Greenspan suggested gold price suppression in 1993

Remarks by Dimitri Speck
International Precious Metals and Commodities Show
Olympia Park, Munich, Germany
Saturday, November 7, 2009

Since August 5, 1993, there has been systematic intervention in the gold market by American financial institutes with the objective of preventing an increase in the price of gold or at least of mitigating its rise. The intervention is supposed to support the bond market and the dollar as well as ease inflation expectations and the mood of crisis as the case may be. So far these activities have not been officially confirmed, but there is ample evidence of their occurrence.

There is only one crucial statement known thus far by then-Federal Reserve Chairman Alan Greenspan where he comes out in favour of influencing the gold price. It has to do with a comment Greenspan made before a Senate committee on July 30, 1998, which has become famous among Fed observers:

"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."

What is notable about this comment is that he refers to the leasing of gold as an instrument for influencing price. Admittedly Greenspan made the comment in a different context (discussions about regulation); the discussion was not about the framework in which intervention should actually take place.

But there is a second and until now overlooked Greenspan comment on gold price intervention. It came during the Federal Open Market Committee meeting of May 18, 1993, only about two months before systematic pressuring of the gold price actually began. His statements during that meeting clearly reveal the motives that led to the decision a short time later to intervene in the gold market, because this time the context of Greenspan's comment corresponds.

In addition the comment clearly shows that Greenspan wants to prevent an increase in the price of gold. For this purpose he unmistakably considers direct intervention.

FOMC meetings are recorded and the transcripts made public after five years. Greenspan's newly discovered comment is contained in one of these very transcripts, on Page 40 of the transcript here (Page 42 of the PDF version):

http://www.federalreserve.gov/monetarypolicy/files/FOMC19930518meeting.pdf

Apparently Greenspan spoke informally with his colleague, Fed Governor Mullins, during the course of the meeting, and reported this conversation to his other colleagues. Greenspan mentions the Treasury Department, since in the United States only the treasury and not the Federal Reserve can dispose over gold. The market price of gold was increasing at the time. In his unique, somewhat verbose style, Greenspan said:

"I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market. There's an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology."

Here Greenspan himself considers direct intervention in the gold market, and it is clearly about gold sales for the purpose of influencing price. It is not about sales for other purposes (such as managing the reserves), which are announced publicly as reasons for gold sales by the Federal Reserve.

Greenspan refers to gold as a "thermometer." He wants to influence its signal effect. If otherwise "thermometer" readings are too high and the gold price were to suddenly rise in this environment, it would fundamentally affect market psychology.

This quote from Greenspan and the context in which it was made show the main motive for the gold market intervention that began two months later. It had to do with quelling the signal that would indicate inflation might increase.

Against the backdrop of a weak economic environment, the Fed was faced with the threat of a continued increase in the inflation rate. An interest rate increase would have weakened the economy further. Central bankers were not clear about the reasons behind the general increase in prices; popular explanations such as a wage-price spiral were rejected on factual grounds. For this reason they suspected inflation expectations as the driving force behind currency depreciation. The increasing price of gold threatened to magnify those expectations.

Intervention in the gold market was begun so that the "thermometer" would show lower values -- and no fever.

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Dimitri Speck is a mathematician, chief financial engineer for the Staedel Hanseatic investment house in Riga, Latvia, proprietor of the Internet site www.seasonal-charts.com, and a consultant to GATA who has often documented manipulation of the gold market.

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