Proposed Sale of IMF Gold

March 22, 1999

President Clinton and Treasury Secretary Robert Rubin are currently proposing the sale of $1.5 to $3.0 billion worth of IMF gold reserves for the purpose of debt forgiveness to benefit the world's poor. I believe that the stated purpose of this proposed sale is in fact a cynical fraud; rather its real purpose is to depress and control the price of gold for the benefit of their friends.

The IMF has no gold reserves. All IMF gold is owned by and pledged by member countries in a double accounting scheme for reserve purposes. This is why congress must approve the sale of any IMF gold – it's really U.S. gold owned by the citizens of the United States. The real purpose of the sale of U.S. gold reserves through the IMF is to set a precedent for raids on U.S. reserves in the future; in other words another piggy bank to be raided any time someone dreams up a politically high-minded scheme.

I will first address what the Clinton administration and other concerned parties stand to gain by selling gold reserves because the first principle of investigation is "look to the motive". The concerned parties who will benefit are not the world's poor; rather they are hedge funds, investment houses, bullion dealers, stock speculators and the Clinton administration.

Last fall the public was introduced to the term "yen-carry trade" in the aftermath of the Long Term Capital Management ( LTCM ) debacle in which the U.S. Federal Reserve played a central role in bailing out LTCM's investors. Hedge funds or others seeking risky-but-cheap cash for speculation purposes could borrow Japanese yen at interest rates below one percent. LTCM would convert the yen to dollars (or rubles) for speculation purposes and hope to repay the loan later at less than borrowed cost as long as the yen continued to fall in value relative to the dollar. You will recall that the yen-carry trade blew up last fall when the yen appreciated 15% in one week against the U.S. dollar. This necessitated a bailout by the Fed because, had LTCM liquidated its positions in the market, the U.S. stock market would have crashed.

It is not well known that there is also a gold-carry trade similar to the yen-carry trade that is currently used by speculators in the same manner. Years ago central banks started lending their gold to producers ( miners ) so that they could hedge against a future drop in the price of gold. The central banks receive a low interest rate, around 0.7 to 1.2 percent today, and are repaid later with mined gold. An unfortunate side effect for these mining companies is that this hedging also tends to keep the price of gold down.

In the 1990's speculators saw these gold loans as a ready source of cheap off-balance-sheet cash. They borrowed gold from the central banks through the intermediary services of bullion dealers and sold it into the market. These speculators are different from the mining companies because they must go back into the market in the future to buy gold with which to repay the loan. They are, in effect, speculating that the price of gold will not go up.

As long as the price of gold stays low borrowers can repay the loan with cheap gold in the future. If the price of gold goes up however, they will all need to rush to cover, driving the price of gold up further. The result would be more LTCM's. In fact, LTCM had borrowed around 300 tons of gold by last fall which the Fed helped them resolve in an off-market transaction so as not to increase the gold price.

Presently it is estimated that the total amount of gold borrowed from central banks, including our Fed, is between 3000 and 8000 tons. Total annual gold production is only 2550 tons! Actually no one really knows the correct amount because the world's central banks, including our Fed, do not disclose the amount of their gold reserves which are out on loan, hence at risk. If the price of gold rose significantly it might be impossible for all of the borrowers to buy enough gold to repay their loans, causing default. Central banks that have placed their reserve assets at risk for a tiny return might have to face credulous taxpayers.

Bullion banks benefit from this gold-carry trade because they make enormous profits as intermediaries between the central banks and gold borrowers. The real beauty and tragedy of this scheme versus the yen-carry trade is that should the gold price rise, all the borrowers need to do is borrow more gold and sell it in the market to depress the price. Unfortunately this process is perilous and doomed to failure in the long run, hence a new scheme to mobilize the world's gold reserves in the interest of a perpetual-motion negative-interest-rate borrowing scheme.

Who else benefits from the sale of U.S. gold reserves other than hedge funds, investment banks, bullion dealers and speculators? The answer is the Bill Clinton, the Democratic party, the U.S. Fed, and any government with loose monetary policy. As long as the price of gold, now at an 18 year low, remains depressed it is seen as evidence of low inflation. Conversely if the gold price rises it will place pressure on the Fed to increase interest rates, thereby perhaps causing both stocks and Bill Clinton's polls to decline.

The U.S. Federal Reserve and Treasury Department stand to gain by a low gold price because it lowers CRB and inflation statistics, thereby improving the Fed's "report card".

This week there has been an orchestrated raid on the price of gold led by Goldman Sachs, the bullion banks and others (gold is down $14 in one week!) . It is interesting to note the coincidence of this successful raid with press announcements pushing the sale of IMF gold by Jacque Chirac (Monday) , Bill Clinton (Tuesday) , and Robert Rubin (Wednesday) . This is unprecedented. Given Robert Rubin's relationship with Goldman Sachs it also implies collusion in terms of timing because the foundation for this raid was laid last week in the futures markets prior to these announcements. Collusion in an effort to control the market price of a commodity violates U.S. antitrust law.

Bill Clinton's stated purpose, debt forgiveness for poor countries, is a cynical fraud. Why not just forgive some IMF debts or reduce the interest rate paid by developing countries to the IMF? The IMF gave Brazil alone some $40 billion. What's another billion here or there? The proposed sale only involves between $1.5 and $3.0 billion dollars in gold. The answer should be obvious – this is a sham proposal with an ulterior motive, the depression and control of the gold price. How many miners in Africa, South America, Central America, Mexico and Indonesia are out of work because of depressed metals prices? If Bill Clinton really wanted to help the poor then he would stop attempting to depress the price of gold.

The sale of 5 to 10 million ounces of "IMF" gold is a triviality, an amount traded in one morning in London. The market could easily absorb this. The fact is that this week's orchestrated remarks by Jacque Chirac, Bill Clinton and Robert Rubin have done more to depress the price of gold than the proposed sale would. However, this sale would be but the start of an ongoing raid by the IMF on its member countries' reserves at a time when world governments are printing money at an unprecedented rate. The U.S. M3 money supply increased at an annual rate in excess of 11% in the last six months alone (source: Grant's Interest Rate Observer) .

Please notice that Robert Rubin said the timing of the sales would be spread out so as not to affect the market. I am more likely to believe that the sale timing would be coordinated with Goldman Sachs and others who perpetrated this week's gold raid.

If the U.S. Congress approves this first precedent of gold sales by the IMF, I predict the following results:

  1. It will be a signal to owners of stocks in mining companies to divest themselves of these shares, putting more miners in Africa, the Americas and Asia out of work.
     
  2. The speculation community involved in the gold-carry trade will be given a green light to recklessly charge ahead, resulting in more LTCM's in the future.
     
  3. The price of gold will continue to gradually decline over time, helping prop up the U.S. stock market bubble a while longer, benefiting Bill Clinton's poll numbers in the short term but disastrous to the economy in the long term.
     
  4. There will be many more IMF gold sales in the future. All, of course, with a high-minded save-the-waifs rationale, but in fact nothing but a sham to eliminate our reserves over time in the interest of political expediency.
     

I believe it would be enlightening if the following questions were asked of Robert Rubin and Alan Greenspan in future congressional hearings:

Have the U.S. Federal Reserve or the Treasury lent any of their gold reserves? How much? To whom?

What did Alan Greenspan mean last summer when he stated in hearings "the price of gold cannot rise as long as central banks stand ready to lend gold"? Is this not illegal price fixing in violation of U.S. antitrust law?

The world’s largest gold nugget is 61 lbs, 11 oz and is on display in Las Vegas.