BROWN'S BLEEDING HEART
Excuse To Dump IMF Gold
South Africa bends to the bankers
Investment Indicators from Peter George
February 25, 2005
Scripture
"When you sit to dine with a ruler,
note well what is before you…
do not crave his delicacies,
For that food is deceptive."
Proverbs chapter 23, verses 1,2,&3
SUMMARY
Three key events dominate American monetary history of the past century.
The first was the establishment of the Federal Reserve Bank in 1913. The
second was Roosevelt's confiscation of gold in 1933. The third was Nixon's
closing of the gold window in 1971. Their cumulative effect severed the
nation's link to gold and placed control of the country's financial affairs in the
hands of a private cabal of bankers, largely acting as agents for financial
interests in London. Rothschild funded Rockefeller and used the House of
Morgan as a camouflage.
It was President Woodrow Wilson, who approved the Federal Reserve Act.
Years later, he reflected:
"I am a most unhappy man. I have unwittingly ruined my country. A
great industrial nation is controlled by its system of credit. Our system
of credit is concentrated. The growth of the nation, therefore, and all our worst ruled, one of the most completely controlled and dominated
governments in the civilized world - no longer a government by free
opinion, no longer a government by conviction and the vote of a
majority, but a government by the opinion and duress of a small group
of dominant men."
From 1913 onwards, the disguised and privately owned 'Central Bank'
acquired sole monopolistic right to print paper and create credit on an ever-increasing scale. There were consequences. The value of the dollar began to
decline. From the time the last ties to gold were broken in 1971, US monetary
authorities began fighting a 'rearguard action' to shield their increasingly frail
'FIAT' dollar from the growing attractions of a metal they thought had been
consigned to 'outer darkness'.
Through the centuries, gold has lived up to its God-given, biblical role as
man's most reliable store of value. No paper currency can match it. The bible
calls replicas 'dishonest weights and measures'.
Over the years, the US Treasury has become adept at deploying the various
monetary weapons at its disposal. The purpose was - and is always -to
deceive citizens into believing the FIAT system has a future. A good example
can be drawn from a recent exchange between current Fed Chairman
Greenspan - an ex 'House of Morgan' man - and Congressman Ron Paul.
Greenspan was testifying before the House Banking Committee. Both were
discussing the growing need to curb the budget deficit. Paul reminded
Greenspan of an excerpt from a famous article the Fed Chairman had himself
written 40 years earlier. It was entitled: 'Gold and Economic Freedom'.
"Government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the 'welfare
statists' to use the banking system as a means to an unlimited
expansion of credit. They have created paper reserves in the form of
government bonds."
Greenspan responded with tongue in cheek:
"I do not think you could claim that the central bank is facilitating the
expansion of expenditures in this country."
Richard Russell has a different perception:
"The obvious question that Greenspan was avoiding was this...If Fed
'management' of the nation's money is so expert, even without the
discipline of gold, why has the purchasing power of the dollar been
declining year after year, decade after decade? That's the one subject
Greenspan doesn't want to touch. So the slow, systematic destruction of
the dollar and the nation's savings goes on."
Greenspan and his backers may win the occasional 'pyrrhic victory'. They can
postpone the outcome through 'manipulative interventions'. They can never
prevent it. Without the backing and discipline of gold and silver, all FIAT
currencies will inevitably self-destruct. One has to give the bankers 'credit' -
they do try hard to buy time.
It is interesting to note that from inception, the Chairman of the Fed has
always been a "bankers' man"- a person trained and in the previous employ -
of one of the founding shareholders. Greenspan was no exception.
What is important for the gold community is that we recognize the
counter-strikes when they come, and expose them for what they are.
Our long- term objective has to be monetary reform and the return of
currencies based on gold and silver. Why include silver? In the Old Testament
Book of Haggai, God's word states:
"The silver is mine and the gold is mine", declares the Lord.
God intended the two operate in tandem. Silver was to be 'poor man's gold'.
All of this is from another world. Let us fast forward to recent events.
S.1 GORDON BRINGS TECHNICOLOUR TO THE G7
Finance Ministers of the G7 met in London over the weekend of Friday
February 4, and Saturday the 5th. Special invitations went to 'guest nations'
China, India, Brazil and South Africa. Presiding over the meeting, as is
customary, was host nation Finance Minister Gordon Brown, UK Chancellor of
the Exchequer. On this occasion, he gave new meaning to the term 'preside'.
'Orchestrate' would have been more appropriate. It was a masterstroke of
deception. We discuss his performance later.
What is this "G7'? How did it originate and what is it supposed to do? The 'G'
stands for 'Group'. It started as an informal but somewhat panicky gathering
of the world's four richest nations. That was back in 1973. Two years earlier,
the US had faced a stark choice.
They could either eliminate their trade deficits or revalue the dollar
DOWNWARDS against gold. President Nixon decided to do neither.
Instead, he closed the 'gold window' by suspending the rights of foreign
nations to convert their dollars into gold. It marked the end of the Bretton
Woods Accord of 1944 and forced a mutation of the role of the IMF,
established at the same meeting in 1944. The IMF's original purpose was to
stabilize the global economy, 'fixing' exchange rates between currencies, and
pegging them to the dollar. The dollar in turn was made 'exchangeable' into
gold at $35 an ounce - but only for central banks, not the man in the street. It
was called the 'Gold Exchange Standard'.
Closing the gold window in 1971, blew Bretton Woods out the water and
forced the IMF to redefine itself as 'a lender of last resort' whose new purpose such a role demands. Today the world's monetary system rests on faith in
paper currencies whose value fluctuates at the whim of events.
In a sense, the period since Bretton Woods has been a 'planned' progression.
In Edward Griffin's book: "The Creature from Jekyll Island", the subject of
the left side of our opening cartoon, Griffin summarized the accord as follows:
"The 1944 meeting in Bretton Woods, New Hampshire, at which the
world's most prominent socialists (The Economist John Maynard
Keynes and the Communist Harry Dexter White) established the
International Monetary Fund and the World Bank as mechanisms for
eliminating gold from world finance"
Griffin said the hidden agenda behind the joint establishment of the IMF and
World Bank, was the building of World Socialism. The US Federal Reserve
would help to bring it about. Their overall aim was to TERMINATE the use of
gold as the basis of international currency exchange and replace it with a
politically manipulated paper standard. In other words, it would allow
governments to escape the discipline of gold so they could create money out
of nothing. The latest G7 was an excellent demonstration of how a meeting
ostensibly called to sort out currency problems, miraculously morphed into an
opportunity to hammer gold.
S.2 THE 'SMITHSONIAN AGREEMENT' OF DECEMBER 1971
Within four months of the collapse of Bretton Woods, the 'Smithsonian
Agreement' was arrived at in an attempt to replace the rigidity of Bretton
Woods with something a little more 'flexible', but still retaining the benefits of
'stability'. Twenty-four months later, that was up in smoke. There being no
new agreements to take its place, the world settled by default on free-floating
exchange rates.
S.3 "WE NEED SOMEONE IN CONTROL"
In the following six weeks, international currency markets became
increasingly volatile. On two occasions, they closed. The first occurred over a
'Valentine Day's Weekend' in February 1973, the second for three weeks in
March, when central bank governors met at the Bank for International
Settlements. Their job was to fix a new rate for the dollar. Fed Chairman
Arthur Burns admitted there was a growing 'collapse of confidence' and told
Congress:
'The task of overhauling the international monetary system must be
done in a matter of months rather than years'.
Two months later, right on cue, Nixon called for an informal meeting of the
leaders of France, Britain and Germany at the 'Oval Office'. Their respective
Finance Ministers would simultaneously meet in the White House Library. A
German participant later said:
"We agreed there was a need for someone to be in control again on an
international scale…We hardly knew each other, but mutual appreciation
and understanding developed as we talked, laying the ground for
successful co-operation."
Analyst Joan Veon summed it up as follows:
The idea was born of "a group of leaders meeting to 'monitor' the world's
currency markets."
S.4 G5 MEETS FOR THE FIRST TIME IN 1975
What was originally known as 'The G5', gathered for the first time, two years
later, at Rambouillet, France, in 1975. It consisted of the US, Britain,
Germany, France and Italy, with a last minute invitation to Japan. A year later
Canada joined and they officially became known as the 'G7'.
S.5 RUSSIA SET TO JOIN G8
In 1998, seven years after the collapse of the Soviet Union, a 'transforming'
Russia turned up at the Birmingham Summit in preparation to make it 'G8'. In
2004, leaders of the G7 met in Canada. They agreed to elevate Russia to full
membership when they meet again in St Petersburg, Russia, during 2006. We
are not there yet. They are still officially only 'The G7'.
S.6 G7 FINANCE MINISTERS JOIN GLOBAL CABINET IN 1982
In 1982 the G7 'Heads of State' declared:
"It is essential to intensify our economic and monetary co-operation…to
work towards …orderly EVOLUTION of the international monetary
system."
They gave effect to this by ensuring the permanent involvement of their
respective Ministers of Finance.
By 1996 G7 Ministers of Finance were issuing their own reports. Reflecting
their growing status in world affairs, they said:
"The process of GLOBALIZATION creates new opportunities."
Two years later the Asian crisis hit and G7 ministers realized their efforts to
bring about 'globalization' also brought challenges and dangers. They reacted
by including the heads of their respective 'Central Banks' at all future
gatherings. This is normally were the real power resides - with the central
bank governors, not the politicians.
The process described above shows how fast we are drifting towards the
much vaunted 'New World Order' so beloved of global politicians. We give
analyst Joan Veon, the last word on the role assigned to the G7:
"President Nixon's actions …eliminated FINANCIAL ACCOUNTABILITY
and gave us a world which trades in paper…making it easier for central banks to create money out of thin air. ..It is possible that the volatility we
are seeing in the currency and stock markets is custom-designed to
FACILITATE economic integration." (Edward Griffin would agree
wholeheartedly)
When Veon wrote that in late 2004, G7 leaders were about to meet in BOCA
RATON. She said the name stands for 'MOUTH OF THE RAT' and
concluded that it was more than 'coincidental' - in other words the place they
chose to meet was quite fitting in relation to the manner in which they were
trying to achieve their purposes. February's meeting in London took us further
down the road. Realize this. The G7 is merely a tool, part of a pattern. Its
unfolding purpose will clarify when we place recent events in historical
perspective.
1. RUN-UP TO THE FEBRUARY 2005, G7 MEETING
In the build -up to the latest G7 meeting of Finance Ministers in London,
attention focused on pressuring the US to address its twin deficits. Reports
showed the deficit on trade averaging close to $60billion a month. Adjusting
for a temporary drop in oil prices, even the latest month registered an all-time
high - barely offsetting last month's inflow on capital account. Despite the
small surplus, net inflows had fallen a sharp 34%, to $61billion. This
compared to previous month's $89billion. In other words, net foreign
investment - including sales of US Treasuries to foreign central banks - is
battling to cover an exploding trade deficit. The margin of safety has
disappeared. If a significant shortfall materializes, it can trigger the next down
leg in the dollar. For US trading partners, this is not a pleasant prospect. At
issue between them and the US, therefore, is the CAUSE of these deficits.
Here are some examples to illustrate their differing standpoints. First we
consider those of US spokesmen.
1.1 US ATTITUDES
a. The stage was set as early as last November. Ahead of a G20 meeting in
Berlin, Greenspan shocked a conservative audience of bankers in Frankfurt
on November 19, 2004, by suggesting the massive US trade deficit had
reached a watershed:
"Net claims against residents of the United States cannot continue to
increase forever…It seems persuasive that, given the size of the US
current account deficit, a DIMINISHED APPETITE for adding to dollar
balances must occur at some point."
The above hammered the dollar. Greenspan then went on to rock the stock
and bond markets by predicting higher rates:
"Rising interest rates have been advertised for so long and in so many
places that anyone who has not appropriately hedged his position by
now, obviously, is desirous of losing money."
For many traders, the comments confirmed a widely held view that US policymakers
were in process of dramatically reversing their long-standing 'strong
dollar policy'. They needed a weaker dollar to help curb the trade deficit,
without requiring adjustments to jobs and growth by either raising taxes or
cutting consumption. The US wanted the entire burden of adjustment to fall on
its trading partners. In EM65, published on December 14, 2004, entitled:
"US Flying on Empty - Time for a Golden Parachute", we reviewed
previous US strategies for curbing trade deficits. The most notable occurred
between 1985 and 1990. Then it required a fifty per cent dollar devaluation
and a five year time span, to reverse a trade deficit of far less serious
proportions than the present. Of greater significance was the fact that no
improvement took place until the Administration acted - at the end of year
three - to cut the budget deficit. Only then, did the deficit on trade rapidly
begin to shrink. It seems the US has still not learnt that lesson. Who can
blame them? Curbing consumer credit to the extent required will trash
corporate profits. Stocks are substantially overpriced. Imagine suffering the
double whammy of sliding profits. Unfortunately, the alternative of a sharply
falling dollar is equally painful for US trading partners. Knowing this,
Greenspan softened his stance in advance of February's G7.
b. In an unusually upbeat speech, the Fed Chairman sought to mollify US
critics of his Berlin speech of last November, saying he now believed:
"Market forces and the prospect of fiscal discipline in Washington
appear poised to help reverse the current account deficit."
What a deceiver! He further stated it could be achieved:
"without any significant consequences to aggregate economic activity."
In true 'Green-speak' the Fed Chairman refused to elaborate as to whose
economic activity he was referring to, but he effectively told us not to worry,
because Bush had made soothing noises about 'halving' the budget deficit
over a five-year period! (Even if the Administration were serious, something
considerably more radical is required to stave off crisis.)
c. Prior to the meeting, US Treasury Secretary Snow said he intended:
"to stress the importance of Europe and Japan taking steps to
accelerate growth and thus help reduce the US trade gap…..The US
current account deficit ….basically reflects differential growth rates
between the United States and our trading partners…If Europe and
Japan grew faster they would buy more US-made goods."
Snow then ducked out ahead of the G7, sighting a 'bad chest cold'. That was
just as well because the 'differential growth' argument would have gone
down like a lead balloon.
1.2 TRADING PARTNER ATTITUDES
In sharp contrast to the above, America's trading partners adamantly refuse to
accept that the US deficit can be resolved by simply allowing the dollar to
slide. They know from experience, that the currency route places the burden
of adjustment on them alone. They rightly insist the US tackle its budget
deficit FIRST.
a. On January 29, Li Ruogo, Deputy Governor of the People's Bank of China,
made this point very clearly. In anticipation of fresh pressure to allow his
currency, the Yuan, to float upwards, he refused to shoulder blame for the US
trade imbalance with his own country:
"The world economic imbalance is attributable to many reasons, but not
to the exchange rate…China has not the capacity to address that socalled
imbalance. We are not willing to do it, and we are not able to do
it."
In light of the fact that the overall Chinese current account is close to neutral -
surpluses earned on exports to the US, are largely spent on imports of raw
materials from other countries- a revaluation of the Yuan, in the opinion of the
writer, is not warranted and we gave the reasons in EM 65, referred to in 1.1
above. The US is using the Chinese as 'whipping boy' to cover for their own
economic indiscipline.
b. On February 1, two days after the Chinese statement, Japan's Minister of
Finance, Sadakazu Tanigaki, continued in similar vein:
"Resolving the US current account deficit just with currencies would be
impossible."
Japan knows that the profitability of her exporters rests on a knife- edge.
Should the Yen strengthen further, many will slip into operating loss.
c. On February 3, eve of the G7 meeting, an EU source expressed widely
shared relief at the effects of the recent dollar rally:
"The exchange rate is not the cause for concern it was a few months
ago…It's no longer considered a recessionary factor."
Having said that, the same source made it clear the EU was not prepared to
stomach another bout of dollar weakness:
"If the dollar weakens again, the Fed should react by raising rates more
quickly."
In other words, he was calling for the Fed to address the budget deficit by
curbing the consumer and encouraging the saver. On the face of it, the US
was going to be forced into a corner and pilloried but - to be fair to both sides
- the problem for the US is not an easy one to solve. Curbing the budget
deficit could tip the economy into serious recession. Either way the dollar is heading for a beating - of greater or lesser magnitude. Some feared it could
develop into a rout - dragging international stock and bond markets in its
wake. Under that scenario, GOLD would not just rise in relation to dollar
weakness. It could explode against all currencies. This would threaten 'short'
positions in the derivative markets and highlight dangers to the FIAT money
system 'in toto' - a central banker's nightmare. International agencies had to
do something to bring the process back under control.
2. 'WASHINGTON AGREEMENT' - IN RETROSPECT
On August 27 1999, gold registered a multi-year low of $253 an ounce. The
slump in price was a direct result of the looming threat of central bank selling.
It had been building up over the previous three months. It began in March of
that year, with an attempt by US President Clinton and Treasury Secretary
Rubin, to dump some IMF gold, on the pretext of reducing poor country debt.
It was followed in short order by an announcement from the UK Chancellor of
the Exchequer, in May 1999, to the effect that his government intended more
than halving its gold holdings, by selling off 400 tons. The reason given by
Prime Minister Blair, in answer to a question in parliament, was:
'Gold is a bad investment and we need to diversify our reserves'.
This time there was no talk of debt relief. It was a panic move to save the
London Bullion Market. Over the following three years, 400 tons of British gold
was disposed of at an average price of $274 an ounce - leaving the Bank of
England with a mere 300 tons in the kitty, less than 7% of total reserves. Note
the announcement came as gold was on verge of breaching $300 on the
upside - not what the central banks had wanted at the time, so the British
rescue. The manner in which the sale was widely broadcast made it clearly
apparent the UK's purpose was not to restructure British foreign reserve
performance. It was to cap the price of gold. When approached for an
explanation, a Bank of England spokesman virtually confirmed this. He said:
"It was a political decision. We had nothing to do with it."
A month later, in June 1999, with the price already falling, G7 finance
ministers added fuel to the fire by revving up earlier plans to sell off 300 tons
of IMF gold - 10% of total holdings. Here again, the same Gordon Brown who
dominated this month's G7 meeting in London, was a leading driver behind
the IMF. The ostensible purpose, as now, was to help fund a 'debt relief
initiative' for 'Highly Indebted Poor Countries'. Why would the UK 'front run' an
IMF initiative to help the poor, by slamming the price of gold in advance,
thereby reducing the amount to be raised?
In the event, there was widespread opposition to the IMF sale, the origin of
which we discuss later. Suffice to say that some of those most vociferous
then, are surprisingly acquiescent today. We investigate why.
Due to America's 'blocking vote' of 17% - where a minimum 85% is required
on such matters - the deal fell through. Instead, a more complicated 'gold
revaluation process' was adopted. Brazil and others were given substantial
'debt write offs'. IMF gold holdings remained intact. Average 'book cost' rose
from $42 per ounce to $80. It was still unrealistically low and the slight of hand
methods used, amounted to robbing taxpayers - of the countries which
belonged to the IMF and therefore 'owned' the gold. The simplest solution
would have been a decision to write off the loans as bad debts.
2.1 THE WASHINGTON AGREEMENT OF 1999
We return to the main issue under our microscope- central bank efforts to
hammer the price of gold. With gold having fallen from almost $300 in March
1999, back down to $253 by August, central banks realized they had gone too
far. For no apparent reason the price of gold began to spike. Within a month,
it reached $285. Then, on September 26, the central banks announced:
"The Washington Agreement of 1999"
It was a public undertaking by a majority of European central banks, to limit
combined sales of the metal over a five-year period, to a maximum of 2000
tons. It was tantamount to saying:
"We control this market but we're going to ease the pressure a bit -
sorry about the shocks of the past couple of months."
In retrospect, gold dealers had caught a strong whiff of what was coming. In
the previous thirty days, gold had lifted $30 to an intra-day high of $285. Two
days post the announcement it jumped a further $35, to peak at $320.
In the months that followed, secret US Treasury sales, mostly via the
Exchange Stabilization Fund, capped the price. It required massive
intervention to halt the momentum. That was when Eddie George, Governor
of the Bank of England, allegedly passed a famous aside to his friend,
Nicholas Morrell of Lonmin Plc:
"We looked into the Abyss if the gold price rose further. A further rise
would have taken down one or several trading houses, which might
have taken down all the rest in their wake. Therefore at any price, at any
cost, the central banks had to quell the gold price, manage it. It was very
difficult to get the gold price under control but we have now succeeded.
The US Fed was very active in getting the gold price down. So was the
UK."
The US borrowed the gold they needed from the German central bank. They
later dumped it into European 'spot' markets. This explained the subsequent
'change of designation' applied to US Treasury gold held at West Point.
Following an audit, the description altered from 'Bullion Reserve' to 'Custodial
Gold' - in other words gold held on behalf of someone else. When queried,
Treasury officials morphed it again to 'Gold in Deep Storage'. The US would
have found it difficult selling 'Treasury Gold'. Most of it is still in the form of 'coin melt' bars, from the time when Roosevelt confiscated it from the public in
1933.
A year and a half down the line, on 16 February 2001, combined central bank
efforts managed to drag the price back down to $254, within spitting distance
of the previous low of $253 on 27 August 1999.
In a letter entitled: "Out of Darkness" and dated August 2003, analyst Sean
Corrigan refers to an even more 'infamous' remark by Eddie George's partner
in crime, Fed Chairman Greenspan, uttered a year earlier when being
questioned in the Senate. They were quizzing him about the potential dangers
inherent in unregulated derivative markets - particularly the gold market.
Greenspan went to great pains to protest that regulation was unnecessary. He
had to. In the event the derivative markets ever become 'regulated', the extent
of 'official' interference in the gold market, will automatically get exposed.
Greenspan assured his interrogators no harm could eventuate:
"Nor could private counterparties restrict supplies of gold….where
central banks stand ready to lease gold in increasing quantities should
the price rise."
Shortly thereafter Long Term Capital Management nearly blew up Wall Street.
Brilliant mathematicians and statisticians were running the company. Risk
forecasting was their bread and butter. They were allegedly 'short' a few
hundred tons of gold, the proceeds of which they had used to finance all their
other investments - some of which were in the Russian debt market. Happy
birthday! In the Book of Proverbs, chapter 27, verse 1, we read:
"Do not boast about tomorrow, for you do not know what tomorrow may
bring."
That is why the 'leasing' of central bank gold to earn a paltry 1% a year is the
height of folly. The return can never compensate for the unpredictable nature
of uncovered debts - especially Russian bonds in 1998, or worse still, being
'short' on gold in a raving bull! The experience supports our view that in a
world where the balance of power is rapidly changing from West to East, it is
unwise to rely on so-called 'Central Bank Agreements' on Gold. Reliable
'sellers' may vanish. Big new buyers can appear from nowhere.
3. CENTRAL BANK GOLD AGREEMENT - 'RENEWED'
On March 16, 2004, European central banks announced having reached a
'collegial commitment' to renew the Washington Agreement of 1999, due to
expire on September 27, 2004. They raised their 'self-imposed limit on sales'
from 400 tons of gold a year, to 500. During the next five years, central banks
would be entitled to sell an increased total of 2,500 tons - up from 2,000 tons
in the first five. Within a fortnight, the threat of increased sales caused a rising
gold market to slow and peak at $425 an ounce. By May 7, less than two months later, the price had fallen 13%, down $54, to an intra-day low of $371.
The dollar itself had only fallen 4% against the EURO. This was manipulation.
Gold was under planned pressure.
Then things began to go wrong. In the four months preceding the official
signing of the new agreement on 27 September 2004, and the two months
following, the dollar, pushed by Greenspan, fell 13%, with the EURO rising
from 117, to 133 by end November. Gold bounced back viciously, up 23%,
from $371 in May, to $456 by end November.
3.1 CENTRAL BANK AGREEMENT IN TROUBLE
As early as March last year, South African gold analyst Julian D.W. Phillips,
warned it was premature to assume that central bank sales for the next five
years, were set in concrete. Having read a few of his articles in the course of
researching this topic, the writer phoned him. Phillips told of how he had made
the subject of central bank gold sales his special field of study. His analysis
made sense and helped explain Gordon Brown's G7 strategy. Phillips' March
2004 letter already indicated a maximum five-year target of 1,276 tons -
barely half the central bank budget of 2,500. The lower figure still relied on
600 tons to come from the Germans but, as analyst Peter Spina pointed out in
his own March letter:
"The majority of Germany's Bundesbank Board is not in favour of such
an action."
Spina further pointed out that even though Italy was capable of selling 1700
tons:
"The Bank of Italy has not sold any gold for over half a century and it's
not clear if they will actually sell any of their holdings."
If both countries were to withdraw, it could cut the sales target in half again, to
around 600 tons over an entire five-year period! If our earlier contention is
correct - that half Germany's gold has already been lent to the US and sold -
it makes further sales from that quarter more unlikely still. It suggests
recurring German threats to sell in the past, have been so much hot air.
Analyst Nick Barisheff raised another interesting issue. He said that Japan
was the world's largest holder of US debt, and that on January 27, 2004 its
Finance Minister had suggested that:
'It would be wise if Japan brought its gold holdings towards levels more
consistent with those of other industrialized nations.'
Barisheff noted that any rebalancing by Japan to match the 40% gold holdings
of European nations, would swallow far more than the measly 2,500 tons
covered by the new agreement. With current holdings of only 765 tons, Japan
would have to acquire another 17,235 tons! This would amount to over half of
all official holdings - assuming they still exist in the hands of banks. GATA
members are generally of the opinion that at least 10,000 to 15,000 tons of proclaimed central bank stocks of 32,000 tons, have already been leased out
or sold.
With China heading for a confrontation with the US and Japan over Taiwan,
large-scale Chinese purchases become a distinct possibility as well. There is
no better way for China to exercise painful financial leverage over the US,
than by swapping a portion of her growing dollar holdings for gold. In the
process, she would simultaneously depress the US currency, boosting gold.
3.2 CENTRAL BANK GOLD SALES TO CEASE?
On 5 October 2004, Phillips wrote an article headed as above. He pointed out
that a week into the new agreement, the expected confirmations of gold sales
from the signatories to the 2004 Central Bank Gold Agreement, never came.
Having promised early news of a decision, Italy's silence was deafening. They
were not going to sell. France intimated an announcement would be made
early in the 2005. Nothing came from there either.
On December 27 2004, Phillips sent out an urgent update. Italy had
announced it:
"Had no plans to sell gold"
The market was taken aback. They forget Italy is a major manufacturer of
jewellery. They cannot possibly want the investment merits of gold belittled.
While still reeling from this announcement, bears received another shock. On
December 13, the German Bundesbank stated it would not be taking up its
option to sell 120 tons of gold in 2004/2005. A few weeks earlier the President
of the Banque de France, Christian Noyer, also had reason to rejoice. His
'bete noire', the anti-gold Minister of Finance Sarkovsky, had departed. It was
he, who had forced Noyer to start selling gold in October. The governor had
been most unhappy, selling-off France's 'family jewels'. With Sarkovsky gone,
the selling will likely now stop. De Gaulle's challenge to the dollar back in
1968, has not been forgotten. The French have a deep-seated preference for
Gold.
There is one more voice we add to our positive scenario, and what a pleasant
surprise to be able to do it. Long-time hedging-advocate Kelvin Williams,
Marketing Director of AngloGold-Ashanti, is undergoing a mild 'Damascus
Road' conversion experience - similar to a form of 'global warming'. Possibly
smarting a little from having to effect some expensive buy-backs last year, he
recently became a bull on gold. In an interview with South African journalist
Dave Mckay, on 9 December, he admitted the following:
"Central bank attitudes towards gold had changed because its profile as
a store of value had been rehabilitated….The central banks had started
treating the gold market with the same kind of respect that they would
treat the market of a currency of another central bank."
He is ready to acknowledge that gold holdings are finally being treated on a
par with other currencies. One of these days he may even be prepared to give it top billing in relation to ALL currencies. Congratulations Kelvin, you've
turned the corner. Hurry up and cover all those Anglo and Ashanti 'shorts' -
there's a good chap.
This leaves us with a situation where, barring a sharp spike in the price,
central bank sales have effectively halted. Enter Gordon Brown, the British
Chancellor of the Exchequer, pronounced 'gold bear', guardian of London
Bullion Market 'short positions' and barking dog for the US Treasury.
4. DIVERSIONARY TACTICS AHEAD OF G7 2005
Long in advance of the G7 meeting, it was obvious the US and trading
partners would be heading for a showdown. Central bank sales were on brink
of drying up and US twin deficits were an embarrassment. The US and UK
urgently needed to devise a diversionary tactic- something to take the heat off
the US and cap the price of gold in the event the dollar slide became a rout.
Way before signing any new gold agreement on September 27, the situation
we sketched above had become patently clear to both UK Chancellor Gordon
Brown and friends in the US Treasury. As 'watch dog' for the 'London gold
shorts', Brown sensed the market was heading for an uncomfortable squeeze.
It would exacerbate pressure on the dollar - just as recent gold weakness had
strengthened it. Action was necessary. The Anglo-American alliance targeted
fresh supplies of metal. There was only one possible source - the 103m
ounces of IMF gold. Our wily Scot concocted an elaborate scheme to
persuade fellow members to agree a sale. The scheme had numerous angles
and required the careful co-ordination of multiple contributors.
4.1 AID AGENCIES USED AS A 'BATTERING RAM'
It was Sunday, 26 September, 2004, a day before central banks were due to
sign their new agreement of 27 September, 2004. The Chancellor had offered
to speak at a meeting organized by the Trade Justice Movement in St.
Bartholomew's Church, Brighton, England. He used the occasion to launch a
'debt initiative' linked to a 'revaluation' - and sale - of IMF gold. There had
been weeks of preparation, linking in with charities and Christian Church
Agencies. They heralded the campaign with a slogan:
"Make Poverty History"
To mark the event, organizers draped Westminister Cathedral in white.
People marched on Downing Street, the Prime Minister's official residence.
Thousands attended a vigil at Whitehall, where parliament lies - all with the
undoubted connivance and blessing of the good Chancellor. Without
deliberately wishing to be cynical about his motives in helping the poor, we
are convinced Gordon Brown was using the aid agencies as pawns in a
bigger game. From inception, he appears to have been deeply involved in the
overall co-ordination of a campaign. He would help stimulate a groundswell of
public opinion to encourage, even 'pressure', fellow members of the G7 to fall
in line with his scheme.
Of course, their slogan presented a problem. One can never 'make poverty
history'. In Matthew chapter 26, verse 11, we read why. When a woman
from Bethany anointed Jesus with an alabaster jar of very expensive perfume,
his disciples were indignant and accused him of waste. They said. "This
perfume could have been sold at a high price, and the money given to the
poor." Aware of this, Jesus said to them, "Why are you bothering this woman?
She has done a beautiful thing to me. The poor you will always have with
you, but you will not always have me."
4.2 GORDON BROWN'S 'NEW ECONOMICS' - GET GOLD OUT
We return to the machinations of Gordon Brown. There was a 'warm-up' G7
Finance Ministers meeting due on October 1, 2004. One of the organizations
present at his church address in Brighton was 'Jubilee Research for Debt and
Development Coalition Ireland'. One of Jubilee's research team, a certain
Sony Kapoor, fortuitously published a most appropriate report. Kapoor hails
from the New Economics Foundation in Ireland. The Chancellor saw that
Kapoor's report was in the hands of G7 delegates two days before their
meeting on October 1. It was entitled:
"The IMF, gold sales and multilateral debt cancellation"
Under the guise of 'debt relief' for the poor, it proposed a detailed plan to sell
off the entire IMF gold stock over a twenty-year period, at a rate of 5m ounces
a year, equivalent to 156 tons per annum. The idea was to slot the sales into
the new Central Bank Gold Agreement. Knowing there was already a
guaranteed shortfall ensured there would be no problem. No one could object
by saying:
'The market can't take it'.
The new central bank agreement had already made provision for 2,500 tons
over five years, even if the gold was presently not on offer. Kapoor's report is
full of illogical conclusions as to the effect the proposed sales would have on
the price of gold, but its underlying theme is clear as crystal. Gold must fall
away. He referred to 1978, when the IMF passed a Second Amendment to its
Articles of Agreement. We quote from Kapoor's report:
"In combination it was intended to achieve a GRADUAL REDUCTION of
the ROLE of GOLD in the international monetary system and in the
IMF…This was expected to drastically decrease the amount of gold
reserves held by countries…However, this large decrease in gold
reserves never happened…gold is still an important asset…In fact,
between 1978 and 2004 the total reserve holdings of gold have only
gone down by 13%."
Having told us the rate of decrease was minimal, Kapoor went on to state
categorically:
"However, there is an increasing trend for central banks to get rid of
their gold."
To the contrary, the latest information on European Central Bank gold
policies, suggests exactly the OPPOSITE is occurring. As AngloGold's
Marketing Director recently admitted, gold's role as a 'store of value' is being
rehabilitated. Kapoor is talking his book - and in the process is mouthing
rubbish.
4.2 KAPOOR ADVOCATES 'HEDGING' AND 'LEASING'
In order to minimize the hoped-for negative effects of IMF sales, Kapoor
suggests mines 'hedge' their future production by selling forward. He
proceeds to describe how the gold 'dealers' who buy this gold from producers,
are in turn exposed to possible losses if the gold price falls in the future. In
order to 'hedge' their own positions, they 'lease' gold from central banks and
sell it into the spot market. Having advised producers to hedge to limit
revenue risk, he explains how the practice 'helps keep future gold prices
low'. Thanks for nothing.
When discussing the sale of IMF gold, Kapoor makes one very good
suggestion. He says:
"One possible way of selling IMF gold to minimize market impact would
be to include OFF MARKET SALES to central banks that are looking to
INCREASE their gold holdings."
He obviously didn't discuss this point with Gordon Brown before including it in
his report. The IMF was not exactly overjoyed when Argentina bought 40 tons
a while ago. Imagine how they would feel, if either Japan or China offered to
take 1,000 tons of IMF gold, cash up front!
Kapoor concludes with a comment on price levels:
"The current gold price is very high by historical standards, falling
within the top ten percentile of gold prices throughout history."
This is undiluted drivel. First, gold is less than HALF its all time high of $850 in
1980. Second, it is way under valued in relation to oil and other commodity
prices. Third, in making the above statement, Kapoor takes no account of the
effects of twenty-five years of inflation. Dollar buying power is less than half
what it was when gold was $850 in 1980. We would need at least a four-fold
increase from today's price of $425, to match the $850 all time high of 1980.
Oil is half way restored, with dollar prices pushing way over $40 - the
previous high - even over $50. Thanks to the efforts of central banks, gold is
lagging. Kapoor cannot have it both ways. Either he wants to help the poor, in
which case he needs to realize the maximum possible price for the gold he
would have us sell, or he wants gold out the system because it threatens the
FIAT structure he serves.
We know where Gordon Brown stands. Kapoor is close behind. His report to
the G7 members on October 1, last year, set the scene. Well-orchestrated
public support helped persuade Europeans that the mood of the people was positive. Kapoor's report gave theoretical economic backing and a clear
explanation as to how it would work. As governments began to prepare for the
meeting in February, attitudes to the Brown initiative softened.
4.3 BROWN'S BLEEDING HEART
The Chancellor's preparations gathered steam as Christmas came and went.
On January 10, 2005, he addressed a gathering of 18 African Finance
Ministers at the 'Commission for Africa' meeting in Cape Town. He called for
the establishment of an IFF - an International Financing Facility - to generate
an additional $50billion in extra resources to help achieve the UN's Millennium
Development Goals (MDG) by their target date of 2015. Four days later in Dar
Es Salaam, Tanzania, he gave reporters a 'tear jerker', telling them of the
'shock' and 'hope' he had seen during his tour of Africa. He said he intended
sharing his experiences with finance ministers from the G7 when they met in
February.
"We have seen grinding, abject, relentless poverty and we have had a
glimpse at the aching souls of the left-out millions…As long as we fail to
act, all those promises of help to parents and children…are not going to
be redeemed."
Brown said much of his passion for helping the world's poor came from his
father who was a Church of Scotland minister:
"There were many contacts between the Church and Africa. We
repeatedly heard stories of …the tragedy and tribulations of Africa."
He said fatherhood had encouraged him to seek greater aid and made him
more emotional when he met young children in poverty:
"You're looking into the eyes of children all the time and you ask what
their prospects are going to be…It does influence you."
GATA's comment was harsh and to the point:
"This guy doesn't give a rat's butt for the poor. If he did, he would be
asking the richer nations to HOLD BACK on all gold sales."
Is the GATA statement fair? Let us see.
4.4 BROWN HAMMERS GOLD
Two months after the launch of Brown's proposal - particularly the rider
specifying the physical sale of gold to make the project fly - the price of the
metal peaked at $456. By the end of January, four months from the
September launch of his programme for debt relief, there was a growing
realization that the proposal could gain acceptance. This meant there was a
real risk of IMF gold finding its way into the market. The price fell to $420. The
G7 meeting took place over the weekend of February 4th and 5th. By Tuesday
8th, gold was down to $410, bouncing off its 200-day moving average. It has
since pushed back to $433. Where do we go from here?
The G7 targeted raising $12billion to write off monies owed to the IMF. Two
steps would be required. First, they would need to revalue all IMF gold
holdings to market. At current prices, that would make them worth $43billion.
Then they would need to sell $12billion worth of gold - roughly 900 tons out of
a total of 3,200 - but in a manner likely to cause minimum disruption to the
price. Forget the fact that it is intended to hold the price FLAT.
"It would be slotted into the central bank selling programme."
The UK has undertaken to table the proposal before the next IMF meeting in
early April. The fact that gold has rallied $23 from its $410 low, suggests the
market is hoping for a repeat of what happened in 1999. Widespread
opposition among gold producers - particularly the poorer countries of Africa
- persuaded the Black Caucus to kill the proposal in the US Senate. For the
IMF to dispose of gold requires an 85% vote in terms of their own constitution.
The US in turn, controls 17% and cannot vote in favour without first obtaining
Senate approval. This gives the US an automatic 'blocking vote'. Her support
is crucial.
5. THE MYSTERY OF US OPPOSITION
When the question of IMF gold sales first floated in March 1999, the US
Administration was main driver - not Europe and not even the UK - but the
plan died in the Senate. The US Treasury Secretary desperately needed gold
to feed into the market to contain a push through $300. He cried for help. The
UK came to the rescue with a 400-ton disposal plan, which Blair and Brown
foisted on the Bank of England. In retrospect, the average price eventually
received was low and sacrificial - less than $280 an ounce. It hurt the UK to
help the US. This time round, G7 February 2005, Treasury Secretary John
Snow sighted a cold and failed to pitch. Undersecretary John Taylor came
instead.
From the moment he arrived, Taylor's objections to the UK plan were vocal.
Observers went so far as to describe subsequent discussions with G7
members as 'heated'. We review his statements for the record, but share
GATA's skepticism as to their integrity. We are convinced the US reaction
was 'a put up job'- deliberately crafted to deceive. They and the Brits have
cleverly used 'reverse psychology' to 'sucker' normally 'difficult' European
heads of state into supporting a plan on which the US and UK both secretly
agree. The very fact of knowing there was serious American opposition,
induced the Europeans to side with the UK. It reminded them of past divisions
over Iraq where they earned political capital by opposing American
'aggression'. The latest 'debt relief' strategy offers EU members an
opportunity to earn political 'brownie points' with emerging nations who stand
to benefit.
The Europeans fell for the plan and gave the UK strong backing. In due
course, we believe the US will 'graciously' change its stance and 'submit' to
the will of the majority. Gold Bulls meantime think the plan is dead. If our maybe lower. If it occurs, the pullback will not last long. Competitive bids
could soon be on the table - offering to take all the gold available. Then we
will see whether the 'offers' are genuine. Chances are it will cause the
scheme to flop.
Here is the bottom line. Do not construe our interpretation of the situation as a
reason to sell. Those with dry powder set aside should instead prepare for a
genuine, 'once-in-a-lifetime' opportunity, to purchase long-dated options on
the metal. This will likely be the last chance one gets, before the Gold Bull
finally breaks loose. Thereafter, there will be no more dilly-dallying round $400
- next step $500 and upwards. Double that figure would not surprise.
5.1 US OPPOSITION FOR THE RECORD
The poorest nations are in debt to a tune of $70billion owed to international
institutions. Apart from $12billion owed to the IMF, there is further $58billion
owed to the World Bank and others. Britain would cancel the lot by raising
funds in the international money markets - a so-called International Financial
Facility. (IFF) To cover IMF write-offs, Britain suggests revaluing IMF gold
holdings and selling off sufficient to cover a $12billion loss.
Taylor's response was as follows:
"The United States is committed to poverty reduction for heavilyindebted
countries, but we cannot support the IFF…Our own approach,
involving the complete debt write-off of poor country debts to multilateral
institutions, and the use of (conditional) grants rather than loans,
is the right way to go."
Other members have concerns the 'conditions' will be unpalatable to
recipients. The problem is that unless one imposes conditions, recipients
never learn to mend their ways. Irresponsible children are no different.
Taylor said he was also 'not convinced' by Brown's other two proposals
either. The first was that the IMF revalue sufficient of its gold reserves to
enable them to write poor country debts off the balance sheet. The second
was the question of sales.
Taylor continued: 'The Bush Administration is not convinced that gold
sales are a NECESSARY way to raise capital for debt relief.'
GATA's reaction to the US attitude was quite direct:
"No country is more anti-gold than the US. GATA has six years of
documentation of this. Therefore, you can be sure US Treasury
Undersecretary John Taylor's objection to gold sales is a red herring of
sorts…Maybe the US is scared to death of the Gold issue being raised, it
may lead to questions about US Gold, a portion of which has most likely
been clandestinely …swapped out."
In contrast, Brown can console himself with the fact that support for his
proposals is growing within Europe. The German Finance Minister, Hans
Eichel, told the Guardian newspaper that Germany is in principle in favour of
both the IFF and IMF gold sales plan.
5.2 THE ALLIANCE RUNS DEEPER THAN BLOOD
If the above reasoning on the closeness of US-UK strategy, fails to convince
our readers, try the following. US and UK troops are standing and dying side
by side in Iraq. There is however a matter, that runs closer and deeper than
blood. It is the health of the world monetary system. Would they ever dream of
not swapping notes on such a seminal subject as a plan to sell off gold - of
course not! If Gordon Brown even vaguely suspected genuine US Treasury
opposition was running high, would he openly court conflict with his blood
brother- never!
In a leaked memo emanating from discussions at a highly secretive get
together of the 'Bilderbergers' - the European equivalent of the Council on
Foreign Relations meetings in New York - there was an innocuous
description of how board meetings are conducted at the IMF.
"Everything the IMF does is voted on. But contested votes are rare:
decisions are by CONSENSUS, with the consensus usually put together
outside the boardroom."
If that is how members of the IMF conduct business in the wider context of big
meetings, how much more so in the narrow confines of a 'one on one'
discussion between two nations, linked at the hip by history, war and ongoing
financial subterfuge. We rest our case. Prepare for a US 'turnaround' on IMF
gold sales.
A couple of days ago GATA reported a Treasury spokesman saying:
'Washington will not scupper the plan'.
He explained that:
"The British are hoping to strike a deal on a gold sale or revaluation as
soon as April. We are waiting for the IMF to produce its report".
There we go. Let the situation develop.
Peter George
www.investmentindicators.com
DISCLAIMER
Readers are advised that the material contained herein is provided for
informational purposes only. The authors and publishers of this letter are not
acting as financial advisors in providing the information contained in this
publication. Subscribers should not view this publication as offering personalized
legal, tax, accounting or investment related advice. Readers are urged to
consult an investment professional before making any decisions affecting
their finances.
Any statements contained in this publication are subject to change in accordance
with changes in circumstances and market conditions. All forecasts and
recommendations are based on the currently held opinions and analysis of the
authors and publishers. The authors and publishers of this publication have taken
every precaution to provide the most accurate information possible. The
information & data have been obtained from sources believed to be reliable.
However, no representation or guarantee is made that the information provided is
complete or accurate. The reader accepts information on the condition that errors
or omissions shall not be made the basis for any claim, demand or cause for
action. Markets change direction with consensus beliefs, which may change at
any time and without notice. Past results are not necessarily indicative of future
results.
The authors and publishers may or may not have a position in the securities
and/or options contained in this publication. They may make purchases and/or
sales of these securities from time to time in the open market or otherwise. The
authors of articles or special reports contained herein may have been
compensated for their services in preparing such articles. Peter George Portfolios
(Pty) Ltd and/or its affiliates may receive compensation from the featured
company in exchange for the right to publish, reprint and distribute this
publication.
No statement of fact or opinion contained in this publication constitutes a
representation or solicitation for the purchase or sale of securities or as a
solicitation to buy or sell any specific stock, futures or options contract mentioned
in this publication. Investors are advised to obtain the advice of a qualified
financial & investment advisor before entering any financial transaction.
Printer Friendly Version
Email this Article