BERAL, INC.
Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944
E-mail: mlikar@aol.com

Gold Index Bonds – To Avoid the Money Traps

Posted on Feb 2, 2012

We live in an age in which we thought that we are creating money, and by unlucky coincidence, we have created debt. The process has been dangerous and we all know that the larger the debt is, the more dangerous the situation becomes. .

Let us start with a simple example.

Mr. and Mrs. Smith buy a half million dollar house with a $400,000 mortgage. Subsequently, the various family members, let’s say four, each take on a credit card for $10,000, assuming a total credit of $40,000.

The family buys a car on credit, another $20,000. If the bank opens a line of credit for $100,000, then technically the entire house is bought on credit. Not only bought on credit, but the interest to be paid every year as well as the mortgage reduction payment, is either covered from income or has to be covered again with further credit.

Mr. and Mrs. Smith live in danger, which danger will become greater as they get older and when they have problems with their employment .

The various banks that issue the credit put together packages, and they floated bonds incorporating the $400,000 mortgage with thirty other $400,000 mortgages, and soon there is a $10 million credit package. This credit package is sold on the open market, and the debit of the Smith family can be from New York to Kansas City, from Kansas City to London, from London to Paris, and create a liability in the world’s banking system.

A $10 million credit on the open market, of which there may 100, 200, 300, represents a danger to a particular bank that accumulates the packages. A liability of a billion dollars to almost any bank is a meaningful sum, and the servicing of a billion dollars becomes only possible if there is further credit extended to the bank and the billion dollars can be rolled over from one year to another, from one bank to another.

Very soon there is an international crisis. The crisis emerges for two reasons: the billion dollar bank debt holder is hurting its balance sheet and the bank capital is diminished so that it cannot make loans and its share prices fall. To make the matter worse banks have further created derivatives where they have packaged debt on debt in various configurations which further multiplied this problem.

At that stage we have an international conference. The meeting can be held in London, and at least five banks, each with a billion dollars, start to negotiate first, scream again, and devise various schemes of pushing the billion dollars, two billion dollars, from one bank to another, each occasion absorbing the interest with further borrowing, but basically multiplying the problem.

It is called in some fancy language in banking, but basically it is what I call “shifting liabilities.” A billion dollar from Brussels goes to Banque Paribas in Paris, another billion from Deutsche Bank to Lloyd’s Bank in London, and each occasion the bankers and the politicians announce that the banking crisis is over because they have pushed the problem down the road. . They have postponed the payments and covered up the liabilities by not putting them on the balance sheets and they believe they would be able to service the liabilities for the next few days or weeks. This is in fact a pattern.. It is, again I go back, of shifting liabilities.

When I was a student I incurred some debt. I went down from Cambridge to London, and my two uncles picked up the liabilities and I managed to shift my liabilities to them.

As it so happened when I started to work in New York, I could pay back my two uncles, and the liability war of Andrew Racz was over.

However, it should be pointed out that I incurred the liabilities from the age of 18 to 24, and discharged the liabilities with vastly increased earnings by the time I was 30.

Let us take a more cynical approach. I was 28 when I got married, and if I had the student liabilities with me, I would have shifted my liabilities to the family liabilities and curtailed the livelihood of my wife and future family. If I had not two but three or four children, and my wife didn’t work, and my income in the stock market dropped, I would have been in a similar position as banks like Kreditanstalt Bank in Austria find themselves in 2012. Income is down. The base to discharge the liabilities is even further down. And the liabilities and interest attached to them remain.

There are other ways to describe what I call the shifting of liabilities. In fact, in America they discovered the central banking system and the Federal Reseve can issue money to shift the original liability into the balance sheet of the national bank. Since the central bank has unlimited ability to print money, they in fact assume a part of the debt such banks have been burdened with.

It is a marvelous system so as long as it lasts.

The time comes when the national debt is becoming impossible because of the decline of the value of the money and the necessity of keeping interest rates low to service the money.

There must be a better way.

Gold index bonds came to my mind twenty to thirty years ago.

The idea was that moneys backed by gold are respected . My first believer in this idea was none other than President Richard Nixon with whom I discussed my theories in 1982. The idea was to borrow money against American gold reserves which in 1982 were almost 10,000 tonnes and was by far the largest in the world.

The money we float against the gold was supposed to buy up the banking debt of the Soviet Union so that we could blackmail them to end the Cold War.

I am reproducing that memorable conversation I had with the late President. The President liked the idea. He said, “Fighting with banks with gold bonds is much easier than fighting with missiles.”

The concept of using gold is, of course, not new, and people don’t trust currencies. They buy and sell gold.

However, in 2012 we have to be much more imaginative. There is so much debt floating around that recently in order to solve some of the European problems the European Union recommended a trillion dollar bond offering in Europe and asked the IMF to ask the United States to participate. Secretary Timothy Geithner refused. America had no money. America had $15 trillion debt. Who can back the $15 trillion loan and who can back the loan if it increases $1.5 trillion per annum. To increase the $15 trillion with an additional 1 trillion is not realistic. . The secretary said no.

Let us now try to be creative.

Let us assume that our monetary system, even if it’s not bankrupt, is shaky. If it’s shaky, people don’t accept the money. Look at the recent crisis in Greece or Hungary.

However, let’s us create a $1,000 bond. The bond could have a low interest like 3%, and backed by not a thousand dollars worth but let’s say $800 worth of gold, and discharge it over a five- or ten-year period. What it amounts to is that if the price of gold goes up, the buyer of the bonds at $1,000 either makes money or at least breaks even but anyhow gets something very stable. That stability in a time of major international crisis is an issue of utmost importance.

It occurred to me the picture from the movie called Casablanca when wealthy women tried to sell diamonds at low prices because there were so much diamonds in Casablanca.

Today there is too much money and too little gold. If this is the case, a $1,000 bond with $800 current price backing may be a very sound investment.

The benefit is that the buyer is handing over a $1,000 to a bank, a seller, and the bank therefore can discharge a $1,000 obligation in guarantee of delivery of the gold in ten years or less.

Furthermore, gold is a mining asset. Even though almost every ounce of gold which has been mined so far is in circulation today, gold is being mined every month, every year all over the world—China, Africa, Canada, Australia are mining gold.

If in the previously mentioned $1,000 bond, the backing is not the gold which we have in vaults today, but the gold which we are mining today, we can actually increase the $800 to $900 and declare that the bond which is backed by future production at $900, whose price can of course can go up, is also marketable.

Marketable means people want to buy it.

Marketable means that people either want to buy the gold index bonds backed by future production or they want to buy Spanish bonds. If people opt for gold indexed bonds backed by future production, the bank will get the $1,000, the investor will eventually get the gold which is being produced in the future, and the bank can buy back or eliminate the $1,000 Spanish bond from circulation.

What we are doing is exchanging current debt for delivery of future assets. Since today, January 22, 2012, the world has plenty of Spanish, Greek, Hungarian debt, and would like to get rid of them, would like to extinguish them but a great deal of future gold assets on the ground, there is a match. The match has the ultimate benefit of lowering the volume of debt in circulation, helping the banks to cope with the problem, and actually make money for the investors.

Many, many years ago, I read that two-thirds of the globe is water. It was a historical statement but I am told that in the next ten years, the water shortage will top the oil shortage. I’m not an expert but I accept their word.

As the price of gold goes up $1700, $2000, $2500, $3000, the value of the gold production in the world in a ten-year period with higher prices is bigger than ever before. If we can index those gold deposits and mine them in great hurry, we are creating an active portfolio of gold backed bonds, whose ultimately aim is to pay off existing debt that’s circulating in the international banking world today.

Simply speaking all the European current debt is a liability of the IMF. My whole theory is a means of liquidating this liability gradually.
Now, the story I relate is a human story. Why did we get here? We got here because we were shortsighted. Governments were shortsighted. Banks were shortsighted. And if I may say so, people were shortsighted. Nobody buys a car, a house, and increases debt on credit cards and trusts the banks and then blames the banks for being inept and stupid,

The issue is to save the system what is called the common benefit of mankind. If we created the debt spiral, it was our fault. At the same time, human imagination, hard work—even if it’s mathematics, even if it’s gold-related jigsaw puzzle—whatever it is, if it solves it we should do it.

It doesn’t take too much of the reader of this report, to understand that I use the word “gold” as an avenue to convert debt into equity. Debt using assets for equity, future equity, and pay off debt.

This idea of mine may get generalized from gold to silver, from silver to palladium, from palladium to any agricultural commodity to fertilizers, and we would have a whole series of different denomination of bonds on future production of our production and eliminate the tremendous tragedy today that has fallen upon our banking system.

Let there be no mistake about it, we are in a war. This is the first world war of monetary forces, directed against everybody’s livelihood in this universe. This war was totally unnecessary but fortunately human imagination could solve the current problems and help our civilization to go forward in the future.

Great ideas? Mankind has produced them. If you don’t believe so, look up Albert Einstein, look up Steve Jobs

Disclaimer

Information contained herein is based on data obtained from recognized statistical services, issuers reports or communications or other sources believed to be reliable. However, such information has not been verified by us and we do not make any representation to its accuracy or completeness. Any statement non-factual in nature constitutes only current opinions which are subject to change. BERAL INC. or their officers, directors, analysts or employees may have positions in the securities or commodities referred to herein, and may as principal or agent buy and sell such securities or commodities. An employee, analyst, officer or a director of BERAL INC. may serve as a director for companies mentioned in this report. Neither the information nor any comment expressed shall constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. There may be instances when fundamental, technical and competitive opinions may not be in concert. This firm may from time to time perform investment banking or other services for or which investment banking or other businesses from any company mentioned in this report.

 

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Andrew Racz. 300 East 54 Street, Suite 26C, New York, NY 10022
Phone: (212) 319-6949 Fax: (212) 753-1944. E-mail: mlikar@aol.com

Copyright © 2011 Andrew Racz. All Rights Reserved.

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