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Sam’s Exchange: Gold is Trading as a Currency: A Fiat Currency

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“Gold is trading as a currency: the U.S. government has the biggest store of gold in the world - held at Fort Knox - and it is still marked at $35 per Troy ounce (oz). If they mark it to current levels, it will be a game changer.”

“Gold is trading as a currency: the U.S. government has the biggest store of gold in the world - held at Fort Knox - and it is still marked at $35 per Troy ounce (oz). If they mark it to current levels, it will be a game changer.”

This was a quote from one of the presenters at an investment seminar I attended in the United Arab Emirates last week, and I nearly choked on my free bottle of water. To be more specific, it was an online trading seminar.  If I had to summarize the event in one word, it would be “spivvy.” I mean that in the nicest possible way.

I say “spivvy” because it was all about day trading currencies and commodities, where a two-hour chart was considered to be macro, where debate raged about the merits of using dealer or non-dealer desks for trade execution, where fundamental analysis simply was not part of the conference lexicon, and everyone was a hero of hindsight trading. Despite the fact that no one actually set out to create or produce anything other than profits and losses from rampant speculation via the Internet at this online trading event, this one quote made the whole event thoroughly worthwhile for me.

Before we dissect this quote, let’s just make a couple of sweeping assumptions to keep the conspiratorial conjecture at bay. First, Fort Knox actually does hold gold reserves in the amount of 147.4 million troy oz, and that it was not transferred to European banks in the 1960s or stolen by the Rockefellers. Second, gold is actually marked at $35/oz, as per the 1944 Bretton Woods agreement, and not at today’s current market price of $1,350/oz. What does any of this mean, and why would it be a game changer?

If the Fort Knox gold is marked at $35/oz, then only two things could happen: either the U.S. government officially marks the value of this gold to current market prices (meaning a huge windfall for the U.S. taxpayer, and a massive shot in the arm for the value of the U.S.’s balance sheet), or markets will revalue gold back towards $35/oz.  Neither of these scenarios seems all that likely. So, that made me think a little more about the current gold hysteria, about the gold price, and how much gold actually trades.

The current U.S. dollar gold price is still more than 40% below its January 1980 peak of $850/oz. In 2010 U.S. dollar terms with inflation considered, that 1980 peak of $850/oz equates to $2,300/oz today. When it comes to trading gold, for every ounce of real gold that is traded, there are 100 oz of paper gold that trades. So gold is trading like paper - like a currency. In fact, like a fiat currency.

A fiat currency is one which has no intrinsic value. It is not convertible into anything physical, like gold or silver, or platinum. So the current argument that people move into gold when they lose faith in government – and, therefore, the government’s currency - because it is only paper money and is ironic. It is ironic because only one in every 100 trades in gold is actually in gold. The rest is in paper. That is the true meaning of the expression that gold is now trading as a currency.

The idea is that if paper money becomes worthless and you are holding gold, you will be able to use the gold you hold to trade with – to, for example, buy your chickens and cows with which to feed your family. The fact is though that all these so-called gold bugs are not actually buying gold, and will never-ever receive gold when their trade expires. What they are trading are Contracts for Difference (CFDs). What they receive is the difference between the price at which they bought their paper gold, and the price at which they can sell it. The thing is they never actually receive, hold, or ever own gold. These CFDs trade in currency: in fiat currency. It has nothing whatsoever to do with holding something of intrinsic value. So when people tell you they own gold, only one in every 100 of them is telling you the truth.

To be honest, I have no idea whether there is any gold in Fort Knox. I certainly have never seen it but I have no reason not to believe it exists. Equally, I have no idea what price this Fort Knox gold is marked at on the U.S.’s balance sheet. Will the current U.S. administration, or successive ones, be able to pull a rabbit out of the hat and suddenly revive the U.S. economy with a massive revaluation upwards of its gold reserves?  I don’t think so. Will the spivs out there actually care about Fort Knox gold reserves or its price? Definitely not. Gold is trading as a currency - a fiat currency – and as long as it does, day traders will play.

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Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

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