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Catching a Falling Financial Knife

No Evidence for Gold and Silver Price Manipulation

Commodities / Gold and Silver 2013 Dec 04, 2013 - 05:29 PM GMT

By: John_Mauldin

Commodities

Grant Williams

This is an early warning. I'm going to be talking about gold (again) this week, so those amongst you who just kinda wish I wouldn't do that may be excused.

There. Now it's just us.

On November 1, 1961, an agreement was reached between the United States and seven European countries to cooperate in achieving a shared, and very clearly, stated aim.


Actually, let me adjust that last paragraph ever so slightly in the interests of accuracy:

On November 1st, 1961, an agreement was reached between the central banks of the United States and seven European countries to cooperate in achieving a shared, and very clearly stated, aim.

Did you see what I did there? A small amendment, I'll concede, but an important one — particularly as, 52 years later, we witness the incredible power now wielded by those august institutions.

But back to November 1961 and those eight central banks.

The signatories to this particular agreement were, in alphabetical order, the central banks of Belgium, France, Germany, Italy, the Netherlands, Switzerland, the United Kingdom, and the United States; but unlike other agreements of the time — such as that signed at Bretton Woods in 1944 — this one had no catchy title and was agreed upon with no fanfare and no publicity. In fact, this particular agreement was, if not exactly secret, then secretive by design.

It was put into place after a sudden spike in the gold price from its "official" level of $35.20 to over $40 on concerns in late 1960 that whoever won the impending US election might devalue the dollar in order to address the country's balance of payments problem.

The agreement became known as the London Gold Pool, and it had a very explicit purpose: to keep the price of gold suppressed "under control" and pegged regulated at $35/oz. through interventions in the London gold market whenever the price got to be a little ... frisky.

The construct was a simple one.

The eight central banks would all chip in an amount of gold to the initial "kitty." Then they would sell enough of the pooled gold to cap any price rises and then replace that which they had been forced to sell on any subsequent weakness.

The United States — which at that stage owned roughly 47% of the world's monetary gold (excluding that owned by the Soviet bloc) — promised to match every other bank's contribution, ounce for ounce. The value of the US gold hoard was very easy to calculate, thanks to the fixed price of gold at the time ($35):

$17,767,000,000.

Or, put another way, roughly 6 days' worth of QE.

However, somewhat remarkably, only seven years prior, the United States' gold hoard constituted 72% of the world's gold (ex-those pesky Soviets) and was worth an additional $7,000,000,000. More than $5,000,000,000 had been sold between 1958 and 1960.

The other tiny problem, what with the dollar's being convertible into gold and all, was that official institutions, banks, and private holders abroad had roughly $19,000,000,000 of short-term and liquid dollar claims.

So... the US Federal Reserve offered to match the contributions of Happy, Bashful, Grumpy, Sleepy, Dopey, Greedy, and Doc the other seven central banks, which meant that, at its inception, the London Gold Pool looked like this:

Country

Contribution

Tons

Value (1961)

United States

50%

120

$135 mln

Germany

11%

27

$30 mln

United Kingdom

9%

22

$25 mln

France

9%

22

$25 mln

Italy

9%

22

$25 mln

Belgium

4%

9

$10 mln

Netherlands

4%

9

$10 mln

Switzerland

4%

9

$10 mln

TOTAL

 

 

$270 mln

We interrupt this letter to bring you an important message from the Commodities Futures Trading Commission:

There is no evidence of manipulation in precious metals markets.*

*Statement is subject to standard terms and conditions and is not necessarily reflective of any evidence. Government entities are excluded from inclusion based on the fact that we can't really do anything about them; and, anyway, they could put us out of business, and it would make things really, really bad for them. Also, bullion banks are not covered under this statement because we were told they shouldn't be, but individual investors are, and we can categorically confirm that, to the best of our knowledge, no individuals are manipulating the precious metals markets (at this time).

We now return to our regularly scheduled programming.

Initially, everything ran smoothly, and the satisfied grins at those eight central banks must have been borderline sickening to behold.

To continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore – please click here.

John Mauldin Archive

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Catching a Falling Financial Knife