Lessons from the London Gold Pool
As we examine 6000 years of monetary history, several very clear "Monetary Constants" seem to emerge. These very same constants have appeared throughout time and millennia, regardless of the empire, ruler or social structure of the day. While there are several, three of these constants are important to our journey into history today;
- Money is the result of the function of the free market. As long as man has traded his goods and services in a market place, money (or a medium of exchange) has always emerged as a result of this free market process. Almost without exception, gold and silver have always appeared as the "free market money" of choice. No other form of money has functioned as well or as long as the precious metals. Gold, reserved for larger transactions and international trade, and silver, the money of everyday trade, have emerged naturally and not as the result of some government or ruler's decree.
- Government has always intervened. As long as money has existed, the rulers or governments of the day, have entered and become deeply involved in this free market process, in an attempt to control, manipulate and ultimately debase money and the process of its issuance. Often we observe the rulers of the day working closely with the moneychangers or bankers to achieve this end. Ultimately government intervention has led to the ruin of entire empires and economies along with the government issued and controlled money.
- The free market always wins. Eventually the free market process overrides the process of government interference. As government intervention and regulation of markets and money eventually fails, the free market again emerges, leading to a resurgence of "free market" gold and silver money.
Over recent centuries, while money itself and methods of government intervention have changed, and become increasingly more sophisticated, these basic immutable laws of the free market have not changed.
In recent months, due in large to the work of GATA, speculation as to whether there has been covert manipulation within the gold market has again taken center-stage amongst the last of the faithful "goldbugs" and contrarian investors.
In light of almost overwhelming evidence, still for many, the possibilities of powerful central banks and financial institutions concluding to suppress the price of gold seems unlikely, if not farfetched and extreme. However, one only needs to turn to the pages of history to realize that there have been several examples of governments' unsuccessful intervention into the gold market in recent decades, including the US Treasury gold auctions of the mid 70's, and most notable, the London Gold Pool of the 1960's. As in any other time in history, this government intervention into the gold market was motivated by a monetary issue, namely to shore-up and protect the world's reserve currency, the US dollar.
London Gold Market
Throughout the first half of last century, London enjoyed the elite position of the world's premier gold market. Since the early 1900's virtually all of South Africa's gold production was shipped to London for sale. Rhodesian, Ghanaian and even a large amount of the Russian gold production found its way to the London Market. In fact up until the Gold Crisis of 1968, nearly 80% of all newly mined gold passed through London.
Each morning all eyes turned to London as the world eagerly awaited the London Gold Fix, a daily ritual that was shrouded with mystery since its inception in September 1919. It was not until 1968 that a 3 p.m. "afternoon Gold Fix" was introduced, to coincide with the opening of the US markets. Interestingly, throughout the post war years of the 50's and most of the 1960's, the daily price of gold rarely moved outside of a 20 cent trading range of $35 to $35.20. During this era, a daily move of 2 cents made headlines.
The US Dollar Era
In 1944, the Bretton Woods Conference saw the US dollar emerge as the sole reserve currency of the world. Under Bretton Woods, nations currencies were pegged to the US dollar which in-turn was pegged to gold at $35.20 dollars per oz. Under the terms of the Bretton Woods Agreement, foreign central banks and treasuries were entitled to convert US dollars to gold at the rate of $35.20 per oz.
Throughout the early 1950's there was generally a shortage of dollars internationally. However, as years went by, the US began to send ever-larger amounts of dollars overseas to fund their increasing trade deficits with the rest of the world. Overtime, the glut of US dollars held abroad began to threaten U.S. gold reserves. By the late 50's, US gold reserves, which had peaked in 1949, began to rapidly dwindle. Worldwide, demand for gold had increased dramatically, particularly during any perceived crisis.
Critically important to maintaining US gold reserves was the London gold price. If it could be maintained at $35.20, it would be cheaper to purchase gold through London than across the Atlantic, where shipping and insurance would add another 20 cents or more.
Late 1960 was election time in the US. Concern and speculation prevailed whether the incoming President would do anything to solve the balance of payments problem, or even devalue the US dollar. Reacting to this uncertainty, one October afternoon, sudden panic buying of gold saw a drastic price rise to over $40 per oz. An agreement was reached, after emergency overnight calls between the Bank of England and the US Federal Reserve, that the Bank of England should make available for market substantial supply to reduce and stabilize the price.
The London Gold Pool
President Kennedy was inaugurated in January 1961. Throughout that year, reports circulated of government and banks formulating policy and safeguards to prevent future price rises. The US had made it clear that it wanted to stop the drain on its own gold reserves.
Newly-appointed Under-Secretary of the US Treasury Robert Roosa and officials of the Federal Reserve suggested that the U.S., the Bank of England and the central banks of the West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg should set up a sales consortium to prevent the market price of Gold from exceeding $US 35.20 per oz.
Under the "London Gold Pool" arrangement, member banks provided a quota of gold into a central pool, with the Federal Reserve matching the combined contributions on a one to one basis. During a time of rising prices, the Bank of England, the agent, could draw on the gold from the pool and sell into the market to cap or lower prices. In the fall of 1961, London gold prices again began to creep up. In November, with the scheme now up and running, prices were once more stabilized in the $35 - $35.20 range.
By February 1962, the gold pool was buying gold as the price dipped and selling as the price rose. This pattern continued over the next few years, somewhat stabilizing London gold prices, despite extraordinary demand during the Cuban Crisis and as a result of increasing tensions between Washington and Moscow.
Fires on all Fronts
By 1965 the gold pool was consistently supplying more gold to cap prices than it was winning back. The beginning of the end for the London Gold Pool was the devaluation of the pound sterling in November 1967, causing yet another run to gold. Through December that year, London sold close to 20 times its usual amount of gold at market. Under pressure from the pool, both London and Zurich ceased the sale of forward gold. In a matter of weeks the pool had laid out in excess of 1000 ton, in those days valued at the not insignificant amount of over $1.1 billion.
Meanwhile France, led by outspoken Charles de Gaulle and his fiery economist Jacques Rueff, withdrew from the pool and confirmed their position to send dollars, earned by exporting to the U.S., back, in demand for US gold rather than US Treasury debt. At this point, the drain on U.S. gold became acute. Escalation in the Vietnam War in early 1968 brought renewed pressure on the dollar, with the US now running massive balance of payment deficits with the world. As in all of history, during a crisis, gold was again on center stage; demand was skyrocketing.
World Gold Crisis
On Friday March 8th, London sold 100 ton of gold at market, up from around 5 ton on a normal day. The following Sunday evening, the pool released the statement "the London Gold Pool re-affirm their determination to support the pool at a fixed price of $35 per oz". Fed chairman William McChesney-Martin announced the US would defend the $35 per oz gold price "down to the last ingot". That week the London Gold Pool continued to fight the free market process and defend $35.20 gold. By midweek it had emergency airlifted several planeloads of gold from the US to London to meet demand. On Wednesday the London market sold 175 ton, 30 times its normal daily turnover, and by Thursday demand exceeded 225 tons.
That evening emergency meetings were held in Buckingham Palace, with the Queen subsequently declaring Friday 15th March a "bank holiday". Roy Jenkins, Chancellor of the Exchequer, announced that the decision to close the gold market had been taken "upon the request of the United States".
The London gold market remained closed for two weeks, during which time the London Gold Pool was officially disbanded. During that two weeks, Zurich and French markets continued to trade with open market prices for gold exceeding $44 per oz (up 25% from London's official price of $35.20 per oz).
A fortnight later, an official "two-tiered" price was announced to the world, where the official price of $35.20 would remain for central banks dealings, while the free market could find its own price, the London market re-opening again on the 1st April.
Lessons from the London Gold Pool
The ill-fated London Gold Pool affords us many clear lessons today.
- Manipulation of markets by governments, aided by central bankers and powerful financial institutions does exist, especially when nations' currencies, and particularly the world's reserve currency, are at risk. As stated at the outset, throughout all of history, governments have eventually become deeply involved in the free market process, for their own ends. It is not unreasonable to expect that, if governments became heavily involved in suppressing the price of gold in the 1960's, there is no reason why they would not today.
- History has conclusively shown that manipulation of the free market process ultimately fails; no amount of government control, regulation or price manipulation can change the workings of the free market over the long term, the London Gold Pool being no exception. No amount of gold, air-shipped to market by the gold pool could satisfy demand when investors decided, on mass, to storm the market.
- Those behind orchestrating market intervention suffer great loss when their efforts eventually end. By the time the gold pool was officially disbanded in early 1968, it had cost the member countries many billions of dollars (a lot of dollars in those days). The Bank of England never again regained its former position and prestige within the world gold market after the collapse of the London Gold Pool. As one London bullion dealer put it "the Bank of England are no longer the masters, they are just a post office or warehouse where gold is stored before it comes to the market".
- Markets that have been artificially capped, catapult dramatically when market suppression ends. In the 12 years from 1968 to the peak of the bull market, the price of gold had rallied by 2300%. It has been said that "the greater and the longer the manipulation, the greater the eventual price is going be". Today, with far greater amounts of gold involved in the price suppression scheme (10,000 – 15,000 ton versus 3,000 ton in the gold pool era), over a longer period of time, and with far more at stake, it can only be concluded that the eventual price of gold may well run much higher than the 2300% of the late 60's and 70's. At today's prices, a similar move of just 2300% would price gold at a staggering $6,400 per oz.