Many of the world's political looters (I mean leaders) have given gold investors plenty to worry about. The Swiss passed their April 18th referendum to officially go off the gold standard, clearing a major hurdle blocking the sale of up to 1300 metric tonnes of their gold reserves (a metric ton is equal to 2205 lb. or 32,150 troy oz). They now only need public approval in a final referendum this fall. That one is expected to find much greater opposition. The markets actually took it in stride, pushing gold prices sharply higher in what had appeared to be the classic panic short squeeze we were expecting.

That changed abruptly on May 7th when the Bank of England (BOE) sent gold down more than $12/oz. and the XAU Index over 15 points lower in the following two days alone on the surprise announcement that they plan to reduce England's gold reserves by some 415 of 715 tonnes over the next 3 to 5 years. The sales are to begin with 5 auctions every other month beginning in July with the sale of 125 tonnes.

We are more than suspicious that this would come just as prices were starting to rally, especially when it began in the face of the already discounted news from Switzerland. The BOE stated that their intention was to "reconfigure" their reserves toward interest bearing currencies. The British pound dropped immediately on the news as this is yet another socialist run European nation that is, in essence, devaluing and socializing their currency for reasons that can only be guessed at for now. With paper assets backed by little more than the confidence of IOUs (more paper backing paper -defined by us and many others to be a Ponzi Scheme!!) , they are doing everything they can to remove and thoroughly discredit traditional thinking that currency needs to be backed with something tangible.

Why would any nation squander the one sure asset to back the integrity of their paper currency? Perhaps it is because no one making these decisions is old enough to remember the value of a gold linked currency, but more likely they choose to remove barriers that will allow them to print unlimited currency without any responsible fiscal restraint. Thus, convince the world that gold is obsolete as a hard currency and that paper "IOUs" are sufficient, modern, and better. That is, until something happens between nations to remind them that the value of a generic hard asset currency yields to no particular political or nationalistic persuasion. The very essence of its value is that it takes no sides.

The question remains why is this no longer important? If I were a central banker, I'd want to be on the other end of the trade, even if it meant printing more currency to pay for it. At least in the end it would have strong gold backing. Japan, China, India, Russia, and Middle-Eastern nations may have this same idea, yet for other reasons their currencies (by far) don't stand out among recent leaders.

The IMF's proposal to sell up to 10 million ounces of their gold reserves (less than $3 billion at today's depressed prices) has remained a major emotional Sword of Damocles hanging over the market since it was first proposed in 1996. Many think that the majority of CB sales were to beat them to the market, but in reality, their proposed sales aren't large enough to have caused this much front running. The proceeds would be used to provide debt relief for the "Highly Indebted Poor Countries" (HIPC) initiative, many of which are in mineral rich nations that depend heavily on gold production and stable or rising prices. There is much debate over whether these gold sales would provide real relief or are even an appropriate vehicle for this type of aid in the first place. A growing number of key US Congressmen led by Senate Minority Leader, Tom Daschle of South Dakota have started a movement voicing their non-partisan opposition to these sales. The US holds 18% of the 85% majority vote needed to pass the IMF's resolution to sell any gold, effectively enough to veto the entire proposal. If they succeed, they will have removed a huge barrier to higher prices.

The German Finance Ministry, France, England, and the Clinton Administration are in favor of the sales but the Bundesbank, Japan, Russia, and South Africa oppose it. Bundesbank President, Hans Tietmeyer has vigorously opposed any gold sales as has Alan Greenspan who stated that "gold still represents the ultimate form of payment that is always accepted." Even outgoing Treasury Secretary Rubin, who is in favor of IMF sales recently stated, "it wouldn't be wise for the US to start selling its gold." A spokesman confirmed that the US has no plans to sell any of our 262 million ounces held in reserve. That is to say, not in the open market. We reported last October that through 9/23/98 the US Mint had already sold a record 1.2 million one ounce Gold Eagle coins and put dealers on an allocation because they couldn't meet the demand. I don't know what the total 1998 figure was, but in itself this was a lot of gold sold for a country that supposedly needs Congressional approval to reduce its reserves.

It is likely that CBs are deliberately acting to keep the market depressed. Short sellers were starting to panic because they literally can't find enough gold to cover their record short positions. They can't deliver their borrowed gold back to their central bank lenders until they can find the supply, so the BOE announced they'd make it available! This is the equivalent of protecting one's investment, even after they had already rigged the game. The tight supplies we had written extensively about were having a sharply bullish impact on the shorts. According to Michael Kosares (whose Gold Report shares the web site with our own market comments), the BOE announcement may be aimed at helping speculators out of trouble ahead of new accounting standards that will go into effect this summer by the Financial Accounting Standards Board (FASB). These standards will impose exposure of derivatives holdings, making speculators more accountable. A sustained rise in gold prices would rapidly unwind the value of the many bearish gold trades further reducing their ability to cover their shorts, forcing the disclosure of many undesirable positions.

It is obvious that the fresh 20-year low in gold is directly tied to the ongoing manipulation of central banks and speculators. Their fortunes are directly tied to each other through the loans that have allowed them to in turn sell their borrowed gold. A price recovery will cause panic to find the gold needed, forcing them to cover the immense shorts. Salomon Bros /Smith Barney estimates the total number of outstanding loans may exceed 10,000 tonnes (this is equal to 322 MILLION ounces outstanding that must be paid back eventually!!!) The sudden need to cover would undoubtedly drive many short sellers bankrupt as there is MUCH less physical supply available. This would mean they wouldn't be able to pay back the loans to central bankers (Oh what a tangled web we weave when at first we do deceive!!). In fact, Michael Kosares is convinced that the BOE announcement was timed intentionally to privately bail out at least one insolvent British short seller. Isn't it curious that this announcement came just as prices were getting going? Who in their right mind would broadcast this intention before getting the best price they could get? Another plausible theory is that CBs are keeping prices low to keep bond prices artificially higher (yields lower) than they would otherwise be. Issuing loads of low interest loans save these countries many metric tonnes in paper currency (even if we do think it is fiat). Let us not forget our own country's social entitlement cost of living obligations that they've enjoyed keeping low (at the expense of the elderly, poor and disabled). I wonder if this came before or after the chickens decided to suppress hatching any golden eggs.

Perhaps in the end, a good majority of the announced sales (IMF, Switzerland, and now the BOE) will be done privately without any real market disruption. Most of the central bank sales have been conducted this way in recent years, but even if this is not the case going forward, there continues to be enough of an ongoing physical shortfall to offset the extra supply. Last year, for instance, there was a supply deficit of almost 1000 metric tonnes including the total of 437 tonnes sold by the CBs. Salomon Bros/Smith Barney (SB/SB) conservatively projects this year's (1999) supply deficit at 800 tonnes. It is possible that we are at or near the tail end of the trend of CB gold divestment, if for no other reason than because they've already so substantially reduced their holdings. SB/SB advises that "this is not a time to join the CBs in capitulation." CNBC now refers to gold as "a barbarous relic." We know they'll end up regretting these words. We don't know when but we do know that the day will come as it is always the darkest before the dawn. We await a new sunrise and think it will be worth its weight!

Mitch Harris, RIA, June 7, 1999
President, Market Trend Realities
Editor, The Reality Check Newsletter