1.6 France forces closure of the US Gold Window in 1971
In 1968 President De Gaulle of France decided to test the 1944 American promise to back its currency with gold. In an attempt to stem the relentless flow of dollars devouring French industry, he began returning French-held dollars to the US Treasury, demanding gold in exchange. In the aftermath of the Paris Student Riots of 1968 which followed, he was forced from power. In retrospect only the naïve would believe the US innocent of stirring the subsequent turmoil. De Gaulle had dared declare the emperor naked.
By 1971 outflow of gold from the US Treasury had become a torrent. Caught between the escalating costs of fighting a war in Vietnam, and the burdens of funding previous President Johnson’s plans for a ‘great society’, his successor Nixon was forced to close the ‘gold window’. Dollar backing went, with it any pretence at fiscal discipline. Over the following decade US money supply mushroomed 1000%. Dollar purchasing power collapsed. The gold price soared. Overall commodity prices increased sharply. Between 1971 and 1980 the CRB index rose from 100 to 330. Despite more than trebling, the increase was puny in comparison to the move in gold. The noble metal played catch-up, escalating 24 times from $35 TO $850 in ten years. Over the entire decade it amounted to an annual compound growth of 34%. None of this would have been possible under a gold standard.
1.7 Rockefeller pressures Reagan into dropping gold
It was late 1980. In the middle of Reagan’s nomination campaign as contender for the Republican Party, there was talk of the US returning to a gold standard at a price of $1000 an ounce. Reagan’s chosen running mate Jack Kemp was an ardent proponent. It was not to be. Banker David Rockefeller offered to cancel decisive support for Carter, switching to Reagan, conditional on the latter dumping Kemp and taking Bush. More particularly, Reagan was told to can the idea of a return to gold. He was ‘advised’ to halt the printing of money - which had run riot under previous President Jimmy Carter. The Bankers instructed him instead to borrow. He turned to the debt markets. Budget deficits began to rocket. Gold plunged into a 20 year bear market as the bank rate was briefly hiked to levels in excess of 20%. By 1981, long term bond yields had dutifully peaked above 15%. Borrowing exploded but the cessation of printing set rates on a long term trend lower.
1.8 Greenspan secretly hammers Gold in ’87
In August 1987, Greenspan took over as Chairman of the Fed. By October the crash of ’87 was underway. In response, the price of gold momentarily shot from $320 to $420. The records show that Greenspan then called on the Exchange Stabilization Fund to hammer the price. The ESF promptly dumped sufficient to stun the market into submission. Simultaneously the Fed opened the credit taps, successfully calling on major central banks to join the party. The ruse worked. The drive into debt was able to continue because gold was kept under wraps. Kondratieff was forced to depart and come back later. The world economy recovered.
1.9 Gibson’s Paradox and the Gold Standard – Lawrence Summers
By early 1993 gold and commodity prices began to push higher. A year later they entered a mini boom. Enter Gibson’s Paradox and a deliberate Treasury strategy of targeting the price of gold. If a rising trend signalled inflation, pushing up long term bond rates, then suppressing gold could conversely help to hold them down. So it was reasoned.
Shortly before joining a new Clinton administration, as Undersecretary of the Treasury for International Affairs, Lawrence Summers co-authored an article entitled:
‘Gibson’s Paradox and the Gold Standard’.
At the time he was professor of political economy at Harvard.
It was Lord Keynes who gave the name ‘Gibson’s Paradox’ to the correlation between long term interest rates and the price of gold. Keynes showed that as REAL long term rates of interest FELL, reducing the carrying cost of gold, the price of gold went UP.
Lawrence Summers article proposed implementing the strategy in reverse. By suppressing the price of gold, long term rates could be induced to fall, stimulating growth without signalling inflation.
1.10 Central banks launch leasing of gold
By 1995, in order to give reverse effect to Gibson’s Paradox, central banks began to promote the ‘leasing of gold’ on an increasing scale. They would use ‘approved’ bullion banks as intermediaries. The latter would borrow gold from central banks at nominal rates, on-lending it to gold producers wishing to raise funds for expansion. They would hedge future production by selling it forward. AngloGold and Barrick were among the first to take advantage, recognizing in the new central bank policy of ‘leasing’ a fresh determination to drive down the price of gold. It was a form of ‘selling’ without having to declare it as such. By participating in the programme at the outset, these two major gold producers sought to ‘get out while the going was good’, albeit at substantial cost to the industry in general. They were ‘supping with the devil’, knowingly helping central banks to depress the price. Some say a deal was done with De Beers. “Help us with gold. We’ll take the heat off the diamond monopoly.” Anglo and Barrick probably also reasoned as follows:
‘If we can’t beat them we might as well join them.’
From 1995 to 1999, the strategy of selling forward worked to the advantage of both of them. As additional supplies of gold hit market, the price slumped from an intra-day high of $420 in early ’96 to an intra-day low of $253 by September ’99. There was a major panic less than 4 weeks later when gold shot to $331 in the wake of the Washington Agreement in which central banks had committed themselves to limit ‘sales’ of gold to what they thought the market could bear. In defiance of the spirit of the agreement, ‘leasing’ operations were totally excluded and continued unabated. But it took all the Gold Cartel’s efforts - and the rapid sale of up to half Germany’s total stock of 3400 tons, possibly as much as 1700 tons – to prevent a runaway explosion in price. The details are given in 1.11 below.
Eighteen months after plunging to a 20 year low of $253 in September ‘99, before again shooting wildly up to $331a month later, the Cartel finally succeeded in bringing the gold bull under control. It was achieved with great difficulty and at great ultimate cost – most of which has yet to be paid. By February 2001, the metal had effectively ‘double-bottomed’ at $254.
From thereon out gold has been on a tear. Its recent intra-day peak of $430 marked a 14 year high. Based on forward sales at prices closer to $300, Barrick Gold’s current ‘marked to market’ loss exceeds $2 billion. Using ‘inside information’ from central banks has turned out to be a costly exercise. Serves them right, some might think.
1.11 Government Pegging Operation brings down bond rates
As sales of ‘leased’ gold accelerated, slipping the price from $400 in 1995 to $253 by 1999, US long bond rates obediently fell from 8% to 4%. The leasing programme was effectively a ‘Government Pegging Operation’ and had temporarily proved ‘successful’. GATA’s Reg Howe of http://www.GoldenSextant.com commented as follows:
“Without this deliberate government interference in the free market for gold, falling rates would have led to rising gold prices which, in today’s world of unlimited FIAT money, would have been taken as a warning of future inflation and likely triggered an early reversal of the decline in REAL long term rates…………..During this period, as real rates declined from 4% to near 2%, gold prices fell from $400 to around $270 rather than rising toward the $500 level as Gibson’s Paradox and the model constructed by Summers indicated they should have…..The low real interest rates of the past few years have been engineered with far more sophistication than those of a generation ago, including the co-ordinated and heavy use of both GOLD and INTEREST RATE DERIVATIVES. ”
Summers’ article earlier demonstrated that, in the absence of substantial government interference to control gold, the artificial suppression of real long term interest rates would have lead to a rise in the price of the metal. The quote above showed that at one stage in the late ‘90’s, gold was trading at half its natural price - $253 instead of $500.
1.12 1998: Greenspan confirms Central Bank strategies on gold
In testimony before the House Banking Committee on July 24th 1998, Fed Chairman Greenspan unthinkingly showed his hand in response to a question:
Zitat
“Central banks stand ready to lease gold in increasing quantities should the price rise.”
In September ’99, following announcement of the Washington Gold Agreement to limit central bank sales of the metal, the price of gold spiked from $253 to $330 in a matter of days. In panic response the US and UK central banks mustered their resources to tame the rise and save the ‘shorts’ – bullion banks who had borrowed and sold gold lower down. This was probably when the ESF and the German Bundesbank decided to co-operate. Each had banks in trouble. In the presence of three witnesses, Bank of England Governor Eddie George later spoke to Nicholas Morrell, CEO of Lonmin:
“We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the UK.”
In response to the sharp rise in gold, the US and UK central banks had behaved exactly as Greenspan predicted. Of greater interest than being able to predict their strategy was a simple question. Where did they get the gold to sell into the market? Unlike their worthless FIAT paper currencies, gold cannot be printed. It has to be ‘borrowed’. The Germans provided the answer.
1.13 Mystery of the disappearing German gold
As the scale of central bank ‘sales’ increased, tell-tale signs began to appear as to who had lost metal. After an extensive investigation, GATA stalwart James Turk of http://www.GoldMoney.com, discovered a SMOKING GUN. He noticed that the designation of all 1700 tons of US Treasury gold held at Westpoint Military Academy had by September 2000 been changed. In the words of John P. Mitchell, Deputy Director of the US Mint, the gold was:
‘renamed better to conform to audited financial statements, from ‘Gold Bullion Reserve’ to ‘Custodial Gold’.
The logical conclusion was that ‘the better conformation’ arose because the strict application of prudent accounting principles no longer allowed the Treasury to use the term ‘US Gold Reserves’. More than half had been swapped out to ownership by other central banks – almost certainly the German Bundesbank.
When GATA began to query what had happened, Treasury flunkies quickly renamed the gold a second time, but using a more innocuous phrase - ‘Deep Storage Gold’. The new terminology was subsequently applied to describe all Treasury gold. In a thoroughly researched article, GATA’s James Turk explained why he believed the Bundesbank today has title to all gold stored at Westpoint. It was in return for having lent 1700 tons of its own gold to the US Treasury. The purpose at the time was to facilitate Treasury gold deliveries into Europe, much of it from September 1999 onwards when the price spiked from $253 to $330.
On numerous occasions in the three years since this transaction was concluded, there have been ad nauseam repeat announcements from Germany’s Bundesbank President, Ernst Welteke, threatening to dispose of hundreds of tons of German gold. Each statement has been timed to coincide with periods in gold’s history when the price of the metal was poised to burst into new high ground. On no occasion has the gold ever actually been sold.
1.14 Germany threatens to sell as price hits 2004 high of $430
The latest German threat to sell gold was issued eight or more weeks ago, and repeated for good effect a fortnight later. On the first occasion, German magazine Der Spiegel wrote the following:
“The Board of Germany’s Bundesbank has opposed a plan by its president, Ernst Welteke, to sell off some 600 tons of the central bank’s gold reserves to promote education and research. Welteke won’t get a majority for this proposal.”
1.15 GATA’s take on the German threat
Having repeatedly cried ‘wolf’, German threats no longer carry water. Even if carried out, GATA believes the gold has already gone. A ‘sale’ at this stage would be no more than an accounting gimmick to write off gold that’s no longer there. GATA believes half the German gold – 1700 tons - was borrowed by Deutsche bank, and the balance by the US Treasury who swapped it for coin melt at West Point. GATA further believes that neither party is in any position to return it and that any attempt to retrieve it would send prices through the roof. At some point it obviously has to be settled. This can happen in one of two ways. It can either be returned, which seems unlikely, or netted off and declared a ‘sale’ post facto. If losses are to be contained before the price rises into the stratosphere, then the sooner these deals are ‘netted off’ the better. Hence Welteke’s pressure to conclude a ‘sale’. There is little doubt that the Bundesbank president is a loyal supporter of the Gold Cartel, willing to spew out empty threats whenever called on to help.
The latest announcement was given headline treatment in local South African papers. Only in the last paragraph did one read that a majority of Welteke’s Board of Directors opposed his proposal. In other words it was stillborn from the outset. Yet the international press insists on presenting it as a fait accompli. It is part of the insidious and relentless campaign against gold. It is pathetic that even South African papers should condone lies and propaganda by the FIAT money gang.
1.16 A threatened ‘sale’ of 37 tons by Norway
A week after the German gold sale proposal first reared its head, Norway made a similar announcement. In this case the Norwegian central bank helpfully disclosed a ‘sale’ of 17 tons. What they failed to mention was that at latest count 95% of Norway’s gold had already been leased to the Bank of England. More particularly, being an oil producer of note, Norway had no shortage of foreign exchange and absolutely no need to sell off gold. Clearly they were asked to do so, pandering to American entreaties and a Treasury cry for help. The US needed to halt a threatening run in gold.
1.17 Britain drops out of gold cartel – keeps options open
On March 8 the Central banks of 15 European nations renewed what was referred to as the ‘Washington Agreement to limit gold sales’ – originally signed in September 1999. According to Patrick Hosking of the London Evening Standard:
“Britain astonished the gold market by dropping out of the official cartel that caps sales.”
Economics correspondent Philip Thornton said:
Zitat
“Britain said it has no plans to sell any of its gold reserves over the next five years.”
Britain, which had sold two thirds of its gold reserves in recent years, said because it had no plans to sell gold over the next five years, it had decided not to participate.
Well-known gold bear Philip Klapwijk of Goldfields Mineral Services – ridiculed for his gross understatement of the extent of leasing of gold – commented as follows:
‘I would have expected the UK to have been in the accord. Ducking out will give Britain more leeway to lend gold.’
The 15 central banks announced a new pact to restrict annual sales to 500 tons or 2500 tons over a five year period. This up from the 2000 ton limit set in 1999. GATA believes that by announcing another 5 year renewal of the Washington Agreement, many analysts feel the guaranteed gold deficit supply will further heat up a market already on fire.
We believe with Klapwijk that Britain’s refusal to participate has its origins in a Bank of England’s desire to keep its option open. Should the gold price explode in such manner as to embarrass their friends at the Fed, they can always announce that due to ‘changed circumstances’ they have changed their minds and now wish to sell. In that event they will not be beholden to Europe and their latest agreement to limit sales. The French know their British neighbours well - ‘Perfidious Albion’ indeed. Britain’s decision to stay out reinforces our view that the Fed is worried but also shows that remaining stocks of gold available to the Cartel are fast melting away. It confirms our view the game is over.
Demise of US Gold strategy – implications for bonds
The purpose of studying the history of US gold strategy in such detail has been to demonstrate conclusively that in the face of a falling dollar, US gold strategy is dying a natural death. With its end comes a whole new threat to the health of US Bonds. Co-ordinated suppression of gold over an extended period of time served as an important weapon in maintaining artificially low long-term interest rates. These were necessary to prolong growth and later stave off recession. Conversely, an imminent explosion in the price of gold will expose the bond market to the cold winds of reality. A panic sale of dollar-denominated bonds could send US long-term rates rocketing higher, as foreign holders run for cover. The reasons would be a resumed slide in the American currency, a sharp rise in inflation and a marked deterioration in the perceived solvency of US debt.
As gold breaks free, new policies will therefore have to be found to lend artificial and temporary support to both the dollar and US bonds. Failing that, this could be the year the US bond market crashes. As prices fall, rising rates will puncture the housing bubble. Refinancing has already begun to slow quite dramatically. Shaky economic recovery will terminate abruptly unless dollar printing on a massive scale is called on to replace international borrowing. The Fed will need Ben Bernanke with all guns firing. Do central banks have a less dangerous way out? The gold market was easy to manipulate while central bank stocks lasted. The capitalization of the bond market is infinitely greater and will require a massive leapfrog in the scale of intervention. US gold stocks theoretically stand at 8,000 tons or 260m ozs. At $400 an oz they are currently worth $100 billion. In contrast the capitalization of outstanding US Government Bonds amounts to $18 trillion with the corporate market contributing a further $20 trillion.
Instead of selling and suppressing gold, central banks will increasingly be cajoled into supporting the dollar, switching the proceeds into US bonds. This is a different kettle of fish and the execution of such a blunt strategy will be nowhere near as easy as selling off gold. It will necessitate huge and sustained intervention in the currency markets and is already happening. More and more central banks will be drawn in. How long it can continue is a matter for discussion. By the time the strategy implodes, the FIAT currency system will likely have damaged itself beyond repair.
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