I have taken the liberty of publishing some excerpts from Reg’s extraordinary dissertation:
Déjà Vu: Central Banks at the Abyss
http://www.goldensextant.com/S…emselves.html#anchor57474
Blindman's Buff. The immediate impetus for WAG I is easy to understand. The British gold auctions had caused a severe decline in gold prices just after the new European Central Bank and its member central banks had adopted the practice of regularly marking their gold reserves to market. However, as a rational strategy on the part of its signatories, WAG I is difficult to explain except on the hypothesis that the central banks themselves did not have adequate information about, or a sufficient understanding of, the gold lending and gold derivatives markets.
While these markets had grown up largely as the result of more active management by the central banks of the gold reserves under their control, as a practical matter much of the actual management took place on the advice and under the direction of the bullion banks. In Gold Wars (FAME, 2001), pp. 119-176, retired Swiss banker Ferdinand Lips reviewed the emergence of these markets in the 1990's, concluding that the more sophisticated bullion banks had taken advantage of their positions as advisors to the relatively naive central banks (at 144):
Their [the bullion bankers'] only motive was to make money. They made legendary amounts of money with the 'Gold Carry Trade'. By borrowing gold from the central banks at a 1% lease rate, then selling the gold (thereby flooding the physical gold market with an artificial supply) and investing the proceeds in Treasury securities at 5%, they were making fortunes. Who can blame them?
It was the Chairman of the Fed, Alan Greenspan, himself who invited them to do so by declaring before the House Banking Committee on July 24, 1998, and again on July 30, 1998 before a Senate Agricultural Committee, that "[...] central banks stand ready to lease gold in increasing quantities should the price rise." By allowing an unprecedented manipulation of the gold price, the central banks laid the foundation for the biggest money game in history.
Nobody cared that the manipulating (a strong, but truthful assessment) governments, central banks and bullion banks, were completely ignoring the free market process. Greedy bullion banks were permitted to eat away the profits that should have gone to the gold mining companies, their shareholders, workers and last, but not least, the poor gold producing countries.
In fact, a year before his 1998 congressional testimony about gold leasing, Mr. Greenspan's Federal Reserve handed the bullion bankers a powerful document with which to sell the practice of gold lending to central bankers. It released a staff paper arguing that government gold should be made available for private uses sooner rather than later, either by selling it all immediately or lending as much as possible at once and selling it gradually later. D.W. Henderson et als., Can Government Gold Be Put to Better Use? Qualitative and Quantitative Effects of Alternative Policies (Federal Reserve Board, International Finance Discussion Paper 582, 1997). With respect to the latter alternative, the paper suggested a future that may now have arrived (at p. 5):
The quantities of gold available for private uses are the same under the alternative policy as with an immediate sale. However, there is an important difference: under the alternative policy, governments relinquish title to their gold in the future and then only gradually. Therefore, to the extent that government uses can be satisfied by owning gold but not physically possessing it, most if not all of the gains associated with maximizing welfare from private uses can be obtained with little or no reduction in welfare from government uses until sometime in the future. [Emphasis supplied.]
Almost as soon as it was published, Goldman Sachs referred to the paper in 116-page report on gold stocks, calling it a significant negative for gold prices. See J. Tompkins, Portfolio Gold: Now You See It. Now You Don't, Investor Features Syndicate (September 15, 1997). Used in this context by Goldman's stock analysts, the Fed's staff paper was actually relatively benign. But in the hands of its aggressive bullion bankers at J. Aron & Co. as they made their business development calls on the central banks, the paper carried considerable potential to inflict real damage on gold prices. Acquired by Goldman in 1981, J. Aron was transformed into an active and highly profitable trader in gold futures under the direction of Robert E. Rubin, then a new member of Goldman's top management committee, but in 1997 Secretary of the U.S. Treasury. See R.E. Rubin et al., In an Uncertain World (Random House, paperback ed., 2004), pp. 91-92.
By 1999, with major gold mining companies acting -- if they were not in fact -- clueless as to what was really happening, the profit-driven bullion banks and manipulative central banks had turned the always secretive gold market into a sort of gigantic, rolling game of blindman's buff. WAG I knocked the blinders off, but not before the major players had unwittingly trapped themselves in what one prominent gold analyst later described as "the prison of the shorts." See Frank Veneroso et al., Gold Derivatives, Gold Lending, Official Management of the Gold Price and the Current State of the Gold Market (Presentation to Fifth International Gold Symposium, Lima, Peru, May 17, 2002)…..
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