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Manipulating the gold price, Part I

Central bank manipulation of the gold price is about to meet its end...

Global Watch: 2nd May 2007
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CENTRAL BANK manipulation of the gold price is about to meet its end. First, let's look at the central banks' long manipulation of the gold price.

   In Part II, we'll see why this will soon end – with gold returning to its monetary role at much higher prices.

Britain & the Gold Standard

   When coming off the Gold Standard in the early 1930s, Britain found that it could not cover its gold obligations, despite its own major source of new gold in South Africa. The paper it issued was far in excess of the ability of Britain's gold to cover its promises.

   This fact was made clear by the amount of gold Britain held in its vaults. Its behavior in those days set the trend for subsequent monetary duplicity – until now.

The US & gold in 1933

   In 1933, with the geopolitical horizon darkening once again as the prospects of a second world war grew, the United States realized that the Dollar would not serve its role as a unit of account outside the US. During wartime conditions, only gold would be accepted internationally. So the US government decided to fill its war chest with its own citizens’ gold.

   Washington passed a law requiring that US citizens sell their gold at $20 an ounce. This was to result in the greatest manipulation of gold prices ever seen. Two years later, the US devalued the Dollar down to $35 per ounce of gold. These were the days when governments still wanted gold to be a global currency.

   But this was not all, for the United States did not devalue the Dollar in terms of other currencies. That allowed gold dealers to arbitrage between the US and the rest of the world...buying gold at low prices in Europe – where prices remained at pre-devaluation prices – and then selling that gold into the States at a 75% profit in the Dollar.

   These Dollars were then converted at the fixed exchange rates, confirming the arbitrage profits. The overall effect was that the US acquired more than 26,000 tonnes of gold – a gold price manipulation of international proportions, but one aimed at giving real monetary power to the US in the lead-up to war.

The US & gold in 1968

   Three decades later, in 1968, the Dollar was devalued again, taking it to $42.35 an ounce. The hope was to stem international pressure against the Dollar, which was being over-issued and sent abroad – where it was then described as 'Eurodollars'. But the Europeans didn’t buy this gambit. Instead, they used the "gold window" at the Federal Reserve to get rid of these over-supplied Dollars, selling it for US gold.

   Again this was permitted by the US in an attempt to restore credibility to the power of the Dollar. But this failed and gold rose to $850 an ounce by Jan. 1980.

   Right through until then, governments used gold to give credibility to paper currencies. Gold gave them a "last resort" means of payment. But gold is a measurable item that cannot be subject to the abuse of governments when they over issue their promises. The US realized they did not want to be limited by gold – and could not develop ways to use gold as a flexible backer of their currency.

   Gold kept highlighting the dropping value of the US Dollar and the failings of the issuers. They didn’t like it. It was a precise mirror, showing up this behavior.

   So what could they do?

   With the growth of the world roaring away in the '60s and '70s – and the ambitions of the United States at their height – gold had to be defeated, removed form its judgmental position, because the US wanted to use their dominance of the political, financial and monetary global scene to their benefit.

   They were not prepared to see gold as a challenge to the growth of the Dollar's influence over the global economy. This growth was going to confirm US global dominance. And gold got in the way. Gold had to be put in its place, but not sacrificed. After all, even today the US has over 8,000 tonnes of gold in its vault (or so we are told). That's certainly a strong statement of the belief in gold by the US authorities. The States continues to hold gold as insurance against bad times. Washington is not going to dispense with its holdings.

The manipulation of gold

   The first step against gold came in the '70s, and it was to enhance the credibility of the Dollar in the face of its flooding over the rest of the world. Brilliantly, the US Dollar was made the only currency in which oil could be paid for, giving it the needed ingredients for an acceptable global reserve currency. After all who didn’t need oil?

   The second step was to manipulate the gold price downward so it lost its credibility as the money of last resort – a place the Dollar wanted to take. Gold was sold in such large quantities that its price fell dramatically and it became volatile.

   First the US held auctions of large quantities of gold, but the demand for this gold was overwhelming; so that didn’t work. Have no doubt in your mind that this was a blatant attempt to manipulate the gold price down. It was the first in a series of manipulative moves against gold.

   The next step in the downward manipulation of the gold price was to make the International Monetary Fund (IMF) sell other people's gold in the same manner as the US did, announcing the sales well in advance, to ensure the greatest downward pressure on the price. This again did not work very well because of overwhelming demand. These sales also stopped, without achieving their target.

   This attack on gold was not convincing because the selling bodies retained the greater bulk of their gold, with no intention of selling it. A new way had to be found to discredit gold. It came from a rising number of central banks – all supportive of the intentions of the US Dollar, and fully aware of the importance of ensuring that paper currencies were not threatened by gold as a method of payment.

   The chosen route was to loan gold out to gold mining companies that needed to finance future gold production. These gold loans allowed producers to sell this borrowed gold into the forward market as the spot price of gold was falling, and collecting the "contango" – the higher price paid for gold futures since it also contains an interest payment.

   With these proceeds financing their mining operations, the gold producers had few complaints. The scheme accelerated their rate of production at a time when it should have been dropping in line with the falling price, also allowing miners to profit from past high prices. The volume of gold reaching the market rose dramatically as these moves accelerated new production. This was blatant interference and manipulation of the gold price and the gold market.

   The price of gold dropped from its peak of $850 down to the low price of $276, at which price Britain sold half its official gold holdings via pre-announced auctions.

Gold manipulation today

   Today we are in the eighth year of the Central Banks Gold Agreement, in which the leading central banks of the West set a "ceiling" for gold bullion sales. This attempts to manage the sales in a transparent manner. But it has turned from putting an aggressive overhang of gold in the market place – with the persistent threat of government sales – to a tamed set of sales which are almost encouraging the gold price to rise.

   Gone are the volatile "spikes" of the past. This form of manipulation is waning. As such, iIt almost encourages gold purchases, which are starting to be seen even amongst the central banks themselves.

   This entire 30-year campaign of gold price manipulation has so far pushed prices to the downside. We have no hesitation in saying that the gold market has been subject to a decades’ long campaign – not only to discredit it as the last resort for international payments – but also to manipulate it completely.

   A change is coming.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/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 Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they 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 Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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