce-conversion.htm

 

Australia Shoots Itself in the Foot (World Gold Council Archive 1997) - Source: http://www.gold.org/assets/file/pr_archive/html/160797.html

 

Section 115 of the Australian Constitution - Source:  http://www.aph.gov.au/senate/general/constitution/chapter5.htm

 

Gold Price - Source: http://www.bullionvault.com/gold-price-chart.do

 

1983 London PM Fix Price - Source: http://www.kitco.com