How do Central Banks Control the Gold Price?
By Adrian Ash
October 2, 2007
The gold price is controlled by central bankers.
Here's how...
"GOD, IT WAS SO embarrassing...
"Everyone was asking why they ever let that guy publish the report? Credit
Agricole was a laughing stock. Professionals in the gold industry were amazed.
It was just ridiculous..."
The professional gold-industry analyst I met for a pint one warm summer's
evening in Soho, London earlier this year was certainly amazed. Mentioning the
infamous report from Chevreux – a division of Credit Agricole – made him
wince.
The Remonetization of Gold by Paul Mylchreest put the reputation
of France's largest bank right on the line – the same line spun by the Gold
Anti-Trust Action Committee (GATA)
since it first accused the Federal Reserve and its counterparts in Europe of
illegally rigging the gold market to suppress Gold
Prices in 1999.
"Central banks have 10-15,000 tonnes of gold less than their
officially reported reserves of 31,000" the Chevreux report announced seven
years later. "This gold has been lent to bullion banks and their
counterparties and has already been sold for jewelry, etc. Non-gold producers
account for most [of the borrowing] and may be unable to cover shorts without
causing a spike in the gold price."
In other words, "covert selling (via central bank lending) has
artificially depressed the gold price for a decade [and a] strongly rising Gold
Price could have severe consequences for US monetary policy and the US
Dollar."
The conclusion? "Start hoarding," said Paul Mylchreest...a
smart call. Because in finance, being right – even if for the wrong reasons,
perhaps – still pays off. His report for Credit Agricole's Chevreux division
was published in January last year. Come May 2006, the Gold
Price leapt to a 26-year high. It's since gone on to break those levels
again, rising to its highest price since the all-time peaks seen at the start of
1980.
As for the world's central banks, they seem to done a pretty bad
job of "covert selling" since the start of this decade. The Gold
Market has now seen prices double for US investors and savers, and it's
pretty much doubled for British and European gold owners, too. Japanese gold
prices have more than tripled.
How come? Whatever the reality of active, covert manipulation, the
world's central banks do indeed control the Gold
Price, as former Federal Reserve governor Wayne Angell put it in 1993.
"The price of gold is pretty well determined by us...But the
major impact on the price of gold is the opportunity cost of holding the US
dollar...We can hold the price of gold very easily; all we have to do is to
cause the opportunity cost in terms of interest rates and US Treasury bills to
make it unprofitable to own gold."
Cutting interest rates below the rate of inflation between 2003 and
2005, the Greenspan Fed guaranteed a bull market in gold. Cutting rates again
now in late 2007, even as oil and global crop prices move to new record highs,
the Bernanke Fed seems bent on pushing Gold
Prices higher, too.
Indeed, a new report from Citigroup – the United States' largest
bank – agrees with Credit Agricole's conclusions. "Central banks have
been forced to choose between global recession or sacrificing control of
gold," say John Hill and Graham Wark at Citi, "and [they] have chosen
the perceived lesser of two evils.
"We believe that the policy resolution to the credit crunch
will take the form of a massive, extended 'Reflationary Rescue' in a new cycle
of global credit creation and competitive currency devaluations. This could take
gold to $1,000 an ounce, or higher."
More than that, the flood of central-bank gold sales earlier in
2007 was "clearly timed to cap the Gold
Price," they go on. But little good it did the central bankers' aim of
capping gold if so. The price just moved above a 27-year high vs. the Dollar,
and it's tracking new 16-month highs for European investors each day.
Why suppress gold? If gold goes higher, or so the thinking runs,
then the world's confidence in the con-trick of paper money backed by government
promises alone might just collapse. That was the threat in the late 1970s. Given
last month's run on Northern Rock in the United Kingdom...and now the collapse
of NetBank in the US...that might come to be seen as a threat again today.
Meantime, allegations that the world's major central banks actively
work together to suppress the price of gold were only given credence in 2004
when Paul Volcker – chairman of the US Federal Reserve at gold's all-time top
– said in his memoirs that "letting gold go to $850 per ounce was a
mistake" during the last great bull market.
At one of the policy meetings led by Volcker in late 1979,
his Federal Reserve committee noted the threat of "speculative
activity" in people wanting to Buy
Gold. It was spilling over into other commodity prices. One official at the
US Treasury called the gold rush "a symptom of growing concern about
world-wide inflation."
"We had to deal with inflation," as Volcker said in a PBS
interview of Sept. 2000. "There was a kind of great speculative pressure.
"It was the years when everybody wanted to buy collectibles
from New York. The market was booming, and other markets of real things were
booming – because people had got the feeling that things were inflating and
there was no way you could stop it."
But besides waving a gun at anxious gold owners, there seemed only
one other route to stopping speculators profiting from – or rather, defending
themselves against – the demise of the Dollar.
Fix it up with higher interest rates. The Volcker Fed took US
interest rates to 19%...and put the real cost of Dollars above 9% after
adjusting for inflation. The Gold
Price sank almost in half inside 12 months.
Because just like Wayne Angell says, the price of gold really is
determined by central bankers. They can hold it down very easily...simply by
causing the opportunity cost in terms of interest rates and therefore government
bonds to make it unprofitable to own gold.
To do that, however, they have to raise interest rates dramatically
above inflation. If you don't trust the Bernanke Fed to do that – not least
after they cut 0.5% off the returns paid to Dollar savings in mid-Sept. – then
you might want to consider Buying
Gold today.