GUEST EDITORIAL
James E. Sinclair
Chairman & CEO of Tan Range Exploration Corp
The 5 Elements for a Long-Term Bull Market in Gold
Now Have a Nuclear Wild Card by James Sinclair
October 28, 2002
The planned introduction of the Gold Dinar is not an act revenge by Malaysia. It is true that there was a huge and devastating currency raid a few years ago by a famous US trader, who leveled Asian monetary units and caused the major Asian economies to falter. It is true that some of those economies have not fully recovered. However, it is also true that history may point to this currency raid and raider as the germination of the seed for the uniting factor of Islamic economic power that changed the economic and monetary world. That currency raid, which I believe never considered the ramifications to human life, is a watershed example of the devastating negative potential of personal enterprise versus the positive attributes of free enterprise.
I am however starting to think that the plan for the Gold Dinar and support from other Islamic nations is a planned offensive against the use of the dollar as a settlement currency for oil. It is perceived, and correctly so, that the Islamic world is controlled via the use of the US dollar as the main settlement currency. When I say "controlled" I mean whatever happens economically in the USA is exported there via the dollar. Dollars exchanged for the Gold Dinar currency as a measure for gold settlements quarterly or gold convertible to pay for certain oil imports would end all the debate of whether or not gold has a place in the monetary system.
What we are hearing now is that the Gold Dinar will be used as a "measure" settled quarterly in gold on an Islamic intra-nation basis, but that could change quickly. A review of the trade balances of Malaysia and its intra-Islamic trade partners indicates that if the Gold Dinar is employed as now suggested, it would tie up approximately 200 tonnes of gold production equal to 10% of new mine supply. If Malaysia went all the way and went to convertibility with a 15% gold cover, they would utilize more than 300 tonnes of new production. Either way, this is the Wildest of Wild Cards for Gold.
The advent of the Gold Dinar, as now envisioned, would remove any discussion of whether or not we are embarking on a very long-term bull market in gold. I have already told you that I believe this is not just a gold recovery, not just a gold bull phase, not just a gold bull market, but the advent of the return of gold to a monetary application in which gold will be in a bullish posture on balance for the rest of my life. I expect to live until at least 2030. Gold Producer Hedger Take Note.
Few Islamic nations have affinity with Hussein, but fewer like the idea of the US attacking Iraq, an Islamic country. For what it is worth, I am told there is a significant possibility that when the US attacks Iraq, the united Islamic salvo back will be at the US dollar via the Gold Dinar -- not as a measure, but rather as a convertible currency. Confidence that the Saudis will come to the rescue of the dollar stands on thin ice. The Saudi Royal Family is under significant pressure from the fundamentalist influence there. They are less likely than most observers think to rescue the dollar this time. The Gold Dinar is the major wild card in the entire history of gold. It must be monitored very closely.
Translated from the "Al-Fath Al-'Ali Al-Maliki" pp. 164-165
"This Fatwa considers paper-money to be fulus, because it only represents money and does not have value as merchandise. It follows that since Zakat cannot be paid in fulus, which has no value as merchandise, it cannot be paid in paper-money, which value as weight of paper is null. On this basis, it becomes clear the urgent need to restore the use of the Dinar and the Dirham as payment of Zakat. If the millions of Muslims who now make their payment of Zakat in paper money would do it in newly minted Dinars and Dirham's, they will put in circulation millions of gold and silver coins into the mainstream of daily commercial activities of our communities. That single act will became the most important political act of the century, opening the path towards the establishment our own halal free currency breaking away from the usurious financial system.
The return to the payment of zakat in gold and silver is an essential part of the reestablishment of Islam."
Those are serious words and should not be taken lightly. You see, the establishment of a gold-based currency is rebellion against the IMF as it is distinctly forbidden under IMF rules. The advent of the Gold Dinar would be the "Nadir" of the IMF & World Bank.
These are uncharted times. I believe that the Islamic Nations are quite serious about this and that in some form, it will happen on schedule or sooner. Now we can add a "Nuclear Wild Card," an independent gold-based Islamic currency to the 5 elements for a long-term bull market in gold.
The Seriousness of the Gold Dinar
A presentation made in Kuala Lumpur Malaysia
By
The Honorable Dr. Mahathir Bin Mohammed
Minister of Finance for Malaysia
"The Gold Dinar in Multilateral Trade"
Presented to the Community
by
James Sinclair
I have chosen to delete the first 17 points as they refer to subjects that might cause the western precious metals researcher to prejudice the rest of this extremely important document. There is no coverage in the West of this watershed event in monetary history which is clearly, really and powerfully in the making. Those that wish the first 17 points need only ask for them and I will provide them. They speak to the perspective of an Arab in today's Islamic world. This opening 17 points requires a perspective of high pan-determinish to deal with objectively. That is a quality that the West has always lacked and after September 11th probably will not acquire soon in matters dealing with the Islamic world. I have made the decision to make to present t to you in this manner as it must be read with an open mind.
There is an Islamic currency coming. That is a fact. There is a high chance that this is it. The Dinar is a tactic nuclear monetary weapon of self-protection in the Islamic perspective. It is a statement by them of Islamic Self Consciousness and Islamic Self Esteem. It is an Islamic rally point for all 1.2 billion of that persuasion. It is coming soon and it is real. It may not be viewed objectively by the West, in the environment of a weak dollar now existing. That weak dollar situation looks to me as if it will get significantly worse before it gets significantly better. This is not low amplitude noise. This is a NOISE that may scream soon the unthinkable word, Remonetization. Here are the words of its architect. Pay close attention to the final point in the words of this Minister of finances own words. They need to be understood completely in order to understand what is coming. Oleh/By : DATO SERI DR MAHATHIR BIN MOHAMAD Tempat/Venue: IKIM HALL KUALA LUMPUR Tarikh/Date: 23/10/2002 Tajuk/Title : THE GOLD DINAR IN MULTI-LATERAL TRADE SEMINAR
20. If the Muslims are going to protect themselves they must have sufficient wealth. Allah has endowed Muslim countries with inexhaustible wealth. These need to be administered for the good of the ummah.
21. But wealth can also be acquired through commercial activities, through the production and distribution of goods and services and through trade.
22. Today trade between Muslim countries is small. It is not suggested that we reduce our trade with the non- Muslims. But we should endeavour to increase the trade between Muslim countries.
23. We can trade through the exchange of goods, through barter. But today we use money. Since we don't have a currency which is strong enough and stable enough in exchange rate terms, we have to use the American dollar. But the dollar is also not stable. Today the dollar has depreciated against many other currencies. This means that despite the increase in the price of oil for example, we are actually earning less due to the devaluation of the dollar. It is the same with the other currencies. It is the same with our own currencies. They all fluctuate in value. And they are all subject to speculation and manipulation as happened in Malaysia and other East Asian countries, in Russia and in Latin America.
24. The reason for this is that paper currency has no intrinsic value. You can print any figure you like on currency notes but in exchange rate terms the figure means nothing. The Malaysian Ringgit is 3.8 to one U.S. Dollar. The Turkish Lira is 1.5 million to one U.S. Dollar. The Indonesian Rupiah is 9000 to one U.S. Dollar. The purchasing power within the country is different from the purchasing power outside the country. Sometimes countries have as many as four exchange rates -- one official, one for domestic economy, one for export and one for import.
25. Clearly this situation in terms of international finance is chaotic and anarchic. But since the system benefits the powerful countries they are unwilling to correct it.
26. If we want to avoid being short-changed we must have a currency that has intrinsic value. Gold does fluctuate in price but the fluctuation is minimal. It is not possible to devalue gold by one hundred percent or one thousand percent. Nor is it possible to revalue gold by the same percentage. The fluctuation in the value of gold can only be by a few percentages, up or down.
27. When the Allied nations met in Bretton Woods to determine the principle for the rate of exchange of international currencies in order to facilitate trade, they decided to use gold as a standard. The value of the U.S. Dollar was fixed at one dollar for 1/35 ounce of gold or 35 U.S. Dollars per ounce. All other currencies were valued in gold through the rates of exchange with the U.S. Dollar.
28. This worked quite well until some countries wanted to devalue their currencies in order to become competitive in the international market. Then other countries also decided to devalue in order to remain competitive. Finally the U.S. Dollar was devalued against the Gold.
29. At this stage the gold standard could not be sustained. The market claimed that it could determine the exchange rate through the demand and supply of currencies freely traded in the market. But profiteers moved in and they manipulated the value of the currencies so that there was chaos in terms of exchange rates of currencies. Business became very difficult. Indeed many good businesses went bankrupt when the domestic currency gets devalued. The hedge Funds which claim to insure the value of the currencies made huge sums of money speculating and manipulating the values of the currencies.
30. This anarchy in the international financial regime will remain because it benefits the rich and the powerful. If we want to protect ourselves we must evolve our own payment system, our own trading currency.
31. The Gold dinar can provide the currency for trade between nations. If we value all trade items against gold, then we will have no problem with the exchange rate. We know that in the last resort we can melt the gold and sell it in the market. You obviously cannot do that with paper currency, worst still with figures on a computer. They have no intrinsic market value as gold has.
32. But gold is bulky. We cannot be carrying gold all over the world in order to pay for goods we want to import. But we need not do that.
33. It is not intended to use the gold dinar as currency for everyday transactions in the domestic market. For this we can use national currencies. If there is inflation then the currency can buy less gold and other goods. And vice versa. So there is no necessity to carry bags of gold coins for transaction within the countries.
34. But even for international trade the transport of gold bullions or gold coins would be very minimal. Through bilateral payments arrangements the imports can be balanced by the exports and the differences settled in gold dinars. The Central Bank can provide a guarantee for the gold required for the payments of the balance. In the following weeks or months the deficits may be reduced or a surplus achieved. In that case the payments of the balance can be made through accounting arrangements between the Central Banks. It is only occasionally that a necessity might arise for the actual gold dinar to be used to pay for the purchase of imports.
35. We cannot really verify the amount of money a country has. A country's own currency cannot be regarded as its reserve. But gold dinars or gold bullion or gold ingots can serve as a country's reserve. Still in the end we have to trust each other. If we are good Muslims then the cases of fraud by Central Banks would be minimal.
36. Assuming that Malaysia exports to a Dinar Area country a hundred million Dinars worth of motor vehicles and then imports 110 million dinars worth of oil, then the payment required by Malaysia would be just 10 million dinars. The ten million dinars is credited to Malaysia's trading partner. If in the following month the trading partner buys 110 million dinars worth of Malaysian cars and Malaysia buys 100 million dinars worth of oil, then no payment need to be made by either party. The 10 million dinars that has to be paid by Malaysia's trading partner for the motor vehicle can be offset by the credit of 10 million dinars from the previous month's transactions.
37. Today with computers we can close account and pay more frequently. Through this method it is not necessary to purchase or earn hard currency.
38. Of course there may be some countries which are so poor that they cannot have gold dinars. We can buy some raw materials to be paid in gold dinars. They can be helped to build up the reserves of gold dinars.
39. There will be problems. But if we begin with just a pair of countries we would be able to minimise problems and demonstrate whether it works or not. We will be able to identify the weaknesses and the faults and correct them.
40. Gold is a precious metal. There has never been a time when there was no demand for gold. It is also not so plentiful that its price will fall the way paper currency or even other precious metals can fall. Yet it is not so limited in quantity that anyone or any trader can corner it and manipulate the price.
41. In different countries the price of gold will differ in terms of the currency of that country. That is a function of the currency of the country. The value of one gold dinar is one gold dinar no matter what the exchange rate of a currency is against the gold dinar. If the value of goods or services is expressed in gold dinar, the value remains the same no matter which country is involved in the trade.
42. Thus an exporter can declare the agreed price in dinar to the importer in another country and to the Central Bank in his country. Depending on the agreement reached the Central Bank will pay the exporter the current local currency equivalent to the gold dinar price. At the importer's end, he would pay to his country's Central Bank the local currency equivalent of the agreed price in dinar. At the end of the week or month the Central Banks will total up the value in dinar of the exports and imports between the two trading countries. If they are not balanced then the country with a surplus will have a credit account against the country with a deficit. The difference can be paid in dinar or in goods or the country with the surplus can hold the dinar for future purchase from the country in deficit.
43. In multi-lateral trade, the process may be a little more complicated but it is entirely, manageable. A clearing house can be set up for a group of trading countries and the deficit and surpluses balanced. The process is not unlike the clearing of the cheques of numerous banks at a central clearing house.
44. Provided there are goods or services to be supplied by all participating countries, the amount of gold dinars that needs to be kept as reserve backing and for payment in the last resort is very small. Ideally there would be no need to transport and pay in dinars. The imports and exports in most instances would cancel themselves. The profits come from disposing of the goods or services domestically when the local currency would be used.
45. There will be problems of course. But there are problems now. Countries with no "hard currency" i.e. U.S. dollars cannot pay for their imports anyway. In addition the U.S. currency is not as stable as gold. Not only can it appreciate or depreciate widely but a country's currency can be made to depreciate so much against the U.S. Dollar that its imports cannot be paid for, priced as they are in U.S. Dollar. The gold dinar cannot depreciate much against the U.S. Dollar.
46. Gold price can also be manipulated but not as easily as U.S. Dollar or other currency. No one can sell gold at below market price because he just will not be able to deliver when called upon to do so. Short-selling will be very difficult if not impossible.
47. However local currency prices of gold can still fluctuate if left to the market. It is up to the country concerned whether to control exchange rates or not. But speculation and manipulation will not be as easy as when local currency is valued against the U.S. Dollar.
48. It must again be stressed that the Gold Dinar is exclusively for international trade. It is not to be used as local currency. In a sense it is like the U.S. Dollar now. Some countries of course use the U.S. Dollar locally for paying hotel bills by foreigners. But the dinar is heavy and cumbersome to carry. So it cannot be used as freely as the U.S. Dollar locally. This again lends credibility to the dinar and the local currency, which has to be used for local payment.
49. We should not be too ambitious as to launch the Gold Dinar for multi-lateral trade at one go. We should begin by pairing off the countries willing to use the Gold Dinar. A pair of good trading countries with a fairly well balanced trade should initiate the use of the Gold Dinar. Problems that arise can be resolved and the system improved. After the bugs have been got rid off then the trade using the dinar can be expanded gradually to involve more countries.
50. Traders in particular will be happy because their prices in Gold Dinar would not be affected by changes in the exchange rates of the importing countries or the exporting countries. In dinar, the prices will always remain the same.
51. It is not the intention to make the dinar a common currency for all countries. It is not really the Gold Standard with a fixed value against local currency. If countries print more local currency there would still be inflation within the country. But trade would be stable and enhanced. Speculators and manipulators will not be able to undermine international trade.
52. Of course the Gold Dinar can be a trading currency, for all countries, not necessarily Muslim countries. But Muslim countries are in the best position to demonstrate the viability of the system. They are in a position to manage their economies rationally and in the process show the world that they are capable of growing with stability and in peace. And this will do more towards countering oppressions by their enemies than the futile violent retaliations.
Sinclair conclusion:Dear Friends of the Gold Community new and old, this is a very young gold market with a long way to go. It is only in the crawling stage and has done magnificently so far. Soon it will stand up, become strong and be recognized. This time Atlas will not Shrug but rather Gold as an economic Atlas will be used to bolster and restore confidence in the US dollar through a revitalized Gold cover Clause. When the next bull market in equities begins it will be gold that will stand as the foundation to that event and not more paper foolishness from any central bank or international derivative traders. The really millennium begins when gold revitalizes world economies not through convertibility but rather through the gold's real role in the monetary system. Gold is a control item that disciplines the creation of monetary aggregates. That is what the Gold cover clause does and that is why Nixon sterilized it. Mark my words. It is coming and it brings good times, not the four horsemen now looked for as the specters coming over the hill. The ascendancy of gold will be hard fought but will be finally embraced as now popular central bank tools of interest rate manipulation and monetary aggregate expansion are destined by their own definition to fall flat on their political faces. It is amazing that out of Islam comes what will save the Western World's economic system. I am certain that Divinity, whatever He, She or It is or is not, has a unique SENSE OF HUMOR and loves Infinite Variety.
4 of the 5 elements for a long-term bull market in gold are in. The 5th element may well be here as well. Now the Wild Card has raised it's head. Where is the greatest risk in gold now?
In my opinion, the short side of gold has infinite risk. The long side of gold has significant fundamental support.
© 2002 James E. Sinclair
This article appears in the Nov. 15, 2002 issue of Executive Intelligence Review (www.larouchepub.com).
Gold Dinar: An Economic and Strategic
Response to Chaos
by Michael O. Billington
Mounting concern around the world that the Bush Administration is madly threatening to drive the world into perpetual warfare, while doing nothing to address the global financial-economic collapse, has led to the introduction of a number of defensive measures by nations and groups of nations acting in concert. One such measure is the proposal for creation of a Gold Dinar, intended as a replacement for the dollar as the currency of trade among nations. With a war against Iraq looming on the horizon, and U.S. threats against Saudi Arabia escalating in the establishment's institutions and publications, it is increasingly probable that the Gold Dinar policy will be implemented in the near term, among certain Islamic nations at first, and potentially expanding to include non-Islamic nations.
Malaysian Prime Minister Dr. Mahathir bin Mohamad hosted a two-day seminar in Kuala Lumpur on Oct. 22-23, called "The Gold Dinar in Multilateral Trade." This was the second major conference in Malaysia on this subject involving representatives of members of the Organization of Islamic Conference (OIC). The first conference, "Stable and Just Global Monetary Systems," held in August, announced that the Gold Dinar would be implemented as a bilateral arrangement between Malaysia and certain unspecified partners by the middle of 2003, and extended to multilateral agreements over time. At the more recent seminar, Bijan Latif, the head of Iran's Central Bank, offered to support the establishment of a secretariat in Malaysia to coordinate the development of the Gold Dinar policy. Dr.Mahathir supported the idea.
Not a Gold Standard
In his speech to the October seminar, Dr. Mahathir made clear that the proposal was not intended to establish a gold standard (as put forth by fixated "gold bugs" around the world), but to return to the Bretton Woods policy of a gold-reserve system, which was destroyed when President Richard Nixon removed the dollar from a fixed peg to gold on Aug. 15, 1971, allowing currencies to float at the whim of speculators. Dr. Mahathir reminded the participants, that after World War II, "when the Allied nations met in Bretton Woods to determine the principle for the rate of exchange of international currencies in order to facilitate trade, they decided to use gold as a standard." This worked until 1971, when "the market claimed that it could determine the exchange rate through the demand and supply of currencies freely traded in the market. But the profiteers moved in and manipulated the value of the currencies so that there was chaos in terms of exchange rates of currencies."
The Gold Dinar policy intends to return to the former, superior policy. Tan Sri Nor Mohamed Yakcop, an economic adviser to Dr. Mahathir, explained the system at the August conference as follows, using trade between Malaysia and Saudi Arabia as an example: "Malaysian exporters will be paid in ringgit [the Malaysian currency] by Bank Negara [the Malaysian National Bank] on the due date of exports.... Similarly, the importers will pay Bank Negara the ringgit equivalent of their imports. The Saudi Central Bank will do the same for its exports and imports. Say, at the end of a three-month cycle, the total exports from Malaysia to Saudi Arabia is 2 million Gold Dinar, and the total exports of Saudi Arabia to Malaysia is 1.8 million Gold Dinar. Therefore, for that particular three-month cycle, the Saudi Central Bank will pay Bank Negara 0.2 million Gold Dinar. The actual payment can be by way of the Saudis transferring 0.2 million ounces of gold in its custodian's account in the Bank of England in London, to Bank Negara's account with the same custodian. The important point to note here, is that the relatively small amount of 0.2 million Gold Dinar is able to support a total trade value of 3.8 million Gold Dinar."
The weakness of the system as it is now proposed is that gold, too, is subject to speculation, especially if it is pegged to a currency such as the dollar, which is heading for a plunge due to the collapse of the U.S. banking system. Dr. Mahathir is aware of the problem: "Gold prices can also be manipulated," he said, "but not as easily as the U.S. dollar or other currencies.... Speculation and manipulation will not be as easy as when local currency is valued against the U.S. dollar."
EIR Founding Editor Lyndon LaRouche has proposed that the necessary return to a Bretton Woods system of fixed exchange rates must also peg currencies to a "basket of commodities" rather than to gold, as a means of basing currency valuations to the real economy, rather than tying the real economy to a speculative entity (see Documentation). Although the Gold Dinar proposal assigns a value to gold in terms of dollars, Dr. Mahathir suggested in his speech that he is thinking along the lines of a "basket of commodities": "The value of one Gold Dinar is one Gold Dinar, no matter what the exchange rate of a currency is against the Gold Dinar. If the value of goods and services is expressed in Gold Dinar, the value remains the same, no matter which country is involved in the trade."
Whatever the case in this regard, the discussion and implementation of the bilateral or restricted multilateral Gold Dinar policy can provide a much-needed defense against the collapse of the dollar-centered financial system, and could contribute to a more durable global solution in the near future.
Strategic Necessity
Dr. Mahathir emphasized that the Gold Dinar policy is being driven by the crushing reality of the economic and strategic crisis. The disastrous situation in the Holy Land, the terrorist attacks of Sept. 11, 2001, and the threatened war on Iraq, have resulted in "the whole world's economy being unable to grow," he said. "The West, and in particular the Americans, are very angry. So are the Muslims. Angry people cannot act rationally." He concluded his speech: "Of course, the Gold Dinar can be a trading currency for all countries, not necessarily Muslim countries. But Muslim countries are in the best position to demonstrate the viability of the system, ... and in the process, show the world that they are capable of growing with stability and peace. And this will do more towards countering oppressions by their enemies, than the futile violent retaliations."
Other voices are also warning that the current folly in Washington will only hasten this break from the bankrupt IMF system. James Sinclair, the head of the mining company Tan Range Exploration, said in an Oct. 28 editorial in Financial Sense Online: "It is perceived, and correctly so, that the Islamic world is controlled via the use of the U.S. dollar as the main settlement currency.... I am told there is a significant possibility that when the U.S. attacks Iraq, the united Islamic salvo back will be at the U.S. dollar via the Gold Dinar." The Saudis, he says, "are less likely than most observers think to rescue the dollar this time."
In fact, the Saudis are already repatriating deposits from the United States, as reflected in the increase by $30 billion in deposits in Saudi banks in September.
Sinclair also notes, as did Bijan Latif of the Iranian Central Bank, that "the establishment of a gold-based currency is rebellion against the IMF, as it is distinctly forbidden under IMF rules." Sinclair adds: "The advent of the Gold Dinar would be the 'nadir' of the IMF and World Bank."
Other commentators have noted the concern in Saudi Arabia that the United States may freeze Saudi assets in U.S. banks, forcing them to consider the Gold Dinar as a replacement for the dollar, and dumping dollar holdings altogether if necessary. As amazing as this sounds, given the long history of U.S.-Saudi friendship, there has been a drumbeat of anti-Saudi hysteria in the United States recently, escalating since the infamous presentation before the Defense Department's Defense Policy Board on July 10 by the RAND corporation's Laurent Murawiec, which declared Saudi Arabia the mother of all terror, and calling for the overthrow of that country's government and other Arab "dictatorships" (see EIR, Aug. 16, 2002). Although Murawiec was fired by RAND for this mindless diatribe, Richard Perle, who runs the Defense Policy Board, was never publicly reprimanded, let alone fired, and the Saudis took note.
Even more blatant was the report issued by the leading think-tank of the American establishment, the Council on Foreign Relations, in October, "Terrorist Financing." The report is the work of a task force, headed by Maurice "Hank" Greenberg of the AIG insurance cartel, himself a notorious money-launderer. The report castigates Islamic charities in general, but hits Saudi Arabia in particular: "For years, individuals and charities based in Saudi Arabia have been the most important source of funds for al-Qaeda; and for years, Saudi officials have turned a blind eye to this problem," says the report. Making their intentions clear, the CFR adds: "It may well be the case that if Saudi Arabia and other nations in the region were to move quickly to share sensitive financial information with the U.S., regulate or close down Islamic banks, incarcerate prominent Saudi citizens or render them to international authorities, audit Islamic charities, and investigate the hawala system-just a few of the steps that nation would have to take-it would be putting its current system of governance at significant political risk." Nonetheless, they argue, the Bush Administration must proceed, and stop pretending that "Saudi Arabia is being cooperative, when they know very well all the ways in which it is not."
With this madness as establishment policy, the Saudis, and others, may well see no choice but to pull out of the dollar-based system. This is one reason for the great interest in LaRouche and his proposals in the Mideast today. It may well lead to the timely adoption of the Gold Dinar policy among Islamic nations, and progress toward a New Bretton Woods monetary system.
11/3 J. DOUGLAS BOWEY and ANTAL E. FEKETE - M E M O R A N D U M
M E M O R A N D U M TO:
The Right Honorable Dr. Mahathir Mohamad, Prime Minister, Malaysia
FROM: J. Douglas Bowey and Antal E. Fekete
SUBJECT: Islamic Gold Dinar and Silver Dirham Initiative
DATE: 1 November, 2002
Authors of the Islamic Gold Dinar and Silver Dirham initiative are to be congratulated for their ingenuity, courage, and timing on designing and instituting an international monetary system based on hard money. The following points may be useful to further improve the efficiency of this bold initiative inaugurated by Malaysia.
1. No Monetary Role for Gold and Silver without Free Coinage. The Gold Dinar and the Silver Dirham will not be money and can’t have any monetary role until and unless at least one government officially opens the Mint to gold (silver). This means "free coinage of gold (silver)," that is to say, the Mint must stand ready to convert gold into Gold Dinars (and silver into Silver Dirhams) in unlimited quantities free of charge, on the account of anyone tendering the right amount and fineness of gold (silver). In the absence of this commitment, the Dinar and the Dirham, just like the U.S. Gold and Silver Eagles, will remain souvenirs and keepsakes, having no monetary role to play whatsoever. They will not enter into monetary circulation, and will not be used for accounting purposes. This is one of the critical points missed by virtually all hard-money advocates today. It goes without saying that all taxes, duties, imposts, restrictions on the import and export of gold and silver must be abolished and declared unconstitutional.
2. First Step: Open the Mint to Silver. As the IMF has imposed a ban on monetizing gold (but not silver), for tactical reasons it might be advisable to test first by declaring the Mint open to silver only. This would have the effect of attracting capital in the form of silver to countries with a Mint open to silver. A bill market would spring to life more or less spontaneously. It would then finance the production and distribution of crude oil and other important commodities in terms of the Dirham. There is no need unnecessarily to affront and offend the U.S. by declaring the dollar ineligible for billing crude oil deliveries. However, opening the Mint to silver would be just as effective in puncturing the balloon of dollar-hegemony. The dollar would start fading away as the trading currency of the world.
3. Second Step: Open the Mint to Gold. Once the principle of billing in Silver Dirhams is accepted, as a second step, the Mints can be declared open to gold as well. IMF fulminations notwithstanding, Islamic and other countries can go safely ahead with their gold and silver circulation and bill markets trading bills payable in gold and silver, because the denial of IMF dollar-credits can no longer hurt them. They will be able to attract all the capital they want in terms of gold and silver.
4. Third Step: Finance the Trade in Crude Oil with Gold Bills. A gold bill is just an invoice evidencing the sale of goods in urgent demand (such as crude oil, grain and other agricultural commodities, copper, etc.) by the producer to the distributor. It has to be "accepted" by the latter, must mature in 91 days or less without the possibility of extension, and it must be payable in Dinars at maturity. The bill is a "self-liquidating" instrument. This means that, at maturity, the bill is paid out of the proceeds of the disposal of the underlying merchandise by the distributor. A spontaneous trading in gold bills will spring up. In the bill market, outstanding gold bills are bought and sold at a discount, which depends on the number of days left to maturity and the discount rate. The discount rate varies inversely with the "propensity to spend." The greater the demand for the underlying merchandise, the lower is the discount rate. Sellers of bills are those who have salable merchandise to ship; buyers of bills are those who have short-term liquid funds to invest. The discount rate may move up or down in such a way as to facilitate the clearing of outstanding bills in the market. The discount rate should not be mistaken for a rate of interest, as explained in (9) below.
5. Making the Banks Irrelevant. The beauty of the plan is that it can bypass any and all banks that may be suspected of affiliation with or allegiance to the big multinational dollar banks. Banks are irrelevant to the bill market trading gold bills. There is no need to establish new dinar banks and train personnel either; that would take years. The spontaneous bill market trading of dinar bills would be a more than adequate replacement for financing domestic and world trade.
6. Attracting Capital from Abroad. Here is the mechanism whereby a country that has opened its Mint to gold can attract capital. The Central Bank stands ready to rediscount gold dinar bills at the posted rediscount rate. A higher rediscount rate will attract gold to the Mint resulting in a capital inflow. A lower rediscount rate will expel gold from the country, allowing capital to seek higher returns abroad. Foreigners will send in gold in response to a higher rediscount rate as they want to hold the most liquid short-term instrument: the gold bill of exchange.
7. Wages Must Be Payable in Gold Dinar and/or in Silver Dirham. In order to facilitate dinar and dirham circulation, employers must be requested to pay wages in Dinar or Dirham. Employers get Dinars and Dirhams by selling their gold bills in the bill market, or by rediscounting them at the Central Bank. The workers will spend their dinars and dirhams on consumer goods. The circle is now complete: the consumer’s coin is paying the bill at maturity, by which time the underlying consumer good is sold in exchange for the dinar or dirham.
8. Bimetallism Would Be a Mistake. Do not fix the bimetallic ratio between the Gold Dinar and the Silver Dirham. Let the market find and adjust the proper ratio, whenever necessary, without government intervention.
9. Islamic Law Banning Usury and Interest. It must be clear that there is no lending or borrowing, nor interest paying and taking, involved in bill trading. The function of the bill market is not lending; it is clearing. The producer bills the distributor for merchandise shipped, with "terms: 91 days net." The important point to grasp is that the producer is not a lender; and the distributor is not a borrower. The term 91 days net is part of the contract. Hardly any distributor pays cash to the producer for merchandise shipped for resale. Bills circulate spontaneously before maturity; the producer may use them to pay his suppliers, who will be glad to take the bills in payment for the supplies shipped. Alternatively, the producer may discount his bills in the bill market for cash. The transaction has nothing to do with lending and borrowing at interest. Discounting bills is part of the process of clearing. In more detail, discounting is an essential part of the trade in consumer goods. The amount of discount is of the same character as the markup on merchandise representing overhead and profit of the merchant, allowable charges under Islamic Law. The amount of discount depends (1) on the number of days the bill has to run before maturity; and (2) on the discount rate. The discount rate is not an interest rate. The former reflects the propensity to consume; the latter the propensity to save, the relation in either case being inverse. That is, the higher the propensity the lower is the rate and vice versa.
Note that gold distribution and the bill market are just the two sides of the same coin: neither could stand without the support of the other. In order to make the gold dinar an instrument of world trade, there must be a complementary bill market.
We would be pleased to answer any questions derived from this MEMORANDUM, or to act as consultants and/or advisors to Governments that are courageous enough to implement a plan to open the mint to silver and/or gold.
J. DOUGLAS BOWEY is a Private Merchant Banker living in Los Angeles, California. He has traveled extensively and lived in the Islamic world. Bowey’s specialty is strategic alliance finance.
ANTAL E. FEKETE is Professor Emeritus (Mathematics), Memorial University of Newfoundland, St. John’s, Newfoundland, Canada. He is a world-class economist specializing in monetary science and history. He lives between St. John’s, Newfoundland, Canada, and Budapest, Hungary. He has written extensively. A portion of his writings may be seen on the website www.goldisfreedom.com.
J. DOUGLAS BOWEY and ANTAL E. FEKETE have recently joined forces to create an opportunity. Together they will now begin to offer this opportunity (methodology) to "select" Central Banks/Governments. This methodology allows Central Banks/Governments to continually increase their gold and silver reserve holdings, with minimal risk, without the use of "financial engineering," and while retaining full physical control of those reserves.BOWEY and/or FEKETE may be contacted through:
J. Douglas Bowey and Associates
Beverly Hills, CA
Email: jdbanda@aol.com
Telephone: 310/820-0444
