November 25, 2016
This is an article about abuses in the gold market. It is
meant to be for readers, who are well informed and interested in the gold
market and monetary items, such as student (central) bankers, politicians,
financial analysts, supervisors, etc.
Based upon study, we (re)constructed the Gold Price
Intervention Circuit Diagram. The purpose for the (secret) interventions is
the stabilization of the exchange value of the US dollar. There are many
actors involved by the interventions; they vary from politicians, central
bankers, institutions like the BIS, IMF and LMBA, Market Makers on the
OTC-market (commercial banks), and Clearing Members LPMCL. We call an
intervention secret if it has not been reported to market participants at the
latest on the day the intervention was carried out by the one or two involved
central banks, or not being reported at all (13).
Furthermore we (re)constructed some determinants of the
(secret) Intervention Policy on the price of gold by central banks.
Gold Price Intervention Circuit Diagram
A Short Explanation on this Intervention Circuit
Diagram
About the Gold Reserve Act of 1934 (1)
…Authorization to deal in gold and foreign exchange
with approval of the US President…
The Gold Reserve Act of 1934 established a fund
(so-called Exchange Stabilization Fund) to be operated by the Secretary of
the Treasury, with the approval of the President. Section 10 of the Act
provided that “FOR THE PURPOSE OF STABILIZATION THE EXCHANGE VALUE OF THE
DOLLAR, the Secretary of the Treasury, with the approval of the President,
directly or through such agencies as he may designate, is authorized, for the
account of the fund established in this section, to deal in gold and foreign
exchange and such other instruments of credit and securities as he may deem
necessary to carry out the purpose of this section.”
As per 30 September, 2015 the total assets of the fund
amount to USD $93 billion.
About Bretton Woods system
The Bretton Woods Agreement is the landmark system for
monetary and exchange rate management established in 1944. The agreement
pegged the exchange rates of nations to the value of the US dollar, witch in
turn was pegged to the price of gold. An overvaluation of the US dollar led
to concerns over the exchange rates and tie to the price of gold. In 1971,
President Nixon found it necessary to suspend the dollar’s convertibility into
gold and several major currencies were allowed to float against the dollar
(era of floating rates).
In the 1960s, the Bank for International Settlements
(BIS) was at the center of central bank efforts to keep the price of gold in
the free market trading near its official price in the Bretton Woods system
(so called Gold Pool).
About SWAP Lines
…SWAP network…Gold is a premier currency…
On 1 November, 1978, the Federal Reserve and the US
Treasury announced a new and expanded program to defend the foreign exchange
value of the dollar. A major aspect of the expanded intervention capability
was a increase in the size of Federal Reserve’s SWAP lines with several key
central banks (so called the “SWAP network”), thereby allowing greater
foreign exchange borrowings for purposes of interventions.
The SWAP network is a set of short-term reciprocal
currency agreements the Federal Reserve maintains with the 14 (1978) foreign
central banks and the Bank of International Settlements (BIS). Each agreement
allows the Federal Reserve and his partner bank short-term access to the
other’s currency up to a specified limit. A SWAP contract is written at the
end of each day that the Federal Reserve SWAP intervention takes place.
Central banks try to make their intervention seem as
random as possible to avoid traders forecasting it and capitalizing on it
(2).
In 2008 the
FED extended the SWAP lines due to their concerns about the global dollar
liquidity.
Don’t forget gold is a currency:
The BIS stated in its 2013 annual report that “gold is to
be dealt with as a foreign exchange position rather than a commodity because
its volatility is more in line with foreign currencies, and banks manage it
in a similar manner to foreign currencies”.
Ex-Fed-Chief Alan Greenspan told The Council of Foreign
Relations on 29 October, 2014 to remember what gold is. Gold is a currency.
It is still, by all evidence, a premier currency.
About the SWAP network in practice
…Secret currency interventions by central banks…
According to the publication of Februari, 1978 of the
Federal Reserve Bank of St. Louis were the gold reserves actually not used
for interventions, due to the current practices as evidenced by SWAPS (3).
The Riskbank is open about the interventions. In October,
2016 is mentioned on their site:
The Riskbank is Sweden’s central bank and responsible for
monetary policy with the objective to maintain price stability. The Riskbank
is joint shareholder of the BIS. According to the Riskbank is their gold
reserve justified, to a large degree, by the fact that the value of gold does
not normally follow the same pattern as the value of the foreign currency
reserve. The gold can be used to fund emergency liquidity assistance or
foreign exchange interventions, among other things.
Further the Riskbank has concluded an agreement with a
number of other central banks, the Central Bank Gold Agreement (CBGA), witch
places a limit on the amount of gold the may sell each year. The aim of the
agreement is to limit the central bank’s sales of gold in order to avoid
undesirable effects on the gold price.
A confidential IMF report from March, 1999 about the
reporting template for central banks advices western central banks to conceal
their gold loans and SWAPS because information about them is “highly
market-sensitive” and accountability about them would “hinder secret
currency” interventions by central banks, in view of the limited number of
participants in such transactions (4).
The FED, the central banks and the BIS formed the
(secret) Gold and Foreign Exchange Committee.
In restricted-controlled notes on the discussion of the
gold market at the meeting of the secret Gold and Foreign Exchange Committee
of the G-10 Governors at the BIS on 7 April, 1997 Terry Smeeton, head of foreign
exchange and gold at the Bank of England said that in May 1996 the SWAP deals
accounted for 75 percent on the trading volume in the London market (5).
Participants Gold and Foreign Exchange Committee
on 7 April, 1997
William R. Wright, Head of Monetary and Economic
Department at the BIS, held an outspoken speech at the fourth BIS Annual
Conference, on 27 – 29 June 2005, while celebrating the 75 years existing of
the BIS (1930 – 2000). Mr White mentioned the five intermediate objectives of
central bank cooperation. The fifth objective was the joint effort of central
banks to influence the price of gold and foreign exchange (11).
On 10 February, 2010 Michel Beine (University of
Luxembourg) reported that the bulk of central banks interventions is located
between 7.00 and 15.00 EST which suggests that the FED intervened using their
network of US commercial banks. But choosing the timing might be a strategic
issue: The Bank of Japan intervened outside Japanese time tot conceal
interventions.
In its 2010 annual report, the BIS said that “gold, which
the bank held in connection with gold SWAP operations, under which the bank
exchanges currencies for physical gold, stands at 8,160.1 million SDR,
equivalent to 346 tonnes this year.”
Here are some shocking results from a survey held by
Christopher J. Neely (senior economist with the FED of St. Louis) among 22
monetary authorities in June 2001.
To resist short-term trends in exchange rates and the
correction of long-run misalignments of exchange rates from fundamental
values are important factors in the intervention decisions (policy). Further
the interventions are conducted secretly to maximize market impact or to
minimize the market impact.
We call an intervention secret if it has not been
reported to market participants at the latest on the day the intervention was
carried out by the one or two involved central banks, or not being reported
at all (13).
Remarkable: The interventions takes place on the OTC
market
The gold trading activity on the OTC markets is hardly
transparent.
According to a LMBA study in 2011 is the volume of gold
traded in the London OTC Gold Market ten times what is implied by the
clearing statistics (12).
In January 2009, the G20 asked for substantial reforms to
OTC markets in order to ‘improve transparency, mitigate systemic risk, and
protect against market abuse’. The G20 reform agenda requires standardised
OTC derivatives to be cleared through central counterparties on exchange or
electronic trading platforms.
Well-known shortcomings are on the so-called pre-trade
transparency (information about price quotes and trade sizes is available to
the two parties involved in the trade prior to executing the trade), the
post-trade transparency (information about executed trades made available to
market participants other than the two parties involved in the trade, or a
narrow set of dealers).
Through this information asymmetry are uninformed
participants at risk of making the wrong trading decisions (14).
Behind the Spot Price of Gold
The Spot Price of gold is the price of gold around the
clock less just a few minutes. Actually it is an quotation price of gold
between the so-called Market Makers (Citi, Goldman Sachs, HSBC, JPM, UBS,
Bank of Nova Scotia, ICBC, Merrill Lynch, Morgan Stanley, Societe Generale
and Standard Chartered Bank) based upon their activity in the hardly
regulated OTC market. According to the LMBA OTC markets provides
confidentiality as the transactions are conducted solely between the two
principals involved and is this particularly important for central banks activity
in the market (15). The Spot Price of gold is under control of the central
banks c.s. (8). See our article of 23 September, 2016 “Behind the Spot Price
of Gold.”
Central Bank Coordination
In 2016 the FED made a study on how central banks
interact with one another in normal times and how they behave during times of
crisis (e.g. The Global Financial Crisis 2007, 2008). One conclusion is that
the policy response of the central banks on global financial crisis required
an extraordinary degree of central bank coordination, and will have
implications for how central banks operate (and relate to each other) for
generations to come (6).
Determinants Intervention Policy
Based upon study we (re)constructed some Determinants
from the Intervention Policy on the price of gold by central banks.
It is obvious that the central banks within the BIS
network handle an intervention policy for the price of gold. Furthermore they
built up an implementing organisation for the execution of this intervention
policy. The interventions are secret because they are not being reported to
market participants at the latest on the day the intervention was carried out
by the one or two involved central banks, or not reported at all. The
interventions set the Spot Price of gold.
The regulatory authorities seem to look away.
In our paper from 20 July, 2015 we concluded that JPM in
cooperation with the BIS controls the dollar gold price through interventions
on the development of the dollar gold price. Overall the conclusion was that
there is no free market for gold.
In our paper from 7 October, 2015 we explained that JPM
and the BIS are operating agents for the BIS network to maintain the
confidence in the dollar and therefore manipulate the dollar gold price.
The BIS network is the successor of the Gold Pool. The
Gold Pool provided for central banks of surplus countries with large foreign
exchange reserves to share the burden of interventions in the London gold
market in order to keep price fluctuations within a reasonable range. The BIS
network determines the intervention zone for the dollar gold price for their
operating agents.
In our paper from 23 September, 2016 we explained the
setting and the importance of de Spot price of gold. The Spot price of gold
is the basis for many transactions in gold. Actually it is an quotation made
by so-called (thirteen)Market Makers (commercial banks) and based upon their
trading activity in the harly regulated OTC-market.
(1) Audit Report 8 December, 2015 ESF Fiscal Years 2015
and 2014
(2) Economic Review March 1979 Federal Reserve
Intervention Policy by R.K. Abrams
(3) The Mechanics of Intervention in Exchange Markets by
A.B. Balbach (FED), februari 1978
(4) Special Data Dissemination Standard by IMF 10 March,
1999
(5) Restricted-Controlled notes Gold and Foreign Exchange
Committee G-10 7 April, 1997.
(6) Study International Aspects of Central Banking 30
July, 2016 by Robert B. Kahn cs
(7) Study International Monetary and Financial
Cooperation, Piet Clement (BIS), June 2006
(8) MoneyInsights.org, article 23 September, 2016, Behind
the Spot Price of Gold
(9) Summary of Intervention Survey June 2001 by C.J.
Neely, FED of St. Louis
(10) Site Riskbank Sweden, October 2016
(11) MoneyInsights.org, article 29 November, 2015, Speech
William R. Wright (BIS)
(12) Financial Times 9 September, 2011
(13) Study Reported and Secret Interventions in the FX
Markets by Michael Beine, 2003
(14) Bank of England Quarterly Bulletin 2011 Q4
(15) Letter LBMA to the Bank of England 30 January, 2015
regarding Fair Markets
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Nico Simons is a Dutch investigative journalist on financial issues,
especially monetary issues. His articles are regularly published on MoneyInsights.org.
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The author is not affiliated with, endorsed or sponsored by Sprott Money
Ltd. The views and opinions expressed in this material are those of the
author or guest speaker, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
accuracy, completeness, timeliness and reliability of the information or any
results from its use.
