With a sling and a stone

1:20p ET Sunday, September 16, 2007

Dear Friend of GATA and Gold:

A friend asked the other day why, given what he and many others on our side consider their "sinister nature," most of the Western central banks should have gotten together in 1999 to announce, in what became known as the Washington Agreement, that they were going to start limiting their gold sales and leasing. With gold nearly $500 above its low of 1999, he asks, doesn't that seem strange now? So what was the real motive of the central banks?

In reply I could not help but speculate and elaborate along the lines of what was first suggested five years ago by the international financial adviser and GATA consultant Frank Veneroso: that prior to 1999 the central banks didn't fully realize how much gold each was leasing and selling, how much they were collectively driving the mining industry out of business, and how much they were exposing the gold market to a short squeeze and themselves to the sudden irretrievable disappearance of their reserves when so much of their leased gold was found to have been draped around the necks of women in India and elsewhere, who would have inadvertently cornered the gold market:

http://www.gata.org/node/4249

If the central banks indeed did have such a realization, they next might have realized that they could recover their gold -- or help their intermediaries, the bullion banks, cover their short positions and avoid bankruptcies that would have collapsed the world financial system -- only by working together, to coordinate the unwinding of the gold carry trade the central banks had engineered or at least underwritten. Otherwise the first one or two central banks to demand their leased gold back might get it while the others lost their gold and all of them were devastated by the damage to fiat money generally.

Such collaboration is, after all, only what we suppose the central banks to be doing in regard to the U.S. dollar -- coordinating their dishoarding of dollars and Treasuries, or coordinating their reduction in purchases of dollars and Treasuries, so that every central bank has time to hedge its dollar and Treasuries reserves.

I'm not as convinced as Veneroso seemed to be that anything here may have been accidental at the beginning. If the principle to follow is "cui bono" -- who benefits? -- then the central banks always had an interest in shorting gold to manipulate and deceive the currency and bond markets and support their own currencies and government bonds and keep interest rates down and generally empower the financial class. That's what the research of then-Harvard professor and future Treasury secretary (and Harvard president) Lawrence Summers was about, as published as an academic paper in 1988 in The Journal of Political Economy, "Gibson's Paradox and the Gold Standard":

http://www.gata.org/files/gibson.pdf

But being finite, unlike those fiat currencies, the gold can run out. Yes, derivatives can make gold seem to last a lot longer, diverting demand from the physical to the hypothetical, but it still can run out, and if it runs out, a lot of central bank power runs out with it.

For me, that's what the gold issue is all about -- not metal worship, which would be idolatry, but overthrowing a secretive, deceptive, and essentially totalitarian world financial system. It's about transferring power from the money changers (sorry to start sounding biblical) to the producing classes (sorry to start sounding Marxist).

I suppose our side disparages the great American politician and three-time presidential nominee, William Jennings Bryan, for being an inflationist with his advocacy of the free coinage of silver in the 1890s. But then none of us has lived through the catastrophic deflations through which many in Bryan's time did have to live, and we forget that, until recently back then, silver had been money in the United States. Further, Bryan's bigger issue was indeed to democratize the financial system. There may be no political speech in American history more stirring than Bryan's "Cross of Gold" speech at the Democratic convention in Chicago in 1896, the speech that, with its defense of free coinage of silver, swept him into the party's nomination for president:

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When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our business interests by your action. We say to you that you have made too limited in its application the definition of a businessman.

We come to speak for this broader class of businessmen.

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Bryan didn't quite succeed but he may have pointed the way. Now it's our turn to take a crack at the bad guys, those who in Bryan's time were called the Money Power. Let's keep doing what we can. Of course our side is small and ridiculously overmatched, but you never know. ...

And David put his hand in his bag, and took thence a stone, and slang it, and smote the Philistine in his forehead, that the stone sunk into his forehead; and he fell upon his face to the earth. So David prevailed over the Philistine with a sling and with a stone, and smote the Philistine, and slew him; but there was no sword in the hand of David.

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

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