European Central Bank chief brandishes intervention ''weapon'' at speculators


8:47a ET Friday, December 3, 2004

Dear Friend of GATA and Gold:

The "Buttonwood" column from the November 30 issue
of The Economist, appended here, is wonderful for its
calling things by their right names -- the market for
gold is the "most rigged" of the precious metals
markets, and the central banks' coordination of their
gold sales policies constitutes a "cartel." (GATA
Chairman Bill Murphy's ideas and phrases in THE
ECONOMIST? Yikes! Maybe he HAS gotten a new tailor!)

"Buttonwood" suggests that, because of the central
banks' penchant for rigging the gold market, the
prospects for silver are better. Well, metal is

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

All That Glisters

Is the rise in the price of gold merely the flip side
of the dollar's fall? Or does it point more broadly
to a loss of faith in central bankers' promises?

By Buttonwood
The Economist, London
Tuesday, November 30, 2004

Alas, the nearest that Buttonwood gets to visiting
jewellery shops these days is a trip to Claire's
Accessories, a chain of fabulously tacky shops
beloved of his daughters. To be fair, Claire's
("Where getting ready is half the fun") does not
pretend to be anything other than cheap and
cheerful. Nothing seems to cost more than 2.99.

The jewellers in Bond Street, just round the corner
from The Economist's offices, are about as different
from Claire's Accessories as it is possible to get.
The stuff in them costs rather more than 2.99. And
their already steep prices have been going up
because the prices of precious metals have been
rising, gold's not least. In the past week, gold has
topped $450 an ounce, its highest level in 16 years
-- and up from a low of $253 in the late 1990s. What,
if anything, does this tell us about investors' faith
in paper currencies.

The financial world, it sometimes seems, is broadly
divided into those who believe in gold as the ultimate
currency and those who don't. In the latter camp are
most economists, the most famous of whom, John
Maynard Keynes, described gold as a "barbarous
relic." But even as late as the 1960s, Charles de
Gaulle, then president of France, claimed that gold
was the "unalterable fiduciary value par excellence."

Gold or silver were money for most of human history,
either directly or indirectly. Once paper currency was
introduced, it was, in theory at least, backed by either
of the two metals. Silver was gradually edged out as
a monetary metal in the 19th century, from which time
the "gold standard" reigned supreme. This arrangement,
in its purest form, collapsed in the 1930s, but it
continued in a bastardised form after the Second World
War, when America, which by then held three-quarters
of the world's gold reserves, again tied the dollar to
gold, and the rest of the world's currencies tied
themselves to the dollar. In 1971, the dollar was forced
off the gold standard because of mounting inflationary

Since then the world has had so-called fiat currencies,
which are backed by nothing more than the promises
of central bankers and politicians that they will uphold
the value of those currencies. Fans of gold -- known as
gold bugs -- wonder whether those promises are worth
the paper they aren't written on.

They certainly weren't in the early years. Inflation ate
away at the value of anything with a fixed monetary
value, and during the 1970s the price of gold rose from
$35 to $850. But in 1979, Paul Volcker, then chairman
of the Federal Reserve, stomped on inflation and the
price of gold fell sharply. In its place came a bull
market in the price of government bonds.

The dollar, it must be said, fared less well. It may have
become the world's reserve currency, even without the
backing of gold, but it has been anything but a splendid
investment, especially in recent years. While its internal
value has not fallen as much as it once did, thanks to
lower inflation, its external value -- i.e., in relation
to other currencies -- has been in remorseless decline,
albeit punctuated by some longish rallies. In recent weeks,
encouraged by malign neglect from American politicians
and central bankers, the fall has shown signs of
becoming a rout. As the dollar has fallen, so the dollar
price of gold has risen.

It used to be that gold bugs touted the yellow metal's
credentials as a hedge against inflation. But the link
was anyway pretty feeble, except for currencies with
hyperinflation. And though consumer prices have risen
a bit this year, it would be hard to make the case that
inflation is about to roar anywhere in the developed

Why, then, is gold prospering at a time when inflation
is low?

Perhaps it reflects nothing more than the fall in the
dollar: Gold transactions are denominated in dollars,
and in euros the rise in the gold price has been

However, there is no law that says a falling dollar must
translate into a rising gold price. Apart from a rise in
demand for jewellery, the rise in the price of gold may,
at the margin, reflect demand for real, hard assets, as
opposed to the paper sort. And the reasons are not
hard to find, for across the developed world debts have
escalated alarmingly in recent years -- and in America
not least, hence the vast and growing current-account

While central bankers are generally trusted not to
"monetise" these debts by rolling the printing presses,
history would suggest that this displays a touching
naivety. As James Grant, publisher of an eponymous
financial newsletter, and the most erudite of the gold
bugs, says: "[Alan] Greenspan, the figurehead of the
dollar, was trading at three times book in the late
1990s; I think he may return to book value." Or lower.

Gold's virtue, says Mr Grant, is that it is a monetary
metal, because of its scarcity and, of course, its
history. Actually, Buttonwood can't help feeling, gold's
history counts against it.

Of all the metals, the market for gold is probably the
most rigged. It is because of history that central banks
hold in their reserves almost a quarter of all the gold
that has ever been mined. They would like to sell at
least some of it, but the vast amount that they hold
means doing so would drive the price down. In 1999
central banks therefore came to an agreement to
restrict gold sales. The agreement -- or cartel, if you
will -- was extended in September. But it would
presumably be torn up if the gold price rose sharply:
The Bank of France said this month that it wants to
offload some 500 tonnes over the next five years.

And that would presumably limit gold's upside. Perhaps
a better argument can be made for other scarce metals:
platinum, say, or silver. Silver, after all, not only
spent centuries vying with gold as a form of money, but
also has many industrial uses and is not held by central
banks; annual demand is much higher than annual
production. Along with many other metals, the price of
silver fell sharply in April, but unlike gold it has not
even regained the ground it lost. Also in its favour is
that it is not exactly sold in industrial quantities at
Claire's Accessories.


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