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What we are seeing in the gold market now is a rerun
of the failure of the London Gold Pool.
The United States
was on a gold exchange standard until 1971. The official price was $35 per
ounce of gold. Because of the need to finance the Vietnam War, the United States
was inflating the supply of paper dollars. As a result foreigners were
returning dollars to the Federal Reserve's gold window and getting gold in
return. The outflows were accelerating.
The United States
and a group of seven European central banks agreed to set up the London Gold
Pool in 1961 to defend the $35 per ounce price. They supplied gold to the
market in concerted ways to bring down the price and bought the gold back on
dips. (Do you recognize this behavior?) At first it
worked well, but by 1968 it became impossible to hold down the price. Here is
what James Dines wrote about the operation in the book "Invisible
Crash":
"The
gold pool was designed to dump gold on the market whenever it began to rise. This
suppression of free-market price is not free enterprise. The United States
provided 50 percent of the total net gold sales of the pool, which gives an
indication of the geographical location of the true culprit (of monetary
debasement)."
When the
situation became untenable, France
withdrew from the pool. In March 1968 the gold pool was closed and in a
last-ditch effort to control the gold price a two-tiered pricing system was
instigated -- one for "official transactions," which was $35 per
ounce, and one for "open market transactions," which rose rapidly
to more than $44 per ounce. The gold window was closed in 1971 and the gold
bull market was launched.
On July 20,
2005, there was an exchange at a committee of the U.S. House of
Representatives between U.S. Rep. Ron Paul and Federal Reserve Chairman Alan
Greenspan. Greenspan said:
"So that
the question is: Would there be any advantage, at this particular stage, in
going back to the gold standard? And the answer is: I don't think so, because
we're acting as though we were there.
"Would
it have been a question at least open in 1981, as you put it? And the answer
is yes. Remember, the gold price was $800 an ounce. We were dealing with
extraordinary imbalances, interest rates were up sharply, the system looked
to be highly unstable, and we needed to do
something.
"Now, we
did something. The United States -- Paul Volcker, as you may recall, in 1979
came into office and put a very severe clamp on the expansion of credit, and
that led to a long sequence of events here, which we are benefiting from up
to this date.
"So I
think central banking, I believe, has learned the dangers of fiat money, and
I think, as a consequence of that, we've behaved as though there are, indeed,
real reserves underneath the system."
Now that I
look at this again I realize that Greenspan was telling us that they are
suppressing the gold price -- or, put differently, "behaving as if we
were on a gold standard." That is to say they were trying to
"fix" the gold-dollar price.
Remember
Greenspan said that "central banks stand ready to lease gold in
increasing quantities should the price rise." This is a description of
the London Gold Pool except that they thought they were being smart by
leasing it instead of selling it so in theory they can get the gold back, but
in practice they cannot.
The other
aspect of this has been the paper market. Greenspan said, "So I think
central banking, I believe, has learned the dangers of fiat money, and, I
think, as a consequence of that, we've behaved as though there are, indeed,
real reserves underneath the system"
"Behaving
as though there are, indeed, real reserves underneath the system"? That
means that there are not real reserves under the system.
This is an
indirect reference to the suppression of the gold price on the Comex and the
OTC derivatives. Selling short makes it appear that they have real
gold to back their intervention, but they don't. So they "behave"
as if there are gold reserves under the system but there are not. This cannot
be done without some real gold, so that is where the leasing and
selling came in, but they were able to behave as if we were on a gold
standard with less than 1 percent gold backing.
But such a
scam cannot be maintained. We have now reached the "two-tier pricing"
such that we have an "official price" on the COMEX but a higher,
market price in the physical retail market. This is almost identical to the two'tier pricing that was the last-ditch attempt to
control gold before the gold exchange standard was abandoned in 1971 and the
price of gold exploded into a bull market that ended in 1980 at $850 per
ounce. We have reached the same point again but under different and more
extreme circumstances.
The World
Gold Council's gold demand update for the third quarter of 2008 is telling us
that physical demand is overwhelming the supply of gold. The game is all but
over. The lesson that should have been learned in the 1960s should have been
that you can't gold-back a currency if you issue more currency than the
promised gold. Now the lesson is that you can't maintain a currency's
purchasing power by behaving as if there were real reserves under the
currency when they are not.
The obvious question is: What do you want to own --
the paper that is being managed as if there were real gold reserves under the
system, or the real gold reserves themselves? The WGC's
new report tells us the answer.
Adrian Douglas
Marketforceanalys.com
Adrian
Douglas writes many articles on his observations and
analysis on financial markets, gold and silver markets, and some selected
company stocks. The articles were all initially published at www.lemetropolecafe.com. Adrian Douglas is a member of GATA's Board
of Directors.
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