You are here

How Do We Know that Central Banks Rig the Gold Market? They Told Us. - by Chris Powell

Section: Essays

By Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
May 30, 2004

How does the Gold Anti-Trust Action Committee know that central banks are working with bullion banks and other financial houses to suppress the price of gold?

We know because of the painstaking research of our consultants -- Reg Howe, James Turk, Andrew Hepburn, Mike Bolser, and Bob Landis. They have gone through the official reports and the footnotes of the Bank for International Settlements, the International Monetary Fund, the Federal Reserve, the U.S. Treasury Department, central banks and government agencies, mining companies, and financial houses, and have amassed enormous evidence.

But that's the complicated stuff, and we also know for a very simple reason.

We know that the central banks and their intermediaries are working together to suppress the price of gold because time and again they have TOLD us so.

After all, what was the Washington Agreement of September 1999 if not a proclamation that the 15 participating central banks were colluding to regulate the gold price?

Of course in the Washington Agreement the central banks affected to be SUPPORTING the gold price; they pledged to limit their gold sales to 400 tonnes per year for five years -- lest, they said, the gold market be flooded with metal and the gold price collapse, taking with it the economies of gold-producing countries.

Of course GATA has put a different construction on the Washington Agreement. We consider it the device by which central bank gold LOANS are written off as SALES at discounted prices, rather than be called back and cause a short squeeze in gold.

That is, far from supporting the gold price, the Washington Agreement was how the central banks kept gold from rising and prevented the bankruptcy of the financial houses that, at the invitation of the central banks, eagerly joined the gold carry trade of the 1990s. In that carry trade gold was, in effect, loaned by the central banks for next to nothing and sold by the financial houses to depress its price, strengthen the U.S. dollar, reduce interest rates, and inflate the price of paper assets, which were purchased with the proceeds of the gold sales.

But no matter how you want to construe it, the Washington Agreement was admittedly a co-ordinated action by the central banks to regulate the gold price. That central banks get together to discuss and unify their policy toward gold is a matter of ordinary public record. Anyone who really believes that this collusion is always benign, in the public interest, and without ulterior motives shouldn't go even grocery shopping alone.

The Washington Agreement wasn't the first coordinated intervention of the central banks in regard to gold. It was at least the second and probably much more belated than that. How do we know?

Because Federal Reserve Chairman Alan Greenspan told us. In fact, he told Congress too. As usual, no one in the financial press seems to have been paying attention.

But on July 24, 1998, Greenspan told the House Banking Committee: "Central banks stand ready to lease gold in increasing quantities should the price rise." He repeated that statement a few days later to the Senate Agriculture Committee:

Of course, like the central banks that participated in the Washington Agreement, Greenspan was disguising the true purposes of the policy he described. He was explaining why he didn't think that the derivatives market needed federal regulation, and suggested that central bank gold leasing was a safeguard against a private corner on the gold market, a safeguard that made derivatives regulation unnecessary.

GATA maintains that, as with the Washington Agreement, the purposes of the central banks were the opposite of what Greenspan was suggesting. Far from working together to prevent a private corner on the gold market, the central banks were using gold leasing to maintain a corner on the gold market themselves.

Construe Greenspan's testimony as you will, but there it is again -- central banks admitting that they work together to regulate the price of gold. And, more than that, Greenspan told Congress, if inadvertently, that the purpose of gold leasing was not really the purpose long maintained by the central banks involved in it -- to extract a little income from a supposedly dead asset -- but rather to keep the gold price down.

Central bankers aren't the only ones in the gold business who acknowledge collusion to control the gold price. The biggest hedger among the gold-mining companies, Barrick Gold, has gone so far as to confess, in federal court in New Orleans, to participation in this scheme. Sued along with its bullion bank, J.P. Morgan Chase, by Blanchard & Co., the New Orleans coin and bullion dealer, Barrick filed a surprisingly candid motion in court on February 28, 2003.

Barrick moved for dismissal of Blanchard's lawsuit on grounds of sovereign immunity. That is, Barrick claimed that, in borrowing gold from central banks through Morgan Chase, Barrick became the agent for central bank gold policy; that, as the agent of central banks, the company could not properly be sued without also suing the real parties in interest, the central banks, as well; and that, since the central banks, as the agencies of sovereign governments, have immunity and could not be made party to the Blanchard suit, the suit should be dismissed:

Fortunately Judge Helen Berrigan dismissed Barrick's motion, and so Blanchard's lawsuit has gone to the evidence-collecting phase. The suit is similar to Reg Howe's federal lawsuit, which was brought in U.S. District Court in Boston, underwritten financially by GATA, included government defendants, and failed on the very issue of sovereign immunity -- the issue that is now out of the way so that, in the Blanchard case, the world yet might get a close look at how the gold market really works.

Just as the true purpose of gold leasing is to suppress the gold price rather than earn a little interest on a "dead asset," some central banks even acknowledge that the only purpose of holding gold reserves at all now, in the absence of any currency's formal convertibility, is to rig markets.

GATA is grateful to its researcher in Amsterdam, Milhaly Schroth, for locating the following admission from the Reserve Bank of Australia, which, on Page 31 of its annual report for 2003, says this about its reserves:

"Foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market. In investing these assets, priority is therefore given to liquidity and security, in order to ensure that the assets are always available for their intended policy purposes."

The Reserve Bank of Australia's admission can be found at its Internet site here here --

-- and at GATA's Internet site here:

All this shows that while the formal convertibility of currencies into gold has been ended by the articles of the International Monetary Fund, gold continues in its nature and function as money and as the independent international currency, the competitor of the dollar and the euro -- and that central banks recognize as much, however grudgingly.

Central banks often acknowledge intervention in currency markets -- direct intervention, as with the Bank of Japan's printing yen to buy dollars and the People's Bank of China's enforcing a fixed exchange rate with the dollar; and indirect intervention, as by the heavy purchases by many central banks of U.S. government bonds. Meanwhile the Federal Reserve intervenes in and supports the U.S. bond and equity markets every week through the strategic purchase and sale of U.S. government bonds.

Maybe you've heard the joke about the lawyer who, asked by a potential client, "How much is 2 and 2?," replied, "How much do you WANT it to be?" These days that is even more the premise of central banking than of the practice of law. What do the markets say? What do you WANT them to say?

Far from being the mechanisms of steady development and democracy we tout to the developing world, markets now, in the eyes of central banking, are considered to be usually INEFFICIENT and WRONG. And so bailouts and interventions and the issuance of price-capping derivatives have followed constantly on each other's heels so that no big financial interest might ever suffer the consequences of its mistakes or venality. National and even world economic objectives are now set by unelected overlords, gods of the market whose power is almost completely undemocratic.

Amid all this intervention, why should it be so hard to accept that central banks might be more involved in the gold market than they make plain? Indeed, to believe that central banks are NOT deeply involved in the gold market, one almost has to believe that it is the ONLY market they are not deeply involved in.

GATA is in the free-market advocacy business, not the investment advice business. But we can draw a few conclusions.

First, because of gold leasing and the deceptive accounting for it, central bank gold reserves are far less than what is claimed.

Second, amid worldwide currency debasement, the gold price will be largely a matter of how much more gold the central banks are ready to lease and then sell, a matter of how far down the central banks are willing to run their gold reserves and whether they think they may need gold again to restore confidence someday when currency debasement gets out of hand. The evidence of the gold price of the last few years -- rising steadily despite constant selling or talk of selling by the central banks -- suggests that the central banks are attempting a controlled retreat with gold. The increase in official anti-gold propaganda supports suspicion that the central banks are running out of golden ammunition.

And third, and most important, far from being Keynes' "barbarous relic" or a quaint antique, gold remains not just basic to the world economic system but, in fact, the secret knowledge of the universe -- the substance and mechanism by which everything else financial can be revealed and measured. If gold ever escapes the distortions that so laboriously have been imposed on it, we may see how everything we have considered normal has actually been distorted grotesquely -- may see, to our shock, that, as Kipling wrote in "The Gods of the Copybook Headings":

"... all is not gold that glitters, and two and two make four."

When that day comes and the real world reasserts itself with a vengeance, people will need the real thing -- or the real things, ANYTHING that is real. Kipling foresaw it this way:

... Then the Gods of the Market tumbled,
...... and their smooth-tongued wizards withdrew,
... And the hearts of the meanest were humbled
...... and began to believe it was true
... That All is not Gold that Glitters,
...... and Two and Two make Four --
... And the Gods of the Copybook Headings
...... limped up to explain it once more.

... As it will be in the future,
...... it was at the birth of Man --
... There are only four things certain
...... since Social Progress began: --
... That the Dog returns to his Vomit
...... and the Sow returns to her Mire,
... And the burnt Fool's bandaged finger
...... goes wabbling back to the Fire;
... And that after this is accomplished,
...... and the brave new world begins
... When all men are paid for existing
...... and no man must pay for his sins,
... As surely as Water will wet us,
...... as surely as Fire will burn,
... The Gods of the Copybook Headings
...... with terror and slaughter return!