GATA featured in South Africa

Section:

LINE IN THE SAND

By James Turk
Copyright 1999
The Freemarket Gold & Money Report
www.fgmr.com

For months it has been my contention that central banks
are manipulating the Gold price. More proof came on
May 7.

The British government, through the Bank of England,
announced that it intends to dishoard 415 tonnes of its
715 tonne Gold reserve. In contrast to the other
governments (e.g., Belgians, Dutch, Australians, etc.)
which have announced their dishoarding after they have
sold in order to get the highest possible price from
their sale, why did the British announce in advance
what they intend to dishoard, unless their intention
was to drive down the gold price, rather than maximize
the proceeds from their sale?

Also, why did the British grossly misrepresent the
present composition of their foreign reserves to make
it appear that they had a relatively large percentage
comprised of gold? See the brilliant letter to the
Financial Times on May 12 by Ms. H. Fakuda, the newly
appointed Chief Executive of the World Gold Council,
explaining this point. Although she addressed only the
facts of this matter and left unanswered the British
government's motivation, can anyone reasonably doubt
that their specious attempt to justify this dishoarding
is anything but a brazen attempt to talk down the price
of gold?

This contrived announcement to change the composition
of the British government's reserve assets --
conspicuously timed precisely as the gold price was
beginning to break-out of its downtrend channel -- is
but the latest instance of this ongoing manipulation of
the freemarket price of gold. On cue the gold price
swooned after the announcement, stopping a promising
rally dead in its tracks.

The motivation of central banks to manipulate the gold
price arises in two ways. First, the 20-something MBA's
now managing the asset portfolio in many central banks
appear to have little understanding of why their
employer holds gold in the first place. Consequently,
these wizards have been turning this reserve asset into
a revenue asset.

Instead of holding gold within their vault to provide
the ultimate monetary protection for the currency
issued by the central bank, these young hot-shots have
been lending that gold. They have turned the central
bank's gold from a tangible and unencumbered asset into
a promise, namely, that the borrower promises that he
will repay (return) that gold in the future. But what
if the borrower doesn't repay?

To put the best possible light on this matter, this new
breed of central banker seems to believe that the
interest income earned from the gold while it is being
loaned is more important than the prudential objectives
achieved by holding the gold as a reserve. To put the
worst possible light on this matter, this new breed of
central bankers may in fact be no different from any of
their predecessors throughout this century, who
regularly and repeatedly demonstrated their palpable
anti-gold bias. If so, this new breed may be using the
revenue generating capability of gold loans as a smoke-
screen to achieve their primary objective, which is to
drive down the gold price and to make gold appear to be
an monetary asset that has outlived its usefulness.

In any case, this lending has increased the weight of
bullion readily available to the market. The gold price
has declined as the market absorbed this additional
supply.

This downward pressure on the gold price dovetails
nicely with the other reason that central banks are
motivated to manipulate the price of gold. Gold is the
barometer by which central bank management of a
country's currency and economy is being gauged and
evaluated. A rising gold price is a sign that monetary
danger lies ahead, such as inflation or banking
problems. A falling or low-and-steady gold price is
taken by the market as a sign that all is well with the
national currency and the economy.

Clearly, central bankers would rather not have gold
looking over their shoulder at their every move. So the
central bankers have been at war with gold.

This war is not new. Battles have been raging all
century long, and include many fierce stand-up, knock-
down, drag-out conflicts. The removal of gold coins
from circulation during and after World War I.
Implementation of the gold exchange standard in the
1920s. Attempts to confiscate and outlaw the ownership
of gold in the 1930s. Bretton Woods and the aim to make
the dollar, and not gold, the center of world finance
after World War II and into the 1950s. Price
manipulation from the London Gold Pool in the 1960s.
Dishoarding in the 1970s by the International Monetary
Fund and U.S. Treasury to try breaking the rising gold
price. And gold lending in the 1980s and 1990s to keep
a lid on the gold price. And add throughout the
century, deft control of the media which devoutly
reports whatever central bankers want you to hear,
regardless whether or not it is the truth.

Gold has won some of these battles; governments have
won others. But the most important battle has just
begun. The British government has drawn a line in the
sand, and is challenging the gold mining industry -- and
indeed, anyone who believes that gold is a useful
monetary asset -- to step across it. The point is that
an object's usefulness determines its value, and the
higher this value, then the higher its price. The
British are maligning gold's usefulness as a monetary
asset.

I believe that the British government is blowing smoke
because gold is the only money that is no one's
liability. But is the gold market ready to call their
bluff? Are the mining companies going to continue to
sit idly by watching in the hope that national
governments and their captive central banks do nothing
harmful to the gold market? Or will they finally
respond to this challenge?

Governments are two-faced about gold. They disparage
it, but not because gold has little value or
usefulness. Rather, it's because governments cannot
control gold anymore than they can control the
freemarket process. Consequently, gold undermines the
power of governments that pursue reckless monetary
policies, and no politician likes that. But the
reality is that governments recognize one basic truth
about gold. Gold is money, and money is power. If
governments dishoard gold, they lose an important
source of their power, and no politician wants to lose
that.

So the British government has for once and for all
thrown down the gauntlet. Will the gold mining
industry rise to the challenge? Will some of the
companies that have contributed to the low gold price
by their hedging, cover some of these hedges by bidding
for the gold the British government is auctioning?

It is my hope -- indeed, it is my expectation -- that
this announcement by the British government will prove
to be a watershed event. No longer can anyone
reasonably doubt that the gold price is being
manipulated.

This observation is now sinking into the mind of the
market's participants. They will therefore seek answers
for the reasons behind these manipulations. More
importantly, as a result of this process of detailed
examination, they will also be forced to make some
basic conclusions about the value of national
currencies, all of which are for all practical purposes
because of the global linking of banking and finance
subject to these manipulations.

I expect that this process will result in some
meaningful changes in the future compared to the way
gold has been perceived in recent years. Namely, only
one basic conclusion withstands the test of logic and
monetary history -- if governments hold less gold,
their national currencies will be worth less in terms
of gold, not more.

The removal of the gold reserve that is backing a
national currency diminishes the value of that
currency; it does not enhance it. Take away the gold
reserve and a currency is worth less than when the gold
reserve was there, providing its useful and prudential
function.

Consequently, the demand for gold will continue to
increase (studies by the World Gold Council indicate
that demand continues at record levels) as the
realization sets in that removing the gold backing from
a currency debases that currency in terms of gold. And
with this increase in demand, so too will the price of
Gold increase.

Therefore, in the days immediately ahead, the market
will look through this announcement by the British for
what it really is -- anti-gold propaganda, nothing
more, nothing less. And when the market looks through
this announcement to reach this basic conclusion about
gold, the underlying fundamentals, bullish as they are,
will still be there for anyone to see if they are
prepared to look.

-END-

------------------------------------------------------------------------

eGroups.com home: http://www.egroups.com/group/gata