What the World Gold Council has wrought


By Michael Kosares
July 30, 2001

Gold is down in early trading after a quiet session overseas.
Some traders await the decision on whether or not South
African miners will strike three South African producers --
Goldfields, Harmony, and Durban Roodeport. AngloGold ,
South Africa's largest producer, has come to terms with its
workers. The National Union of Mineworkers plans to
strike the three producers on Wednesday if a settlement
is not reached. Goldfields and Harmony rank two and
three in South African production.

UBS/Warburg says, "With the settlement of the wage
dispute with the largest gold producer, Anglogold, the
chances of a protracted strike materially reducing
supply has receded, although small disruptions remain
possible." As a result, gold is tracking down this morning.

With all the talk of the United States government being
involved in international gold swaps, thanks largely to
revelations discovered in the minutes of Federal Open
Market Committee meetings by investigators working
on the gold manipulation lawsuit now before the court,
one should not discount the potentiality that the
International Monetary Fund could be participating, if not
the lead dog, in swapping gold in connection with its need
to bolster failing Third World economies like Brazil and
Argentina. (Have you ever wondered where the IMF with
all its funding difficulties finds this steady stream of
capital for these endless bailouts?) The steady fall of
gold since the problems in Latin America made the front
pages recently may be connected to the need to raise
capital for these bailouts, and the mechanism used
could be "swaps."

At the moment, ruminations like these must fall under
the "suspicions" column by necessity since the IMF is
not obligated (as far as I know) to making such
operations public. I do not know what the IMF charter
allows with respect to gold, but we should not forget the
heavy pressure from Britain and the Clinton
administration to sell IMF gold a few years back under
the guise of providing relief for troubled Third World
economies. Those attempts were rebuffed by the U.S.
Congress after gold owners and advocates mounted
a campaign to force Congress to stymie the sales.

Essentially, the relief mentioned takes the form of
debt that eventually becomes impossible to pay
without further infusions from the IMF -- and, though
the IMF and country in trouble by time, the cycle
moves to the next level of instability. In Indonesia
the result of IMF attention was rioting in the streets
and the imposition of a police state. Be assured,
the international banks and IMF will not cry for
Argentina. They will demand the austerity required
to pay back the loans. It will not end happily. The riots
will begin down the road and everything will be done
to disassociate the riots from the IMF's lending
activities in the public's mind.

Noted gold analyst Timothy Green in his "The Gold
Companion: The A-Z of Mining, Marketing, Trading,
and Technology'" defines a "swap" (beyond a
simple trading of one hallmark for another) as the
"simultaneous spot sale of gold with a forward
transaction to buy the same amount back at a later
date. For governments and central banks it has
become a way either of raising cash to meet short
contingencies or simply to invest the money on an
interest-bearing basis." It is also a way to keep gold
on the asset side of the ledger while enjoying the
benefits of its utility. For the IMF it might be a
convenient way to end run the restrictions the U.S.
Congress put on selling the metal. However, it
defies the intent of Congress which was to keep
the IMF from depressing the price of gold, and by
extension, undermining various Third World

I note that in the Federal Open Market Committee
discussions under scrutiny, the subject of the
discussion was the collapse of the Mexican peso
and banking system. Surely, the discussion had to
be how a bailout was to be structured.

Now we have Argentina near collapse and a
Reuters headline this morning reads "U.S. says
Argentina could get IMF cash early." In these carefully
crafted public relations tap dances, it is difficult to
see through the haze and discover what's really
going on behind the scenes. That usually comes
later -- sometimes years later -- when the memoirs
are written and the responsible parties have moved
on to "private" pursuits. We can only surmise.