The Death of Money (36 page)

I have a secret understanding in writing with the Bundesbank . . . that Germany will
not buy gold, either from the market or from another government, at a price above
the official price of $42.22 per ounce.

Just three days after the Burns memorandum was written, President Ford sent a letter
to German chancellor Helmut Schmidt incorporating the substance of Burns’s advice:

THE WHITE HOUSE

WASHINGTON

J
UNE
6, 1975

Dear Mr. Chancellor:

. . . We . . . feel strongly that some safeguards are necessary to ensure that a tendency
does not develop to place gold back in the center of the system. We must ensure that
there is no opportunity for governments to begin active trading in gold among themselves
with the purpose of creating a gold bloc or reinstating reliance on gold as the principal
international monetary medium. In view of the world-wide inflation problem, we must
also guard against any further large increase of international liquidity. If governments
were entirely free to trade with one another at market-related prices, we would add
to our own common inflation problem. . . .

Sincerely,

Gerald R. Ford

Central bank gold market manipulation wasn’t unique to the 1970s but continued in
the decades that followed. A Freedom of Information Act (FOIA) lawsuit against the
Federal Reserve System filed by an advocacy group uncovered meeting notes of
the secret Gold and Foreign Exchange Committee of G-10 central bank governors held
at the Bank for International Settlements on April 7, 1997. That committee is the
successor to the notorious 1960s London Gold Pool price-fixing scheme. The notes,
prepared by Dino Kos of the Federal Reserve Bank of New York, include the following:

In May 1996, the market traded the equivalent of $3 billion of gold daily. Swap deals
accounted for 75 percent of the volume. . . . Gold had traditionally been a secretive
market. . . .

Gold leasing was also a prominent piece of the market, whose growth central banks
were very much a part of. The central banks, in turn, had been responding to pressures
that they turn a
non-earning asset into one that generates at least some positive return. . . . Central
banks mostly lent gold at maturities of 3–6 months. . . . Central banks had some responsibility
for the gold leasing market since it was their activity which made that market possible
to begin with. . . . Gold does have a role as a war chest and in the international
monetary system. . . .

BIS had not sold any gold in many years. The BIS did some leasing.

[Peter] Fisher (United States) . . . noted that the price of gold . . . had historically
not trended toward the cost of production. This seemed to suggest an ongoing supply/demand
imbalance. . . . He had the sense that the gold leasing market was an important component
in this puzzle. . . .

Mainert (Germany) asked how a big sale would affect the market. What would happen
if, say, the central banks sold 2,500 tonnes—equivalent to one year’s production. . . .
Nobody took up Mainert’s challenge. . . .

[Peter] Fisher explained that U.S. gold belongs to the Treasury. However, the Treasury
had issued gold certificates to the Reserve Banks, and so gold . . . also appears
on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the
certificates would also be revalued upwards; however [to prevent the Fed’s balance
sheet from expanding] this would lead to sales of government securities.

More recently, on September 17, 2009, former Federal Reserve Board governor Kevin
Warsh sent a letter to a Virginia law firm denying an FOIA request for documentation
of Fed gold swaps on the grounds that the Fed had an exemption for “
information relating to swap arrangements with foreign banks on behalf of the Federal
Reserve System.” While the FOIA request was denied, Warsh’s letter at least acknowledged
that central bank swaps exist.

On May 31, 2013, Eisuke Sakakibara, former vice minister of the Japanese Ministry
of Finance, cheerfully recalled how Japan’s government had secretly acquired 300 tonnes
of gold in the mid-1980s. This gold acquisition does not appear in the Bank of Japan’s
reserve position
reported by the World Gold Council, because it was executed by the Finance Ministry
rather than by the central bank:

We bought 300 tonnes of gold in the 1980s to strike a commemorative coin for the sixtieth
anniversary of the reign of Emperor Hirohito. It was a very difficult operation. We
worked through JPMorgan and Citibank. We could not disclose our actions because it
was a very large quantity, and we did not want the price to go up that much. So we
bought gold futures, which are very liquid, and then we surprised the market by standing
for delivery! Some of the bars delivered were three-nines [99.90 percent pure], but
we melted them down and refined them into four-nines [99.99 percent pure] because
we could only use the finest gold for the Emperor.

The gold was transported to Japan by Brinks in the upper deck of two Boeing 747s configured
for cargo use. Two shipments were used not because of weight but to spread the risk.
Brinks had two couriers on each flight so that the gold could be watched at all times
even as one courier slept.

The foregoing documentary record is just the tip of the iceberg in terms of official
gold market manipulation by central banks, finance ministries, and their respective
bank agents. Still, it establishes beyond dispute that governments use a combination
of gold purchases, sales, leases, swaps, futures, and political pressure to manipulate
gold prices in order to achieve policy objectives, and they have done so for decades,
since the end of Bretton Woods. Official gold sales that depressed gold prices were
practiced extensively by Western central banks from 1975 to 2009 but came to an abrupt
end in 2010, as gold prices skyrocketed and citizens questioned the wisdom of selling
such a valuable asset.

The most notorious and heavily criticized case involved the sale of 395 tonnes of
U.K. gold by chancellor of the exchequer Gordon Brown in a series of auctions from
July 1999 to March 2002. The average price received by the U.K. was about $275 per
ounce. Using $1,500 per ounce as a reference price, losses to U.K. citizens from Brown’s
blunder exceed $17 billion. More damaging than the lost wealth was the U.K.’s diminished
standing among the ranks of global gold powers. Recently, outright gold
sales by central banks as a form of price manipulation have lost their appeal as gold
reserves have been depleted, prices have surged, and the United States has conspicuously
refused to sell any gold of its own.

The more powerful price manipulation techniques by central banks and their private
bank agents involve swaps, forwards, and futures or leases. These “paper gold” transactions
permit massive leverage and exert downward pressure on gold prices, while the physical
gold seldom leaves the central bank vaults.

A gold
swap
is typically conducted between two central banks as an exchange of gold for currency,
with a promise to reverse the transaction in the future. In the meantime, the party
receiving the currency can invest it for a return over the life of the swap.

Gold
forward
and gold
futures
transactions are conducted either between private banks and counterparties or on
exchanges. These are contracts that promise gold delivery at a future date; the difference
between a forward and a future is that the forward is traded over the counter with
a known counterparty, while a future is traded anonymously on an exchange. Parties
earn a profit or incur a loss depending on whether the gold price rises or falls between
the contract date and the future delivery date.

In a
lease
arrangement, one central bank leases its gold to a private bank that sells it on
a forward basis. The central bank collects a fee for the lease, like rent. When a
central bank leases gold, it gives the private banks the title needed to conduct forward
sales. The forward sales market is then amplified by the practice of selling
unallocated
gold. When a bank sells unallocated gold to a customer, the customer does not own
specific gold bars. This allows the banks to sell multiple contracts to multiple parties
using the
same
gold. In
allocated
transactions, the client has direct title to specific numbered bars in the vault.

These arrangements have one thing in common, which is that physical gold is rarely
moved, and the same gold can be pledged many times to support multiple contracts.
If the Federal Reserve Bank of New York leases 100 tonnes to JPMorgan in London, JPMorgan
then takes legal possession under the lease, but the gold remains in the Fed’s New
York vault. With legal title in hand, JPMorgan can then sell the same gold ten times
to different customers on an unallocated basis.

Similarly, a bank like HSBC can enter the futures market and sell 100 tonnes of gold
to a buyer for delivery in three months but needs no physical gold to do so. The seller
needs only to meet margin requirements in cash, which are a small fraction of the
gold’s value. These leveraged paper gold transactions are far more effective in manipulating
market prices than outright sales, because the gold does not have to leave the central
bank vaults; therefore the amount of selling power is many times greater than the
gold on hand.

The easiest way for central banks to disguise their actions in the gold markets is
to use bank intermediaries such as JPMorgan. The granddaddy of all bank intermediaries
is the Bank for International Settlements, based in Basel, Switzerland. That the BIS
acts for the central bank clients in the gold markets is not surprising; in fact,
it was one reason the BIS was created in 1930. The BIS denominates its financial books
and records in SDRs, as does the IMF. The BIS website states plainly, “
Around 90% of customer placements are denominated in currencies, with the remainder
in gold. . . . Gold deposits amounted to SDR 17.6 billion [about $27 billion] at 31
March 2013. . . . The Bank owned 115 tonnes of fine gold at 31 March 2013.”

The BIS’s eighty-third annual report, for the period ending March 31, 2013, states:

The Bank transacts . . . gold on behalf of its customers, thereby providing access
to a large liquidity base in the context of, for example, regular rebalancing of reserve
portfolios or major changes in reserve currency allocations. . . . In addition, the
Bank provides gold services such as buying and selling, sight accounts, fixed-term
deposits, earmarked accounts, upgrading and refining and location exchanges.

Sight
accounts in gold are unallocated, and
earmarked
accounts in gold are allocated. In finance,
sight
is an old legal term meaning “payable on demand or presentment,” although there is
no requirement to have the gold on hand until such demand is actually made. The BIS
achieves the same leverage employed by its private bank peers using leasing, forwards,
and futures.

Notably, footnote 15 of the accounting policies in the 2010 BIS annual report stated,
“
Gold loans comprise fixed-term gold loans
to commercial banks
.” In the 2013 report, the same footnote stated, “Gold loans comprise fixed-term gold
loans.” Apparently by 2013 the BIS considered it wise to hide the fact that the BIS
deals with private commercial banks. This deletion makes sense because the BIS is
one of the main transmission channels for gold market manipulation. Central banks
deposit gold with the BIS, which then leases the gold to commercial banks. Those commercial
banks sell the gold on an unallocated basis, which allows ten dollars of sales or
more for every one dollar of gold deposited at the BIS. Massive downward pressure
is exerted on the gold market, but no physical gold ever changes hands. It is a well-honed
system for gold price suppression.

While the presence of central banks in gold markets is undoubted, the exact times
and places of their manipulation are not disclosed. But intriguing inferences can
be made. For example,
on September 18, 2009, the IMF authorized the sale of 403.3 tonnes of gold. Of that
amount, 212 tonnes were sold, during October and November 2009, to the central banks
of India, Mauritius, and Sri Lanka. An additional 10 tonnes were sold to the Central
Bank of Bangladesh in September 2010. These sales were done by prearrangement to avoid
disrupting the market. Sales of the remaining 181.3 tonnes commenced on February 17,
2010, but the buyers have never been disclosed. The IMF claimed the other sales were
“on market” but also said that “initiation of on-market sales did not preclude further
off-market gold sales directly to interested central banks or other official holders.”
In other words, the 181.3 tonnes could easily have gone to China or the BIS.

At the same time as the IMF gold sales were announced and conducted, the BIS reported
a sharp spike in its own gold holdings. BIS gold increased from 154 tonnes at the
end of 2009 to over 500 tonnes at the end of 2010. It is possible that the IMF transferred
part of the unaccounted-for 181.3 tonnes to the BIS, and that the BIS Banking Department,
controlled at the time by Günter Pleines, a former central banker from Germany, sold
the gold to China. It is also possible that the large gold influx was attributable
to gold swaps from desperate European banks trying to raise cash to meet obligations
as their asset values imploded during the sovereign debt crisis. The answer is undisclosed,
but either way
the BIS stood ready to facilitate such nontransparent gold market activity as it had
done for the Nazis and others since 1930.

Some of the most compelling evidence for manipulation in gold markets comes from a
study conducted by the research department of one of the largest global-macro hedge
funds in the world. This study involved two hypothetical investment programs over
a ten-year period, from 2003 to 2013. One program would buy gold futures at the New
York COMEX opening price every day and sell at the close. The other program would
buy gold at the beginning of after-hours trading and sell just before the COMEX open
the following day. In effect, one program would own New York hours and the other program
would own the after-hours. In a nonmanipulated market, these two programs should produce
nearly identical results over time, albeit with daily variations. In fact, the New
York program revealed catastrophic losses, while the after-hours program showed spectacular
gains well in excess of the market gold price over the same period. The inescapable
inference is that manipulators slam the New York close, which creates excess profit
opportunities for the after-hours trader. Since the New York close is the most widely
reported “price” of gold, the motivation is equally clear.