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In 1961, The US
and Europe pooled their Gold resources in London to prevent the market price
for gold from exceeding the mandated rate of $US 35 per ounce. This project
to suppress gold was known as the “London Gold Pool”.
The TIME article
below was written in March 1968, as the "London Gold Pool"
collapsed under a speculative gold stampede.
(emphasis mine) [my
comment]
Speculative
Stampede
Friday,
Mar. 22, 1968
Quietly and secretly, technicians at Fort Knox, Ky., loaded an estimated
$450 million worth of gold ingots [about 410 tons
of gold] onto a heavily armed convoy. The
convoy proceeded to a nearby U.S. Air Force base, where the gold was loaded
aboard a transport plane and flown to Britain.
There, it was sent to the Bank of England, to be transported by Swissair
and British European Airways flights to the coffers of Swiss banks. The
influx of gold became so bulging, in fact, that one Swiss bank had to
reinforce the walls of its vault to contain it. It was all part of the
largest gold rush in history, a frenetic, speculative stampede that last week
threatened the Western world with its greatest financial crisis since the
Depression.
Socks & Mattresses. Telephone and telex lines to London, the
world's largest gold market, were swamped as buyers throughout Europe
demanded gold, gold and more gold. More than 200 tons, or $220 million
worth, changed hands on the London gold market in one day to establish a new
single-day trading record. Where gold could be bought directly, mob
scenes erupted and the price soared. Ten times the usual number of
buyers jammed the gold pit in the cellar of the Paris Bourse, and fist fights
broke out as the price on one day rose to $44.36 an ounce v. the official
price of $35. In Hong Kong, frantic trading drove the price up to
$40.71, and around the world investors and banks bought gold certificates and
gold stocks. Many refused to accept the U.S. dollar in payment.
In dozens of nations, from Austria and Italy to Sweden and Ireland,
ordinary citizens rushed out to buy gold coins to stuff socks and mattresses,
cleaning out numismatic stocks virtually overnight. In London, a $20 U.S.
gold piece sold for $56, a £ 1 British sovereign for $10.20. In
Geneva, the Swiss lined up at tellers' windows to convert their savings to
gold bars. There was even a run in Hong Kong on gold jewelry. All
told, between $1 billion [910 tons] and
$2.5 billion [2270 tons] in
gold may have changed hands within ten days in London—as much as 10% of
the total gold in the seven-nation Gold Pool, whose bullion reserves are the
cushion for the $35 international price of gold. No estimate
was possible of all the other trading in gold around the world, except that
it was colossal.
Lost World? The rush was on because speculators—some
avaricious, some panicky, some merely prudent—had become convinced that
the U.S. and its partners could not much longer maintain the $35 price. With
a balance of payments deficit of $3.6 billion last year and a war in Viet Nam
that is costing some $30 billion annually, the U.S. has seen its gold
reserves shrink by 50% from a postwar peak of $24.6 billion. Now, believed
the speculators, the U.S. was nearing the end of its gold tether [This
is beginning to happen again]. If the U.S.
could no longer sell gold to all takers at $35 an ounce and the price were
allowed to rise to meet the demand, the speculators stood to make a handsome
profit, just as they had in the devaluation of the pound sterling last
November. Having tasted blood then, many scented another kill
—and, in their wild buying, ripped and clawed at the remaining gold
stocks in the Gold Pool [for more on the London Gold Pool, see my
entry on Gold Wars].
Who were the speculators? The identity of most was veiled in the
secrecy of Swiss bankers' files, but they were situated throughout the world.
Perhaps as much as 40% of Swiss bank purchases were destined for
safekeeping in the coffers of Middle Eastern sheiks and oil potentates. Latin
American businessmen, affluent overseas Chinese, Asian generals—all
claimed a piece of the action. The central banks of many smaller
nations with precarious national reserve margins, including some Communist
Eastern European countries, had undoubtedly joined in to protect themselves.
More in sorrow than in greed, European corporations moved into the buying
to hedge their foreign-currency holdings. So did some wealthy Americans with
numbered Swiss accounts, although it is illegal for U.S. citizens to own gold
bullion.
[When
2009’s gold rush and dollar panic truly begins, everyone, even US
allies (Middle Eastern sheiks, European corporations, US citizens), will flee
the dollar into physical gold.]
For the men who understood the situation best, the spectacle was
appalling. "The world is lost," said London Economist John Vaizey.
"A rise in the price of gold is inevitable now. It's like a grand opera
of which the overture is over, and we're in the first act of a world
depression." A usually unemotional Swiss banker warned that "in
participating in gold speculation, capitalists are doing their best to
destroy the capitalist system. If they win the battle in London, the
probability is that the whole present international monetary system will come
crashing down." French Economist Jacques Rueff, who has long
predicted a crisis and argued for a rise in the price of gold, saw his worst
jeremiads vindicated. "Whether one wants a gold price increase or
not," said Rueff, "it will soon be achieved."
Two-Tier Price. Finally, the pressure grew so great that the U.S. refused
to continue to feed gold to satisfy speculators' greed. In a telephoned
message to British Chancellor of the Exchequer Roy Jenkins, the U.S. asked
Britain to close the London gold market and shut off the flow from the Gold
Pool. Prime Minister Harold Wilson hurried to Buckingham Palace for a
midnight meeting with Queen Elizabeth, who declared a bank holiday in
foreign-exchange trading. That shut off the Gold Pool's dealing, and money
markets from Singapore to Lusaka followed suit. The Paris market alone stayed
open.
The U.S. then invited representatives of the Gold Pool nations to Washington
for a weekend conference. There was little doubt that the speculators
had succeeded in wrecking at least part of the world's monetary system, and
that the U.S. and the other members of the Gold Pool would no longer sell
gold to all takers at $35 an ounce. What would likely be decided in
Washington was a "two-tier" pricing system for gold, by which the
speculators would have to conduct their transactions in a free market (see
BUSINESS). Without the U.S.'s willingness to buy back speculative hoards,
their price just might prove in the end to be lower than many of the hoarders
think. [By the end of 1974, Gold had soared from $35 to $195
an ounce.]
My reaction: This
is what a speculative gold rush and dollar panic looks like. The points to
note about what happened in March 1968 are:
1) The world experienced the largest gold rush in history and the greatest
financial crisis since the Depression.
2) Several hundred tons of gold were secretly flown to London from Fort Knox
and sold in an effort to keep the price of gold fixed at $35 per ounce:
3) More than 200 tons changed hands on the London gold market establishing a
new single-day trading record.
4) Telephone and telex lines to London were swamped as “buyers
throughout Europe demanded gold, gold and more gold.”
5) Wherever gold was sold, mob scenes erupted and the price soared.
6) Fist fights broke out as ten times the usual number of buyers jammed the
gold pit in the cellar of the Paris Bourse
7) Traders around the world refused to accept the US dollar in payment.
8) In dozens of nations, from Austria and Italy to Sweden and Ireland,
ordinary citizens rushed out to buy gold coins to stuff socks and mattresses,
cleaning out numismatic stocks virtually overnight.
9) In Geneva, the Swiss lined up at tellers' windows to convert their savings
to gold bars.
10) Hong Kong experienced a run on gold jewelry.
11) Between 910 tons and 2270 tons of gold may have changed hands within ten
days in London
12) Trading in gold around the world was “colossal”
13) The gold rush was caused by the belief that the US was nearing the end of
its gold tether.
14) The investors speculating on gold’s rise included:
A) Middle Eastern sheiks and oil potentates
B) Latin American businessmen
C) Affluent overseas Chinese
D) Asian generals
E) The central banks of many smaller nations with precarious national reserve
margins
F) European corporations
G) wealthy Americans with numbered Swiss accounts (Although it is illegal for
U.S. citizens to own gold bullion)
15) The men who understood the situation best were appalled:
"The world is lost"
"A rise in the price of gold is inevitable now. It's like a grand opera
of which the overture is over, and we're in the first act of a world
depression."
"In participating in gold speculation, capitalists are doing their best
to destroy the capitalist system. If they win the battle in London, the
probability is that the whole present international monetary system will come
crashing down."
"Whether one wants a gold price increase or not, it will soon be
achieved."
16) The pressure grew so great that the US asked Britain to close the London
gold market and shut off the flow from the Gold Pool. The US and the other
members of the Gold Pool would no longer sell gold to all takers at $35 an
ounce.
17) US's fiscal irresponsibility had succeeded in wrecking at least part of
the world's monetary system.
Conclusion: We will see something like 1968’s gold rush soon,
except it will probably be much worse. The trigger for 2009’s gold rush
will be the collapse of paper gold (ie: gold futures, GLD, unallocated gold,
etc). This time around, the dollar won’t just lose some of its value:
it will lose nearly all it.
Eric
de Carbonnel
Market Skeptics
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