Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Have Central Banks lost control of the Gold Market?

Commodities / Gold and Silver 2010 Oct 01, 2010 - 12:41 PM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleYou may be asking yourself, did the central banks ever control the gold market? Yes, indeed they did! The gold Standard was the ultimate system of control they had until it was dropped. Then President Roosevelt's Administration took control of the U.S. gold market when he confiscated all U.S. citizens held gold. Ownership of gold was only re-permitted in the early seventies. Even then the 'powers that be' declared that gold ownership was a privilege, not a right. That still holds. Few really appreciate the extent of central bank control over the gold market and gold price. We believe it is a critical aspect of the gold market and gold price, without which one cannot really understand the gold market.


A brief history of Central Bank control of gold

When Eurodollars appeared in Europe, European central banks were not happy and sold them for U.S. gold. Then President Nixon, in his infinite wisdom closed the 'gold window' [After Europe had boosted their reserves after sending around 12,000 tonnes of gold across the Atlantic into European vaults]. In a mutually beneficial but clandestine accord, the world then saw the U.S. dollar rise to be the sole global reserve currency. It has continued to reign supreme because it is the only currency that is used to buy oil, oil that we all need.

Control lost

After 1971, gold began to rise in earnest as every man and his dog bought some, taking the gold price from $42.35 to $850. This was a public statement that the global investing public did not accept paper currencies with no gold to back them. These had become simply government obligations with no settlement date.

Central banks had to act to ensure the public accepted these currencies and were moved away from gold as money. To do that, the U.S. and by extension the I.M.F. decided on limited [limited because central banks still wanted it in their vaults as an important reserve asset] gold sales through auctions. All the gold sold there was snapped up. The reality of central banks wanting to keep gold then kicked in and the auctions were halted.

Control regained

Another tactic was then used. This time the central banks, lent gold to gold miners who used it to finance gold production. This caused a huge acceleration in the tonnage of gold coming to the market, too much for the market to absorb. The gold price fell right back to its 1999 low of $275. But the central banks technically still owned the gold as producers repaid their loans with gold from their mines.

At the same timed central banks supplied a well orchestrated campaign that implied central banks may well sell all the gold they owned over time. Markets and analyst swallowed the bait. The job of ensuring the U.S. dollar was the only solid, global reserve currency was then achieved without the interference of gold.

Then the time came for the Euro to enter the market in place of the European currencies, such as the French Franc, the Deutschmark, and the Italian Lira, etc. With the task made easier by the anti-gold campaign that ensured the acceptance of the U.S. dollar, the Euro was quickly established as the world's number two currency. Nevertheless, the fear remained that Europeans would prefer gold, so the European central bankers made, to date, three agreements to sell a limited amount of gold over the next fifteen years [four years still to go]. Unexpectedly this removed the fear that central banks were selling the gold price down still.

The gold price turned around, miners over time bought back all their hedged positions [matching central banks sales in the process] and last year both the miners and the central banks let their sales and de-hedging dwindle to almost nothing [AngloGold Ashanti will still buy 131 tonnes of gold to close its hedge book].

Until last year [2009] there is no doubt that the gold market reacted to central bank policy on gold and moved the price accordingly. Let's face it if they did really get rid of over 30,000 tonnes of gold the gold price would collapse. Central banks knew full well the implications of fears that they may sell gold. It would effectively ensure that hardly any investment in gold took place. This was control too!

Have Central Bank lost control again?

Close to the beginning of 2009 the European central banks let their gold sales dwindle. It became clear to all that there was no more appetite in the signatories to sell gold. The Euro was then fully accepted by all. Central bankers re-established the importance of gold by the cessation of gold sales. But European central bankers had made this clear in the first central bank gold agreement, called the 'Washington Agreement', which made it clear that all the signatories regarded gold as an 'important reserve asset'. Consequently, they have been happy to see the gold price rise too. As Axel Weber, the head of the German Bundesbank said in the past, 'gold is a useful counter to the swings in the dollar'.

By then the "credit crunch" had endangered the banking sector and spread into the Sovereign Debt crisis. The currency world did not seem so solid and gold was holding its highs and looked like rising even more. The attraction of gold to central bankers re-confirmed itself in such a climate.

Why is gold an important reserve asset? In times of international financial stress, gold will settle international financial obligations, when government promises won't. We have now entered the time when financial stress underlies the entire global monetary system. Right now we are at the door of potentially major, global currency strife. This means that central bankers are no longer in a mood to sell their 'rainy day' gold.

But they don't control the supply of gold anymore. Their control since 1985 only went as far as to undermine the gold price. They have placed themselves in a position where they can't even buy gold for their reserves. To do so may imply that they have accepted that they too are losing faith in paper currencies. That must never happen. So they sit with a firm grip on the 30,000 tonnes they now have, but have lost control over the gold price. That went the moment they stopped selling.

Control dispersed

As the rest of the world emerges and drains wealth and power from the West taking their foreign exchange reserves to unimagined heights, they now see the need to diversify away from the near total dependence they have on developed world currencies. They have so little gold in their reserves that in their citizen's savings that they have embarked on a campaign to build up Chinese gold holding. India has already done that and topped up their reserves with 200 tonnes from the I.M.F. China in particular has a very long way to go before their gold reserves are adequate for reserve asset requirements.

Russia was the first to announce the intention to increase the gold component of their reserves. Mr. Putin then announced Russia's intention to accumulate 10% of all its reserves in gold. It has taken a long time to even get part of the way there [see the Table Below].

China has made no announcement that it intends to achieve any particular level but is acquiring locally produced gold into an agency that, in time, will pass it to the People's Bank of China and only then will an announcement be made as to what they have bought. This appears reasonable for if China were to announce any target level it would put a rocket beneath the gold price, so, in true inscrutable style they have simply announced increases in gold reserves well after the event. We do believe they are buying gold internationally too. Retail demand in China is way over local production levels [we guess-estimate, around 150 to 200 tonnes is being imported if not more, as the number of importers has been widely extended. We also know that China began buying gold around 2004 if not before then.

In addition, since last year, the number of central banks that have been buying gold has increased steadily. From the Middle East eastwards central bankers have come to the gold market. This new tide of demand is unlikely to subside for a decade if not far longer. Eastern demand is in the hands of half of the world's population and the half that has always loved and respected gold as money.

Central Bank Control lost!

The developed world central banks were able to control the gold market in the days of the gold standard, because they acted in unison and legislated that control nationally [and by extension, internationally]. They nearly lost it when Europe was buying it from the U.S. until President Nixon closed the 'gold window'. Then they lost control of the gold market after 1971 until around 1985. Control was then re-imposed by assisting in accelerating production and discouraging demand until 1999. Thereafter, central bankers had limited control through limited sales, which allowed for a steady rise in the gold price, right through to 2009 [$1,200].

The major breakdown of central bank control over the gold market and the gold price came when emerging markets came to the gold markets to buy gold. 'Eastern' central banks are unlikely to cooperate in holding the gold price down because they need gold in their reserves. Central bankers of the world [developed and emerging nations] have vastly different interests. These are unlikely to meet in any accord over gold. Now, with faith in developed world currencies on the wane, gold is becoming a vital [not just important] reserve asset. The skill will be in acquiring sufficient volumes of gold, without skyrocketing the gold price.

Global central bankers are divided on gold, with some buying, others holding but almost no central bank selling. Without unity of intent, central bankers cannot control the gold market or its price, any longer. They are almost in competition with each other. Non-central bank investors are jostling central bank buyers for any available gold.

Central bankers have now lost control of the gold market. Can they get it back?

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

g kaiser
01 Oct 10, 23:35
gold control

It will be difficult to get the control back, if ordinary people start to hold gold.

There is good reason to expect this to happen in the future as increased control and regulation of bank accounts are introduced.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules