Why the RBNZ should turn its foreign currency reserves into gold

This week:

– Gold Confiscation

– what else might governments do?

– Why NZ should turn it’s Reserve Bank foreign currency reserves into gold- Become your own Central Bank?

Gold Confiscation – what else might governments do? 

Following on from last weeks topic on confiscation where we mentioned what else might govts do – well how about a new announcement from India in the past week to raise import duties.

Here we don’t have any import duties on gold and silver but then unlike India we don’t have a massive demand and it’s not part of our culture to own them either.  So we’d imagine the NZ govt would attack other sectors to grab revenue before they targeted precious metals.  That’s not to say it won’t happen – just that it doesn’t appear on the horizon at all.

Why NZ should turn it’s foreign currency reserves into gold

It’s rarer than hens teeth to see much by the way of positive comment from within the mainstream finance and economics education area, so we were surprised when we stumbled across this article from Philip O’Connor, a senior lecturer in Finance at the Department of Accounting and Finance of the University of Auckland.

Our currency is being debased because it does not have sufficient gold backing.

It’s a somewhat lengthy read but caught our eye, because as you may or may not know and as we wrote 2 years ago the RBNZ doesn’t hold any gold on it’s books.

To summarize this article for you, Mr O’Connor makes the point that while NZ as a nation doesn’t hold gold, we do hold the foreign currencies of other nations.  Many of these nations do have some gold backing for their currency which gives us an indirect gold backing, but every time they bail out institutions in their homeland it devalues their currency.  Then because we hold them as reserves, debasement occurs to our reserves too.

He goes on to outline a rationale as to why we should convert 50% of these RBNZ forex reserves into gold…

“It is estimated that the August 2011 indirect gold backing of the NZ dollar is about 7.7% or 1.6 milligrams of gold. It is also shown that through sales of foreign currency reserves for gold, NZ can get about 10 times the gold represented by their indirect gold holdings.

If half of the RBNZ’s foreign currency holdings are converted into gold, the NZ dollar gold-backing would increase to 42%. Having a sizable direct gold holding, the big 3 [USA, Japan, Euro] could continue to debase their currencies, and the New Zealand dollar will not be debased.”

While Mr O’Connor makes a good argument, we think the odds of the RBNZ doing this are very slim.  And even though he doesn’t say it perhaps he thinks so too as he finishes up by saying…

“Individuals can also trade currency for gold

Individuals can do the same transaction as the RBNZ by exchanging NZ dollars with little gold backing for gold itself, but many people are scared by articles in the financial press that instead talk of gold being in a bubble.

Gold did decline dramatically to below $300 after a brief peak of prices above $600 an ounce in 1980. However, it is extremely important to compare today’s low US dollar gold-backing to the approximately 100% gold-backing in 1980.

You could say that gold was in a bubble in 1980 as expectations were that the gold debasement of the US dollar that started at $35/ounce would continue. Instead, the US Federal Reserve temporarily stopped the debasement by dramatically increasing interest rates (remember the 20%+ mortgage rates?)

Today to get back to a safe gold backing necessary to prevent the chance of a run into gold, the US Federal Reserve could halve its money supply. This would entail a major change of behaviour as minor annual contractions in US money supply are rare and have only occurred in the 1920s and in 1937.

The other alternative is that the US dollar price of gold doubles.”

So Mr O’Connor believes gold will have to double or the Fed will have to halve it’s money supply. But with “The Bernanke” at the helm, a big believer that currency printing would have “cured” the Great Depression, how likely do you think him choosing a massive contraction of the US money supply is anytime soon?

Become your own Central Bank?

So our approach has been to do what the likes of Mark Faber and Jim Sinclair do and “Become your own central bank”.  Just last month on King World News Jim Sinclair was again saying this.   So decide what kind of reserves the “Central Bank of You” wants to hold.  Do you want to follow the path to date of the RBNZ, or rather many of the Eastern Central Banks like India, China, Korea and Russia, and turn some currency into Gold?

This weeks articles

Just 2 articles this week for you, looking at when will gold reach a new high and the same for silver based upon past corrections.  We’ve added our own take to both looking at past major corrections in gold and silver in NZD as well and how long it took for both to break the old high.  Worth a look if only to put the current corrections in both precious metals in perspective.

As usual introductions and links to both articles are at the end of this article.

Gold and Silver pricing

A common piece of feedback in the survey so far has been for specific pricing on the website.   It’s a little tricky for us since we use multiple suppliers and the pricing is determined by them.  We get a price from them and relay it to you, if you accept, you pay them and we get a finders fee from the supplier.  Unlike most other people selling gold and silver who just have the bullion themselves.  But we’ll still look into how we might be able to do this.  Maybe an indicative price daily on the website might be a first step?

In the interim if you need a quote then David is waiting and there are 3 methods:

1. Email: orders@goldsurvivalguide.co.nz

2. Ph: 0800 888 GOLD ( 0800 888 465 )

3. Online order form and full product list

Have a golden week!   

Glenn (and David)

Founders

Gold Survival Guide

When Will Gold Reach a New High?

2012-01-19 22:07:39-05

Here’s some great stats on how long it has taken gold to reach new highs in each of the 3 previous large corrections in the current gold bull market of the past 11 years.  While the below article is based upon the US dollar price of gold, it can give an indication of what to […]

When Will Silver Reach a New High in USD and NZD?

2012-01-24 05:07:25-05 Following on from last weeks article looking at previous corrections in gold and the time it took to make new highs, we’ve also done the same thing with this new article from Casey Research.   We’ve looked at 3 major corrections in New Zealand dollar priced silver since 2005, comparing how deep the corrections have […] read more…  

The legal stuff – Disclaimer:

We are not financial advisors, accountants or lawyers.  Any information we provide is not intended as investment or financial advice.  It is merely information based upon our own experiences.  The information we discuss is of a general nature and should merely be used as a place to start your own research and you definitely should conduct your own due diligence.  You should seek professional investment or financial advice before making any decisions.