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Although this is nothing new, as I and several others have reported
this several times in the past, with a very nice documentary on it having
been done by Max Keiser, this is still a very important article for two
reasons.
First, it lays out rather nicely the gold panic of 1999 and Brown's
Bottom, which is the low in the price of gold achieved by the dumping of
400 tons of gold into the world market at an artificially low price by the
British government.
This was done apparently to bail out a bullion bank or two who were
enormously and irretrievably caught short of gold by the carry trade.
Second, it provides a good description of the gold carry trade. When gold is
leased out by a central bank, the bullion bank takes possession of it and
sells it into the market, and invests the proceeds. At the end of the lease
period, the bullion bank buys the gold bank in the open market and returns it
to the central bank.
Although the gold likely never changes physical location in this process, the
claim or title to the gold does change hands, although that change in claim
may not be adequately reflected in the public records.
Although the author does not mention it here, there is some thought that the
'sale' of the central bank gold at private auction is in reality a paper
transaction between the central bank and the bullion banks who are short
leased gold from the bank, and are unable to return it without causing a
price disruption in the world market.
This is something which could be easily cleared up with the kind of
disclosure one might think is owed the people when their national heritage
items are sold away by the government.
And again, although it is not mentioned in the article, Britain's gold
depletion to save the private banks is infamous only because of the clumsy
manner in which it was conducted. It is thought that several other European
central banks have gold listed on their books which they no longer have,
because of this pernicious habit of lending out the gold on the cheap to the
banks, only to have it sold off in the market, never to return, leaving only
a stack of paper promises.
And finally, the most intractable problem which the bullion banks face today
is that no central bank has a stockpile of silver left with which to bail
them out. So they are caught playing a shell game, robbing Peter to pay Paul,
and living in dread of the day of reckoning when their schemes will be
exposed, and the markets will go into default on their naked short positions.
Telegraph UK
Revealed: why Gordon Brown sold Britain's gold at a knock-down price
By Thomas Pascoe
5 July 2012
A great deal of Gordon Brown’s economic strategy would strike a sane
man as troubling. Not a great deal was mysterious. The orgy of consumption
spending, frequent extensions of the cycle over which he would “borrow
to invest”, proclamations of the “end of boom and bust”:
these are part of the armoury of modern
politicians, of all political hues.
One decision stands out as downright bizarre, however: the sale of the
majority of Britain’s gold reserves for prices between $256 and $296 an
ounce, only to watch it soar so far as $1,615 per ounce today.
When Brown decided to dispose of almost 400 tonnes
of gold between 1999 and 2002, he did two distinctly odd things.
First, he broke with convention and announced the sale well in advance,
giving the market notice that it was shortly to be flooded and forcing down
the spot price. This was apparently done in the interests of “open
government”, but had the effect of sending the spot price of gold to a
20-year low, as implied by basic supply and demand theory.
Second, the Treasury elected to sell its gold via auction. Again, this
broke with the standard model. The price of gold was usually determined
at a morning and afternoon "fix" between representatives of big
banks whose network of smaller bank clients and private orders allowed them
to determine the exact price at which demand met with supply.
The auction system again frequently achieved a lower price than the
equivalent fix price. The first auction saw an auction price of $10c less
per ounce than was achieved at the morning fix. It also acted to depress the
price of the afternoon fix which fell by nearly $4.
It seemed almost as if the Treasury was trying to achieve the lowest price
possible for the public’s gold. It was.
One of the most popular trading plays of the late 1990s was the carry trade,
particularly the gold carry trade.
In this a bank would borrow gold from another financial institution for a
set period, and pay a token sum relative to the overall value of that gold
for the privilege.
Once control of the gold had been passed over, the bank would then
immediately sell it for its full market value. The proceeds would be
invested in an alternative product which was predicted to generate a better
return over the period than gold which was enduring a spell of relative price
stability, even decline.
At the end of the allotted period, the bank would sell its investment and
use the proceeds to buy back the amount of gold it had originally borrowed.
This gold would be returned to the lender. The borrowing bank would trouser
the difference between the two prices.
This plan worked brilliantly when gold fell and the other asset – for
the bank at the heart of this case, yen-backed securities – rose. When
the prices moved the other way, the banks were in trouble.
This is what had happened on an enormous scale by
early 1999. One globally significant US bank in particular is understood
to have been heavily short on two tonnes of gold,
enough to call into question its solvency if redemption occurred at the
prevailing price.
Goldman Sachs, which is not understood to have been significantly short on
gold itself, is rumoured to have approached the
Treasury to explain the situation through its then head of commodities Gavyn Davies, later chairman of the BBC and married to
Sue Nye who ran Brown’s private office.
Faced with the prospect of a global collapse in the banking system, the
Chancellor took the decision to bail out the banks by dumping Britain’s
gold, forcing the price down and allowing the banks to buy back gold at a
profit, thus meeting their borrowing obligations.
I spoke with Peter Hambro, chairman of Petroplavosk and a leading figure in the London gold
market, late last year and asked him about the rumours
above.
“I think that Mr Brown found himself in a
terrible position,” he said.
“He was facing a problem that was a world scale problem where a number
of financial institutions had become voluntarily short of gold to the extent
that it was threatening the stability of the financial system and it was
obvious that something had to be done.”
While the market manipulation which occurred when the gold reserves were sold
was not illegal as the abuse at Barclays may have been, the moral atmosphere
in which it took place was identical.
The crash which began in 2007 and endures still was the result of an
abdication of responsibility across the financial sector. This abdication
ranged from the consumer whose thirst for goods pushed him beyond into grave
debt to a government whose lust for popularity encouraged it to do the same.
Responsibility is evaded by all bar those on whose shoulders it ought to
rest. The gold panic of 1999 was expensively paid for by the British
public. The one thing politicians ought to have bought with that money
was a lesson in the structural restraints which needed to be placed on banks
now that the principle that they were ultimately public liabilities had been
established.
It was a lesson which could have acted to restrain all players in the credit
market boom of the 2000s. It was
a lesson which nobody learnt.
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