Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944

The Brave New World! - Gold at $1000

June 5, 2009

GOLD AT $1,000

It was a summer evening. The evening news on August 15, 1971. President Nixon announced the most drastic changes in American finance. He closed the gold window; foreigners couldn't buy gold with their respective currencies; gold from the U.S. Treasury and the dollar became a floating currency. It was one of the most fundamental changes in American monetary policy. Basically, the United States stopped financing the trade surplus of the rest of the world.

There was a sentence which was highly controversial. The President said that if an American earned his money in dollars and spent his money in dollars, the value of his income in buying power doesn't change a bit. President Nixon misrepresented the destructive force of devaluation.

The architect of the August 15, 1971 monetary changes were created by Governor John B. Connolly of Texas who was at that time Secretary of Treasury for the United States. I knew Governor Connolly quite well. As a matter of fact, I worked with him for ten years, first on his presidential ambition in 1979, later worked with him in business. Texas business! We established two public companies in Texas when he shifted from politics to business.

At one of the private conversations I had with the Governor, he related that he worked three months with the President on the August, 1971 monetary changes. The late Dr. Arthur Burns, Chairman of the Federal Reserve, was on the opposing side. Dr. Burns was against monetary change. He said that nobody would deal with America, the market would fall 20%, and we would not have a single friend left.

When Connolly tested him and asked what he suggested to solve the then prevailing dollar crisis, Burns was referring to various swap arrangements with other central banks, by establishing either position for the U.S. dollar in Dutch marks or Swiss francs and then gradually exchange it to currencies when needed.

Connolly said to me that he didn't understand what Dr. Burns was saying, and he had strong belief that the President would not understand it either. He was totally correct.

In 1971, the dollar became a floating currency. At that time, the price of gold was $35 and only three years later when the U.S. government permitted the ownership of gold for American citizens in what is called the deregulation of gold in December 1974, that the American people could own gold which was denied to them under President Roosevelt in 1933. The object of President Nixon's decisions was to stop the gold outflow and whatever gold was left for the United States--down from 30,000 to about 13,000 tons--he wanted to keep at home in U.S. ownership. Actually, 13,000 tons was the largest gold holding of any country and the current 8,400 tons of gold is still the largest in the world. Next to us is the IMF with 3,500 tons, of which they may be selling 440 tons in 2009, and the Chinese have already made approaches to buy the whole block if it is available.

The President also wanted to reduce the trade deficit which concerned the country. In 1971, we were talking of a trade deficit of $2.0B or less a month and, yes, later it was $6.0B a month in 1988, and today it is $40B.

Undoubtedly, our GNP has grown to over 10 trillion dollars today. Undoubtedly, we have 300 million people as opposed to 200 million when Nixon was President. But the trade deficit is a tremendous drain on American resources.

We also have a domestic deficit.

It is predicted that we will have a $1.8 trillion budget deficit in 2009, $1.3 trillion in 2010, and then $900 billion in 2011. These numbers cannot be explained logically, nor can they be explained by ordinary economics. The only saving grace is that the world has grown to 7 billion people, and what is more important, is that out of the 7 billion maybe as many as 5 billion people work and judicious business overseas can make these numbers as part of the world's economic development. However, these numbers cannot be handled with conventional means. Anyhow, a $1.8 trillion deficit is frightening but, as many people argue, so were the deficit numbers of President Roosevelt many years before.

There is another issue which is emerging, namely the value of gold which has gone from $35 to $1,000, and it's projected by experts to reach $1,500 in a few years' time. $1,500 is about 50 times the $35 which existed in 1971. In 45 years, there is something that America owns that has appreciated in value and is likely to appreciate even further.

There is another major change which the presidential speech in 1971 did not foresee. We have 8,400 tons of gold whose value is $12.8 billion dollars at $1,000 and $20.0 trillion dollars at the $1,500 level.

The Chinese also have 2 trillion dollars in U.S. dollar reserves and are obviously capable of building up their gold reserves to 4,000 tons. At that time, they will be number two in gold reserves. Undoubtedly, they are headed by 2015 to be number one--ahead of the United States.

Time and time again, experimenting with a new currency ended up as a historic flop. We have experimented with a basket of currencies, but it always boiled down to one thing. The U.S. dollar cannot be replaced. Actually, Governor Connolly when he was Secretary of Treasury stated to international bankers at the IMF meeting,

"Gentlemen, the dollar is our currency but your headache."

And then new elements had surfaced. Gold and gold-backed currencies against gold. Any international bank or international banking institution, can float gold-backed bonds. It can create a supplementary currency to the dollar, not a replacement but a supplement to the dollar. Already several countries have strived to trade away from the dollar, like Brazil with China, up to 400 billion dollars, and Malaysia and China on a much smaller scale. In my opinion, these experiments are all going to fail. However, eventually gold-backed paper will be part of the banking resource in major countries.

Actually, this change is not bad for the United States. The United States, the largest owner of gold, and the U.S. dollar and the combination instrument which is tied to gold and made in dollars, make production a much stronger position than ever before.

I must tell you that the people I used to talk to and still talk to about this subject were only three individuals, of which only one is alive. The first person was the famous Lebanese banker, Edmund Safra, who is no longer alive, and Dr. Dietrich, the finance minister and later State President of South Africa, who also is no longer alive. The third person is my friend Robert McEwen, chairman of U.S. Gold, who previously resigned as chairman of Goldcorp, after having built up a company from something like $50 million to $7 billion.

He started a series of new companies, of which U.S. Gold is the flagship, on the assumption that mining and searching for new gold is the best possible business because as you go on exploring, the value of your findings will grow in value. And if it's converted into gold, it is of course the cheapest way to create a solid currency.

If Robert McEwen succeeds with his various gold exploration companies which he is financing himself and public money, he may eventually end with two, three, five, ten, twenty million ounces of gold and build up not only his companies but monetary value.

Frankly, this is the way to go. The discovery's value can multiply this volume increase and price increase. Another mining executive, Mr. Neil McMillan of Claude Resources, called this "the gold options", which will explode. You engage in exploration." Then the value of the gold under the ground increases with the price of gold; then you can raise money, and then you can produce gold, and then you leverage if further via a more valuable public company that you own.

The 21st century is going to be full of gold stories. Mr. McEwen and Mr. McMillan are those two individuals who think about not the new monetary system, but a practical monetary system that can finance international trade.

We have a new development which really made me happy because it happened to me, through me to my friends and still in my lifetime.

Lieutenant Governor Ben Barns of Texas was a very successful businessman I met in 1979 when I started to work for Governor Connolly. He was running the campaign for Connolly's presidency. He remembers our conversations about gold and silver-backed paper in 1979 and 1980, and recently he introduced me to two Nevada-based public gold mining companies and actually asked me to show them to my friend Robert McEwen.

From 1971 to 2009, gold has survived.

Today, June 5, 2009, the Hungarian currency, the forint, declined 2%. Latvia is on the verge of bankruptcy.


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:

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