What Gives with Gold?

What Gives with Gold?


1st remember what we are told in today’s financial press; gold is dead, gold is no-longer part of international monetary assets, gold is a poor investment, gold is a barbarous relic, all central banks are selling etc. Of course if today’s financial heavy weights believed this they would not need to keep hitting us over the head with the same old story.

The truth is gold is free market competition to government issued, debt backed, fiat (valueless) paper currencies. This is particularly the case of the world’s reserve currency, the US dollar.

Gold always has been a POLITICAL metal. Gold (and silver) is money that cant be issued (inflated) at will. It is hard to police, track, control or tax. With this in mind it is easy to see why some governments and central banks seem to have an organized agenda to keep the price of gold (POG) down and out of the minds of investors the world over.

1999 opens with gold in an established $280 – $300 trading range.

Early May 1999 POG threatens to break above $300. In an unprecedented move, the Bank of England (BOE) announces AHEAD of time, and without warning, a series of future gold auctions. POG collapses to $250 – $260 trading range.

September 1999. 2nd BOE gold auction is 8 TIMES over subscribed. Bids come in above current spot price. The historic Washington Agreement is signed, whereby eleven European Central Banks (including BOE and Swiss National Bank) agree to limit gold sales and LENDING, for a period of five years. The new EU policy sees POG rally from $255 to $330 (in 11 days), before settling back to the $290 – $300 range.

This recovery is bad news for many gold producers (it’s a backwards world). Many large gold companies carry extensive derivative and forward sale positions (hedge books). With POG above $300, short positions (many positions entered into below $290) become negative, incurring big losses.

October 1999 At least two major producers incur significant paper losses and attempt to restructure hedge books. Kuwait loans 79 ton of gold to BOE (huh – but isn’t the BOE selling?).

1998 – 99 have been dubbed the years of “The Gold Carry Trade”, where gold is borrowed from central banks & bullion banks at low interest rates of 1-2%, sold at the prevailing market price, with the difference reinvested at 6-7%. Resulting from this questionable practice, substantial short positions have been created (estimated between 10- 14,000 ton). With POG moving above $300, and metal lease rates reaching record levels, substantial losses are incurred by the participants (central banks, bullion banks, hedge funds). Recent volatility and POG decline back below $300 is a reflection of the attempt to unwind and close-out negative positions.

Considering the shortage of physical gold (at a time of record demand) it seems likely that some central banks (i.e. Kuwait) are supplying liquidity back into the market.

Spare a though for the British citizen in all this. BOE announce their auctions in May. The announcement tanks the POG to the lowest price in over 20 years. Two gold auctions are conducted at this super discount price. No one in parliament, the treasury or the BOE wants to accept responsibility for the decision. The explanation given is to divest out of gold into foreign reserve currencies like US treasuries. Presumably the proceeds of the auctions are spent on purchasing (fiat) US dollar reserves right at the time the US dollar takes a big hit on the currency markets. Talk about impeccable timing.

by Philip Judge