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GOLD: THAT AMAZING METAL

Gold is an important metal that has been used over the years as a reference currency and a store of value. This book is not promoting a return to the gold standard; it intends to familiarize the reader with the gold market and how gold prices are fixed and, in some cases, “stabilized,” if not manipulated, by speculators and traders. This brief study should shed more light and give the reader the background necessary to fully understand the RF Commodity Indexation Discipline advocated and promoted by this book. It is sincerely hoped that a new pricing system for world trade will be established, one that is fair to all the citizens of the world.

The RF Institute (the research arm of LARIBA) developed a basic RF monetary rule, which we call the RF Commodity Indexation Rule in which we normalize prices away from fiat (paper) currencies like the dollar and the euro. To bring this rule closer to mind, let us assume that a qard hassan (a benevolent loan to the poor or needy that does not allow any sort of increase over the original value at the time of repayment, as introduced in Chapter 2) of $100,000 was given in March 1971. The agreement to repay this qard hassan back can be expressed in one of the many following options:

■ Pay back in U.S. dollars the amount of $100,000 in 2012.

■ In case the country is a rice producer only and relies on rice as a reference currency, pay it back in the same amount of rice. In this case, $100,000 would buy, in 1971, a total of 18,868 cwt of rice (rice in 1971 was selling for $5.30/cwt). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in rice or 18,868 cwt of rice (which reached approximately $15/cwt in 2012). This is equivalent to $283,000!

■ In case the country is a wheat producer only and relies on wheat as a reference currency, pay it back in the same amount of wheat. If we do it in wheat, then $100,000 would buy, in 1971, a total of 70,922 bushels of wheat (wheat in 1971 was selling for $1.41 a bushel). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in wheat or 70,922 bushels of wheat (which reached approximately $7.90 a bushel in 2012). This is equivalent to $564,000!

■ In case the country is a corn producer only and relies on corn as a reference currency, pay it back in the same amount of corn. If we do it in corn, then $100,000 would buy in 1971 a total of 70,423 bushels of corn (which in 1971 was selling for $1.42 a bushel). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in corn or 70,423 bushels of corn (corn price reached approximately $7.63 a bushel in 2012). This is equivalent to $537,324! Please notice the approximate similarity in value if one uses wheat and corn — two substitutable food staple grains.

■ In case the country is a silver producer only and relies on silver as a reference currency, pay it back in the same amount of silver. If we do it in silver, then $100,000 would buy, in 1971, a total of 61,350 ounces of silver (which in 1971 was selling for $1.63/ounce). Based on this agreement, the quard hassan, when paid back in 2012, will be paid back in the exact amount in silver or 61,350 ounces (which reached approximately $34.14/ounce in 2012). This is equivalent to $2.1 million!

■ In case the country is using gold as a reference standard for currency, pay it back in the same amount of gold. If we do it in gold, then $100,000 would buy in 1971 a total of 2,857 ounces of gold (which was then priced at $35/ounce). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in gold or 2,857 ounces of gold (gold price reached $1,700 an ounce in 2012). This is equivalent to $4.85 million!

Gold was the reserve reference currency of the world before the well- known Bretton Woods Agreement set the U.S. dollar as the world reserve currency, in the ratio of 35 dollars to each ounce of gold. Gold has been used as a store of value over the years by central banks as well as by husbands showing their love to their wives, and it is used as a precious metal in industrial applications for its superior conductivity and other physical characteristics. It is well known that every government's central bank, including the IMF, keeps a certain number of tons in gold reserves. Efforts to exert controls on leading economies in the world to keep inflation under control and to manage their money-printing presses have all pointed toward the use of gold (and possibly other commodities). It is interesting also to note that in 1999, at the IMF/World Bank annual meeting, a historic five-point agreement was reached. Fifteen European central banks, including the European Central Bank (ECB), declared their allegiance to the idea of the role of gold in the economy. Willem Duisinberg, president of the ECB at that time, stated that their agreement consisted of the following five items:

1. Gold will remain an important element of global monetary reserves.

2. The 15 institutions will not enter the market as sellers of gold, with the exception of already decided sales.

3. Gold sales that were already decided would be achieved through a concerted program of sales over the next five years. Annual sales would not exceed 400 tons, and total sales would not exceed 2,000 tons.

4. The signatories to the agreement agreed not to expand their gold leasing and their use of gold futures and options during this period.

5. The agreement would be reviewed after five years.

 
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