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"The transcending value seen
in the Dollar has lost its foundation..."
A SHORT SERIES of secret memos, published and dissected at ZeroHedge, provide the "smoking gun" of
gold-market manipulation. Apparently.
And given
this little slew of dusty archive-digging – throwing up three documents
from 1968 to 1975, each one declassified within thirty years – then "If over 40 years ago the Fed
and the members of the gold 'Pool' were openly intervening in the gold
market, one can only imagine what the situation is now..."
Go on,
just imagine. Because imagination is what you'll need if you're going to nail
type-written notes from before the Moon Landings as primary, original-source
evidence that the United States' official gold reserves – variously sold,
lent, swapped or simply given away since the early 1990s – have been
mobilized to suppress prices, pushing gold down from $250 an ounce a decade
ago to, ummm, more than $1000 today.
These
memos fret about shrinking gold reserves and the world's gold-driven money
supply...Britain's failed deflation policy of the late '60s...whether South
Africa will sell its new mine supply on the open market...German border
taxes...and the "gold-like" qualities of the proposed Special
Drawing Right (SDR). Such prehistory matters, yes. But it's a world away from
demonstrating what newcomers to gold today may mistake for good cause to
steer clear.
The
little history these scattered notes sketch does echo today, however faintly.
Are central banks buying gold at market prices – then France, now
Beijing through via its domestic gold output? How to replace the abiding
monetary standard – then gold, now the Dollar? And like the Fed memos
reviewed on blogs elsewhere this year, the notes
republished by ZeroHedge certainly prove one thing,
at least:
Just how
awkward gold became long before the collapse of the Bretton
Woods monetary system. Bluntly put, it was a pain in the arse
– and not only for Washington.
"Gold
was causing such a rumpus that most authorities wished it would go away and
stop bothering them," as the late Peter Bernstein wrote in his 2000 history,
The Power of Gold. But with so much
of the world's gold stacked up in their vaults, slipping away was impossible,
and the world's monetary system instead "lurched from crisis to
crisis" says Francis J.Gavin, University of
Texas at Austin's professor of international affairs, in his 2004 monograph, Gold, Dollars & Power.
"There
was not one year between 1958 and 1971," Gavin finds, "when the
Dollar and gold problem was not the most pressing issue of American foreign
economic policy." Or as President Kennedy put it in August 1962,
"My God, this is the time...
"If
everybody wants gold, we're all going to be ruined."
Luckily
for JFK and the Dollar, not everyone wanted gold. Like Washington, the
British government would have quite happily seen its former "badge of
honor" turned to dust and swept away, too. Their private citizens were barred
from owning gold, with strict controls applied across most of the rest of the
developed (and communist) world. Yet with so many new US Dollars flooding the
world...and with the Dollar-exchange clause of the 1944 Bretton
Woods treaty still in force...less pliant friends increasingly asked for, and
got, gold over dollars.
One
nation actively sought to bring on the crisis. "There can be no other
criterion, no other standard, than gold," announced French president
Charles de Gaulle at a press conference on February 4, 1965 –
"gold that never changes, that can be shaped into ingots,
bars, coins...that has no nationality and that is eternally and
universally accepted as the ultimate fiduciary value par excellence."
De Gaulle
spoke in French, naturellement,
in the gilded Salle des Fêtes of the Elysées
Palace. But the White House's least Francophone staffers could get the
message loud and clear when, six days later, de Gaulle's finance minister
– future French president Giscard d'Estaing – announced in a
lecture at the University of Paris that, from now on, France would swap every
new Dollar it accumulated for gold bullion from the Federal Reserve.
The major
powers, he said, should "make a solemn and unequivocal declaration"
to likewise settle all their international payments in gold. Which was an easy thing for France to declare, given its large
balance-of-trade surplus.
To drive
the point home, France then made headlines around the world by announcing it
would not only swap all new Dollars for gold...but immediately ship that new
gold straight to France, too.
What
could the United States do? As BullionVault has noted time and again, the final
collapse of the Gold-Exchange Standard – put out of its misery in Aug.
1971, when Richard Nixon canceled America's gold-for-dollars obligation
– came because the US government wanted to keep hold of its gold. The legerdemain
of then "demonetizing" it through occasional sales and amendments
to the IMF treaty only hid this plain fact; it didn't deny it.
The international
promise signed after the Second World War in made defending that hoard
impossible given America's domestic Dollar-inflation. Producing more dollars
than the rest-of-the-world needed to finance its trade, the United States
also invited a drop in the Dollar. That in turn invited withdrawals of gold
from its vaults, effectively sparking a "run on the United States"
as one advisor called it in the mid-60s' phase of the crisis.
"The
kind of transcending value attributed to the Dollar," Charles de Gaulle had
said at that 1965 press conference, "has lost its initial foundation,
which was possession by America of the greater part of the world's
gold." Never mind that de Gaulle himself knocked out that support. What
mattered was the abiding idea – gold equals power. Thus US dominance
was clearly ebbing away.
"The
French this year have been cashing in dollars for gold at a $54
million-a-month rate," reported Time magazine in mid-1966. "Last
week the Bank of France reported that as of Aug. 1, France had hoarded $5.13
billion in gold. Gold now constitutes 86% of all French reserves, compared with
73% at the end of 1964.
"Moreover,
the [French] government is squirreling away the precious metal at such a rate
as to account for the entire net US gold drain so far this year." Hence
de Gaulle's jibe at the Dollar's fall became self-compounding. By demanding
gold over dollars, he proved the value of metal, not paper. But only on the
old tattered Gold Standard logic. Losing its
dominance as the gold-hoarder par excellence, the United States still
retained the supreme currency. The "exorbitant privilege" of which
de Gaulle's advisor, Jacques Rueff, had complained,
would now take America's economic power as its foundation. Depriving the US
of its bullion backing, the promise to redeem Dollars for gold was replaced
with the promise to redeem Dollars with interest.
Fast
forward to the fall of 2009, and the United States remains the world No.1
holder of physical gold (the potential for secret sales, swaps, loans and
outright gifts to Wall Street notwithstanding), but while France and the rest
of Europe turned seller, Russia and emerging Asia began re-stocking this
decade. Moreover, "The United States would be mistaken to take for
granted the Dollar's place as the world's predominant reserve currency,"
as World Bank president Robert Zoellick told an
audience at Johns Hopkins University in Washington this week.
"Looking
forward, there will increasingly be other options to the Dollar...The future
for the United States will depend on whether and how it will address large
deficits, recover without inflation that could undermine its credit and
currency, and overhaul its financial system."
Zoellick
naturally mentioned the Chinese Yuan, noting that "Over 10 to 20 years
[it] will evolve into a force in financial markets." He just happened to
speak on the very same day, as Reuters observes, that Beijing issued its
first Yuan-denominated bond open to foreign investors. Yet all
the World Bank chief did, however, was confirm today's abiding idea
– that monetary power builds on an economy's strength.
Maybe a
new or even old idea will emerge in the next two decades or so. "The
manner in which [this crisis] is resolved may well determine the shape of the
world's monetary arrangements, and therefore our economic and political
interests over the next generation," as then-Fed chief Arthur Burns memo'ed President Ford in June 1975, but
the problem of excess Dollars was never quite fixed.
Still, we
guess it's more than coincidence Beijing is now buying gold – as well as frantically powering its non-stop
economy – as the world's monetary standard slides into crisis more.
Adrian
Ash
Head
of Research
Bullionvault.com
Also
by Adrian Ash
City correspondent for The Daily Reckoning in London,
Adrian Ash is head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich,
on $3 spreads and 0.8% dealing fees.
Please Note: This article is to inform your thinking, not lead
it. Only you can decide the best place for your money, and any decision you
make will put your money at risk. Information or data included here may have
already been overtaken by events – and must be verified elsewhere
– should you choose to act on it.
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