By John Dizard
Financial Times, London
Friday, July 11, 2014
Pecunia non olet. (Money has no smell.) — Emperor Vespasian (69-79) to his son, Titus, when Titus protested a tax on urine.
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There is a fresh wind behind the dollar price of gold, which is also increasing the reported and unreported volumes of physical trading in the metal.
Thanks to what one (non-banker) friend of mine calls the “dangerously stupid” punitive actions and fines levied on banks using the international dollar clearing system by the US government, the world is finding ways to get along without the dollar.
It is a difficult and expensive process, as the transaction costs of the dollar system have been so low, liquidity so great, and the range of instruments so convenient. Alternatives, such as the euro or the Chinese renminbi, have been less universalistic and flexible. Also, investing or paying for the exchange of goods and services in euros, Swiss francs, sterling, or renminbi is accompanied by almost as many intrusive compliance rules and oversight as one finds in the dollar world.
Arguably, gold is the most expensive and least convenient of all of the monetary alternatives to the dollar. It is very heavy to carry and often has to be re-assayed by the person accepting it as payment, since there is often a lack of trust among participants in the off-the-books transactions that use it. Not many transactions or investments are actually invoiced in gold as such; instead gold is used as the settlement medium rather than for the price quotation.
Yet its popularity as a medium of exchange for international transactions has been soaring, particularly in the past few months as the impact of US government sanctions on non-fully compliant banks has become severe.
Since the Bank for International Settlements, International Monetary Fund, and US Internal Revenue Service do not have systematic records of transaction volumes, I can only go by anecdotal information from people in the gold trade whom I have known for decades.
These are not traders trying to goose the price up by 50 cents in a day, or goldbugs looking for another $1,000 this year. They are risk-averse business people who need to meet customer demands and keep a carefully hedged book. An increase in the use of gold to settle transactions leads to a widespread rise in demand for physical metal held by reliable counterparties in secure vaults in locales considered safe from confiscation by a vengeful Justice Department.
Now I would not argue that the banks that have been subject to fines and other sanctions by the US government are innocent. They are not. The form of their punishments, though, seems somewhat self-destructive for the government, considering what had been its long-term interest in collecting a steady, predictable and bearable tax on the commerce and wealth of the rest of the world by encouraging use of the dollar payments system.
As Vespasian was trying to tell his son, payments systems, starting with coin mints, have been a way of bringing value into the realm of state control, including metal or other forms of money that were not originally legitimate, or savoury, or that came from another state. The US government, in effect, is saying, “We do not want you to use the dollar payments system to collect money from those at or beyond the edge of legitimate society and use it to buy US securities. We will just confiscate that money from banks when we need it, at unpredictable times, using regulations that may be hard to reconcile with each other. But we do not care.”
I am not sure this is a superior business model from the point of view of the government itself, but it is what they are doing. Even the gold dealers profiting from the shift to gold-based stores of value and clearing mechanisms think this leads to a less safe world. But one adapts.
So gold in the form of the traditional 400-ounce London good delivery bars is flown to Switzerland, where it is melted and refined into kilo and sub-kilo bars. Then it is flown, say, to Istanbul, Dubai, Shanghai, or Singapore, where it goes into a secure vault owned and operated by some family who have been in the business for a few hundred years.
Then, let us say, someone at an oil-loading port in the region, on recording the delivery of a tanker load, will phone the banker of the supplier (near an Iraqi border, wherever those are today) to work out payment terms. Then the buyer will call a gold banker, who will shift bullion bars from one side of a vault to the other side.
This is far more trouble, and incurs far higher fees, than going through some service such as SGS and settling a transaction through, say, JPMorgan’s correspondent bank, that is ultimately settled in Fed funds posted in New York.
But it is less expensive than having dollar cash balances frozen indefinitely, or having one’s dollar clearing bank covering fines through interest rate margins or service fees.
As a US taxpayer, I would much prefer that the government bring in the necessary revenues through broader, efficient and predictable taxation, or borrowing through the banking system, not confiscating its capital. It makes America look bad.