Who is buying gold and who is selling it mean nothing to the metal's price
trend, nor does it matter where the metal is coming from, financial letter
writer Steve Saville maintains this week in commentary headlined
"Looking for (Gold Price) Clues in All the Wrong Places," posted at
his Internet site, the Speculator Investor, here:
That's not how the U.S. government sees it. To the contrary, the U.S.
government considers gold's location to be of supreme importance to its price
and the price of the U.S. dollar, the primary mechanism of U.S. power in the
The U.S. government's outlook is described in detail by the minutes of a
meeting at the State Department in April 1974 attended by Secretary of State
Henry Kissinger and his assistant undersecretary of state for economic and
business affairs, Thomas O. Enders, minutes archived by the State
Department's historian here --
-- and copied at GATA's Internet site here:
The meeting addressed what the State Department saw as the growing desire
among Western European countries to revalue their gold reserves upward,
thereby increasing gold's role in the international financial system, while
U.S. policy was to demonetize gold so as to leave the dollar unchallenged as
the world reserve currency.
Secretary Kissinger asked: "Why is it against our interest to have
gold in the system?"
Mr. Enders: It's against our interest to have gold in the system
because for it to remain there it would result in it being evaluated
periodically. Although we have still some substantial gold holdings -- about
$11 billion -- a larger part of the official gold in the world is concentrated
in Western Europe. This gives them the dominant position in world reserves
and the dominant means of creating reserves. We've been trying to get away
from that into a system in which we can control ...
Secretary Kissinger: But that's a balance-of-payments problem.
Mr. Enders: Yes, but it's a question of who has the most leverage
internationally. If they have the reserve-creating instrument, by having the
largest amount of gold and the ability to change its price periodically, they
have a position relative to ours of considerable power. For a long time we
had a position relative to theirs of considerable power because we could
change gold almost at will. This is no longer possible -- no longer
acceptable. Therefore, we have gone to Special Drawing Rights, which is also
equitable and could take account of some of the less-developed-country
interests and which spreads the power away from Europe. And it's more
rational in ...
Secretary Kissinger: "More rational" being defined as being
more in our interests or what?
Mr. Enders: More rational in the sense of more responsive to worldwide
needs -- but also more in our interest. ...
That is: Whoever has the most gold can control its valuation, and,
implicitly, can control the valuation of all currencies, and thereby create
the most "reserves," the most money -- money being power.
The interest of the United States, as perceived at that meeting at the
State Department, was to dominate the world through the power of money
creation, a power disproportionately held then by the United States, as it is
Saville writes: "The amount of gold shifting into or out of
exchange-traded fund inventories could be of interest, but the shift in
location from an ETF inventory to somewhere else or from somewhere else to an
ETF inventory is not a driver of the gold price."
Saville's assertion that transfer between inventories can't drive gold's
price is contradicted by the history of the London Gold Pool, which collapsed
in March 1968:
As always, in 1968 gold was merely changing vaults. But that it was coming
out of central bank vaults, whose supplies were announced and finite, surely
did drive price, as it gave buyers confidence that central bank inventories
could be exhausted. If central bank inventories had been considered infinite,
of course no one would have bought in such volume as developed in 1968.
Further, gold's price, like the price of any commodity or currency, also
can be driven by the policy objectives of those who would acquire it. Gold
holders who underwrite vast short selling in gold, as Western central banks
long have done through gold swaps and leases, may profit from maintaining a
low price. And gold holders who recognize the market's vulnerability to a
short squeeze may see profit or geopolitical advantage in arranging one or
Indeed, the government-controlled financial news media in China long have
been full of commentary about the Western central bank gold price suppression
scheme and the advantages to China in defying it:
For example, in April 2009 the the Chinese newspaper World News Journal
wrote: "The United States and Europe have always suppressed the rising
price of gold. They intend to weaken gold's function as an international
reserve currency. They don't want to see other countries turning to gold
reserves instead of the U.S. dollar or euro. Therefore, suppressing the price
of gold is very beneficial for the United States in maintaining the U.S.
dollar's role as the international reserve currency. China's increased gold
reserves will thus act as a model and lead other countries toward reserving
more gold. Large gold reserves are also beneficial in promoting the internationalization
of the renminbi."
Of course, as Saville notes, governments can change their minds and their
But gold price suppression to support the U.S. dollar as the world reserve
currency has been U.S. government policy for more than half a century, and
the power to issue the world reserve currency will always be desirable.
Meanwhile China's policy of gold acquisition has been operating for maybe
two decades now.
These policies and flows have been going on long enough that even a
financial letter writer might discern some price clues in it -- if he ever
thought that evidence and experience were more dispositive than ideology.