Terrorism, war, and gold -- ''Midas'' commentary for Sept. 15, 2001


Gold Fingered?
Gold has lost its glitter. Is there a conspiracy afoot?

The Economist
September 13, 2001

Long considered the ultimate hard asset, gold normally
shines at times of financial turmoil. This week, if
any, should therefore have been gold's time to take up
its traditional role as asset of last resort. But its
performance was less than glittering (see chart).

Could it be that its days as a safe haven are over? Or
is there, as some believe, a conspiracy to keep it

Despite dire talk of recession and retaliation, gold
rose by only 6 percent on September 11, and it then
lost nearly half that gain the following day. Bid-ask
spreads widened to more than 10 times their normal
size, underscoring the lack of confidence in the metal.
Philip Klapwijk of GFMS, a precious-metals consultancy
in London, thinks that the gold price would be well
above $300 if the market had responded to turmoil the
way it did ten years ago.

Some of the lack of interest can be put down to a
shortage of liquidity as Comex, the New York futures
exchange that is near the World Trade Centre, closed
early on the morning of September 11.

But even when the Bank of England went ahead with its
20-tonne gold auction on September 12, prices were
barely higher than in previous weeks. The gold price
may yet soar. But, given the decline in equity markets
provoked by the grim outlook for rich economies, gold
has not provided the shelter that its fans expected of

Most gold experts see nothing more sinister in the low
gold price than weak demand. In the past 10 years, gold
has shown precious little response to macroeconomic or
political news of any kind. It has been dependent
mostly on consumer and industrial needs.

Gold-conspiracy theorists, however, will have none of
this. They have been claiming for a while that rich-
country governments are keeping the gold price below
$300 an ounce by lending masses of gold secretly to big
banks. Some even argue that this gold-price "strategy"
is based on an academic paper published in 1988 by no
less a person than former American Treasury secretary,
Larry Summers.

Giacomo Panizzutti, head of foreign exchange and gold
at the Bank for International Settlements (BIS),
estimates that central banks worldwide have lent no
more than 4,700 tonnes of gold to the market.

The figure, published in The Alchemist, the London
Bullion Market Association's quarterly, is about one-
third of the amount estimated by GATA (the Gold Anti-
Trust Action Committee) based in Dallas, Texas. GATA
says it has uncovered evidence that the American
government, assisted by others, has somehow "lent"
thousands of tonnes to speculators and bullion banks,
notably Citibank and J.P. Morgan Chase, to depress the
gold price.

GATA's website supports a court case filed in Boston by
Reginald Howe, a gold consultant, against Alan
Greenspan, chairman of the U.S. Federal Reserve, Mr.
Summers, the BIS, and several big banks. Mr. Howe
accuses them of conspiring to fix the gold price. Few
of the great and good appear to be taking the
accusations seriously, hoping perhaps that the case
will be thrown out at a hearing next month.

For the record, Mr. Summers' 1988 paper argued that if
the nominal gold price can be "pegged by the
authorities," other asset prices will rise. GATA argues
that this is precisely what Mr. Summers did while in
office under President Clinton, buoying American asset
prices at the expense of poor gold-producing countries.

Gold bugs are smarting because, this week's blip
notwithstanding, the gold price continues its slow
decline -- which can easily be explained without a
conspiracy theory. Mining has become more efficient;
most governments want to reduce gold as part of their
reserves; and, short of reviving the practice of
burying princes complete with their gold hoards, the
stock of gold does not diminish.

* * *

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