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8 Reasons to Ignore the New Central Bank Gold Agreement - by James Turk

Section: Essays

By James Turk
Copyright 2004 by The Freemarket Gold & Money Report
All rights reserved
Letter No. 341
March 15, 2004

On March 8th the European Central Bank and 14 of Europe’s national central banks made the following announcement:

“In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

4. This agreement will be reviewed after five years.”

This statement contains only 147 words, and it appears simple and straightforward enough on the surface. The central banks even tell us the reason for their statement - to ‘clarify their intentions’. Wow, aren’t they swell guys. But don’t be deceived. Central banks deserve our scorn, and for that matter, our enmity too for the interventionist, statist policies that they inflict upon us in order to sustain the fiat currency that they create, which the politicians then debase to our detriment.

To truly understand the significance of any central bank pronouncement, one has to read between the lines. Here’s how I read their statement:

(1) Central banks only tell you what they want you to hear. If this premise weren’t true, they would not keep the public in the dark by holding meetings in secret and then redacting the minutes. They would not report on their balance sheets ‘gold in the vault’ and ‘gold on loan’ as one line item, in obvious disregard for generally accepted accounting principles. So when central banks say that they want to ‘clarify their intentions’, it is prudent to be skeptical - suspicious even - because that is not the way they operate. They operate in secret, and any pretense of openness is just a sham.

(2) As a corollary to #1 above, central banks are transparent only when it serves their interest, and are transparent only to the extent that shedding some light on a matter in fact helps obfuscate their true intent. In other words, they tell half-truths, and then let people draw their own - usually wrong - conclusions from the central bank’s statement. For example, although the Bank of England signed the first central bank gold agreement in September 1999, they did not sign this one because according to a statement released after the new agreement was announced, “Britain did not INTEND to sell any gold during the period covered by the deal”[emphasis added]. Sounds plausible enough at first blush, but hey. Wasn’t the purpose of this new agreement to ‘clarify’ central bank intentions? So if the BoE does not intend to sell any gold during this period as they say, then why not sign the agreement? Clearly, other forces are at work here, so they disclose to the public a half-truth. If their aim was to provide the whole truth, the Bank of England would have declared that they did not sign the agreement because there is a reasonable probability that their present intentions may change before the agreement expires in five years, or they otherwise did not want their hands tied during this period because there were other aspects to the agreement to which they did not agree.

(3) There are several things the Bank of England may not have found acceptable. Even though they took a bath on their gold disposals a few years ago when gold fetched a much lower rate of exchange to the dollar and other currencies than it does today, maybe they want to sell what little they have left. Or perhaps they want to lease more gold, or use futures and options in amounts greater than those “amounts prevailing at the date of the signature of the previous agreement”. The Bank of England plays a pivotal role in the effort by central banks to manage gold’s rate of exchange to national currencies, and the Bank of England apparently did not want its hands tied. We can assume that if they allowed that to happen, the Bank of England’s pivotal role in the gold price management scheme would somehow be impaired. It is therefore logical to conclude from the Bank of England’s self-imposed exclusion from this new agreement that central banks intend to keep trying to hold down the gold price, regardless of this agreement.

(4) Given the decline in hedging by mining companies since September 1999, the amounts of leasing, futures and options outstanding when the first agreement was signed were in all likelihood much larger than today’s levels. But these 15 central banks have now agreed to be bound by the previous limit, not the current one. Therefore, these central banks want more room to maneuver, but why? It’s simple. Central banks are at war with gold because they cannot in the end control it, with the consequence that a rising gold price lays bare the dishonesty of fiat currency and deceitfulness of central banking. Such openness would destroy the pretence of honesty upon which central banking rests, so central banks always seek as much maneuvering room as possible to engage gold in their ongoing war against it.

(5) Note that the Bank for International Settlements, Federal Reserve, US Treasury and US Exchange Stabilization Fund did not sign the agreement - so all the major manipulators of gold are not bound by its terms. So here we have 15 central banks announcing an agreement that itself is a form of intervention in the gold market, in order to give the outward appearance that central banks and other international organizations are not managing the gold price. And people believe it! But, you know what? There is a loophole in this agreement big enough so that even the signatory central banks do not have their hands tied by it.

(6) Central banks always like to leave themselves with an ‘out’, thereby making it easy for them to avoid being tied down by agreements, even when people think they are. For example, there is no mention of swaps in this new central bank agreement, but swaps are routinely used by central banks to convert their gold into national currency. In other words, instead of lending its gold (the total amount of which is restricted by the agreement), a central bank could instead swap it, i.e., they swap their gold for national currency. They accomplish the same economic objective as if they were lending their gold, but who except those few people who understand and follow the arcane world of central banking would know that central banks could mobilize their gold in this way without violating their new agreement because the word ‘swap’ is excluded. Even less obvious is the absence of the word ‘deposit’. For example, let’s say I lend $100 to Morgan Chase. Now compare that act to me depositing $100 in Morgan Chase. For all practical purposes there is no economic difference between the two, as in both cases Morgan Chase creates $100 of liabilities. Central banks frequently ‘deposit’ their gold instead of ‘lending’ it. For example, in describing its liabilities, the BIS states: “Gold deposits at that same date were…” But no where in this agreement is there any mention of gold deposits. So central banks have not imposed on themselves any limitations for swapping or depositing the gold in their vaults. This omission, in effect, allows them to do whatever they want with their gold, while most people think the opposite - that central bank’s are limiting their activity in the gold market, a deception which leads us to the next reason.

(7) It is better from a central bank’s perspective to achieve an outcome that makes possible some deception. Central banks can then act surreptitiously, so that no one is the wiser. In other words, let people think one thing about central bank intentions, while the central banks are actually doing the opposite. This result makes the central banks’ market interventions appear all the more powerful. What’s more, if no one really knows what central banks are doing, they can thereby avoid the embarrassment of having to go through a show trial in testimony before Congress or some other legislature explaining their actions. So not surprisingly this new gold agreement has its ‘outs’ and deceptions as explained above. Consequently, this much-anticipated central bank agreement is not worth the paper it’s printed on. It is just another underhanded attempt by central banks to re-direct the focus away from what they are really doing, namely, intervening in the gold market, which brings us to the last and most important reason to ignore this new central bank gold agreement.

(8) This new agreement is nothing but more of the same central bank anti-gold propaganda that does ongoing damage to gold’s true value. To explain this point, the reasons noted above make it clear that this latest gold agreement has a different purpose than the one central banks would have you believe. This observation leads logically to the following question: If there are enough ‘outs’ from this agreement so that none of it effectively binds central bank actions, then why go through the motions? This agreement serves the central banks’ true objective, which is to make it appear that central banks are more powerful than gold. While the truth is that they are doing everything within their power to keep gold from skyrocketing, this latest propaganda says that they are keeping gold from dropping because they are supposedly limiting their gold dishoarding. This propaganda is no different from that regularly disseminated by them in the late 1960’s saying that gold would drop sharply once they stopped ‘supporting its price’ at $35 per ounce.

By identifying themselves as ‘players’ and ‘kingpins’ in this way, the central banks get leverage. Many people don’t question the central banks’ intent or recognize their true objectives. These people accept at face value and without question these central bank pronouncements, but to do so is a serious mistake because it is utter central bank propaganda.

This propaganda objective is the most important reason to ignore this latest central bank announcement about their gold intentions - in reality central banks are not all-powerful. Their power only comes when people think they are powerful and therefore as a result give central banks their deference. But the reality is that central banks cannot control gold anymore than they can control the price of a Picasso, which is what central banks fear most. Only the market sets the price for goods and services, so never believe a central banker telling you anything different.