| In late June
of 2005, White delivered the opening remarks to the Fourth Annual BIS Conference
on the “Past and Future of Central Bank Cooperation,” an elite gathering
of “central bankers and academics.” Among the latter were “economists and
economic historians,” as well as, for the first time, “political scientists
interested in political and other processes, and the development of institutions
to support such processes.”
White’s speech
enumerated five “intermediate objectives of central bank cooperation.”
The
fifth, and last, of these was “the provision of international credits and
joint efforts to influence asset prices (especially gold and foreign exchange)
in circumstances where this might be thought useful.” [emphasis added]
Useful to whom?
Well, probably not to the average investor.
Then there
is the Washington Agreement—signed in September of 1999 by representatives
of the ECB and the central banks of Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden, Switzerland, and England—which spelled out how the banks would
cooperate in the regulation of the gold market. (The U.S., while not a
signatory, hosted the announcement of the agreement, and may be assumed
to be supportive of it, if not a direct participant.) It placed a limit
on how much they could collectively sell in any given year.
The alleged
reason for the Washington Agreement was to control the amount of gold being
sold by central banks, in order to keep the price high and protect the
value of those banks’ holdings. That makes sense. It would, additionally,
serve as a self-checking mechanism for the signatories, should any of them
be tempted to sell off too much of their reserves.
But Chris isn’t
buying.
“I think
the reasons they gave were very disingenuous,” he says, “and in fact
the opposite of what they were in there for. They said they were going
to regulate the gold market by coordinating their sales and leasing in
order to support the price. I would argue that they were in there to control
the price and see that it didn’t get out of hand, and to protect their
agents, the bullion banks, and the short positions the bullion banks had
undertaken in gold at the behest of the central banks.”
In other words,
to keep the gold price lower than it should be.
Chris sees
the agreement as a smokescreen, a way of deceiving all but the insiders
as to what’s actually going on. It allows the central banks to say that
they’re taking the initiative to limit gold sales, which is true of physical
gold. But while they do that with one hand, with the other they ramp up
the action in the derivatives markets—forward sales, options, swaps and
shorts—thereby maintaining the artificially low price of gold.
That argument
is bolstered by BIS statistics showing that gold derivative transactions
ballooned from $234 to $354 billion, an all-time high, in the first six
months of 2006. Conversely, though, it has been a very uneven progression.
For all of 2005, derivatives activity actually fell. So a firm conclusion
is difficult to draw.
Nevertheless,
the argument that the central banks have worked hard to suppress gold has
merit. To understand why the banks would do that, rather than acting
in what on the surface would appear to be their own best interests, one
has to understand what was going on behind the scenes during gold’s long
bear market.
Chris explains:
“I’m convinced that the gold price suppression scheme wasn’t really aimed
at gold itself. Gold was the tail on the dog. It was aimed at boosting
the government bond market, keeping interest rates down and making the
dollar look strong.”
In order to
accomplish that, the central banks had to give bullion banks some incentive
to cooperate. Which they did.
“By the
bullion banks shorting gold,” Chris says, “they deceived the world
about the level of inflation and money supply growth, and basically they
shorted gold to buy U.S. government bonds and collect the difference. If
you’ve been assured that the gold price is going down, you short the metal
and use the proceeds to buy government bonds. You’re getting 5% on government
bonds and the gold price is going down 5% a year, enabling you to close
the short profitably, so you have a risk-free trade. You’re getting 10%,
as long as the central banks are willing to back you with more gold sales
to keep the gold price going down. And I think everybody was happy with
that. Financial houses, recruited as the banks’ agents, were happy with
their easy profits. The Treasury Department was happy because it boosted
bond prices and kept interest rates down. And the whole world was deceived
about the vast growth that was going on in the money supply. It worked
for a while. Until they started worrying that they were running out of
gold reserves.”
Are they? we
asked.
“That’s the
zillion-dollar question,” Chris says. “The trouble is, Fort Knox hasn’t
been audited since the Eisenhower Administration. Now, the central banks
claim to have more than thirty thousand tons of gold in their vaults, but
our research has found a lot of double counting, and in fact the IMF issued
its own paper some months ago admitting that its rules were allowing the
double counting of gold by member banks.”
By double counting,
we assumed he meant that they’re counting both physical and leased gold.
That’s correct, he says, and jokes that “the actual disposition of Western
central bank gold reserves is a more closely guarded secret than the plans
for the construction of nuclear weapons, which are posted on the Internet
today. You’ll never find out exactly where all the gold is and who really
owns it.”
The question
of ownership is an important one, and it really muddies the waters. Who
owns what, and where, is complicated by the use of gold swaps. We asked
Chris to explain what a gold swap is.
“Basically
an exchange. Say the Bundesbank and the U.S. Treasury Department get on
the phone and Treasury says to the Bundesbank, ‘hey, the gold price is
getting a little high, we’d like to sell twenty tons over the next month
to tamp it down, or at least lease twenty tons, could you do it from over
there to keep our fingerprints off it?’ In return, they say, ‘we’ll give
you title to twenty tons in the depository at West Point.’ The Bundesbank
says, ‘no problem.’ They dispose of twenty tons in Europe through the London
Bullion Market Association, and they get a note from the Treasury Department
saying ‘ok, you now have title to these bars in the vault at West Point.’
And hopefully for the sake of the Bundesbank, they’re numbered bars and
they can come visit them every once in a while.”
We had to say
that it all sounded very convoluted. It must be difficult to coordinate.
"Not really,"
Chris says. "The central banks are constantly talking to each other and
they're all members of the BIS, which compiles extensive data on gold reserves,
as well as derivatives and leasing.
“They need
to talk, because they have to know whose gold is going out into the futures
pit today. And most Western central bank gold, or a lot of it anyway, is
held in trust by the U.S., whether it’s in Fort Knox or the basement of
the Treasury Building in New York, or in the vault up in West Point.
“The West Point
gold, by the way, was quietly reclassified a couple of years ago from ‘gold
bullion reserve’ to ‘custodial gold bullion.’ No reason given by the Mint,
no indication of who we were acting as custodian for. Then in July of 2001,
the Mint redesignated 94% of the U.S. gold reserve as ‘deep storage.’ Go
figure.”
Thinking about
all this, it seems to us that the Treasury Department, the Fed,
and the European central banks were engaging in some mighty risky behavior.
Chris agrees and says that, in fact, the house of cards almost came tumbling
down when gold spiked in late 1999, in the aftermath of the Washington
Agreement, and created a short squeeze.
With the Long
Term Capital Management meltdown fresh in people’s memories (it had happened
only a year earlier), the central banks feared that the gold squeeze could
be even worse, taking down several major trading houses and possibly setting
a whole row of dominoes falling.
In the words
of former World Bank consultant Frank Veneroso, it was “an explosive gold
derivatives crisis” and “the official sector intervened to prevent [it].”
The intervention
worked. Gold retreated back under $300 and stayed there for two years.
Traders were able to unwind their short positions without massive losses.
Since then, of course, steadily rising demand has driven the gold price
ever higher. Ongoing market rigging has been unable to suppress it, but
has served to prevent the metal from finding its true equilibrium point,
in Chris’ opinion. He believes that a day of reckoning will come. And what
will that look like?
“Well, I don’t
want to make any hard predictions about what will happen, or when,” he
says. “But what I think is that we’re going to wake up someday and find
out that the Western central banks have met—along with, maybe, some of
the Asian central banks—and there are going to be new currency arrangements.
Maybe in the name of helping the poor countries, the central banks
are going to be buying gold at $1,500 an ounce or something like that.
It’ll probably happen overnight, because I don’t think the central banks
can withstand a steady escape from the paper currencies into the monetary
metals. If they do it overnight, everybody’s locked into the fiat system,
there’s no getting out. Either you’ve got your gold and silver or you don’t,
and there’s no incentive to get out of the whole central bank system.”
That sounded
to us like a sudden and massive devaluation of the buck.
“Yeah,” Chris
says, “I tend to expect that. In fact, that’s what the whole Plaza Agreement
was about, back in the ‘80s under Reagan. It was a devaluation of the dollar.
They don’t tell you these things are going to happen, they tell you they’ve
already happened.”
Since up to
that point, we’d been talking about the central banks and the executive
branch of the federal government, we asked if Congress knows about all
this, too.
“The leadership
in Congress does,” Chris says. “We told them. A friend of a friend got
GATA a private meeting with Dennis Hastert, speaker of the House. The GATA
delegation met with Speaker Hastert in his office at the Capitol on May
10, 2000 and we laid it all out for him. Also for Spencer Bachus, the Alabama
Congressman who chaired the subcommittee with jurisdiction over gold and
silver. Not that we really needed to. A couple of months later, I was able
to deduce that we’d been given that meeting not because the speaker wanted
to hear what we had to say, but rather wanted to know how much of this
was leaking out, how much was known, how much of the whole thing was
compromised. I can’t explain exactly how I know that, because it would
put my source at risk, but trust me, I do.
“Look, right
now the Comptroller General of the U.S. is going around saying that we’re
bankrupt and we’ve got to do something about it immediately. So everyone
in government knows what’s happening. As I said earlier, my request to
the world is not to look at GATA as some conspiracy nuts. We just want
to point out the public record and ask people to pursue it and draw their
conclusions. We’re not issuing wild charges or anything. We’re just trying
to call attention to the admissions that have been made. And to get people
to look at those admissions in a new light. Or in any light at all, as
far as I’m concerned.”
Forewarned
is forearmed. In Chris’ words, either you’ve got your gold and silver or
you don’t.
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www.caseyresearch.com |
