PANIC!

December 9, 1999

Western central banks are in panic mode. No other interpretation can be put on the announcement yesterday of further Dutch gold sales of 300 metric tons. European central bankers should have spent last weekend preparing to announce gold purchases and a Euro truly independent of the dollar. Instead, they used the time to cobble together another bailout for the Fed, the Bank of England and the mostly Anglo-American bullion banks sinking, or so it would appear, into ever deeper trouble.

The Dutch announcement basically uses up all the slack left in the Washington Agreement, which provided for central bank gold sales of 2000 tons over the next five years, including 1300 tons by the Swiss and the 365 tons then remaining in the planned British disposals of 415 tons, leaving only 335 tons of possible additional sales. That gap has now been almost entirely filled by the Dutch.

The gold banking crisis that unfolded rapidly in the wake the Washington Agreement on September 26, 1999, has resulted in some rather unusual gold disposals. First, Kuwait announced publicly that it was making its entire official reserves of 79 tons available for lease through the BOE. Not long afterwards, it was revealed that Jordan had sold 10 tons from its official reserves of 26 tons. This depletion of long held official gold reserves by two Middle Eastern nations easily subjected to Anglo-American pressure pretty much speaks for itself, particularly when followed by disclosure of additional U.S. military spending for Kuwait. What is more, a rumor -- quickly denied -- of a possible reduction or halt in British gold sales caused an immediate almost $10 spike in the gold price.

The Dutch announcement itself is notable in three respects: (1) the sales will be arranged through the BIS, no public auctions for the Dutch; (2) nevertheless, the sales were publicly announced in advance, not a smart way to get the best price especially on the first year's planned sales of 100 tons; and (3) the Dutch emphasized that even after the sale "the Netherlands will remain a significant gold holding country with a gold stock of more than 700 tons."

In fact, the Dutch gold sales may be no more than an advance on the proposed Swiss sales. The Swiss have been slow to complete all necessary preparations for their sales, which were probably intended, inter alia, to provide the European safety valve on the gold market. Certainly the Netherlands could repurchase whatever gold it sells now from Switzerland later, and it may well have already received some assurances on this point. For that matter, maybe most of the 100 tons that the Dutch plan to sell in the first year is necessary to repay Kuwait's loan to the BOE, a loan that reportedly has been the subject of much criticism in Kuwait.

The World Gold Council's press release on the Dutch sale is yet another example of that organization's unfortunate tendency to serve as apologist for the central banks instead of advocate for the gold industry. Admitting that "the timing of the announcement...may have caused a ripple in the market," the WGC then accepts uncritically a reported private assertion by the Dutch central bank that the decision to sell was made in July, but delayed to participate in the Washington Agreement. Why, then, wasn't the proposed Dutch sale included in the agreement? Why didn't the Dutch sell on the price rally after announcement of the agreement? Was there any connection between the timing of the Dutch announcement and the continuing problems of the bullion banks, the Kuwaiti gold loan, and the Jordanian sale? Apparently these are all questions that the WGC neglected to ask in its private discussions with the Dutch central bank. Speaking only for myself, and it pains me to say it, Ms. Haruko Fukuda, the new chief excecutive of the WGC, is rapidly losing both her halo and her credibility.

Central bankers are generally a clubby and prudent sort, not given to unnecessary risk taking. Given the uncertainties of the Y2K changeover, Anglo-American and European central bankers may have arrived at an informal truce or agreement designed to push resolution of the gold banking crisis into the new year. In this connection, it would not be surprising to see Anglo-American intervention in support of the Euro should it threaten to break below parity. Indeed, if the European central bankers did not obtain a commitment of this sort as a condition of the Dutch gold sale, they should all be fired. Yesterday's surge in the Euro may not be solely attributable to the good German factory report.

But make no mistake: the day of reckoning is rapidly drawing near for both the Euro and the bullion banks. The EMU and the ECB cannot provide further gold to the market without not just destroying their own credibility, but also undermining the whole notion of the Euro as a truly independent currency and alternative to the dollar. As for the bullion banks and their protectors at the Fed and the BOE, they must know that they cannot count on others to bail them out forever. Ultimately there can be no lender of last resort in a gold banking crisis.

Citizens of the Euro Area should be asking themselves tonight whether their central bankers have merely gone the last mile to help the British and the Americans with their gold banking crisis, or whether the ECB and its allied central banks and finance ministers are about to, as a former British prime minister once put it, "go wobbly."

18 karat gold is 75% pure gold.