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Since August 5, 1993, there
has been systematic intervention in the gold market by American financial
institutes with the objective of preventing an increase in the price of gold
or at least of mitigating its rise. The intervention is supposed to support the
bond market and the dollar as well as ease inflation expectations and the
mood of crisis as the case may be. So far these activities have not been
officially confirmed, but there is ample evidence of their occurrence.
There is only one crucial
statement known thus far by then-Federal Reserve Chairman Alan Greenspan
where he comes out in favour of influencing the gold price. It has to do with
a comment Greenspan made before a Senate committee on July 30, 1998, which
has become famous among Fed observers:
"Nor can private
counterparties restrict supplies of gold, another commodity whose derivatives
are often traded over-the-counter, where central banks stand ready to lease
gold in increasing quantities should the price rise."
What is notable about this
comment is that he refers to the leasing of gold as an instrument for
influencing price. Admittedly Greenspan made the comment in a different
context (discussions about regulation); the discussion was not about the
framework in which intervention should actually take place.
But there is a second and
until now overlooked Greenspan comment on gold price intervention. It came
during the Federal Open Market Committee meeting of May 18, 1993, only about
two months before systematic pressuring of the gold price actually began. His
statements during that meeting clearly reveal the motives that led to the
decision a short time later to intervene in the gold market, because this
time the context of Greenspan's comment corresponds.
In addition the comment
clearly shows that Greenspan wants to prevent an increase in the price of
gold. For this purpose he unmistakably considers direct intervention.
FOMC meetings are recorded
and the transcripts made public after five years. Greenspan's newly
discovered comment is contained in one of these very transcripts, on Page 40
of the transcript here (Page 42 of the PDF version):
http://www.federalreserve.gov/monetarypolicy/files/FOMC19930518meeting.p...
Apparently Greenspan spoke
informally with his colleague, Fed Governor Mullins, during the course of the
meeting, and reported this conversation to his other colleagues. Greenspan
mentions the Treasury Department, since in the United States only the
treasury and not the Federal Reserve can dispose over gold. The market price
of gold was increasing at the time. In his unique, somewhat verbose style,
Greenspan said:
"I have one other
issue I'd like to throw on the table. I hesitate to do it, but let me tell
you some of the issues that are involved here. If we are dealing with
psychology, then the thermometers one uses to measure it have an effect. I
was raising the question on the side with Governor Mullins of what would
happen if the Treasury sold a little gold in this market. There's an
interesting question here because if the gold price broke in that context,
the thermometer would not be just a measuring tool. It would basically affect
the underlying psychology."
Here Greenspan himself
considers direct intervention in the gold market, and it is clearly about
gold sales for the purpose of influencing price. It is not about sales for
other purposes (such as managing the reserves), which are announced publicly
as reasons for gold sales by the Federal Reserve.
Greenspan refers to gold as
a "thermometer." He wants to influence its signal effect. If
otherwise "thermometer" readings are too high and the gold price
were to suddenly rise in this environment, it would fundamentally affect
market psychology.
This quote from Greenspan
and the context in which it was made show the main motive for the gold market
intervention that began two months later. It had to do with quelling the
signal that would indicate inflation might increase.
Against the backdrop of a
weak economic environment, the Fed was faced with the threat of a continued
increase in the inflation rate. An interest rate increase would have weakened
the economy further. Central bankers were not clear about the reasons behind
the general increase in prices; popular explanations such as a wage-price
spiral were rejected on factual grounds. For this reason they suspected
inflation expectations as the driving force behind currency depreciation. The
increasing price of gold threatened to magnify those expectations.
Intervention in the gold
market was begun so that the "thermometer" would show lower values
-- and no fever.
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