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Saville says gold's flow doesn't matter to price; U.S. and China disagree

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Published : January 30th, 2015
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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:

http://tsi-blog.com/2015/01/looking-for-gold-...all-the-wron...

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 world.


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 --

http://history.state.gov/historicaldocumen...s1969-76v31/d63

-- and copied at GATA's Internet site here:

target="_blank"

http://www.gata.org/files/StateDeptKiss...rEnders1974.txt

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 now.

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:

target="_blank"

http://en.wikipedia.org/wiki/London_Gold_Pool

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 threatening to.

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:

target="_blank"

http://www.gata.org/node/10380

target="_blank"

http://www.gata.org/node/10416

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 policies.

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.

 

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Chris Powell is the secretary of the Gold Anti-Trust Action Committee (GATA) which has been organized to advocate and undertake litigation against illegal collusion to control the price and supply of gold and related financial securities.
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In ten years of trading gold, there is a reason I use Steve Saville's advice and not Chris Powell's for trading purposes. One works, the other doesn't. I don't mind supporting Steve and his lovely family's little jaunts off to ride elephants or scuba dive in Australia either. It's kinda fun. I've got a trip planned floating the Middle Fork of the Salmon...again. Lovely river. Met Garth Brooks and four (or was it six?) bikini clad gals on one trip. Big log jam on the last that could have drowned us all, forest fires on others. Yikes!
Whatever the U.S. is trying to pull off in the gold market isn't going to work very well for them on this trip either, I would say. Gold is bigger than those dip wads.
DB
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In ten years of trading gold, there is a reason I use Steve Saville's advice and not Chris Powell's for trading purposes. One works, the other doesn't. I don't mind supporting Steve and his lovely family's little jaunts off to ride elephants or scuba div  Read more
David Barber - 2/4/2015 at 2:12 AM GMT
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