BERAL,
INC.
Andrew G. Racz
Director of Research
300 East 54 Street, Suite 26C
New York, New York 10022
Telephone: (212) 319-6949
Fax: (212) 753-1944
E-mail:
mlikar@aol.com
October
11, 2007
In a
private conversation in the summer of
1982 President Nixon, after studying
my theories said,
"I
would have used the power of American
gold reserves to confront Brezhnev and
win a strong point about Russia's financial
weakness."
In 1982 Nixon
wasn't President, and the Cold War lasted
almost another decade.
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I first heard the value of gold when I
was seven years old, the year was 1945, the beginning
of hyper-inflation in Hungary. We had only one of the
six rooms heated, so after dinner my father and three
of his cousins were pushing around the table, Swiss franc,
British pound and Napoleon gold. Usually they decided
to convert everything into gold and put it in the vault.
When it comes to paying the village people
who brought us food, my father paid with small Napoleon
gold. If they didn't have gold, we wouldn't have food.
That is when I first learned that In Gold We Trust.
I lived in South Africa in 1961 and visited
the country many times. I even became friendly with the
late Edmond Safra and Dr. Dietrich, the former state president
of South Africa. I learned that investing in gold-related
assets, meaning mining shares in the 1970's, I made money
and in fact I generated a lot of commissions, when my
fellow brokers could hardly meet the bill at the dinner
table. In 1975 when Wall Street was starving, we bought
a house at the lake in South Salem, New York, coming from
the commissions I generated in selling gold shares to
my clients. The summers at the lake were magnificent,
and I reaffirmed my belief that In Gold We Trust.
In 1981 I was fortunate to get acquainted
with President Nixon. When I got to know him a bit better
I acquainted him with a theory of how to beat the Russians
with American gold reserves. Actually I wrote an article,
Russia in Bankruptcy, in which I stated that capitalism
may not be able to pay for the Cold War, but communism
simply cannot afford it. The Cold War was getting more
and more expensive for the Soviet Union.
The story that I was telling to President
Nixon was very simple. America has gold reserves. Float
gold-backed bonds for about $1 trillion. This money would
be segregated like Social Security money. Then, American
agents would go all over the world and visit in London,
Barclays the Westminster Bank and ask the bank how much
is the floating credit of the Soviet Union. If the answer
was $100 million, rolled over every month, the American
agent would simply hand over a bill for $100 million and
extinguish the Russian credit. Now, if the Russians want
to get money not over the $100 M credit line at the end
of the month, they have to come to the United States,
their new creditor.
If it's done quietly, with $800 billion
spent, the United States could simply buy up the world
wide Russian credit and when it comes to the first of
the month, Russia would be in a dilemma. We could simply
say, that they should go and try to get credit from their
friends. The US Treasury wants cash.
The idea appealed to the President. He
went through various angles and subsequently stated that
if he were President now, he would use this. After all,
what is easier, to fight Brezhnev with a checkbook, or
missiles?
It was then in 1980 that gold-backed
bonds became a fixation in my mind. In Gold people Trust.
If a nation instead of printing money would float in London
or in New York a $100 million gold-backed bonds, it would
have to pay only perhaps two or three percent interest
rate instead of the prevailing rate, which certainly in
the early 80's was in the vicinity
of 7 to 10 percent.
An idea came back to my mind. By 2001 and
2002 the US dollar, which was the cornerstone of international
trade, had begun to decline. Budget deficits, the Afghanistan
and Iraq wars led to a position where America had to borrow
every day $2 billion worth of foreign currency to pay
for its deficits. By the time the Chinese had over a trillion
dollars in US dollars, the dollar decline became a daily
phenomenon. Correspondingly, the Euro began to climb in
the current decade from $0.90 to $1.50. This issue created
another problem. Frankly, we are putting Europe out of
business.
Actually, Spain and Italy, but particularly
France and Germany found it very difficult to cope with
a $1.50 Euro. It increases their unemployment, stops some
of their factories from working, puts some of their manufactured
goods out of the reach of the world market It creates
unemployment and further pension liabilities.
Living in the world of European Union,
we kept the old habit of having every commodity in the
world, gold, silver, aluminum, copper, wheat, uranium,
everything measured in US dollars. What it amounts to
is that when the dollar declines, yes the purchase of
this commodity is cheaper. At the same time for the sellers,
oil, a fact for manufacturing almost any kind of equipment,
the proceeds from the sale of goods to the dollar markets
virtually wipes out the profit.
To make matters more colorful, we call
the current age, The Age of Commodities. Commodity prices
have increased from $1 copper to almost $4 copper, $6,000
a ton nickel to $50,000, oil from $20 a few years ago
to $80. The sale of this vast amount of commodities and
the proceeds of trillions of dollars from the commodity
markets, for the commodity producers, have been dropping
in real value when it's converted back to their own currency.
The cheap dollars become the Currency of Man's Destruction.
Well, the commodity producers didn't
say too much so far. The next frank French Revolution
is yet to come. But the OPEC and other oil producers argue
that it is true that oil is $80, but in terms of the Euro,
they have to take away one third of the price because
of the change in currency values.
We reached a stage when the commodity
markets actually not only compete with the stock markets,
influence the stock markets, but in terms of daily turnover,
represent such magnitude that if they had votes, if there
was a vote in the world market for the commodity producers,
they would vote the dollar out of existence.
This kind of controversy cannot be sustained.
The major change is accentuated that with the current
commodity markets, several trillion dollars in cash is
accumulated in the Middle East and in the Far East. Part
of the money goes for infrastructure, but the other part
of the money is investments and savings. Up until the
habit was to hold all these currencies, all these monies
in dollars, even though they saw a sharp deterioration
of their savings and the value.
The pressure on the current system, and
by the current system I mean October, 2007, comes from
two corresponding sources, the commodity price for the
commodity producers is falling in value because of the
dollar, and on the top of it their savings is depreciating
because of the value of the dollar.
If we want to put it in rough graphic
terms, if a commodity producer, an oil producing nation,
is losing 15 cents or 20 cents in value because of the
decline of the dollar and their savings loses another
20 cents, we are talking of a merchant who gets in real
terms, 40 cents less off of the dollar when it conducts
daily business.
And this is when the dollar comes in.
The dollar technically may be forced to give up its crucial
and traditional position in the world.
And this is where gold comes
into the picture. For the beginner, we have to appreciate
that 90 percent of the gold that has ever been mined in
history, is still in regular form and available for trade.
I never thought that we'd
go back to the barter business that prevailed in Hungary
from 1945-1947. Frankly, I do not wish to go back to that
system. However, the seven-year old boy in 1945 saw his
parents daily work converted into Napoleon gold and bought
the food which was necessary for living.
Sixty years later, isn't the
situation is the same. The commodity producing country,
the oil producing country, have to buy food, have to build
cities, have to modernize their life, and they may come
to the same conclusion as the lucky middle class in Hungary,
that they store the value of their daily existence in gold.
Of course, the world has advanced
in the last 60 years. It is inconceivable that any government,
let's say the Nigerian government receiving its income from
oil would not only buy gold, but settle its food bill with
Ghana, coffee and cocoa, paying with the same gold.
We have an international monetary
system. We have an international bond market of various
currencies, in various categories, government bonds, corporate
bonds, secured bonds, and of course, real estate backed
bonds.
If Ghana would like to be
paid for cocoa and coffee in a solid currency, they would
welcome the idea if the financiers of London or Dubai or
America would create gold-backed bonds which act just as
frequently as ordinary treasury bonds. Gold-backed bonds
can be created by governments. However, it is more than
likely that they would be created by corporations.
First of all, what is a gold-backed
bond? It is a bond with an interest rate with a denomination,
with an expiration date and any other characteristics like
any legal tender. If a company realized that it could create
a bond with full or partial gold backing, and pay less interest
and it would be welcomed more by the international purchasing
community, by hedge funds, by private equities, they would
resort to creating such paper.
Let us take a practical example.
Not so long ago Travis tendered $24 billion for TXU the
largest utility in America. For a few months it was difficult
to close the deal because the banks had difficulty placing
the bonds.
What if KKR had access to
sufficient gold that it could issue 100 percent or 50 percent
or 25 percent of gold-backed bonds, wouldn't the buyer run?
And the takeover would have happened much faster.
Take the large or not so large
gold companies that are listed on the New York Stock Exchange.
Barick has been known to be an acquisition-oriented company,
issuing shares on each occasion. If Barick raised $500 million
in gold-backed bonds, maybe the acquisitions would have
been much cheaper on a per share basis, and raised the price
of their stock.
Let us not forget that the
21st Century created other new phenomena in the market.
We have now $1.5 trillion in the hedge funds industry. The
hedge funds move very fast. The hedge funds have money available.
The hedge funds make acquisitions. Major investment banks
buy into hedge funds. The pool of capital very soon may
be $3–$4 trillion. If you have the private equity
companies, we are talking $5 trillion if not $10 trillion.
If these fast moving entities
have access to gold-backed bonds, which they issue for their
activities, they would acquire tremendous power, accelerate
their programs, and expand their programs. Take for instance
a famous example, KKR buying Hilton Hotels not so long ago.
Hilton is supposed to double its hotels in China because
of the 2008 Olympics. If they used gold-backed bonds and
made the acquisition cheaper, there is more money available
to expand the hotel chain, and in fact would create all
over the world a better climate for hotels and entertainment.
If the same thing applies to the steel industry, we would
probably have the entire international steel industry reorganized,
mainly those who have gold-backed bonds, and those who don't.
Gold-backed bonds came into
being because a monetary system that has served the world
since the Bretton-Woods Agreement in 1944 is no longer valued.
The lack of trust is basically the lack of trust in the
continual buying power of the dollar, and as such, can create
a tremendous dislocation between other currency values,
commodity prices, particularly if the producing countries
demand a change of currency denomination other than the
dollar.
In this atmosphere comes gold.
The creation of gold-backed bonds by governments, by corporations,
by utilities, is a refuge which would absorb the current
dissatisfaction of the monetary system.
It is not a solution.
It can lead to silver-backed
bonds. It can lead to oil-backed bonds. It can lead to a
commodity exchange system into which we are in any case
going into.
The recovery of Europe was
not fueled by gold-backed bonds after the Second World War.
Gold has, however served as a storage of values to my family
and in fact to many families in Europe. We had something
to trust. We had exchange of values to sustain our lives.
To my mind, we are at the
same turning point.
In 1947 Hungary would have
collapsed if they hadn't brought in a total devaluation
and brought in a new currency. In the year 2007 we are heading
toward something similar. The dollar as an ultimate currency
is breaking down. We can, if we do nothing, wake up one
morning with an international monetary catastrophe. It could
be an announcement by Saudi Arabia and a number of Middle
Eastern countries demanding the price of oil set by a combination
of currencies or the Euro. It can be ushered in by other
drastic changes between currencies, commodities and exchange
rates, or even could lead to sequestership.
We can, in fact, forcefully
live through Mr. Erdmann's famous book, The Crash of '79.
However, thanks to mankind
and thanks to the gold mining industry for the last two
hundred years, we have sufficient amounts of gold in the
world to have gold and silver backed bonds, which could
be a bridge between the dying system that we have and the
new system which is to be born.
Gold is not a solution. Gold,
however, and gold-backed bonds gives us the opportunity
to believe that there is a way to bridge over the 20th and
the 21st Century.
We have come to this historical
point, because the world has to realize that
"The
Way We Were"
was a success only on the movie screen.
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© 2005-2007 Andrew G.
Racz
