German TV reports on gold market manipulation

By Barry Riley
The Financial Times
www.ft.com
October 6, 2000

You may think the stock market is stuck in a rut, but
spare a thought for the gold bullion traders who are in
an even worse fix.

They have watched, from the sidelines, a panic develop
over the euro and an alarming spike form in the oil
price. So what has happened in that historical nest of
speculation over currencies and inflation, the gold
market? Nothing at all: for two months the price has
been trapped between $277 and $270 an ounce.

Gold is the dog that has not barked and may even be
dead.

It is exactly a year since it last whimpered, through
the price jump to $330 stimulated by the Washington
Accord in which the major central banks clarified their
intentions towards their own bullion holdings. The
temporary price surge disastrously ruined the hedge
books of big mining companies such as Ashanti.

This week Peter Bernstein published The Power of Gold*,
a well worked history of the once mighty metal. This is
not a review of his book, but it has jogged some of my
memories. When I started as a financial journalist in
the 1960s gold was regularly in the headlines. Now it
is almost forgotten.

Rationalists argue that the demonetisation of gold is
approaching a climax. Some 33,000 tonnes of the stuff
remain locked away in the vaults of central banks and
institutions such as the International Monetary Fund.
But can they justify holding an illiquid asset which
earns almost nothing, except when it is lent out to
borrowers who assume it will fall further in price?

The British Treasury has embarked on a high-profile
disposal programme. If many more governments do the
same the price at some point must collapse.

Gold bugs see it differently. These days, curiously,
their declining numbers are concentrated in the US.

That is strange because their own dollar is seen as
gold's enemy. The dollar, they say, is a man-made
contrivance which cannot withstand the natural
competition of untarnishable gold.

So the gold price has been manipulated through the
derivatives market, and has fallen by 5 percent in
dollar terms since the start of 1999 (but don't forget
it has risen by 18 percent in euros).

Conspiracy theories abound, as they always have. I was
surprised to find recently that some seasoned gold bugs
still believe that gold was the ruin of the late C.
Gordon Tether, a predecessor columnist of mine on the
FT who was sacked in 1976. Officially Tether was fired
because he defied the editor by campaigning too
relentlessly against the European Common Market in his
Lombard column, and this dispute was outlined at length
in a marathon 45-day hearing at an industrial tribunal
(which he lost).

The gold believers still think this was a cover story,
however. Tether, himself a gold enthusiast, had
investigated a rumor that the U.S. government, which
began publicly auctioning gold in 1975, had secretly
disposed of its all its gold holdings, leaving Fort
Knox empty. For this, quot;theyquot; (being the anti-gold
establishment) had Tether removed; it is all nonsense,
but symptomatic of the gold zealots' belief that their
views are subjected to censorship and suppression.

The more scholarly bugs are especially frustrated just
now, because traditionally gold comes to life at the
end of the great asset price inflations. This happened
in the early 1930s and even more spectacularly in the
1970s, when the bullion price rose from $35 to $800 an
ounce. Now, 30 years later, another long bull market in
stocks and real estate is ending but gold is lifeless.
Precious metal fans have done much better in platinum
and palladium.

What might give gold a shot in the arm? It depends, of
course, on the travails of the fiat currencies, money
backed only by a government's pledge to maintain its
value. Central banks own their gold hoards for reasons
of diversification. But there is a paradox, in that the
yellow metal's presence in large piles of ingots in
their vaults is symbolic of the leading central
bankers' distrust of each other's currencies (and even
of their own). Those currencies are dwindling in number
anyway; about three-quarters of official reserves
around the world are held in dollars, which represents
a high concentration of risk.

The 33,000 tonnes of gold are worth about $290 billion,
but this is not much of a monetary base these days. If
the world's financial system were ever forced back on
to a gold standard the bullion price would have to rise
many times over to provide enough liquidity. The death
of the dollar is therefore what gold bugs dream about.

It is tempting, certainly, to draw parallels with the
1960s, when the Americans exploited the dollar's
strength in order to run a balance of payments deficit
(not least, to finance the Vietnam war). That
infuriated the Europeans, especially the French under
General De Gaulle, and a battle ensued over the role of
gold. The London Gold Pool, a price-holding ring of
central banks, was organised to fight off the gold
bugs. Eventually though, in 1971, the Americans were
forced to unfix the bullion price.

The dollar went through some hard times after that, but
today it rules the world again and a $400 billion U.S.
current account deficit reflects a consumer spending
spree. The European countries are forced to accept the
dollars in payment: indeed, their citizens are at
present so eager to convert their dollars into US
assets that the euro has become disturbingly weak. In
any case, the only substantial alternative currency is
the Japanese yen, the responsibility of a government
which faces scary borrowing projections and is subject
to regular downgradings by credit rating agencies.

Meanwhile, gold still accounts for more than a quarter
of the euro-zone's reserves. Whereas the U.S. owned 75
percent of the world's official gold at the end of the
second world war, it now has only 25 percent, and the
Europeans hold half as much again; they would be bigger
losers if the bullion price were to turn seriously
weak.

The Americans have in effect devised a new real asset
class, a vastly expanded, technology-rich stock market,
and they are determined that with its help the dollar
will replace gold. They have yet to prove, however,
that the U.S. economy is a reliable creator of enduring
value rather than the destroyer of capital that the
Japanese economy turned out to be at the end of the
1980s.

If Wall Street tumbles, so will the dollar. There is
double jeopardy here. It is the gold bugs' only hope.