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Central banks may have been evil with gold but not stupid

Section: Daily Dispatches

10:27a ET Saturday, February 25, 2017

Dear Friend of GATA and Gold:

In commentary yesterday headlined "Will the Fed Tell Every American to Buy Gold Before It Destroys the Dollar?," Swiss gold fund manager Egon von Greyerz mocked Western central banks for selling so much of their gold at market lows between 1999 and 2004:

Von Greyerz suggests that this was errant stupidity by the central banks. But there is a more plausible scenario, a scenario in which the gold sales by Western central banks made perfect sense from their perspective.

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That is, at the turn of the century Western central banks long had been leasing their gold to financial houses that also operated as bullion banks, purportedly to earn a little interest on a supposedly dead asset. But as Federal Reserve Chairman Alan Greenspan disclosed, perhaps inadvertently, in testimony to Congress in July 1998, the purpose of gold leasing was actually to suppress the price of the monetary metal, which is a competitor to government currencies and a determinant of government bond prices:

Greenspan meant his testimony to discourage Congress from trying to regulate derivatives in the commodity markets -- probably because central banks were already manipulating those markets surreptitiously using derivatives and intermediaries, as was indicated years later by reports filed by commodity-exchange operator CME Group with the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission:

Any serious regulation of commodity derivatives as contemplated by Congress would have risked exposing this market intervention by central banks.

In regard to gold, Greenspan testified: "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."

That is, Greenspan was telling Congress not to worry about the market-manipulating potential of derivatives, and especially not to worry about manipulation of the gold market, because central banks themselves already were using derivatives to keep the commodity markets under control.

The British economist Peter Warburton picked up on this three years later in his essay "The Debasement of World Currency -- It Is Inflation, But Not as We Know It":

Warburton wrote that central banks easily could use big financial houses as intermediaries to control the commodity markets with derivatives and thereby prevent monetary inflation from showing up in consumer prices. For an effective hedge against inflation, Warburton wrote, investors would have to find commodities free of futures markets and thus free of the price-suppressive influence of the derivatives trading inspired and underwritten by central banks.

As it turned out, by the year 2000 gold leasing by central banks and the gold carry trade it supported had gone a little too far.

Financial houses had borrowed central bank gold at negligible interest rates, sold it for cash, and invested the cash in government bonds, collecting a handsome spread while helping Western governments support their currencies and bonds. This trade was risk-free trade as long as the financial houses had assurance that central banks would always inject more gold into the market as necessary. But the dishoarding of gold by central banks through the gold carry trade eventually drove the monetary metal's price so far below the cost of production that production declined, shortages developed, and the market started to reverse upward.

At that point central banks could not recover their leased gold from the financial houses without worsening the shortage, exploding the gold price, and ruining the financial houses. So the central banks began selling gold -- or, rather, every few weeks they announced that they were selling gold.

But actually the central banks were only arranging cash settlement of their gold leases and not requiring the gold's return. This rescued the financial houses the central banks had used as cover for their interventions in the gold market.

Why is this a better explanation of the central bank gold sales that von Greyerz mocks as simple stupidity?

Because during the years in question, even as every few weeks brought another announcement of a central bank gold sale, the gold price nevertheless rose steadily by 60 percent, from roughly $250 to $400:

The price would not have risen steadily if the gold whose sales were being announced was actually hitting the market.

But the price would have risen steadily if the gold in the purported sales had been leased and sold into the market long before and if the sales being announced were actually just the cancellation of leases on terms favorable to the financial houses.

Yes, Western central banks must have lost a lot of gold in this operation. But they bought themselves and their allied financial houses a couple of decades of supreme power over international politics and markets. And since the central banks retain the power to create infinite money, if they ever run out of the real metal necessary for market rigging, they can create as much money as necessary to repurchase it, run its price up, devalue their currencies to erase the immense and unpayable public debts that have been created by Western governments, and thereby avert a catastrophic debt deflation, as the Scottish economist Peter Millar noted a decade ago they have to do periodically:

Then they can renew their gold price suppression scheme for another half century at a more sustainable level and maintain their control over markets.

Western central banks may be the corrupt and even evil instruments of the financial class, and to preserve their power they may be prepared to do any amount of damage to the world, particularly by destroying markets, the engines of humanity's economic progress.

But stupid? Not when central banks have gained and kept control of the world's money and thus control of the valuation of all capital, labor, goods, and services in the world. What's stupid is any society that doesn't rise up against them or at least demand disclosure of their surreptitious operations.

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

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