Gold - Renewed Upswing Underway
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ShareThisGold’s recent price performance, strong physical demand for the metal in important world markets, worries about European and U.S. public debt, continuing aggressive monetary stimulus by the U.S. Federal Reserve, and news of substantial long positions by some prominent institutional investors and sovereign wealth funds together have contributed to the resumption of gold’s long-term upward march.
We believe that after a three-month period of correction and consolidation beginning in early December 2009 (when gold hit an all-time record price of $1,227 an ounce) gold has begun advancing anew - and could well register new U.S. dollar-denominated highs by midyear.
Positive signals in recent price performance:
Gold prices are already at record highs denominated in euros and British pounds, a reflection of declining confidence in those currencies and perceptions of rising sovereign risk on the debt of a number of European nations.
Meanwhile, the U.S. dollar-denominated price gained about one percent in February despite the dollar’s sizable appreciation in world currency markets. Importantly, this may be signaling a breakdown in the inverse lock-step correlation between gold and the dollar that has characterized these markets in the past few years - and could be paving the way for gold to begin moving higher again even if the dollar continues to gain against other key currencies.
From a technical point of view, gold managed to hold up early this year despite several tests of the $1,100 price level, easily bouncing back each time to slightly higher price levels. This has encouraged some short-term speculators to adopt a more positive view of the market. Accordingly, selling by institutional traders, which triggered and fed the metal’s decline over the last quarter, appears to have run its course. Some are establishing new long positions.
Strong demand in key markets:
European investment demand for physical gold has picked up in the past month - despite the record high euro-denominated prices. With declining faith in the future value of the euro and a reluctance to continue looking at the dollar as a safe haven, some Europeans are now turning to gold as the ultimate safe haven.
India, historically the biggest gold-consuming market, has seen a big jump in gold investment - and imports - in January and February. A few weeks ago, we reported Indian gold imports in January of approximately sixty tons. Now, we hear that February’s imports will again be quite strong. The estimate by the Bombay Bullion Association of 30 to 35 tons is likely to be on the low side (as it often is) - and actual imports could be closer to January’s sixty tons.
Anecdotal evidence suggests that gold investment demand in China is also rising. Thailand, Vietnam, Taiwan, and other East Asian gold-consuming markets (where gold is a traditional savings vehicle as it is in China) are also seeing rising interest. China’s robust economic recovery and growth in household income is leading to more investment and jewelry demand. At the same time, rising agricultural prices are encouraging some additional “inflation-hedge” demand for gold.
Moreover, news a few weeks ago that China’s sovereign wealth fund, the China Investment Corporation, had recently purchased a few tons of gold is surely viewed as an official endorsement of gold investment by China’s monetary authorities.
There has also been greatly reduced scrap supply from the recycling of old jewelry and investment bars in the region extending from the Arabian Gulf states (Saudi Arabia, Abu Dhabi, Dubai, etc.) across to India and Southeast Asia up to China. This certainly reflects the more positive outlook for gold held by investors in these countries. It also reflects improving economic circumstances and reduced “distress” selling.
Aggressive US monetary stimulus continues:
Despite the recent hike in the Federal Reserve discount rate (the rate at which the Fed loans reserves to banks), the U.S. central bank is maintaining a very aggressive - and, in our view, ultimately inflationary monetary policy. At last week’s Congressional testimony, Fed Chairman Ben Bernanke stressed yet again the central bank’s intention to maintain low rates for an extended period.
Another monetary indicator, the Monetary Base (currency in circulation plus bank reserves) surged by some $90 billion in the two weeks ending February 24th. This represents an annualized rate of growth of nearly 200 percent - and tells us that the Fed is pushing liquidity into the economy just as hard and fast as it can.
In the long run, the dollar’s purchasing power - and consumer-price inflation - is a reflection of the quantity of money in circulation. The Fed keeps telling us that inflation is not a problem because of the high degree of slack (unused productive resources) throughout the economy. But the 1970’s, a decade of stagflation in the US, shows us that even in the absence of robust economic activity and low rates of capacity utilization, excessive monetary creation leads to excessive price inflation.
U.S. Treasury debt - from foreign borrowing to printing more money:
As in the 1970s, foreign central banks and institutional investors - who are the main holders and buyers of U.S. Treasury debt -now appear increasingly reluctant to roll over existing positions, let alone continue building ever-larger portfolios of U.S. Treasury short-term bills, medium-term notes, and long-term bonds. Indeed, the Treasury’s last auction was greatly under subscribed.
This suggests that the Treasury will soon be forced to pay higher interest rates - to compensate buyers for the increasing risk they attach to U.S government paper - or turn to the Federal Reserve as the buyer of last resort. In other words, rather than borrowing to finance our national debt the Fed will be forced to “monetize” a growing portion of America’s annual deficits by simply creating new money. This is essentially the same as “quantitative easing” - the purchase of government, agency, mortgage, or other debt by the Fed - to stimulate economic growth. But rather than stimulate the economy, this policy will likely debase our currency and accelerate inflation.
Wednesday, March 3, 2010
Thursday, January 28, 2010
Gold suppression is public policy and public record, not 'conspiracy theory'
Gold suppression is public policy and public record, not 'conspiracy theory'
Submitted by cpowell on Sat, 2009-11-07 18:16. Section: Essays
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
International Precious Metals and Commodities Show
Olympia Park, Munich, Germany
Saturday, November 7, 2009
Thank you for coming to listen to me today. Please forgive my inability to speak German. I'll be discussing many documents, some of them fairly complicated, but don't worry if you miss something about them. They'll be posted at GATA's Internet site with these remarks.
On Friday, September 25, Jim Rickards, director of market intelligence for the Omnis consulting firm in McLean, Virginia., was interviewed on the cable television network CNBC in the United States. Talking about the currency markets, Rickards remarked: "When you own gold you're fighting every central bank in the world."
That's because gold is a currency that competes with government currencies and has a powerful influence on interest rates and the price of government bonds. And that's why central banks long have tried to suppress the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power.
As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.
Of course what Jim Rickards said about gold was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, what Rickards said has been our premise for most of our 10 years, and we have documented it extensively. Rickards' assertion was spectacular simply because he was allowed to make it in the mainstream financial news media and was allowed to keep talking. While the gold price suppression scheme is a hard fact of history, it is seldom mentioned in polite company in the financial world. I have been asked to talk about it here. I am grateful for this invitation and I will try to be polite.
How have central banks tried to suppress the price of gold?
The gold price suppression scheme was undertaken openly by governments for a long time prior to 1971.
That's what the gold standard was about -- governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies that were backed by gold.
Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price. Throughout the 1960s the United States and Great Britain attempted to hold the price at $35 in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement came to be known as the London Gold Pool.
As monetary inflation rose sharply, the London Gold Pool was overwhelmed by demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold -- convertibility for government treasuries that wanted to exchange dollars for gold. At that moment currencies began to float against each other and against gold -- or so the world was told.
For since 1971 the gold price suppression scheme has been undertaken largely surreptitiously, seldom acknowledged officially. But sometimes it has been acknowledged officially, and with a little detective work, more about it can be discovered.
You may have heard GATA derided as a "conspiracy theory" organization. We are not that at all. To the contrary, we examine the public record, produce documentation, question public officials, and publicize their most interesting answers, or their most interesting refusals to answer. I'd like to review some of the public record with you.
The gold price suppression scheme became a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee's minutes, that the U.S. Treasury Department's Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed's Internet site:
http://www.federalreserve.gov/monetarypolicy/files/FOMC19950201meeting.p...
The gold price suppression scheme was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." That is, Greenspan himself, supposedly the greatest among the central bankers, contradicted the usual central bank explanation for leasing gold -- which was supposedly to earn a little interest on a dead asset -- and admitted that gold leasing is all about suppressing the price. Greenspan's admission is still posted at the Fed's Internet site:
http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm
Incidentally, while we gold bugs love to cite Greenspan's testimony from 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important today. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.
The Washington Agreement on Gold, made by the European central banks in 1999, was another admission -- no, a proclamation that central banks were working together to control the gold price. The central banks making the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement at the World Gold Council's Internet site:
http://www.reserveasset.gold.org/central_bank_agreements/cbga1/
Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. That is when Barrick filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market.
Barrick's motion claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick's confession to the gold price suppression scheme is posted at GATA's Internet site:
http://www.gata.org/files/BarrickConfessionMotionToDismiss.pdf
The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. "Foreign currency reserve assets and gold," the Reserve Bank's report said, "are held primarily to support intervention in the foreign exchange market." The bank's report is still posted at its Internet site:
http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/...
Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.
There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." White's speech is posted at GATA's Internet site:
http://www.gata.org/node/4279
In January this year a remarkable 16-page memorandum was discovered in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis:
http://fraser.stlouisfed.org/docs/historical/martin/23_06_19610405.pdf
In August this year the international journalist Max Keiser reported an interview he had with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York. That interview is posted at the YouTube Internet site:
http://www.youtube.com/watch?v=EzVhzoAqMhU
Some people saw the Bundesbank's admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. On August 24 the Bundesbank replied to Kirby by e-mail with a denial of Keiser's report, but the denial was actually pretty much a confirmation:
http://www.gata.org/node/7713
"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."
The Bundesbank did not specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others -- like the United States, the custodian of German gold.
In September this year a New York financial market professional and student of history named Geoffrey Batt posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.
The first was a long cable dated March 6, 1968, from someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It is posted at the Zero Hedge Internet site:
http://www.zerohedge.com/article/declassified-state-dept-data-highlights...
The cable described the strains on the London Gold Pool, the
gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.
The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors "that there is no point any more in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.
The cable recommends creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposes "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable calls a "reshuffle club" that would apply gold where market intervention seemed most necessary.
These "reshuffles" sound like the central bank gold swaps of recent years.
The idea, the cable says, is for the central banks "to remain the masters of gold."
Also in September this year Zero Hedge's Geoffrey Batt disclosed a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too is posted at the Zero Hedge Internet site:
http://www.zerohedge.com/article/cia-chimes-gold-control-highlights-hist...
The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:
" -- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."
And:
"-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."
The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge, also in September this year, may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and gold and gold would be free trading.
The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It is posted at the Zero Hedge Internet site as well:
http://www.zerohedge.com/article/smoking-gun-fed-controlling-gold
Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."
Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."
While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was still 34 years ago. But now at last there has been a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a
denial, a denial based on proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)
Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps. Of course both requests were denied again. But through its Washington lawyer, William J. Olson --
http://www.lawandfreedom.com -- GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA's appeal but in his letter to our lawyer he let slip some stunning information:
http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf
Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."
So there it is: The Federal Reserve today -- right now -- has gold swap arrangements with "foreign banks."
Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:
http://www.gata.org/node/1181
But now the Fed admits such arrangements.
Of course Fed Governor Warsh did not say that the Fed has actually swapped any gold lately, only that it has arrangements to do so -- and, just as important, that the Fed does not want the public and the markets to know about those arrangements, does not want the public and the markets to know about the disposition of United States gold reserves.
GATA is preparing to sue the Fed in federal court to compel disclosure of these gold swap arrangements.
There is a reason for the Fed's insistence that the public and the markets must not know what the Fed is doing in the gold market.
It is because, as the documents compiled and publicized by GATA suggest, suppressing the gold price is part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments, because this market rigging is the foremost objective of U.S. foreign and economic policy, and because this rigging cannot work if it is exposed and the markets realize that they are not really markets at all.
And the rigging increasingly is being exposed and understood.
In complaining about the manipulation of the gold market, GATA has not been called "conspiracy nuts" by everyone. We have gained a good deal of institutional support over the years.
First came Sprott Asset Management in Toronto, which in 2004 issued a
comprehensive report supporting GATA. The report was written by Sprott's chief investment strategist, John Embry, and his assistant, Andrew Hepburn, and was titled "Not Free, Not Fair -- the Long-Term Manipulation of the Gold Price." It remains available at the Sprott Internet site:
http://www.sprott.com/docs/PressReleases/20_not_free_not_fair.pdf
Then in 2006 the Cheuvreux brokerage house of Credit Agricole, the major French bank, issued its own report confirming GATA's findings of manipulation in the gold market. The Cheuvreux report was titled "Remonetization of Gold: Start Hoarding," and you can find it at GATA's Internet site:
http://www.gata.org/files/CheuvreuxGoldReport.pdf
And in 2007 Citigroup -- yes, Citigroup, a pillar of the American financial establishment -- joined the supposed conspiracy nuts. It published a report titled "Gold: Riding the Reflationary Rescue," written by its analysts John H. Hill and Graham Wark, declaring: "Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price." You can find the Citigroup report at GATA's Internet site:
http://www.gata.org/files/CitigroupGoldReport092107.pdf
Even those authorities who do not want to run afoul of government institutions that with a few computer keystrokes can create virtually infinite amounts of money may have to admit the opportunity for central banks to manipulate the gold market. For it is widely acknowledged that annual world gold production is about 2,400 tonnes, that annual net world gold demand is about 3,400 tonnes, that gold production has been falling as demand has been rising, and that the thousand-tonne gap between production and net demand has been filled mainly by central bank dishoarding and leasing.
What do you suppose the gold price would be if central banks were not supplying more than a quarter of annual demand?
That dishoarding was not all innocent management of a foreign exchange reserve portfolio. Much of it was meant as market intervention -- and after all, market intervention is exactly why central banking was invented.
Intervening in markets is what central banks do. They have no other purpose.
Central banks admit intervening often in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels. Central banks admit doing the same in the government bond markets. There is even evidence that the Federal Reserve and Treasury Department have been intervening frequently in the U.S. stock markets since the crash of 1987.
You do not have to settle for rumors about the "Plunge Protection Team," also known as the President's Working Group on Financial Markets. Again you can just look at the public record.
The Federal Reserve injects billions of dollars into the stock and bond markets every week, on the public record, through the major New York financial houses, its so-called primary dealers in federal government bonds, using what are called repurchase agreements and the Fed's Primary Dealer Credit Facility. The financial houses thus have become the Fed's agents in directing that money into the markets. The recent rise in the U.S. stock market matches almost exactly the money funneled by the Fed to the New York financial houses through repurchase agreements and the Primary Dealer Credit Facility.
Meanwhile, for years the International Monetary Fund, the central bank of the central banks, has been openly intervening in the gold market by threatening to sell gold. The IMF said its intent in selling gold was to raise money to lend to poor nations. This explanation was ridiculous on its face, though the IMF has never been challenged about it in the financial press. No, the financial press has been happy to tell the world that central banks that lately have effortlessly conjured into existence fantastic amounts of money in many currencies could find a little money to help poor countries only by selling gold.
Of course the intent of the IMF and its member central banks was not to help poor countries but to intimidate the gold market and control the gold price.
That the IMF intimidated the gold market so long with this threat of gold sales was all the more remarkable because the IMF probably has never had any gold to sell in the first place.
In April 2008 I wrote to the managing director of the IMF, Dominque Strauss-Kahn, with five questions about the IMF's gold. I copied the letter to the IMF's press office by e-mail, and quickly began to get some answers from one of its press officers, Conny Lotze.
My first question to the IMF was: "Your Internet site says the IMF holds 3,217 metric tons of gold 'at designated depositories.' Which depositories are these?"
Conny Lotze of the IMF replied, but not specifically. She wrote: "The fund's gold is distributed across a number of official depositories." She noted that the IMF's rules designate the United States, Britain, France, and India as IMF depositories.
My second question was: "If you would prefer not to identify the depositories for security reasons, could you at least identify the national and private custodians of the IMF's gold and the amounts of IMF gold held by each?"
Conny Lotze replied, again not very specifically: "All of the designated depositories are official."
My third question was: "Is the IMF's gold at these depositories allocated -- that is, specifically identified as belonging to the IMF -- or is it merged with other gold in storage at these depositories?"
Conny Lotze replied, still not very specifically: "The fund's gold is properly accounted for at all its depositories."
My fourth question was: "Do the IMF's member countries count the IMF's gold as part of their own national reserves, or do they count and identify the IMF's gold separately?"
Conny Lotze replied a bit ambiguously: "Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund in their international reserves."
This sounded to me as if the IMF members were still counting as their own the gold that supposedly belongs to the IMF -- that the IMF members were just listing the gold assets in another column on their own books.
My fifth question to the IMF was: "Does the IMF have assurances from the depositories that its gold is not leased or swapped or otherwise encumbered? If so, what are these assurances?"
Conny Lotze replied: "Under the fund's Articles of Agreement it is not authorized to engage in these transactions in gold."
But I had not asked if the IMF itself was swapping or leasing gold. I had asked whether the custodians of the IMF's gold were swapping or leasing it.
This prompted me to raise one more question for Conny Lotze. I wrote her: "Is there any audit of the IMF's gold that is available to the public? I ask because, if the amount of IMF gold held by each depository nation is not public information, there does not seem to be much documentation for the IMF's gold, nor any documentation for the assurance that its custody is just fine. Without any details or documentation, the IMF's answer seems to be simply that it should be trusted -- that it has the gold it says it has, somewhere."
And that was the last I heard from Conny Lotze. She didn't answer me again. I had spoken a word that is increasingly unspeakable in the gold section of central banking: audit.
This week the IMF at last announced the disposal of some of the 400 tonnes of gold it long had been threatening to sell. Two hundred tonnes have been purchased by the Reserve Bank of India. This may or may not be a real transaction, a real transfer of gold from an IMF vault to a vault of the Reserve Bank of India. More likely this transaction is only a bookkeeping entry among IMF member central banks. But in any case it seems likely that the gold with which the IMF has been threatening the market for years is never going to hit the market, if it even exists. Rather, this gold will remain in the mysterious possession of central banks.
Lately central bankers often have complained about what they call "imbalances" in the world financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers about "imbalances" are brazenly hypocritical, since these imbalances have been caused by the central banks themselves, caused by their constant interventions in the currency, bond, and commodity markets to prevent those markets from coming into balance through ordinary market action lest certain political interests be disturbed.
Yes, when markets balance themselves they often do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for the almost 150 years before then the country went through a catastrophic deflation every decade or so. Central banking was created in the name of preventing those catastrophic deflations.
The problem with central banking has been mainly the old problem of power --- it corrupts.
Central bankers are supposed to be more capable of restraint than ordinary politicians, and maybe some are, but they are not always or even often capable of the necessary restraint. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest -- to benefit especially the financial interests, the banking and investment banking industries. These interventions, subsidies to special interests, increasingly are needed to prevent the previous imbalances from imploding.
And so we have come to an era of daily market interventions by central banks -- so much so that the main purpose of central banking now is to prevent ordinary markets from happening at all.
By manipulating the value of money, central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret -- because, in choosing winners and losers in the economy, advancing infinite amounts of money to some participants in the markets but not to others, administering the ultimate patronage, central banking cannot survive scrutiny.
Yet the secrecy of central banking now is taken for granted even in nominally democratic countries.
Maybe the Federal Reserve's intervention to rescue Bear Stearns through the Fed's de-facto subsidiary, JPMorganChase, will cause some devastating public inquiries by Congress and the news media. But what a hundred years ago in the United States was called the Money Power is so ascendant today that it sometimes even boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in the United States in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: "The last duty of a central banker is to tell the public the truth."
The truth as GATA sees it is this:
First, gold is the secret knowledge of the financial universe, but it is becoming an open secret. That is GATA's work -- to break the secret open, to show how the gold price has been suppressed by central bank creation of imaginary gold in amounts to match and thus help conceal the vast inflation of the world's money supply. We will continue to use freedom-of-information law against the Fed and the Treasury Department about their policies toward gold and the disposition of the U.S. gold reserve. Of course central banks can no more afford to account fully for their gold reserves than the Fed and JPMorganChase can afford to disclose details of their negotiations for the rescue of Bear Stearns. Indeed, as my correspondence with the IMF suggests, the disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons.
Why can't the public and the markets be permitted to know exactly where central bank gold reserves are? Because in the hands of governments gold is a deadly weapon -- as the Reserve Bank of Australia acknowledges, the main weapon of currency market intervention.
Second, all technical analysis of markets now is faulty if it fails to account for pervasive government intervention.
And third, the intervention against gold is failing because of overuse, exposure, exhaustion of Western central bank gold reserves -- we estimate that the Western central banks have in their vaults only about half the 32,000 tonnes they claim to have -- and the resentment of the developing world, which is starting to figure out how it has been expropriated by the dollar system, a system in which people do real work and create real goods and send them to the United States in exchange for mere colored paper and electrons.
For years now the Western central banks have been attempting a controlled retreat with gold, bleeding out their reserves with sales, leases, and derivatives so that gold's ascent and the dollar's inevitable decline may be less shocking. Central bankers often convey part of this strategy in code; they warn against what they call a "disorderly decline" in the dollar, as if an "orderly" decline is all right.
The rise in the gold price over the last decade is just the other side of that coin -- an "orderly" rise, 15 percent or so per year, a rise carefully modulated by surreptitious central bank intervention.
But GATA believes that the central banks may have to retreat farther with gold than anyone dreams, and far more abruptly than they have retreated so far. We believe that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between, on one hand, the supply of real gold, actual metal, not the voluminous paper promises of metal, and, on the other hand, the explosion of the world money supply of the last few decades -- as the market begins to perceive the difference between the real and the unreal -- there may not be enough zeroes to put behind the gold price.
A century ago Rudyard Kipling wrote a poem that foresaw the decline of the empire of his country, Great Britain. Kipling's poem attributed this decline to the loss of the old virtues, the virtues that were listed at the top of the pages in the special notebooks, called "copybooks," that were given to British schoolchildren at that time -- virtues like honesty, fair dealing, Ten Commandments stuff. The title of Kipling's poem is "The Gods of the Copybook Headings," and its conclusion is a warning to the empire that succeeded the one he was living in:
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.
The gold price suppression story is important despite this week's dramatic rise in the gold price. For even as the price of gold has been rising, we really don't yet know what a fair price, a free-market price, for gold is, since gold has not traded in a free market for many years and is not trading in a free market now.
Indeed, since central bank intervention in the currency, bond, equities, and commodity markets has exploded over the last year, we don't really know what the market price of anything is anymore. Thus the gold price suppression story is a story about the valuation of all capital and labor in the world -- and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.
The specifics of the gold price suppression operation are complicated, but you don't have to remember them all if you know what they mean.
They mean that there is a currency war going on between countries and their central banks. There has been such a war for many years, only the victims were not really fighting back. Now some of them are. Signs of this war are now everywhere -- like the story published a month ago by the British newspaper The Independent that described an international plan to replace the dollar in oil trading:
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar...
Gold and silver have been and remain currencies and will be remonetized by markets eventually if not by central banks as well, because gold and silver are the only neutral currencies, the only currencies that are not the liabilities of any particular country.
But when you invest in currencies like gold and silver, you risk getting caught in the crossfire of the currency war. As in any war, truth is the first casualty in the currency war, even as secrecy is always the first principle of central banking.
Meanwhile, not asking the right questions of the right people seems to be the first principle of most mainstream financial journalists and even the first principle of some gold and silver market analysts. These journalists and analysts take government secrecy in central banking for granted, even as the evidence of market intervention and manipulation explodes all around them. This acceptance of secrecy reminds me of the bumbling police detective played by Leslie Nielsen in the "Naked Gun" movies, particularly his performance in this scene:
http://www.youtube.com/watch?v=rSjK2Oqrgic
Well, there is something to see here.
The precious metals promise great rewards to investors, but to get the necessary information you have to do a lot more work than other investors.
And you have to remember the remarkable properties of gold and silver. It's not just that gold is the most malleable and lustrous of metals, or that silver is the most conductive and reflective, but also that, once they get into the hands of central banks, bullion banks, and exchange-traded funds, gold and silver can become invisible.
* * *
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Vancouver Resource Investment Conference
Sunday and Monday, January 17 and 18, 2010
Hyatt and Fairmont Conference Hotels
Vancouver, British Columbia, Canada
http://www.cambridgeconferences.com/index.php/vancouver-resource-investm...
* * *
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http://gata.org/tshirts
Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:
http://www.cartserver.com/sc/cart.cgi
Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:
http://www.goldrush21.com/
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Submitted by cpowell on Sat, 2009-11-07 18:16. Section: Essays
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
International Precious Metals and Commodities Show
Olympia Park, Munich, Germany
Saturday, November 7, 2009
Thank you for coming to listen to me today. Please forgive my inability to speak German. I'll be discussing many documents, some of them fairly complicated, but don't worry if you miss something about them. They'll be posted at GATA's Internet site with these remarks.
On Friday, September 25, Jim Rickards, director of market intelligence for the Omnis consulting firm in McLean, Virginia., was interviewed on the cable television network CNBC in the United States. Talking about the currency markets, Rickards remarked: "When you own gold you're fighting every central bank in the world."
That's because gold is a currency that competes with government currencies and has a powerful influence on interest rates and the price of government bonds. And that's why central banks long have tried to suppress the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power.
As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.
Of course what Jim Rickards said about gold was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, what Rickards said has been our premise for most of our 10 years, and we have documented it extensively. Rickards' assertion was spectacular simply because he was allowed to make it in the mainstream financial news media and was allowed to keep talking. While the gold price suppression scheme is a hard fact of history, it is seldom mentioned in polite company in the financial world. I have been asked to talk about it here. I am grateful for this invitation and I will try to be polite.
How have central banks tried to suppress the price of gold?
The gold price suppression scheme was undertaken openly by governments for a long time prior to 1971.
That's what the gold standard was about -- governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies that were backed by gold.
Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price. Throughout the 1960s the United States and Great Britain attempted to hold the price at $35 in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement came to be known as the London Gold Pool.
As monetary inflation rose sharply, the London Gold Pool was overwhelmed by demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold -- convertibility for government treasuries that wanted to exchange dollars for gold. At that moment currencies began to float against each other and against gold -- or so the world was told.
For since 1971 the gold price suppression scheme has been undertaken largely surreptitiously, seldom acknowledged officially. But sometimes it has been acknowledged officially, and with a little detective work, more about it can be discovered.
You may have heard GATA derided as a "conspiracy theory" organization. We are not that at all. To the contrary, we examine the public record, produce documentation, question public officials, and publicize their most interesting answers, or their most interesting refusals to answer. I'd like to review some of the public record with you.
The gold price suppression scheme became a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee's minutes, that the U.S. Treasury Department's Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed's Internet site:
http://www.federalreserve.gov/monetarypolicy/files/FOMC19950201meeting.p...
The gold price suppression scheme was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." That is, Greenspan himself, supposedly the greatest among the central bankers, contradicted the usual central bank explanation for leasing gold -- which was supposedly to earn a little interest on a dead asset -- and admitted that gold leasing is all about suppressing the price. Greenspan's admission is still posted at the Fed's Internet site:
http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm
Incidentally, while we gold bugs love to cite Greenspan's testimony from 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important today. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.
The Washington Agreement on Gold, made by the European central banks in 1999, was another admission -- no, a proclamation that central banks were working together to control the gold price. The central banks making the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement at the World Gold Council's Internet site:
http://www.reserveasset.gold.org/central_bank_agreements/cbga1/
Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. That is when Barrick filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market.
Barrick's motion claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick's confession to the gold price suppression scheme is posted at GATA's Internet site:
http://www.gata.org/files/BarrickConfessionMotionToDismiss.pdf
The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. "Foreign currency reserve assets and gold," the Reserve Bank's report said, "are held primarily to support intervention in the foreign exchange market." The bank's report is still posted at its Internet site:
http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/...
Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.
There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." White's speech is posted at GATA's Internet site:
http://www.gata.org/node/4279
In January this year a remarkable 16-page memorandum was discovered in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis:
http://fraser.stlouisfed.org/docs/historical/martin/23_06_19610405.pdf
In August this year the international journalist Max Keiser reported an interview he had with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York. That interview is posted at the YouTube Internet site:
http://www.youtube.com/watch?v=EzVhzoAqMhU
Some people saw the Bundesbank's admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. On August 24 the Bundesbank replied to Kirby by e-mail with a denial of Keiser's report, but the denial was actually pretty much a confirmation:
http://www.gata.org/node/7713
"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."
The Bundesbank did not specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others -- like the United States, the custodian of German gold.
In September this year a New York financial market professional and student of history named Geoffrey Batt posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.
The first was a long cable dated March 6, 1968, from someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It is posted at the Zero Hedge Internet site:
http://www.zerohedge.com/article/declassified-state-dept-data-highlights...
The cable described the strains on the London Gold Pool, the
gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.
The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors "that there is no point any more in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.
The cable recommends creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposes "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable calls a "reshuffle club" that would apply gold where market intervention seemed most necessary.
These "reshuffles" sound like the central bank gold swaps of recent years.
The idea, the cable says, is for the central banks "to remain the masters of gold."
Also in September this year Zero Hedge's Geoffrey Batt disclosed a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too is posted at the Zero Hedge Internet site:
http://www.zerohedge.com/article/cia-chimes-gold-control-highlights-hist...
The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:
" -- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."
And:
"-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."
The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge, also in September this year, may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and gold and gold would be free trading.
The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It is posted at the Zero Hedge Internet site as well:
http://www.zerohedge.com/article/smoking-gun-fed-controlling-gold
Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."
Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."
While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was still 34 years ago. But now at last there has been a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a
denial, a denial based on proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)
Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps. Of course both requests were denied again. But through its Washington lawyer, William J. Olson --
http://www.lawandfreedom.com -- GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA's appeal but in his letter to our lawyer he let slip some stunning information:
http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf
Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."
So there it is: The Federal Reserve today -- right now -- has gold swap arrangements with "foreign banks."
Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:
http://www.gata.org/node/1181
But now the Fed admits such arrangements.
Of course Fed Governor Warsh did not say that the Fed has actually swapped any gold lately, only that it has arrangements to do so -- and, just as important, that the Fed does not want the public and the markets to know about those arrangements, does not want the public and the markets to know about the disposition of United States gold reserves.
GATA is preparing to sue the Fed in federal court to compel disclosure of these gold swap arrangements.
There is a reason for the Fed's insistence that the public and the markets must not know what the Fed is doing in the gold market.
It is because, as the documents compiled and publicized by GATA suggest, suppressing the gold price is part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments, because this market rigging is the foremost objective of U.S. foreign and economic policy, and because this rigging cannot work if it is exposed and the markets realize that they are not really markets at all.
And the rigging increasingly is being exposed and understood.
In complaining about the manipulation of the gold market, GATA has not been called "conspiracy nuts" by everyone. We have gained a good deal of institutional support over the years.
First came Sprott Asset Management in Toronto, which in 2004 issued a
comprehensive report supporting GATA. The report was written by Sprott's chief investment strategist, John Embry, and his assistant, Andrew Hepburn, and was titled "Not Free, Not Fair -- the Long-Term Manipulation of the Gold Price." It remains available at the Sprott Internet site:
http://www.sprott.com/docs/PressReleases/20_not_free_not_fair.pdf
Then in 2006 the Cheuvreux brokerage house of Credit Agricole, the major French bank, issued its own report confirming GATA's findings of manipulation in the gold market. The Cheuvreux report was titled "Remonetization of Gold: Start Hoarding," and you can find it at GATA's Internet site:
http://www.gata.org/files/CheuvreuxGoldReport.pdf
And in 2007 Citigroup -- yes, Citigroup, a pillar of the American financial establishment -- joined the supposed conspiracy nuts. It published a report titled "Gold: Riding the Reflationary Rescue," written by its analysts John H. Hill and Graham Wark, declaring: "Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price." You can find the Citigroup report at GATA's Internet site:
http://www.gata.org/files/CitigroupGoldReport092107.pdf
Even those authorities who do not want to run afoul of government institutions that with a few computer keystrokes can create virtually infinite amounts of money may have to admit the opportunity for central banks to manipulate the gold market. For it is widely acknowledged that annual world gold production is about 2,400 tonnes, that annual net world gold demand is about 3,400 tonnes, that gold production has been falling as demand has been rising, and that the thousand-tonne gap between production and net demand has been filled mainly by central bank dishoarding and leasing.
What do you suppose the gold price would be if central banks were not supplying more than a quarter of annual demand?
That dishoarding was not all innocent management of a foreign exchange reserve portfolio. Much of it was meant as market intervention -- and after all, market intervention is exactly why central banking was invented.
Intervening in markets is what central banks do. They have no other purpose.
Central banks admit intervening often in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels. Central banks admit doing the same in the government bond markets. There is even evidence that the Federal Reserve and Treasury Department have been intervening frequently in the U.S. stock markets since the crash of 1987.
You do not have to settle for rumors about the "Plunge Protection Team," also known as the President's Working Group on Financial Markets. Again you can just look at the public record.
The Federal Reserve injects billions of dollars into the stock and bond markets every week, on the public record, through the major New York financial houses, its so-called primary dealers in federal government bonds, using what are called repurchase agreements and the Fed's Primary Dealer Credit Facility. The financial houses thus have become the Fed's agents in directing that money into the markets. The recent rise in the U.S. stock market matches almost exactly the money funneled by the Fed to the New York financial houses through repurchase agreements and the Primary Dealer Credit Facility.
Meanwhile, for years the International Monetary Fund, the central bank of the central banks, has been openly intervening in the gold market by threatening to sell gold. The IMF said its intent in selling gold was to raise money to lend to poor nations. This explanation was ridiculous on its face, though the IMF has never been challenged about it in the financial press. No, the financial press has been happy to tell the world that central banks that lately have effortlessly conjured into existence fantastic amounts of money in many currencies could find a little money to help poor countries only by selling gold.
Of course the intent of the IMF and its member central banks was not to help poor countries but to intimidate the gold market and control the gold price.
That the IMF intimidated the gold market so long with this threat of gold sales was all the more remarkable because the IMF probably has never had any gold to sell in the first place.
In April 2008 I wrote to the managing director of the IMF, Dominque Strauss-Kahn, with five questions about the IMF's gold. I copied the letter to the IMF's press office by e-mail, and quickly began to get some answers from one of its press officers, Conny Lotze.
My first question to the IMF was: "Your Internet site says the IMF holds 3,217 metric tons of gold 'at designated depositories.' Which depositories are these?"
Conny Lotze of the IMF replied, but not specifically. She wrote: "The fund's gold is distributed across a number of official depositories." She noted that the IMF's rules designate the United States, Britain, France, and India as IMF depositories.
My second question was: "If you would prefer not to identify the depositories for security reasons, could you at least identify the national and private custodians of the IMF's gold and the amounts of IMF gold held by each?"
Conny Lotze replied, again not very specifically: "All of the designated depositories are official."
My third question was: "Is the IMF's gold at these depositories allocated -- that is, specifically identified as belonging to the IMF -- or is it merged with other gold in storage at these depositories?"
Conny Lotze replied, still not very specifically: "The fund's gold is properly accounted for at all its depositories."
My fourth question was: "Do the IMF's member countries count the IMF's gold as part of their own national reserves, or do they count and identify the IMF's gold separately?"
Conny Lotze replied a bit ambiguously: "Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund in their international reserves."
This sounded to me as if the IMF members were still counting as their own the gold that supposedly belongs to the IMF -- that the IMF members were just listing the gold assets in another column on their own books.
My fifth question to the IMF was: "Does the IMF have assurances from the depositories that its gold is not leased or swapped or otherwise encumbered? If so, what are these assurances?"
Conny Lotze replied: "Under the fund's Articles of Agreement it is not authorized to engage in these transactions in gold."
But I had not asked if the IMF itself was swapping or leasing gold. I had asked whether the custodians of the IMF's gold were swapping or leasing it.
This prompted me to raise one more question for Conny Lotze. I wrote her: "Is there any audit of the IMF's gold that is available to the public? I ask because, if the amount of IMF gold held by each depository nation is not public information, there does not seem to be much documentation for the IMF's gold, nor any documentation for the assurance that its custody is just fine. Without any details or documentation, the IMF's answer seems to be simply that it should be trusted -- that it has the gold it says it has, somewhere."
And that was the last I heard from Conny Lotze. She didn't answer me again. I had spoken a word that is increasingly unspeakable in the gold section of central banking: audit.
This week the IMF at last announced the disposal of some of the 400 tonnes of gold it long had been threatening to sell. Two hundred tonnes have been purchased by the Reserve Bank of India. This may or may not be a real transaction, a real transfer of gold from an IMF vault to a vault of the Reserve Bank of India. More likely this transaction is only a bookkeeping entry among IMF member central banks. But in any case it seems likely that the gold with which the IMF has been threatening the market for years is never going to hit the market, if it even exists. Rather, this gold will remain in the mysterious possession of central banks.
Lately central bankers often have complained about what they call "imbalances" in the world financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers about "imbalances" are brazenly hypocritical, since these imbalances have been caused by the central banks themselves, caused by their constant interventions in the currency, bond, and commodity markets to prevent those markets from coming into balance through ordinary market action lest certain political interests be disturbed.
Yes, when markets balance themselves they often do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for the almost 150 years before then the country went through a catastrophic deflation every decade or so. Central banking was created in the name of preventing those catastrophic deflations.
The problem with central banking has been mainly the old problem of power --- it corrupts.
Central bankers are supposed to be more capable of restraint than ordinary politicians, and maybe some are, but they are not always or even often capable of the necessary restraint. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest -- to benefit especially the financial interests, the banking and investment banking industries. These interventions, subsidies to special interests, increasingly are needed to prevent the previous imbalances from imploding.
And so we have come to an era of daily market interventions by central banks -- so much so that the main purpose of central banking now is to prevent ordinary markets from happening at all.
By manipulating the value of money, central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret -- because, in choosing winners and losers in the economy, advancing infinite amounts of money to some participants in the markets but not to others, administering the ultimate patronage, central banking cannot survive scrutiny.
Yet the secrecy of central banking now is taken for granted even in nominally democratic countries.
Maybe the Federal Reserve's intervention to rescue Bear Stearns through the Fed's de-facto subsidiary, JPMorganChase, will cause some devastating public inquiries by Congress and the news media. But what a hundred years ago in the United States was called the Money Power is so ascendant today that it sometimes even boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in the United States in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: "The last duty of a central banker is to tell the public the truth."
The truth as GATA sees it is this:
First, gold is the secret knowledge of the financial universe, but it is becoming an open secret. That is GATA's work -- to break the secret open, to show how the gold price has been suppressed by central bank creation of imaginary gold in amounts to match and thus help conceal the vast inflation of the world's money supply. We will continue to use freedom-of-information law against the Fed and the Treasury Department about their policies toward gold and the disposition of the U.S. gold reserve. Of course central banks can no more afford to account fully for their gold reserves than the Fed and JPMorganChase can afford to disclose details of their negotiations for the rescue of Bear Stearns. Indeed, as my correspondence with the IMF suggests, the disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons.
Why can't the public and the markets be permitted to know exactly where central bank gold reserves are? Because in the hands of governments gold is a deadly weapon -- as the Reserve Bank of Australia acknowledges, the main weapon of currency market intervention.
Second, all technical analysis of markets now is faulty if it fails to account for pervasive government intervention.
And third, the intervention against gold is failing because of overuse, exposure, exhaustion of Western central bank gold reserves -- we estimate that the Western central banks have in their vaults only about half the 32,000 tonnes they claim to have -- and the resentment of the developing world, which is starting to figure out how it has been expropriated by the dollar system, a system in which people do real work and create real goods and send them to the United States in exchange for mere colored paper and electrons.
For years now the Western central banks have been attempting a controlled retreat with gold, bleeding out their reserves with sales, leases, and derivatives so that gold's ascent and the dollar's inevitable decline may be less shocking. Central bankers often convey part of this strategy in code; they warn against what they call a "disorderly decline" in the dollar, as if an "orderly" decline is all right.
The rise in the gold price over the last decade is just the other side of that coin -- an "orderly" rise, 15 percent or so per year, a rise carefully modulated by surreptitious central bank intervention.
But GATA believes that the central banks may have to retreat farther with gold than anyone dreams, and far more abruptly than they have retreated so far. We believe that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between, on one hand, the supply of real gold, actual metal, not the voluminous paper promises of metal, and, on the other hand, the explosion of the world money supply of the last few decades -- as the market begins to perceive the difference between the real and the unreal -- there may not be enough zeroes to put behind the gold price.
A century ago Rudyard Kipling wrote a poem that foresaw the decline of the empire of his country, Great Britain. Kipling's poem attributed this decline to the loss of the old virtues, the virtues that were listed at the top of the pages in the special notebooks, called "copybooks," that were given to British schoolchildren at that time -- virtues like honesty, fair dealing, Ten Commandments stuff. The title of Kipling's poem is "The Gods of the Copybook Headings," and its conclusion is a warning to the empire that succeeded the one he was living in:
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.
The gold price suppression story is important despite this week's dramatic rise in the gold price. For even as the price of gold has been rising, we really don't yet know what a fair price, a free-market price, for gold is, since gold has not traded in a free market for many years and is not trading in a free market now.
Indeed, since central bank intervention in the currency, bond, equities, and commodity markets has exploded over the last year, we don't really know what the market price of anything is anymore. Thus the gold price suppression story is a story about the valuation of all capital and labor in the world -- and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.
The specifics of the gold price suppression operation are complicated, but you don't have to remember them all if you know what they mean.
They mean that there is a currency war going on between countries and their central banks. There has been such a war for many years, only the victims were not really fighting back. Now some of them are. Signs of this war are now everywhere -- like the story published a month ago by the British newspaper The Independent that described an international plan to replace the dollar in oil trading:
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar...
Gold and silver have been and remain currencies and will be remonetized by markets eventually if not by central banks as well, because gold and silver are the only neutral currencies, the only currencies that are not the liabilities of any particular country.
But when you invest in currencies like gold and silver, you risk getting caught in the crossfire of the currency war. As in any war, truth is the first casualty in the currency war, even as secrecy is always the first principle of central banking.
Meanwhile, not asking the right questions of the right people seems to be the first principle of most mainstream financial journalists and even the first principle of some gold and silver market analysts. These journalists and analysts take government secrecy in central banking for granted, even as the evidence of market intervention and manipulation explodes all around them. This acceptance of secrecy reminds me of the bumbling police detective played by Leslie Nielsen in the "Naked Gun" movies, particularly his performance in this scene:
http://www.youtube.com/watch?v=rSjK2Oqrgic
Well, there is something to see here.
The precious metals promise great rewards to investors, but to get the necessary information you have to do a lot more work than other investors.
And you have to remember the remarkable properties of gold and silver. It's not just that gold is the most malleable and lustrous of metals, or that silver is the most conductive and reflective, but also that, once they get into the hands of central banks, bullion banks, and exchange-traded funds, gold and silver can become invisible.
* * *
Join GATA here:
Vancouver Resource Investment Conference
Sunday and Monday, January 17 and 18, 2010
Hyatt and Fairmont Conference Hotels
Vancouver, British Columbia, Canada
http://www.cambridgeconferences.com/index.php/vancouver-resource-investm...
* * *
Support GATA by purchasing a colorful GATA T-shirt:
http://gata.org/tshirts
Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:
http://www.cartserver.com/sc/cart.cgi
Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:
http://www.goldrush21.com/
* * *
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Monday, November 2, 2009
Gold Report Nov2nd 2009
Gold steadily rose throughout most of world trade to as high as $1062.65 by about 10AM EST before its fell back off a bit into the close, but it still ended with a gain of 1.35%. Silver climbed as much as $0.45 to $16.70 by about 10:30AM EST before it also fell back off in the last few hours of trade, but it still ended with a gain of 0.62%.
Euro gold rose to about €713, platinum gained $9 to $1329, and copper rose slightly to about $2.96.
Gold and silver equities rose over 2% at the open and nearly 4% by midmorning before they fell back off in early afternoon trade to see slight losses by around 2PM EST, but they then rallied back higher into the close and ended with about 1% gains.
Euro gold rose to about €713, platinum gained $9 to $1329, and copper rose slightly to about $2.96.
Gold and silver equities rose over 2% at the open and nearly 4% by midmorning before they fell back off in early afternoon trade to see slight losses by around 2PM EST, but they then rallied back higher into the close and ended with about 1% gains.
Jeff Nichols remarks on Gold, must reads
Hong Kong Speech: Gold Market Situation & Outlook
Print
Speech to the Gold Outlook Asia 2009 Conference
Hong Kong – October 22, 2009
I’ve been asked to talk about the world economic and financial crisis – and the implications for gold. In addition, I want to discuss important changes in the official sector and structural developments in the private investment sphere that have important implications for the price of gold over the next few years.
The place to begin, however, is with the U.S. and global macroeconomic situation – past, present, and future.
This is an especially appropriate topic for an American economist since it has been, in large measure, America’s economic policies over the past several decades that have landed us in today’s international economic predicament.
Easy Money
In my view, the root cause of the current world economic crisis has been decades of easy money, low interest rates, and a persistently expansionary monetary and fiscal policy by the United States – aided and abetted by China and the other major Asian exporting nations. As a result, Americans have been on a buying binge in the global marketplace, buying things we often don’t really need with money we don’t really have.
And the rest of the world – especially China and the other Asian economic powerhouses – have been co-conspirators, lending us the money to satisfy our need for more things in order to promote economic growth and high employment in their own economies.
Now, however, many foreign lenders – both private and official – who have been financing America’s budget and trade deficits are becoming increasingly uncomfortable pouring more and more good money after bad.
Here’s a quick lesson about the economic history of the late 20th and the early 21st centuries: Beginning in President Reagan’s second term with the appointment of Alan Greenspan as Chairman of the U.S. Federal Reserve and continuing with Ben Bernanke at the helm of America’s central bank, the Fed has pursued an expansionary, low interest-rate policy that has placed growth above all else.
During these years, every economic or financial-market crisis was met with injections of liquidity into the banks and financial markets with interest rate cuts often to negative inflation-adjusted rates of return.
The stock market crash of 1987, the Gulf War beginning in 1990, the Mexican Peso Crisis in 1994, the Asian Currency Crisis in 1997, the Long-Term Capital Management bankruptcy in 1998, the Internet Dot-Com Bubble in 2000, and the U.S. Housing Bubble that ended in 2007:
Each crisis was met with more money and lower interest rates – a policy that came to be known as the “Greenspan Put” and more recently the “Bernanke Put” because it assured many of the most reckless risk-takers they would not lose a red cent. Even if their investment and trading strategies went awry, the Fed was there to bail them out.
We never would have had the last stock market boom carry valuations to such heights without easy money.
We never would have had the U.S. housing boom without artificially low interest rates and without Fannie Mae and Freddie Mac promoting home ownership for everyone.
We never would have had the mortgage-backed securities debacle without easy money and low interest rates. And, no one – especially foreign central banks – would have bought these and other sub-prime securities if they thought they could lose their shirts.
A healthy vibrant economy needs to clean out the dead wood from time to time. Rather than allowing periodic recessions and bear markets to purge the excesses of each prior boom or bubble, the Fed stimulated the economy with massive doses of new credit, more liquidity, and lower interest rates. Neither the Fed nor the politicians in Washington wanted a recession – and hardly anyone complained when the Fed just printed more money.
Not Over Yet
Today, we should not be fooled by signs the U.S. financial crisis is now over. The losses are still there . . . and still growing: They’ve only been transferred from Wall Street and the private sector to the Federal Reserve and the U.S. Treasury.
And, don’t be fooled that the recession in the United States is really over and things are getting back to normal. The U.S. economy is showing signs of life only because of massive injections of liquidity from the Fed, unprecedented fiscal stimulus by the U.S. Treasury, and inventory restocking.
Do you really think the economy will continue to grow if the Fed removes the intravenous feeding tube? Do you really think American consumers are in shape to start spending again – with unemployment rising, household wealth diminishing, and continuing uncertainty about our economic future?
Although many economists, politicians, investors, and news reporters are beginning to talk about economic recovery in the United States, those that are seeing “green shoots” in my view are looking through “rose-colored” eyeglasses . . . and there is significant risk of a “double-dip” recession with further contraction and a second down-leg in U.S. equity prices yet to come.
Indeed, much of the recent uptick in economic activity reflects the government stimulus programs, such as the “cash-for-clunkers” program that gave the U.S. auto industry a temporary boost.
While some of these programs help businesses and households in the short run, they are all adding to the Federal budget deficit . . . and, in the long run, will complicate the Federal Reserve’s monetary policy dilemma.
We are in this mess today because America borrowed and spent too much, because we created too much credit, pumped out too much liquidity, and often kept interest rates too low– and the rest of the world was willing to go along.
Now, the politicians and policy-makers are telling us the cure is more spending, more borrowing, bigger deficits, more credit, more liquidity and negative real interest rates.
How can this be? It was too much liquidity, too much credit, too much spending, and too much borrowing that created the economic crisis in the first place.
Yet, Americans are told by mainstream economists and politicians that the prescription is more of the same – only in bigger doses.
Just look at the surging Federal budget deficit: Not many years ago, a deficit of two hundred or three hundred billion dollars was considered sufficient to elicit concern. Now, we expect annual deficits in the trillions for at least the next 10 years . . . and few are complaining.
I don’t know what the prescription is . . . but I can tell you it’s not more of the same. Would you tell a drug addict to cure his addiction with more heroin, only in bigger doses? Of course not!!
However, what I do know is that difficult times lie ahead – not just for the United States but also for many of its creditors and trading partners. Large budget deficits call for increased taxation at home – but tax increases are an anathema to Americans and there is only so much American voters will accept.
Inflation Ahead
In lieu of actually paying down America’s huge debts, we can expect currency debasement and higher rates of inflation to reduce the real value America’s debts at home and abroad.
Here’s another indicator that the United States is headed into a period of higher inflation.
We have never in the economic history of the United States seen a period of rapid growth in money and credit nor an extended period of negative real interest rates that has not been followed by a declining dollar exchange rate abroad and a rising inflation rate at home.
A number of important foreign central banks – especially China and the other Asian tigers – are waking up to this situation.
They are seeking ways to diversify their reserve assets in order to minimize dollar-related risks – and this will likely include acquiring proportionately more euro-denominated debt and more gold purchases by the official sector.
And, they will increasingly encourage their corporate sectors to invest in real assets around the world – including mining and mineral resources – so that they get something of intrinsic value for some of those depreciating dollars held by their central banks.
With higher inflation and a depreciating U.S. dollar, I think you can sense that I’m bullish on gold. I’ll have more to say about this later.
But first I’d like to briefly discuss five important gold-market trends: (1) the continuing slide in world gold mine production, (2) the surge in old gold scrap last year and early this year, (3) the fall of jewelry fabrication demand, (4) changing central bank attitudes with respect to gold, and (5) important developments in the gold investment arena.
Mine Production in Decline
Annual worldwide gold-mine production peaked in 2001 at 2,645 tons and has been falling gradually ever since. This downtrend is expected to continue at least for the next few years . . . and by 2011 it will likely have dwindled to less than 2,300 tons – a decline of 14 percent over the 10-year period.
Over the long term, mine output is a reflection of price versus the rapidly rising cost of production and the increasing difficulty and expense in finding new deposits large enough to offset the loss of production from the ongoing depletion of existing mines.
In addition, increasingly stringent environmental regulations are adding to costs – and unfriendly government attitudes toward mining or foreign ownership in some countries – are discouraging exploration and development.
Importantly, the stock-market crash and continuing global economic crisis has slowed funding and retarded mine exploration and development in many countries.
One explanation to the on-going decline in worldwide mine production is that prices in the past couple of decades simply have not been high enough to encourage exploration and development sufficient to replace the dwindling reserves in the historic “big four” gold producing countries – South Africa, the United States, Canada, and Australia.
Interestingly, the locus of world gold-mine production is shifting from the “big four” to the emerging market nations – particularly China, Russia, Indonesia, and Peru.
China became the world’s number one gold-producing country in 2007 aided by supportive government policies that continue to promote a rapid pace of mine development and rationalization of the industry. These policies are likely to continue . . . and, I expect, China’s gold mine production will continue to grow, both in absolute terms and as a proportion of total world output.
Although there is much exploration and development activity in a number of prospective regions around the world – and more can be expected as prices rise and access to financing improves – it will not be sufficient to reverse the downtrend in global gold-mine production for at least the next five years – and likely longer.
Even if the price of gold rises substantially in the next few years sufficient to provoke a rush of exploration and mine development, for projects large enough to make a big difference, it usually takes five to ten years or longer to move from exploration to development and then to large-scale production.
The Rise of Secondary Supply
Unlike “primary” output from mines, the recycling of old scrap – mostly from jewelry – reacts quickly to changes in the price of gold beyond certain levels that are seen by holders as attractive “selling” points.
Last year and earlier this year, as prices rose through the $900 and $1000 an ounce levels, holders of old gold jewelry in many countries around the world made a collective judgment that the price was too high. As a result, scrap supplies exploded, so much so that there was a flood of metal into the market, making the higher price levels unsustainable.
Scrap recycling, which on average runs about a thousand tons a year climbed to double that rate in the fourth quarter of 2008 and the first quarter of 2009.
In the past couple of years, the rise in jewelry scrap has also been a reflection of economic hardship, high unemployment, and a desperate need for cash by some holders of old gold jewelry.
With prices recently over $1000, it is encouraging to note that the responsiveness of scrap has been much more subdued compared to the previous episodes of gold moving over this psychologically important price level.
The Fall of Jewelry
Let’s turn from old scrap – where jewelry is a source of supply – to jewelry fabrication, which until recent years has been a steady and reliable source of gold demand.
Gold jewelry fabrication demand reached an all-time in 1997 at 3,342 tons – and, since then, has been trending downward. This year, I expect worldwide jewelry fabrication demand will total little more than 2,100 tons.
Much of the decline in jewelry offtake has occurred since 2001 and reflects the substantial rise in gold prices – both in U.S. dollar terms and in local currencies for many important geographic jewelry markets.
With the continuing credit crisis and global recession, demand has also been hit hard by the collapse in retail sales, especially in the United States and Europe. In addition, and of importance to the near-term outlook, the steep decline in fabrication has been exaggerated by the running down of inventories on hand at manufacturers, distributors, and retailers.
In general, I expect a modest recovery in worldwide jewelry demand, reflecting an improving economic environment in some of the developing markets – especially India and China – and supported also by some rebuilding of inventories . . . but this recovery will muted by the expected rise in the metal’s price over the next few years.
Official Sector Gold Policy
Let’s turn our attention to the official sector. As many of you know, central banks and the IMF have been are a hot topic in the world of gold.
I believe this year is a key turning point in the modern history of gold as an official reserve asset. Central bank attitudes with respect to gold are becoming increasingly positive. After years of persistent net sales by central banks in the aggregate, the official sector is now becoming a net purchaser of gold from the market.
On average, the central banks of the world hold about 10 percent of their international reserves in gold . . . but there is great disparity from country to country and region to region.
The major Euro-zone nations together hold about 55 percent of their assets in gold. In contrast, the Asian nations, as a group, hold only about two percent of their reserves in gold. Based on recent published statistics, China has about 1.9 percent of its reserve assets in gold and Russia holds about 4.3 percent in gold.
For the past three decades, beginning in the mid-1970s, gold has been under the threat of massive sales by the world’s gold-rich central banks and by the International Monetary Fund as well. In fact, the official sector has been a net seller of gold each and every year since 1989.
At times, official sales – and the threat of more to come – have contributed to negative sentiment in the marketplace with the price typically falling whenever one or another central bank announced a sales program.
This was seen most dramatically in 1999 when, much to its recent embarrassment, the Bank of England sold over half its official gold reserves at an average price of about $275 an ounce. So much for central bankers making smart decisions!!
A number of other European central banks – among them Switzerland, France, Italy, Spain, Portugal, and the Netherlands – followed Britain, together selling about 3900 tons in total over the next 10 years.
Realizing that their gold sales were having a considerable disruptive affect on the market and the metal’s price, the European central banks announced in September 1999 their agreement to limit future gold sales to no more than 400 tons per year over the next five-year period.
This was followed by a second Gold Agreement in 2004, which limited sales by the European signatory nations to 500 tons per year for another five years.
And, just recently, the European Central Bank announced a third Agreement that caps the group’s aggregate sales once again to 400 tons per year for the next five years.
All of this may prove to be irrelevant because the European central banks have not been inclined to sell much gold this past year – and my guess is that they will not sell much at all during the next few years.
For one thing, many central bankers are bullish on the metal and don’t want to sell an appreciating asset.
Moreover, central banks that have sold large quantities of gold in the past now look quite foolish as the metal’s price has moved higher and the value of their U.S. dollar reserves has declined.
European central bank sales in this final year of the second Central Bank Gold Agreement, which ended last week, will probably total about 150 tons versus the 500 tons allowed.
I believe the decline in gold sales by the European central banks reflects a renewed respect for the yellow metal as a reserve asset and reliable store of value.
The International Monetary Fund has also made news with its plans to sell 403.3 tons of gold to support lending to the poorest countries. IMF strategists have suggested sales might occur gradually over two or three years. Others believe all 403 tons may be sold “off the market” directly to one or a few central banks – with China, Russia, India, Brazil, and the Gulf states mentioned as possible buyers.
Importantly, the new Central Bank Gold Agreement incorporates these sales by the IMF, even though the Fund is not a signatory. In other words, total sales by the European central banks and the IMF cannot exceed 400 tons per year – unless some of the IMF metal is transferred “off the market” to one or more central banks.
To a large extent, gold sales by the IMF are already anticipated and factored into the current price. However, direct sales – off the market – to one or more central banks would be confirmation that central bank attitudes are shifting in favor of gold and would likely have a positive affect on the metal’s price.
The big news of the past year has been announcements from both China and Russia that they have been buying gold from their domestic mine production – importantly demonstrating that large central banks can gradually buy gold without disrupting the market.
This past April, China told the world it had purchased 454 tons since 2003, bringing its total official holdings to 1,054 tons – still less than two percent of its total official reserves.
I believe China continues to buy gold from domestic production at a rate of at least 75 tons a year – but gold purchases this year have not yet been transferred to the central bank accounts and have not yet been reported as official reserves.
Russia, like China, has also been buying gold for official reserves from its own domestic mine production. Prime Minister Putin has said that Russia should hold 10 percent of its official reserves in gold versus the 4.3 percent that it held at the end of July. Recent statistics indicate the country has added nearly 50 tons to its official reserves during the first seven months of the year.
The Expansion of Investment
While changes in gold’s commodity fundamentals are important, it is developments in the investment arena that will have the greatest impact on the metal’s price.
Already, the introduction and growing popularity of gold exchange-traded funds (ETFs) is having a profound influence on the gold market.
Gold ETFs are gold-backed stock-market securities representing ownership in a trust designed to track the ups and downs of the metal’s price. Despite some rumors to the contrary, certainly the major gold ETFs representing the lion’s share of the market are backed 100 percent by physical bullion held in depositories on behalf of ETF investors.
Importantly, gold ETFs are bought, sold, and trade just like equities on a stock exchange – and they avoid the tax, storage, and other difficulties sometimes associated with owning physical gold.
By facilitating gold investment and ownership they have brought significant numbers of new participants to the market – not just individuals but hedge funds, pension funds, and other institutional investors.
So much so that bullion held in depositories on behalf of ETF investors now total some 1,729 tons, more than the central banks of either Switzerland or China – a remarkable feat considering gold ETFs have been around only about six years and got off to a slow start.
I’ve already mentioned China’s central bank interest in gold. Just recently, China has gone one step further by encouraging private citizens to buy gold and silver investment – and will be making investment bars available through the domestic banking system.
To put this into perspective, imagine that just one percent of China’s population each buys one ounce of gold next year – that’s 13 million ounces (or about 404 tons) of new demand, coincidentally about the same amount the IMF will now be selling.
The Future Price of Gold
The future price of gold – at least over the long term – has less to do with mine production, secondary supply, jewelry fabrication or any of the other “commodity” fundamentals of gold supply and demand . . . and most to do with gold’s appeal as a financial and monetary asset – an asset held as a savings medium, store of value, portfolio diversifier, and insurance policy by individuals, investment institutions, and central banks alike.
As I discussed earlier, real interest rates are a reliable indicator of Federal Reserve monetary policy – and it is monetary policy and money-supply growth that ultimately affects the dollar, inflation, and gold.
The historical data show that the U.S. dollar gold price is inversely related to the real (or inflation adjusted) rate of return on U.S. Treasury securities.
Not surprisingly, the current bull market for gold that began in 2001 (with gold near $255 an ounce) has, for the most part, been a period of negative or low real interest rates.
In fact, in the years of market-determined gold prices (since August 1971 when President Nixon closed the gold window) each and every time the real inflation-adjusted three-month U.S. Treasury bill rate fell below zero, the U.S. dollar gold price rose over the subsequent 12-month period.
The great bull market for gold in the late 1970s culminating in the 1980 high near $875 an ounce was also a period of negative real interest rates in the United States. And, gold’s run up in late 2007 and early 2008 – an advance that saw the price rise briefly over $1,030 an ounce – was again a period of negative real interest rates.
Today, real “inflation-adjusted” interest rates across a range of maturities are again negative . . . so, if history is a guide, we can expect the price of gold to continue moving higher over the next year.
As my clients know, I am “extremely optimistic” on the gold-price outlook — but, unlike many other bullish analysts, I believe the metal’s ascent will take several years to reach its next long-term cyclical peak.
In the meantime – partly because of the activity of ETF investors and partly because the price sensitivity of secondary supply and jewelry fabrication in this difficult economic environment – we can expect high volatility and a difficult climb, with sharp reversals along the way that will, at times, cause some observers to wonder if the market has already topped out.
Ultimately, thanks to the extremely expansionary monetary policy – and with a little help from ETF investors, central banks, and new or evolving geographic markets – like China and India – gold will most likely climb into the US$2000 to $3000 range – and it could go even higher given the right confluence of economic and political developments . . . or if a late-cycle mania produces a final hyperbolic bubble before the gold-price cycle moves into its next bear-market phase.
Speech to the Gold Outlook Asia 2009 Conference
Hong Kong – October 22, 2009
I’ve been asked to talk about the world economic and financial crisis – and the implications for gold. In addition, I want to discuss important changes in the official sector and structural developments in the private investment sphere that have important implications for the price of gold over the next few years.
The place to begin, however, is with the U.S. and global macroeconomic situation – past, present, and future.
This is an especially appropriate topic for an American economist since it has been, in large measure, America’s economic policies over the past several decades that have landed us in today’s international economic predicament.
Easy Money
In my view, the root cause of the current world economic crisis has been decades of easy money, low interest rates, and a persistently expansionary monetary and fiscal policy by the United States – aided and abetted by China and the other major Asian exporting nations. As a result, Americans have been on a buying binge in the global marketplace, buying things we often don’t really need with money we don’t really have.
And the rest of the world – especially China and the other Asian economic powerhouses – have been co-conspirators, lending us the money to satisfy our need for more things in order to promote economic growth and high employment in their own economies.
Now, however, many foreign lenders – both private and official – who have been financing America’s budget and trade deficits are becoming increasingly uncomfortable pouring more and more good money after bad.
Here’s a quick lesson about the economic history of the late 20th and the early 21st centuries: Beginning in President Reagan’s second term with the appointment of Alan Greenspan as Chairman of the U.S. Federal Reserve and continuing with Ben Bernanke at the helm of America’s central bank, the Fed has pursued an expansionary, low interest-rate policy that has placed growth above all else.
During these years, every economic or financial-market crisis was met with injections of liquidity into the banks and financial markets with interest rate cuts often to negative inflation-adjusted rates of return.
The stock market crash of 1987, the Gulf War beginning in 1990, the Mexican Peso Crisis in 1994, the Asian Currency Crisis in 1997, the Long-Term Capital Management bankruptcy in 1998, the Internet Dot-Com Bubble in 2000, and the U.S. Housing Bubble that ended in 2007:
Each crisis was met with more money and lower interest rates – a policy that came to be known as the “Greenspan Put” and more recently the “Bernanke Put” because it assured many of the most reckless risk-takers they would not lose a red cent. Even if their investment and trading strategies went awry, the Fed was there to bail them out.
We never would have had the last stock market boom carry valuations to such heights without easy money.
We never would have had the U.S. housing boom without artificially low interest rates and without Fannie Mae and Freddie Mac promoting home ownership for everyone.
We never would have had the mortgage-backed securities debacle without easy money and low interest rates. And, no one – especially foreign central banks – would have bought these and other sub-prime securities if they thought they could lose their shirts.
A healthy vibrant economy needs to clean out the dead wood from time to time. Rather than allowing periodic recessions and bear markets to purge the excesses of each prior boom or bubble, the Fed stimulated the economy with massive doses of new credit, more liquidity, and lower interest rates. Neither the Fed nor the politicians in Washington wanted a recession – and hardly anyone complained when the Fed just printed more money.
Not Over Yet
Today, we should not be fooled by signs the U.S. financial crisis is now over. The losses are still there . . . and still growing: They’ve only been transferred from Wall Street and the private sector to the Federal Reserve and the U.S. Treasury.
And, don’t be fooled that the recession in the United States is really over and things are getting back to normal. The U.S. economy is showing signs of life only because of massive injections of liquidity from the Fed, unprecedented fiscal stimulus by the U.S. Treasury, and inventory restocking.
Do you really think the economy will continue to grow if the Fed removes the intravenous feeding tube? Do you really think American consumers are in shape to start spending again – with unemployment rising, household wealth diminishing, and continuing uncertainty about our economic future?
Although many economists, politicians, investors, and news reporters are beginning to talk about economic recovery in the United States, those that are seeing “green shoots” in my view are looking through “rose-colored” eyeglasses . . . and there is significant risk of a “double-dip” recession with further contraction and a second down-leg in U.S. equity prices yet to come.
Indeed, much of the recent uptick in economic activity reflects the government stimulus programs, such as the “cash-for-clunkers” program that gave the U.S. auto industry a temporary boost.
While some of these programs help businesses and households in the short run, they are all adding to the Federal budget deficit . . . and, in the long run, will complicate the Federal Reserve’s monetary policy dilemma.
We are in this mess today because America borrowed and spent too much, because we created too much credit, pumped out too much liquidity, and often kept interest rates too low– and the rest of the world was willing to go along.
Now, the politicians and policy-makers are telling us the cure is more spending, more borrowing, bigger deficits, more credit, more liquidity and negative real interest rates.
How can this be? It was too much liquidity, too much credit, too much spending, and too much borrowing that created the economic crisis in the first place.
Yet, Americans are told by mainstream economists and politicians that the prescription is more of the same – only in bigger doses.
Just look at the surging Federal budget deficit: Not many years ago, a deficit of two hundred or three hundred billion dollars was considered sufficient to elicit concern. Now, we expect annual deficits in the trillions for at least the next 10 years . . . and few are complaining.
I don’t know what the prescription is . . . but I can tell you it’s not more of the same. Would you tell a drug addict to cure his addiction with more heroin, only in bigger doses? Of course not!!
However, what I do know is that difficult times lie ahead – not just for the United States but also for many of its creditors and trading partners. Large budget deficits call for increased taxation at home – but tax increases are an anathema to Americans and there is only so much American voters will accept.
Inflation Ahead
In lieu of actually paying down America’s huge debts, we can expect currency debasement and higher rates of inflation to reduce the real value America’s debts at home and abroad.
Here’s another indicator that the United States is headed into a period of higher inflation.
We have never in the economic history of the United States seen a period of rapid growth in money and credit nor an extended period of negative real interest rates that has not been followed by a declining dollar exchange rate abroad and a rising inflation rate at home.
A number of important foreign central banks – especially China and the other Asian tigers – are waking up to this situation.
They are seeking ways to diversify their reserve assets in order to minimize dollar-related risks – and this will likely include acquiring proportionately more euro-denominated debt and more gold purchases by the official sector.
And, they will increasingly encourage their corporate sectors to invest in real assets around the world – including mining and mineral resources – so that they get something of intrinsic value for some of those depreciating dollars held by their central banks.
With higher inflation and a depreciating U.S. dollar, I think you can sense that I’m bullish on gold. I’ll have more to say about this later.
But first I’d like to briefly discuss five important gold-market trends: (1) the continuing slide in world gold mine production, (2) the surge in old gold scrap last year and early this year, (3) the fall of jewelry fabrication demand, (4) changing central bank attitudes with respect to gold, and (5) important developments in the gold investment arena.
Mine Production in Decline
Annual worldwide gold-mine production peaked in 2001 at 2,645 tons and has been falling gradually ever since. This downtrend is expected to continue at least for the next few years . . . and by 2011 it will likely have dwindled to less than 2,300 tons – a decline of 14 percent over the 10-year period.
Over the long term, mine output is a reflection of price versus the rapidly rising cost of production and the increasing difficulty and expense in finding new deposits large enough to offset the loss of production from the ongoing depletion of existing mines.
In addition, increasingly stringent environmental regulations are adding to costs – and unfriendly government attitudes toward mining or foreign ownership in some countries – are discouraging exploration and development.
Importantly, the stock-market crash and continuing global economic crisis has slowed funding and retarded mine exploration and development in many countries.
One explanation to the on-going decline in worldwide mine production is that prices in the past couple of decades simply have not been high enough to encourage exploration and development sufficient to replace the dwindling reserves in the historic “big four” gold producing countries – South Africa, the United States, Canada, and Australia.
Interestingly, the locus of world gold-mine production is shifting from the “big four” to the emerging market nations – particularly China, Russia, Indonesia, and Peru.
China became the world’s number one gold-producing country in 2007 aided by supportive government policies that continue to promote a rapid pace of mine development and rationalization of the industry. These policies are likely to continue . . . and, I expect, China’s gold mine production will continue to grow, both in absolute terms and as a proportion of total world output.
Although there is much exploration and development activity in a number of prospective regions around the world – and more can be expected as prices rise and access to financing improves – it will not be sufficient to reverse the downtrend in global gold-mine production for at least the next five years – and likely longer.
Even if the price of gold rises substantially in the next few years sufficient to provoke a rush of exploration and mine development, for projects large enough to make a big difference, it usually takes five to ten years or longer to move from exploration to development and then to large-scale production.
The Rise of Secondary Supply
Unlike “primary” output from mines, the recycling of old scrap – mostly from jewelry – reacts quickly to changes in the price of gold beyond certain levels that are seen by holders as attractive “selling” points.
Last year and earlier this year, as prices rose through the $900 and $1000 an ounce levels, holders of old gold jewelry in many countries around the world made a collective judgment that the price was too high. As a result, scrap supplies exploded, so much so that there was a flood of metal into the market, making the higher price levels unsustainable.
Scrap recycling, which on average runs about a thousand tons a year climbed to double that rate in the fourth quarter of 2008 and the first quarter of 2009.
In the past couple of years, the rise in jewelry scrap has also been a reflection of economic hardship, high unemployment, and a desperate need for cash by some holders of old gold jewelry.
With prices recently over $1000, it is encouraging to note that the responsiveness of scrap has been much more subdued compared to the previous episodes of gold moving over this psychologically important price level.
The Fall of Jewelry
Let’s turn from old scrap – where jewelry is a source of supply – to jewelry fabrication, which until recent years has been a steady and reliable source of gold demand.
Gold jewelry fabrication demand reached an all-time in 1997 at 3,342 tons – and, since then, has been trending downward. This year, I expect worldwide jewelry fabrication demand will total little more than 2,100 tons.
Much of the decline in jewelry offtake has occurred since 2001 and reflects the substantial rise in gold prices – both in U.S. dollar terms and in local currencies for many important geographic jewelry markets.
With the continuing credit crisis and global recession, demand has also been hit hard by the collapse in retail sales, especially in the United States and Europe. In addition, and of importance to the near-term outlook, the steep decline in fabrication has been exaggerated by the running down of inventories on hand at manufacturers, distributors, and retailers.
In general, I expect a modest recovery in worldwide jewelry demand, reflecting an improving economic environment in some of the developing markets – especially India and China – and supported also by some rebuilding of inventories . . . but this recovery will muted by the expected rise in the metal’s price over the next few years.
Official Sector Gold Policy
Let’s turn our attention to the official sector. As many of you know, central banks and the IMF have been are a hot topic in the world of gold.
I believe this year is a key turning point in the modern history of gold as an official reserve asset. Central bank attitudes with respect to gold are becoming increasingly positive. After years of persistent net sales by central banks in the aggregate, the official sector is now becoming a net purchaser of gold from the market.
On average, the central banks of the world hold about 10 percent of their international reserves in gold . . . but there is great disparity from country to country and region to region.
The major Euro-zone nations together hold about 55 percent of their assets in gold. In contrast, the Asian nations, as a group, hold only about two percent of their reserves in gold. Based on recent published statistics, China has about 1.9 percent of its reserve assets in gold and Russia holds about 4.3 percent in gold.
For the past three decades, beginning in the mid-1970s, gold has been under the threat of massive sales by the world’s gold-rich central banks and by the International Monetary Fund as well. In fact, the official sector has been a net seller of gold each and every year since 1989.
At times, official sales – and the threat of more to come – have contributed to negative sentiment in the marketplace with the price typically falling whenever one or another central bank announced a sales program.
This was seen most dramatically in 1999 when, much to its recent embarrassment, the Bank of England sold over half its official gold reserves at an average price of about $275 an ounce. So much for central bankers making smart decisions!!
A number of other European central banks – among them Switzerland, France, Italy, Spain, Portugal, and the Netherlands – followed Britain, together selling about 3900 tons in total over the next 10 years.
Realizing that their gold sales were having a considerable disruptive affect on the market and the metal’s price, the European central banks announced in September 1999 their agreement to limit future gold sales to no more than 400 tons per year over the next five-year period.
This was followed by a second Gold Agreement in 2004, which limited sales by the European signatory nations to 500 tons per year for another five years.
And, just recently, the European Central Bank announced a third Agreement that caps the group’s aggregate sales once again to 400 tons per year for the next five years.
All of this may prove to be irrelevant because the European central banks have not been inclined to sell much gold this past year – and my guess is that they will not sell much at all during the next few years.
For one thing, many central bankers are bullish on the metal and don’t want to sell an appreciating asset.
Moreover, central banks that have sold large quantities of gold in the past now look quite foolish as the metal’s price has moved higher and the value of their U.S. dollar reserves has declined.
European central bank sales in this final year of the second Central Bank Gold Agreement, which ended last week, will probably total about 150 tons versus the 500 tons allowed.
I believe the decline in gold sales by the European central banks reflects a renewed respect for the yellow metal as a reserve asset and reliable store of value.
The International Monetary Fund has also made news with its plans to sell 403.3 tons of gold to support lending to the poorest countries. IMF strategists have suggested sales might occur gradually over two or three years. Others believe all 403 tons may be sold “off the market” directly to one or a few central banks – with China, Russia, India, Brazil, and the Gulf states mentioned as possible buyers.
Importantly, the new Central Bank Gold Agreement incorporates these sales by the IMF, even though the Fund is not a signatory. In other words, total sales by the European central banks and the IMF cannot exceed 400 tons per year – unless some of the IMF metal is transferred “off the market” to one or more central banks.
To a large extent, gold sales by the IMF are already anticipated and factored into the current price. However, direct sales – off the market – to one or more central banks would be confirmation that central bank attitudes are shifting in favor of gold and would likely have a positive affect on the metal’s price.
The big news of the past year has been announcements from both China and Russia that they have been buying gold from their domestic mine production – importantly demonstrating that large central banks can gradually buy gold without disrupting the market.
This past April, China told the world it had purchased 454 tons since 2003, bringing its total official holdings to 1,054 tons – still less than two percent of its total official reserves.
I believe China continues to buy gold from domestic production at a rate of at least 75 tons a year – but gold purchases this year have not yet been transferred to the central bank accounts and have not yet been reported as official reserves.
Russia, like China, has also been buying gold for official reserves from its own domestic mine production. Prime Minister Putin has said that Russia should hold 10 percent of its official reserves in gold versus the 4.3 percent that it held at the end of July. Recent statistics indicate the country has added nearly 50 tons to its official reserves during the first seven months of the year.
The Expansion of Investment
While changes in gold’s commodity fundamentals are important, it is developments in the investment arena that will have the greatest impact on the metal’s price.
Already, the introduction and growing popularity of gold exchange-traded funds (ETFs) is having a profound influence on the gold market.
Gold ETFs are gold-backed stock-market securities representing ownership in a trust designed to track the ups and downs of the metal’s price. Despite some rumors to the contrary, certainly the major gold ETFs representing the lion’s share of the market are backed 100 percent by physical bullion held in depositories on behalf of ETF investors.
Importantly, gold ETFs are bought, sold, and trade just like equities on a stock exchange – and they avoid the tax, storage, and other difficulties sometimes associated with owning physical gold.
By facilitating gold investment and ownership they have brought significant numbers of new participants to the market – not just individuals but hedge funds, pension funds, and other institutional investors.
So much so that bullion held in depositories on behalf of ETF investors now total some 1,729 tons, more than the central banks of either Switzerland or China – a remarkable feat considering gold ETFs have been around only about six years and got off to a slow start.
I’ve already mentioned China’s central bank interest in gold. Just recently, China has gone one step further by encouraging private citizens to buy gold and silver investment – and will be making investment bars available through the domestic banking system.
To put this into perspective, imagine that just one percent of China’s population each buys one ounce of gold next year – that’s 13 million ounces (or about 404 tons) of new demand, coincidentally about the same amount the IMF will now be selling.
The Future Price of Gold
The future price of gold – at least over the long term – has less to do with mine production, secondary supply, jewelry fabrication or any of the other “commodity” fundamentals of gold supply and demand . . . and most to do with gold’s appeal as a financial and monetary asset – an asset held as a savings medium, store of value, portfolio diversifier, and insurance policy by individuals, investment institutions, and central banks alike.
As I discussed earlier, real interest rates are a reliable indicator of Federal Reserve monetary policy – and it is monetary policy and money-supply growth that ultimately affects the dollar, inflation, and gold.
The historical data show that the U.S. dollar gold price is inversely related to the real (or inflation adjusted) rate of return on U.S. Treasury securities.
Not surprisingly, the current bull market for gold that began in 2001 (with gold near $255 an ounce) has, for the most part, been a period of negative or low real interest rates.
In fact, in the years of market-determined gold prices (since August 1971 when President Nixon closed the gold window) each and every time the real inflation-adjusted three-month U.S. Treasury bill rate fell below zero, the U.S. dollar gold price rose over the subsequent 12-month period.
The great bull market for gold in the late 1970s culminating in the 1980 high near $875 an ounce was also a period of negative real interest rates in the United States. And, gold’s run up in late 2007 and early 2008 – an advance that saw the price rise briefly over $1,030 an ounce – was again a period of negative real interest rates.
Today, real “inflation-adjusted” interest rates across a range of maturities are again negative . . . so, if history is a guide, we can expect the price of gold to continue moving higher over the next year.
As my clients know, I am “extremely optimistic” on the gold-price outlook — but, unlike many other bullish analysts, I believe the metal’s ascent will take several years to reach its next long-term cyclical peak.
In the meantime – partly because of the activity of ETF investors and partly because the price sensitivity of secondary supply and jewelry fabrication in this difficult economic environment – we can expect high volatility and a difficult climb, with sharp reversals along the way that will, at times, cause some observers to wonder if the market has already topped out.
Ultimately, thanks to the extremely expansionary monetary policy – and with a little help from ETF investors, central banks, and new or evolving geographic markets – like China and India – gold will most likely climb into the US$2000 to $3000 range – and it could go even higher given the right confluence of economic and political developments . . . or if a late-cycle mania produces a final hyperbolic bubble before the gold-price cycle moves into its next bear-market phase.
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Nov. 2, 2009, 11:09 a.m. EST
Gold futures rise above $1,060 an ounce as dollar falls
By Polya Lesova & Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- Gold futures gained more than 1% on Monday, as upbeat economic reports from the U.S., China and Europe pressured the U.S. dollar, lifting the appeal of the precious metal.
Gold for December delivery rose $20.10, or 1.9%, to $1,060.50 an ounce on the New York Mercantile Exchange.
Earlier in the session, the contract hit an intraday high of $1,059.20 an ounce. Other metal prices also gained, with December silver futures rising 23 cents, or 1.4%, to $16.48 an ounce and December copper up 2 cents, or 0.5%, to $2.97 a pound.
The dollar index (INDEX:DXY) , which tracks the performance of the greenback against a basket of other major currencies, fell to 75.965 in recent trading from 76.320 late Friday.
The U.S. unit has tended to be used as a safe-haven currency over the past year, losing its appeal on upbeat news. A weaker dollar, in turn, helps boost hard assets, such as commodities and gold.
GLD 103.96, +1.43, +1.39%
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And economic reports this week take on added significance ahead of the Federal Reserve's monetary policy announcement on Wednesday. Confirmation last week that the U.S. economy returned to growth in the third quarter failed to prevent a sell-off in stocks on Friday amid concerns over consumer spending.
Gold prices fell 0.6% on Friday, still holding to a 3.8% advance for the month of October.
But stocks rallied on Wall Street after a U.S. manufacturing index rose much more than expected in October. The Dow industrials (INDEX:INDU) recently gained 120 points.
The SPDR Gold Trust (NYSE:GLD) , the largest exchange traded fund dedicated to gold, gained 1.5%.
The Institute for Supply Management said its factory index rose to 55.7% in October from 52.6% in September, and much higher than the reading of 53.0 expected by economists surveyed by MarketWatch. Readings above 50 indicate expansion. See full story.
Reports on U.S. pending home sales and construction spending also improved.
The upbeat tone began earlier as manufacturing reports from China and Europe boosted hopes for global growth, pressuring the dollar.
Crude-oil prices rose more than 1% to top $78 a barrel, as the data lifted hopes for a recovery in oil demand. See Futures Movers.
GLD 103.96, +1.43, +1.39%
Also boosting gold, CIT Group Inc. (NYSE:CIT) , in one of the biggest corporate bankruptcies ever, filed for Chapter 11 protection in New York on Sunday.
CIT, a major lender to small and midsize businesses, has struggled to avoid collapse since the recession triggered billions of dollars in loan losses and the financial crisis cut the company off from its main source of financing. See full story.
"The U.S. banking crisis is not over yet, as was indicated this weekend by the insolvency of CIT," wrote analysts at Commerzbank in a note to clients. "This event may induce investors to increasingly shift to safe-haven gold again."
Gold is traditionally seen as a safe-haven asset. Investors tend to buy it at times of financial turmoil.
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