How to Fix Gold Price Fixing
(& Introducing Ron Paul)
Silver Stock Report
by Jason Hommel, April 9, 2007
The world monetary system is in serious trouble, and the main problem is that nobody who is in power seems to know how to fix it. This is the theme of an article at lemetropolecafe.com called "The Road to Roota or The Implementation of the Gold Standard." (You can read the article if you signup for a free two-week trial at lemetropolecafe.com, which I strongly suggest that you do.)
The Fed tried to work on a cure for the monetary system in 1981. See "All That Talk About Gold", from October, 1981.
It was thought, at the time, that the biggest difficulty was to determine the fixed, set dollar price, for gold and silver, and nobody could agree.
President Reagan decided to continue to let the market decide, and let the dollar "float", and it has been sinking ever since.
Five years later, in 1986, the president's commission came up with issuing gold and silver Eagles.
But they printed the term "$50" on Gold Eagles, and "$1" on Silver Eagles. Most everyone who has ever looked at one of these coins, which are worth about $700 and $15 today, will ask, "Why did they do that?"
And that shows how far away they were from a solution. These days, price fixing is more widely recognized to be inefficient, unworkable, and incompatible with free market economics.
This January, in 2007, the Boston Fed created an updated version of a comic book, written in 1981, called "Wishes and Rainbows", designed to help people think about how to return to using gold and silver as money. See the teacher's guide.
In the comic book, a town only knows black and white, no color, until a girl discovers colored flowers, which stand for gold and silver, and the problem is one of allocation. Since the girl discovered the flowers, she gets to allocate them, just like miners would, if the world were using gold and silver as money. So, even today, the Fed is working on the problem: how do you determine who gets the gold, and/or what price do you set?
So, what should the government do? How will we transition from our current monetary system, to gold and silver?
Here's my suggested improvements to the Government's current gold and silver coin program. I have outlined a way for employers, or state governments, or any nation in the world, to use silver coins, in a world that uses paper dollars, in my "Silver Coin Proposal".
Gold and silver are ideally measured, and valued, in terms of ounces, not dollars.
The U.S. Constitution gives the Congress the power to determine the price of gold, in terms of dollars, but it defined a dollar as an amount of silver. That may work, as long as a dollar is simply a measure of a weight of silver, about 72% of a troy ounce. But the biggest problem today is that the dollar, as we know it, has become corrupted, and now does not mean a weight of silver at all, but it is merely a "unit of account".
And it is exceedingly difficult to fix an honest weight to dollars if there are too many dollars.
Therefore, an ounce of gold should be priced in terms of the number of ounces of silver, as the Constitution implies.
How and why should the Congress adjust the price of gold to silver, rather than set a fixed dollar price?
The age-old problem of a government fixed price under a bi-metallic system was that if the price of gold set by the Congress was fixed too high with regard to silver in the market, then the treasury will empty of silver, and fill with gold. And vice versa.
Here's a possible solution to that problem. The government price could be a spread, both above, and below, the market price. The price in the market is never one price, it is two prices, and both can change; there's a bid and ask, like wholesale and retail, a price to buy, and a price to sell.
So, if the free market prices for silver and gold are a narrow spread of 49 to 1, and 50:1, then the government's prices should be about 48 to one and 51 to one. In this way, the government treasury can never be looted by traders.
Further, if the free market price for gold in terms of silver were to rise or fall, the government spread should move up or down accordingly.
The next problem is how would the government determine the market's price, because any large trader's price (like the government's) can end up setting a price (for a time).
Here's a solution to that problem. Just as the government should not favor any religion, and not establish any religion, the government should not favor either gold or silver. Thus, the government should frequently change prices in a way as to maintain a fairly equal value of both gold and silver in the Treasury.
In this way, the government is constantly adjusting to the market, and never playing favorites.
Perhaps these simple solutions were never tried because men in government are usually lawyers who try to fix a law in place, rather than traders who know they have to adjust to the market.
Unfortunately, world governments today are acting in a way that limits gold prices today, by leasing gold, which has the side effect of suppressing the gold price, and supporting, paper money.
So, the real problem is that the government cannot return to honest weights and measures of gold and silver, as long as it is actively engaged in supporting the fraud of the dollar, and actively suppressing gold and silver.
As the gold price dips, government agents tend to try to buy gold. And as gold prices rise, they try to sell, but they mostly sell gold. Some call this "manipulation", "management", "containment", or even, "price fixing".
One problem with this is that the government sells gold for dollars (not silver), through bullion banks in the futures markets.
Another problem is that the price is never published. The agents today sometimes buy, but mostly sell.
But the worst part of all is that government agents are mostly selling, or losing gold. Once the government runs out of gold, then price fixing will end as the government will have no ability to contain the gold price. Why?
Because after generations of price fixing and issuing too much paper money, the market will ultimately decide the price.
Eventually, the world will return to using gold and silver as money, because the capital gains returns for owning gold and silver are now exceeding the returns of many businesses. Why work, run a business, or put capital to risk, when you can just buy gold or silver instead?
Rising gold prices will attract ever more investment demand, which, in turn will cause ever more rising gold and silver prices, until the dollar is no more.
So, if the world is going to return to gold no matter what, then perhaps the real question is, will the government return to using gold while it still has some, or will it try after it runs out, and is forced to, as the dollar collapses in value?
It may also be important to note that if the government decided to fix the price of gold in 1980, and if they fixed an annual price increase according to the inflation rate, the gold price today would be $5,430 per ounce.
Here's the math:
1980: M3: 1.8 Trillion, gold price $850/oz.
2007: M3: 11.5 Trillion. 11.5 / 1.8 x $850 = $5,430
Here's the proof of what M3 was at those times.
This opportunity, to buy gold and silver so cheaply, will ultimately put a stop to gold price fixing.
As you start using gold and silver as your preferred form of savings, you will ultimately benefit from the government's many tragic trading mistakes.
What I have outlined above is actually a trading guide for any large trader, whether a state government, national government, or even a fund, who would be a market mover and who could move the precious metals markets against themselves. It's how to set bids and asks, in such a way as to maximize profits. Many precious metals dealers already trade in a similar way. They publish prices, yet try to maintain a balanced inventory, sometimes moving the markets, and they add a commission on top of their prices, so that they can earn money by trading a part of their inventory. A dealer’s “commission” is simply another term for a “wider spread” as I indicated above.
In summary, if the government wants to know how to use gold and silver, they merely need to consult those people who already are using gold and silver, such as men who run coin shops.
I know a man who used to own part of the Camino Coin Shop, and he is now running for president. His name is Ron Paul.
I hereby endorse Ron Paul for President of the United States.