"Although the gold standard could hardly be portrayed as having produced a period of price tranquillity, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."
These remarks are significant when we consider the history of actions by the Federal Reserve concerning gold over the last quarter of a century. It was the U.S. that decided not to allow the diminution of its reserves by continuing to leave the "Gold Window" open when Europe, led by the pragmatic President de Gaulle, was happily buying all the gold it could from the U.S. , despite the discrediting of gold by it, since then.
Had they believed their own press, they would have willingly dumped their gold into Europe. Instead they chose the inadequate [so they thought] open market, into which to drop 500 tonnes of gold in the hope of a gold price collapse. The result, a price shiver, and all was swallowed up. They did not repeat the exercise, because it was NOT about dumping gold. They closed that gold window, so tightening their already firm grip on these stocks of the yellow metal. The I.M.F. went through the same exercise, with the same conclusion, now stating the value of gold in their reserves in unequivocal terms: -
"The IMF's gold reserves are a fundamental strength in its financial position, giving it increased credibility and the capacity to assist its broader membership in crisis situations."
Could they put it more strongly?
So the immediate future, in the light of this almost public reconciliation to gold, by Sir Alan [even my wife might accept such a recanting of my bad behaviour], has to be factored in carefully. No, we are not saying that this will send the gold price up like a rocket, indeed a far more fundamental, long term, trend signal is being given to us. It is saying that gold does have its place in the Monetary system! Now put yourself in the shoes of a European Central Banker who hears that. Wouldn't you review the decision to sell gold? Wouldn't you feel out on a limb if you did. Wouldn't you feel like a soldier still charging when your side is in full retreat? I have absolutely no doubt that after these remarks, quite a few potential sellers of gold amongst the Central Bank community would halt these sales and review the situation, as well as the decision. We want to get this in proper perspective so we do well to get to know the reality on the ground in "Official" gold.
The following table will present the "Official" gold situation. This table presents the picture of World Official Gold Holdings detailed as at November 2002. We include the percentage of reserves that Gold formed as of August 2002.
NOTES
Highlights from these figures
Who might have or might not have sold Gold before Chairman Greespan's speech?
The Washington Agreement was extremely significant, in that it reasserted Gold's position in the monetary system, as well as placing a ceiling on, already arranged Gold Sales. To emphasise this point the Washington Agreement was not a new agreement to sell gold, as banks simply confirmed what they had already decided to do. Nothing new came to the picture. Some see the Agreement as giving "Transparency" to the position of the leading Central Banks, as though those that had agreed to sell joined with those who were not selling to state a unified or joint statement of intent. We believe this signified a cessation of new arrangements to sell gold on the open market, by the 15 Central Banks who were signatories to the Washington Agreement. In the three years since the Agreement, no arrangements have yet been made to institute sales after the end of this Agreement. This is significant in itself and we see it as, partially, confirming our position.
The "continuation of Sales view"
The widely held view held in the London Bullion market currently, is that Official Sales of Gold will be agreed upon, at around the 500tonne level, with the Gold coming from Italy, France and Germany, who may like to see their reserves in line with the E.C.B. average of 15%. Nothing has been stated publicly to substantiate that view, but it must be considered. The implication as understood by our informant, was that the open physical market would continue to be fed by "Official" supplies, but not enough to keep the lid on the price, but enough to allow a steady manageable rise. If this is correct. It states that Central Banks would indeed be manipulating the Gold Price actively, but in an orderly manner and with the protection of the institutions in mind, who may be damaged if the price were to rise too quickly. This would certainly validate the "Conspiracy" theory so prevalent in some quarters of the market place.
Another view expressed by the market is that the next Agreement might well stipulate a similar ceiling of 400 tonnes per annum, even though the banks had no intention of realising that level of sales. The W.A. after all, established a ceiling on sales, not a commitment to sell. The effect of the Agreement would then be to restrain sellers, who might want to go above that figure. The market could then gauge exactly what maximum to expect from this source. This would not act to give the market any but short term expectations of "Official" supplies, as their failure to actually sell, would be reflected in a rising gold price leaving only the "faithful" conservatives, believing that "Official sales were pending. It would define the Agreement as simply a "ceiling".
An addition to this view is that more Central Banks will participate in this Agreement. Were that the case, they would simply confirm that no surprise sales could be expected from them as well as the original 15 signatories, in other words they would increase the unity amongst Central Banks not to sell more than a defined amount.
Another view expressed is that a ceiling will be set, but at a lower level than 400 tonnes. This would allow the Gold price to rise substantially, as it is clear to all that such a reduction would confirm the present, structural shortfall in physical gold supplies to the market. Clearly, such a statement could only be made in the hope of weaning the market off "Official" gold.
Of course, in the absence of any arrangement to sell "Official" gold, being made prior to Sept 2004, this ceiling could be omitted. In itself, this would be a statement which would cause the gold price to rise like the Space Shuttle. Perhaps this statement has already been made by the absence of new arrangements. Certainly, such a none-statement would be consistent with the style of Central Bankers. Perhaps it would confirm what has already taken place in the market place - namely justify the significantly higher gold price we will see by Sept 2004?
To enable our readers in their search for a conclusion we remind you that Central Banks never intended their function or intent to be a supplier to the physical market.
What evidence of possible arrangements to sell more gold is there. Some, only some: -
Mr Ernst Welteke, President of the Bundesbank, revealed a desire on the part of the Bundesbank to sell a small amount of gold in the future. The potential sales stem from a desire to increase the yield on the reserves and thereby increase the Bundesbank's profits. If he were to follow the E.C.B.'s policy of Gold Reserves at 15% of total reserves, Germany has just under 2,100 tonnes to sell. However, this does not reconcile to his statement that "small amounts" will be sold, nor to a country, currently failing in its economic performance in the face of deflation, within the Common Market "Stability Pact". Nor is it the likely policy of a nation that saw the destruction of its currency twice last century! Reading between the lines we perceive a measure of "feeling out reactions" by the Bundesbank, to these proposals, which is not, at this stage, a serious proposal to sell gold. However, Mr Welteke has said publicly that he feels the Agreement is of value and that he thinks it should be extended. He is quoted as saying, "The Treaty has proven its worth. After all, the danger existed that the Central Banks would release uncontrolled amounts of Central Bank gold onto the market…..This Treaty was entered into in order to protect the gold market, which has suffered a sharp drop in prices in recent years. This "gold treaty" also serves to protect the value of our gold reserves!" Hardly the statements of a man intent on getting rid of Germany's gold, except, as he said in small quantities [if he receives the needed blessings].
Were the objective by the European holders of Official Gold to lower reserves to 15% they could release:
I strongly suspect that were France begin to sell, there may well be another invasion of the "Bastille".
A short glance at the history of Government and currency in Italy would allow us a view of just over almost half a century of governments - this is not years but numbers of governments most of whom failed due to a hormone deficiency. The Lira has an even poorer performance. Knowing themselves well, it is unlikely that any Italian governments could take enough Viagra to dispose of any of their Official gold.
Should the Netherlands continue to sell gold, they have the capability of selling 617 tonnes, if they too, wished to lower their gold reserves to 15% of Total Reserves. They intend selling 172.6 tonnes by Sept 2004, but have made no statements to that effect that they will sell more after Sept 2004, however, we would not be surprised to see them to sell.
However, should higher sales levels be agreed upon of say 500 tonnes per year, the market has just under 7,000 tonnes to sell or, 14 years of gold available at current prices. Should prices rise substantially, these amounts over the 15% level of Reserves will increase, in proportion to the price rise. Were this to happen, this would be tantamount to a reverse "Gold Standard", which would be contrary to the spirit of the Washington Agreement, as well as the statements from the I.M.F. Nevertheless, it is the current view of the market and one to be recognised and factored in.
Whilst there is talk of a Gold Dinar, or Islamic international trading currency, this is in the early stage, but one which would quickly gain credence in the face of a war on Iraq and a subsequent fall in the Oil price. This would be a defence mechanism to try to move away from their "enemies" currencies. It could prove a significant factor brining new buyers [including Official ones] to the market, and cause a removal of gold from the Bank of England to home countries [if permitted].
China and its growing gold interests
However, one of the most significant factors in the market could be the rising economy of China. At 500 tonnes China's reserves of gold represent around 2.0% of its reserves, a rapidly dwindling percentage, in view of the growth of its international trade. Were they to follow the direction of the E.C.B.'s guideline of 15% they would be in line to buy a further 3,255.2 tonnes additional gold.
They could only achieve this, if they were permitted to buy directly from another Central Bank, such as those mentioned above. The closure of the "Official" gold market in the seventies would have to be re-opened for such a purpose, a prospect that has become so remote, in the light of Greenspan's remarks, that it is not worth factoring in. [If the intention of Central Banks were to sell gold - the Netherlands could sell all their "saleable" gold to China in one transaction?] Were this not to happen, we could have no more explicit statement that Gold will remain an integral part of Monetary reserves.
The world was led to believe that the Chinese government, in its usual ponderous, careful manner would possibly permit Chinese citizens to purchase gold as individuals sometime in 2003. To the market's amazement, the People's Bank of China relinquished its monopoly on the gold market and has permitted the sale of gold to Chinese individuals, in mid-December 2002. The initial sales were dramatically high. In fact, we are expecting sales of gold to individuals in China to rise well, well above 300 tonnes for 2003. This has the effect of broadening the holding of Chinese gold from the Official to private holdings. In the event of monetary drama, the confiscation of individual gold to Official hands, as happened in 1934 in the U.S.A. [or the voluntary sale of private gold to the Central Bank as happened in Korea] is an option open to the Chinese government. What is of great significance is that the Chinese government has shown that it wants gold in its, or it's peoples hands!
Sales under the Washington Agreement
to March 2002 in tonnes.
An opinion from a key man at the Bank for International Settlements
The Bank for International Settlements, the Central Bankers Bank, has as its head of Foreign Exchange and Gold, Mr Giacomo Panizzutti. Whilst he could not speak for the B. I. S. his views reflect a deep insight to the Central Banks prospects for selling more gold on the "Open Market". These are his views and comments based on inferences drawn from Central Bank attitudes and publicly available information. [The numbers in brackets are the amounts of Gold held in the reserves of the countries mentioned] :-
This accounts for 87% of Total Official Gold Holdings 28,466 tonnes
Of the remainder, two groups can be highlighted:-
Since Mr Panizzutti expressed these views, in the last "unknown" category, we have seen Russia BUY not sell, 111 tonnes and China, BUY 105 tonnes.
If our perceptions of the impending war against Iraq is correct, it is unlikely that the Islamic world, as individuals or as a group will sell their Gold to buy U.S. $ or Euros. We have no doubt that, as said above, the West would not be too happy to sell significant mounts of "Official" Gold on the open market, only to see it snapped up by the Islamic nations or China. This would lead to a repeat of 1968 -1971.
Between now and 2004 it is unlikely that we will see very more sales than the 400 tonnes from the Washington Agreement signatories and the additional 90 tonnes from others as has been seen in the market place. After September 2004, Sales from the W.A. signatories could possibly, come from the Netherlands and Germany, but not in significant quantities if the President of the Bundesbank is to be believed. Indeed, we believe that both the Financial climate and the Political climate will encourage not only the retention of Gold in the reserves, but encouragement for additional purchases.
As we have just seen, the Islamic world may, not only bring their assets "home", and not sell, in the future, but could do all they can to divert as much of their future reserves to Gold and away from the $ and Euro, simply as a matter of prudence. Further gold purchases and gold holdings will, therefore be expected from Islamic nations.
Both Russia and China are expected to continue their policy of building up Gold Reserves.
Future Macro-Economic picture indicated by Chairman Greenspan
Further into his speech Sir Alan made observations on situations he has faced and MAY WELL face. With his resources and his awareness of the opinions of other outside competent observers, he has to give an undertow of optimism. Remove that, and we can see the prospects he foresees and is hoping to handle.
These observations, in themselves, create an uncertainty and climate for a strongly rising gold price in the LONGER TERM
Right now, he finds that he does not have jurisdiction over the most worrying of the problems facing him. He knows that although he is tasked with tending to Internal U.S. problems, he knows that the consequential, external, monetary factors, out of his control, are creating further problems, for the U.S.
The current world scene requires - no demands - one "world authority" to manage it on a sound basis, to ensure a worldwide, prudent, monetary Policy. A pipedream you may say, but if this does not happen, then we will be left with a U.S. World Monetary power, without the tools that Sir Alan has at his disposal, to manage it.
This is an impossible task, leading to, not only muddied waters, but democratically, ungovernable, muddy waters Sir Alan alluded to that in his speech, making a significant point for our understanding of economic events that affect the Gold Price. The only possible alternative is to dominate this global village with a heavy and undemocratic hand, as history has frequently demonstrated.
The $, as we have said before, accounts for 86% of World Trade and 76% of world savings. It is the world's prime monetary instruement. What happens to it happens to us all.
Sir Alan, because he is charged with being responsible for Monetary policy within the U.S.A. only, will guard those interests and those well before any others, even at the expense of the rest of the world, including friends of the U.S. A. The U.S.A.'s economic health is vital for the health of all its $ colonies, even if it is grabbed at the expense of those around it.
Oh yes, he will tend to the world economy, where he can, and if it suits the U.S. policy of $ Imperialism, but never at the expense of U.S. interests.
Do not be fooled, no concept of an interdependancy in a global economy will work, someone must rule and with a strong hand, often at the expense of others, if any form of world monetary harmony is to be achieved. A U.S. $, backed by gold has the greatest, if only, chance of achieving this. There is NO alternative.
Meamwhile, back in the States he intends, in a weakening economy, to release huge amounts of liquidity to counter deflation, should they deem it a serious threat. Put another way, he has prepared the Fed. for such action, clearly because it is such a threat. With the prospect of deflation being attacked with inflationary means, he hopes to achieve a compensating result, giving rise to "Stability", and a climate in which growth would be engendered and such growth precipitating capital investment, thus staving off further threats of deflation. Almost to alert us to the risks he is taking Sir Alan detailed the uncontrollable nature of the "inflation tool". The concept of a prudent Monetary policy emerging out of the mixing of these two elements, could be like mixing fire and water. The two just don't mix well. The consequential, increasing velocity of money and the mercurial nature of these tools, in the economy is an explosive mix. We are certain that, greater expansion of M3 does not inspire the confidence to build inventories, leading to capital investment and steady growth. No one is convinced by this, least of all those now possessed of unutilised, production capacities. We have seen how such increases in Japan did not find their way into capital investment, but into short term instruments. A ceiling on long term bonds is one of the few tools at Sir Alan's disposal, but growth can only spring out of confidence, a very delicate commodity in the States and one out of his control! The unavoidable consequence, the one we are witnessing in the market right now is the falling $.
So, having read the entire text of Sir Alan's speech we are no longer intrigued by his comments on gold. In fact we are certain we will hear more!
To look beyond the U.S.A. borders at the "collateral damage" that will follow on these policiies, takes on two prime forms: -
Don't think for a moment that we are talking about a Far East takeover of the world economy, no, the mere influence, as well as the marginal impact of China, can be devastating to the balance that is Sir Alan's current problem. To illustrate we look to David Copperfield's Mr Macawber, he told us that: -
"Happiness is earning 20 pounds a year and spending 19 pounds and sixpence, Misery is earning 20 pounds a year and spending twenty pounds and sixpence!"
It is all about confidence. Sir Alan hopes that by providing 21 pounds he will ensure confidence.
With these limitations, and with the interests of the U.S. before him, he gently warns us of the prospect, that the $ was and will be,allowed to fall, not as a policy, but a consequence of his dilemma.
Bad news for the rest of the Developed World as they import the U.S. deflation.
It becomes clear that the only option left to other nation's currencies is to do what Japan is now trying to do, which is to fight to keep their currencies from getting stronger, and to head off the deflation. This has to lead to the world adopting the same increasing of their money supplies, and easing monetary conditions. Again hugely favourable for gold!
The most significant point Sir Alan made after the comment on gold, was the difficulty he has in factoring pressures from independent nations and from geopolitical facts, into the World's money supply. Tragic, because: -
Reasons for selling Gold, or holding it, in the aftermath of Chairman Greenspan's speech!
Ostensibly, the purpose put forward by some Central Bankers, for gold sales, is to make profits. One buys any asset to make a return on capital, or to ensure no loss of capital, as far as possible.
However, interest rates have dropped into negative territory, with the prospect of further drops nearby, to even zero, if we are to accept the words of Sir Alan. So, we now have to question the risks involved in gaining this now miniscule income. Contango's have dropped to such low levels, and even "out-of-the-money" that, with the prospect of hard times ahead, the high risk attending the capital value of the interest bearing instruments, compared with their low income, has prompted many to consider Gold as the necessary, safe alternative. To be blunt, any Central Banker seeking this small income from gold or contemplating disposing of Gold, for an alternative interest bearing currency will be risking his job, let alone the Bank's investments. Not only does this prevent a risk-averse Central Bank from disposing of Gold, in these troubled times, but has to be dismissed as unacceptable. Indeed that a Central Bank should face any market risk, is alarming.
Currencies are not simply a means of exchange, they reflect the economic performance and capital management as well as the vagaries of the foreign Exchange markets. Gold is tied to no economy and no government. Indeed, in real terms, gold has outperformed the major alternative currencies, held by Central Banks.
Hence, we cannot see a good reason for any central Bank to sell gold at this point. It would be more than reasonable to conclude that, in the light of this speech by Chairman Greenspan, it is unlikely that we will see significant sales of gold bullion from "Official" sources after September 2004.
Julian D. W. Phillips
www.authenticmoney.com
1 January 2003