First: The London Gold Pool 1965-1980


The creation of the London Gold Pool was a response to US running deficits in the early 1960s which put pressure on its ability to keep gold pegged at US$35/oz (all other currencies were fixed to the US dollar and, therefore, indirectly to gold also). The Fed, Bank of England and the European central banks pooled their gold reserves and sold gold to maintain the value of the US dollar. As Bob Landis opined in 2007:

“Addressing the underlying problems was, of course, out of the question, so the monetary authorities set about manipulating the market price of gold instead...in a flamboyant waste of public assets so grand, so misconceived, so futile, as to make Chancellor of the Exchequer Gordon Brown’s decision to dump half the UK’s gold reserves at the bottom of the market some 30 years later look positively brilliant by comparison.”

In the 60s, things started to go badly wrong when US deficits ballooned due to the escalation of the Vietnam War, France’s withdrawal from the Pool and the forced devaluation of Sterling. It was the French President, Charles de Gaulle, advised by one of my gold market heroes, Jacques Rueff, who caused the London Gold Pool to collapse in March 1968. Rather than just withdrawing from the Pool, the French began converting their overvalued US dollars into undervalued gold, as they were entitled to do under the Bretton Woods Agreement of 1944. Here is part of Wikipedia’s entry on Jacques Rueff:

“In the 1960s, Rueff became a major proponent of a return to the gold standard and critical of the use of the dollar as a unit of reserve, which he warned would cause a worldwide inflation…(he) always remained a firm opponent of Lord Keynes’ ideas.”

Investors piled into gold along with the French government, which led to a run on the London Gold Pool. By the time the US raised the white flag in March 1968, it had lost 5,381 tonnes of gold (36% of its reserves) and the UK 869 tonnes (43% of reserves).

Amateurs.

In contrast, France increased its reserves by 2,770 tonnes at US$35/oz. In Paris, they named this square “Place Jacques Rueff”:

[Picture]

Source: Travel Webshots


I was looking through declassified documents on the US State Department’s website while trying to piece together how the US secretly supported the creation of Japan’s Liberal Democratic Party after World War II (this was in relation to Yamashita’s gold). This is the political party which has recently been deposed after about fifty years of almost continuous rule - although as one commentator once put it “It’s not liberal, it’s not democratic and it’s not a party”. While searching for information on that, I came across documents relating to the US dollar and Sterling crises during the Johnson and Nixon administrations in the 1960s and 1970s. This obviously included the collapse of the London Gold Pool in 1968 and the closing of the “gold window” in 1971.

With us poised to experience a kind of “redux” experience (unless the powerz can access more of Yamashita’s hoard), it was extremely interesting to read about how the major players approached the crisis back then and how confident they were until very near the end that they could defy economic gravity – before being overtaken by events. Has anything changed in the intervening period? Doubt it.

Let’s begin with an except from a memo from Treasury Secretary Dillon to President Johnson on 4 January 1965 titled “The Current Gold Situation and Future Prospects”:

“The immediate prospect for early 1965 is for a substantial acceleration in the gold outflow. This is due to a number of factors, the most important of which relates to decisions about to be taken by the French Government. We have had a number of informal exchanges with the French in which they have indicated that it is their intention to convert their excess dollars into gold by purchase from us.”

Moving forward to July 1965 and pressure was building on the British pound to devalue which caused fears about a knock-on effect on the dollar. In this memo from Under Secretary of State Ball to Treasury Secretary Henry H. Fowler, the US is considering using the G10 to raise funds to support Sterling. In truly arrogant fashion, they will not “tolerate” devaluation. Free market forces obviously don’t get a mention. There is also a swipe at those nasty gold buyers, the French!

“The procedure for carrying out 1, above, will probably require telephonic exchanges with the other members of the Group of Ten. (We talked about this yesterday). I can’t see any other practical way of raising the money. If the UK were to ask for a meeting of the Group of Ten in Paris, the visibility of a conclave of Finance Ministers and Central Bankers would probably touch off a further run. The French would be given a golden (good pun, Paul) opportunity to wreck the operation if that is what de Gaulle decides he wants… But I am frankly appalled at the thought, put forward during the Treasury talks, that we should suggest to the British, at any point, that we would tolerate the devaluation of sterling. I think we should let them know in no uncertain terms that any change in the sterling rate is out of the question.”

One of the assertions of GATA has been that one (of the many) ways that the US authorities have intervened in the gold market has been via the Exchange Stabilization Fund (ESF). James Turk of goldmoney.com showed evidence that the ESF was active in the gold market by showing the discrepancy between the Federal Reserve’s “Gold Stock” on its balance sheet and “Gold Stock including the Exchange Stabilization Fund” in its statement on US Reserve Assets. On 31 December 1995, US gold reserves were identical in both sources but diverged from 1996, broadly when GATA alleges that suppression of the gold price began. After 1999, references to the “Gold Stock including the Exchange Stabilization Fund” were removed with no explanation.

After discussing the above, it’s worth mentioning the background to the ESF. It was created, ironically, from the profits made from the confiscation of gold from US citizens in 1933. Gold was bought from the populace at US$20.67/oz but the dollar was subsequently devalued, leading to an increase in the price of gold to US$35/oz. The ESF is basically a gigantic slush fund used to manipulate gold and other markets without any Congressional or public oversight since it is under the exclusive control of the Treasury Secretary and the President.

From the declassified documents of the US State Department, the President’s Special Assistant, Walt Rostow, sent a memo to President Johnson on 23 March 1967 suggesting a way to falsify the first quarter balance of payments data to support the dollar using the ESF. Even better, the recommendation for this move comes from the Treasury Secretary, Henry H. Fowler. The memo is titled “Two Steps to Help the Balance of Payments”. Here it is:

“In the attached, Secretary Fowler asks you to approve two ways of using his Exchange Stabilization Fund to help the balance of payments. He proposes to use the Fund:

- to guarantee payment of a German offset obligation we would sell to the U.K. in a complicated, 3-cornered deal designed to shift $100 million in receipts into the first quarter. (If we do this, we must do it before midnight, Friday, March 31.)


Fowler has blanket authority to use the Exchange Stabilization Fund for any purpose which will strengthen the dollar (an important comment to this day, Paul). But the law requires that he have the President’s approval.

3-Cornered Arrangement

Fowler, Ackley, and the rest of us are very worried that a very large first-quarter payments deficit would produce serious pressure for tight money--which is just what we don’t need. Fowler’s proposal would take advantage of an opportunity to sift $100 million in inflow from the second quarter to the first. This would not solve the problem, but it would help. Basically, Fowler suggests the following:

- we would transfer to the British $100 million in German offset obligations which will be paid in the second quarter.

- in return, the U.K. would immediately pay us the $100 million, less the interest we would normally pay on a similar amount in Treasury bills.

- through the Exchange Stabilization Fund, we would guarantee payment of the German obligation.

Obviously, we would have to forego $100 million in anticipated second-quarter receipts, but your advisers are agreed that the first-quarter problem is serious enough to be worth it. This transaction would not be made public. If it leaked, we could be charged with gimmickry, but Fowler believes he has an effective defense: we are simply trying to keep our balance of payments difficulties from being exaggerated through uneven receipts under the US-FRG offset deal.

Purchases of Securities

This proposal is aimed at the longer term. The market is now so structured that there are relatively few sales of U.S. agency securities to foreign governments and central banks. Fowler’s proposal is that the Exchange Stabilization Fund buy these securities at the going rate and sell them to official foreign holders, usually at a slight discount (1/8-3/8 of a point). The Exchange Stabilization Fund would take the small losses involved.

Fowler is confident this operation would not cause any trouble on the Hill if it were noticed at all. (The Exchange Stabilization Fund is not audited outside the Treasury and does not require appropriations.) If criticism did develop, he believes we could show that the benefits to the balance of payments far outweigh the cost to the Fund.

Recommendation

I recommend that you approve both proposals. The CEA concurs.

Walt


A subsequent memo from the Treasury Secretary to the President has the latter’s signature in the approval line.

Moving on to June 1967 and here is an excerpt from the minutes of a conversation between the US, represented by Treasury Secretary Fowler and Deputy National Security Advisor, Francis Bator, and Germany, represented by Minister of Economic Affairs, Karl Schiller, and First Secretary, Ernst Jirka. The subject of the conversation was “International Liquidity”.

“Mr. Bator said the wrong kind of compromise would do the world no good. Many French officials don’t want the price of gold to go up in any event. The others must be made to realize that gold won’t go up. ‘The game won’t be played that way’… Secretary Fowler asked whether politics or economics was more important to de Gaulle. Mr. Jirka replied that ‘economics are the basis of de Gaulle’s politics’…Mr. Schiller made a long speech on German loyalty to the U.S.A. Secretary Fowler said he had no doubts on this score but what we must focus on is making the first step--and it must be on the right path and a big enough step to convince the world that the price of gold would not go up. Otherwise, we would have crisis after crisis.”


Unbelievable - “The others must be made to realize that gold won’t go up”. If the US government had put its economic house in order then the gold price wouldn’t have subsequently exploded.

A month later, the US delegation was planning for an upcoming G10 meeting where the attendants would discuss the creation of additional liquidity in the form of Special Drawing Rights issued by the IMF. These are comments attributed to the Chairman of the Federal Reserve William McChesney (Bill) Martin:

“He feared that the breakdown in the negotiations would be what the French want. We should therefore come out with a hopeful attitude rather than forcing a collision. The French were winning the propaganda battle. Our line should be one of sweet reasonableness. He reiterated that he would propose to espouse the IMF plan now at the meeting instead of publicly on August 1. We should also make clear that we are not proposing reserve creation to solve our balance of payments problem and we are not trying to avoid drawing on the IMF or selling gold. We merely want a bona fide supplement to gold.”

Forty years ago, US was trying to substitute paper for physical gold and it’s still running the same play today with the shenanigans on COMEX and some of the ETFs!

In August 1967, the US balance of payments situation was deteriorating and it was clear that the US was leaning on European countries not to buy gold. This is a memo from the Deputy for National Security, Francis Bator, to President Johnson:

“In getting the Europeans to cooperate in not buying gold, and accepting a U.S. deficit as not entirely illegitimate (we are not running an economy like Brazil), direct investment is our Achilles heel. They recognize the world-wide case for foreign aid, for military spending (even Vietnam) and for access to our capital markets. But many of them think that financing U.S. direct investment by means of a deficit is equivalent to buying up Europe with money borrowed from Europeans.”

The lesson seems to be that when you know you’re losing the battle resort to the filthy practice of politics. In November 1967, with Sterling on the brink of devaluation, Treasury Secretary Fowler sent a memo to President Johnson:

“While we believe the Common Market would hold, there is some evidence that France would try to follow the U. K. - in an effort to attack the dollar and try to force a gold price increase. Japan, Australia, and Canada probably could be held, although Japan, itself, would face great pressures.

But even if all this worked out:

- the dollar would come under attack;

- the gold market would come under very great pressure--and might explode;”

It was to no avail as Sterling was devalued from US$2.80 to US$2.40 on 18 November 1967. Rather than face up to the coming consequences for the dollar, President Johnson called a meeting of 17 members of the US leadership, including the Treasury Secretary and Chairman of the Federal Reserve, which decided that the US position was:

“to stand firm… Building confidence in the dollar through demonstrating fiscal responsibility and other constructive measures to improve the balance-of-payments position.”


So with the pressure building, the US leadership belatedly recognizes the need to take action to sort out its finances! Surely that couldn’t happen again could it? Yep, it’s a dead cert. As a little aside, there was a wonderful example of being completely two-faced on the part of President Johnson. In a memo to Special Assistant Joseph A. Califano after Sterling’s devaluation he comments:

“The fourth quarter is very serious. It is caused substantially by

1. The inept handling by the British of their devaluation which played unbelievably into the hands of speculators - smart money men and even amateurs (talking of amateurs, son – Paul).

2. Subsequent loss of gold to speculators and hoarders who saw the British devaluation as the opening wedge and under the present structure of the London gold can buy gold at prices which carry no risk.”

A week later, he wrote a letter to British Prime Minister, Harold Wilson, which included the following heart-felt message:

“Dear Harold,

We are at the end of a difficult year, and both our countries have much unfinished business to carry forward. It is encouraging to recall nonetheless that it has been a year in which our close consultations and collaboration have helped produce a number of memorable achievements… We can take heart also from the success we have had through our joint efforts and through the cooperation of the other financial powers in meeting the critical problems of November and December and in restoring a sense of confidence and order to the world’s financial system.

The speculative fever of these weeks has severely tested our methods of cooperating on economic problems; but, we have continued to work together effectively in a financial world suddenly beset by fear and disorder. We have, thus far, met and repelled a serious threat to the foundations of the international monetary system…”

Back to the story and President Johnson had returned to Texas where his Special Assistant, Walt Rostow, sent him a telegram on 22 November 1967:

“The gold market continues to be nervous as an aftermath of sterling devaluation. Rumors are circulating that the price of gold will not be held on the London market. These rumors have been fed by leaks out of Paris on the operation of the gold pool and French withdrawal from the pool (which actually took place in June).

We expected substantial gold losses after the devaluation. The gold pool lost $28 million Monday, $45 million Tuesday, and $104 million today. (We supply 60 percent, our European partners the other 40 percent.) Rumors were responsible for the sudden rise.

Bill Martin is going to call the other Governors of the Central Banks who are partners with us in the gold pool (Germany, Italy, the Netherlands, Belgium, U.K., and Switzerland), to support us in a statement today affirming business as usual. If they won’t, Bill Martin would issue a statement that U.S. intends to continue to support the market and referring again to your statement of Saturday that the U.S. will buy and sell gold at $35 an ounce.

We expect further heavy losses this week. An unequivocal statement of our position should calm things down. We will keep you advised.”

In December 1967, Rostow sent another memo to the President that keeping the European members of the London Gold Pool happy would require the US to carry some of their losses – though it seems this was a behind-the-scenes deal:


“Attached is the answer Bill Martin received from his approach to our gold pool partners. They have agreed to go along with us but expect us to bail them out of some of their gold losses. Each would make his own pitch to us if he finds it necessary. The UK is replying separately. Bill did a really impressive job.

We are working on a brief statement to clear with the Europeans and release tomorrow. It should put a stop to the rumors and quiet things down a bit.”

The Europeans responded in a telephone call from the Governor of the Central Bank of Belgium to Fed Chairman, Bill Martin. His comments were summarized as follows:

“1. I am speaking for myself, the Germans, the Italians, the Dutch, and the Swiss. These are our unanimous views.

2. Of course we are always ready to support you because we believe in the fundamentals of the policy of gold at $35 an ounce.

3. We wonder if you will find it possible to make your balance of payments program known as soon as possible--before the 10 days you mentioned--even if it is in very general terms.

4. We approve and strongly support your going to the IMF. Apart from the measures it shows the U.S. is ready to solve the problem.

5. We very much hope that the program will be really very fundamental and substantial; not just a stop-gap measure; something really affecting the root of the matter.

6. We wonder if it would not be better to close the London market for awhile until your program is known as it is open to speculators and is completely disorganized. The French cannot even deliver gold. However, we understand you may prefer to keep it open but this is up to the United States to decide; it represents not a condition but a reflection.

7. Having this in mind, we were strongly of the opinion until yesterday night, when you got in touch with all of us, to recommend that we should stop our intervention in the London market. But taking into account your request, the fact you have a program, the fact that public reaction to withdrawal from the London market would be bad, we are ready to stay in the market. You may say this is a common policy not only of the Fed and the U.S. Treasury but of all the European central banks concerned.

8. This does not mean that we will not ask for reimbursement in gold of any excessive accumulation of dollars which may be the result of our intervention. We will stay in the pool but on the other hand we cannot face a large depletion of our gold reserves. All of us agree on this in principle but it would be left for each central bank to work it out with the Federal Reserve.

9. We recommend that you issue a communique over the weekend indicating, if possible, the U.S. intentions on the balance of payments program, reaffirming our intent to maintain the $35 price of gold, and reaffirming no change in operations in the London gold market, and pointing out this is not only an American position but represents the unanimous views of the European central bankers, all of whom endorse this position and are cooperating in the interest of maintaining stability in the international monetary system.”

So although the position of the Europeans was publicly aligned with the US, they had lost their nerve. The communiqué issued by the US Treasury Secretary and the Chairman of the Federal Reserve was as follows:

“The United States stands firm in its determination to maintain the gold value of the dollar. The central banks of Belgium, Germany, Italy, the Netherlands, Switzerland, and the United Kingdom support this position and continue to participate fully with the United States in policies and practices in support of the price of gold at $35 an ounce. The operation of the London gold market will continue unchanged. The United States authorities and the European central banks concerned endorse this position unanimously and are cooperating in the interest of maintaining the stability of the international monetary system.”

The substance of this statement from a European standpoint was, therefore, a lie.

Switching briefly from declassified documents from the US State Department to the Federal Reserve, here is part of the FOMC meeting minutes from December 1967 unearthed by Zero Hedge:

“Of greater concern, however, was the fact that the drain on the pool was accelerating again, Mr. MacLaury observed. Last week there was a small net surplus, but yesterday the loss was $56 million and today $95 million; for December to date, the pool was in deficit by $183 million. Some of the demand shortly after devaluation apparently represented large individual purchases by Eastern European countries, Communist China, and possibly Middle Eastern countries, although demand was more general in the last two days.On the whole, it was Mr. MacLaury’s impression that the measures taken by the Swiss commercial banks and by some other continental banks to impede private demand for gold worked quite well, although it was clear from the start that such measures could serve only as a stop-gap until some fundamental change was agreed upon. Persistent newspaper leaks--mainly from Paris--about current discussions on this subject and their reflection in gold market activity Monday and today pointed up the need for speed in reaching a decision…The governors agreed that a group of technical experts should meet on Monday morning, in advance of the meeting scheduled that day with Mr Deming, to discuss problems and possible methods of limiting demand in the London market and to consider the relationship between the restraints in that market and the kinds of limitations the Swiss National Bank had applied. The Italians and Belgians favored a plan in which a distinction would be drawn between legitimate industrial demands and all other types of demand, with only the former to be met on the London market. It was the general sense that it would be desirable for central bank demands, other than those from the sterling area, to come directly to the United States, rather than being permitted to contribute to pressures in the London market.

Mr Hayes noted that the sense of urgency at the meeting was greatly accentuated by the problem of leaks. Practically all of the discussion, in garbled form, was published daily in the Paris newspaper Le Monde and those reports were picked up by other newspapers. There were reporters sitting about and waiting in the corridors, something he had never seen before at a Basle meeting.”

And as an indication of how desperate they were getting:

“The possibility of limiting US tourism (to Europe) had not been raised but he thought that possibility should be studied carefully.”

Paraphrased as – things are going badly in the gold market so let’s consider restricting civil liberties. These people.

On 1 January 1968, President Johnson announced a new programme to address the country’s balance of payments deficit, which included tax increases. By 7 February 1968, rumours of an impending crisis were circulating in the London markets and here is wonderful example of poor judgement on the part of the Treasury Secretary in a memo sent to President Johnson:

“There is some belief in financial circles, particularly in the City of London, that a new international financial crisis may occur in March… Furthermore, the exchange markets do not seem to be looking for an early crisis. Sterling is not as strong as we would like, but it has behaved fairly well and U.K. reserves have strengthened somewhat…In sum, I think the probability of a March crisis is not all that great, but I think it well for you to have this background as you talk to the Prime Minister.”

On 8 March 1968, the London Gold Pool lost 100 tonnes of gold compared with about 5 tonnes on a normal day as the crisis blew up. This led to a meeting of the Dillon Committee and a memo was sent to President Johnson by his Special Assistant, Rostow, on its conclusions:

“1. The tax bill is a must. They agree on a strong public statement (attached) which they will release next week after going over it with Fowler.

2. They are unanimously opposed to an increase in the price of gold as a way of dealing with the present crisis.

3. Most would prefer to keep the present gold pool arrangement going but they do not believe it will be possible to negotiate with the Europeans the arrangements necessary (specifically, the gold certificate proposal) to turn the market around and restore calm.

4. They, therefore, believe we will have to close the gold pool operation and let the market price go. They believe it is essential we do this in cooperation with our gold pool partners and preferably at their request.

5. They were somewhat fuzzy on particular plans for getting non-gold pool members to cooperate and suggest we perhaps can use the IMF for this purpose. They believe we will have to act within 30 days and must have a clear idea of where we want to go and how we plan to get there.

Comment: As you can see, these views are not very different from our own. After the meeting of the Central Bankers in Basel this week end, we will have a better idea of what the Europeans are willing to do, what the prospects are of keeping the gold market open and quiet, and what would be the most orderly way of bringing about change. Deming returns tonight, and Bill Martin on Monday.”

They seem fairly close to acknowledging that the game was up, but in a memo to President Johnson from Rostow, dated 12 March 2009, they were still putting together funds for a final, doomed attempt to save the US dollar.

“Mr. President:

Here, as we understand it, is what Bill Martin found out and will report to you.

1. With respect to a change in the price of gold, the British and Dutch are inclined to flirt with this option. The Germans are wobbly. The Italians, Belgians and Swiss are strongly against.

2. He achieved agreement on the statement and the willingness to back the gold pool with $500 million, with another $500 million contingent. (At the rate the market in London is going, this will only last a matter of days.)

3. The Europeans realize that we all may face soon some quite unpleasant choices; but they are not clear about what these choices are and what will be required of them if we are to hold the system together. They are prepared to close down the London gold market and let the free market price of gold float. What they have not thought through are the terms of the intimate collaboration which will be required to make that kind of system work--especially how to deal with the consequences of a two-price gold system.

4. In the light of this situation, Treasury, State, Federal Reserve, Council of Economic Advisers, and White House staff people have been driving all day, at Ed Fried’s insistence, to get in shape an operational scenario of the kind that is attached. The essential object of the scenario would be to get certain minimum essential commitments from the other members of the gold pool before the closing of the gold pool was announced. On this basis we could proceed in reasonable order to a monetary conference. Xxxxxxxxx

5. We do not yet know Joe Fowler’s or Bill Martin’s personal views of this particular scenario. But we will be presenting it to them either late this evening or tomorrow morning.

6. It emerged from the Basel meeting that the U.S. tax bill and the austerity of the British budget of March 19 are absolutely critical factors. Joe Fowler and Bill Martin have been working Mills over hard on this point. They are also talking to the Republican Policy Committee this afternoon.

My own feeling is that the moment of truth is close upon us; and we shall have to convert some such scenario into action within the next few days.

Walt”

Two days later, a follow-up memo on outlined the President’s options when they finally realized it was over.

“Washington, March 14, 1968.

SUBJECT Gold

Your senior advisers are agreed:

(1) We can’t go on as is, hoping that something will turn up.

(2) We need a meeting of the gold pool countries this weekend in Washington.

(3) We want to negotiate the following package:

- Interim rules on gold.

- Measures to keep order in the financial markets.

- Acceleration of the SDR’s.

(4) With the right kind of interim package, we could maintain our gold commitment to official holders.

(5) If we can’t get this package, we would have to suspend gold convertibility for official dollar holders, at least temporarily, and call for an immediate emergency conference.

(6) This probably would mean a period of chaos in world financial markets, but it may be the only way to push the others into a sensible long-run arrangement which avoids a rise in the official price of gold. We are unanimously agreed that a rise in the price of gold is the worst outcome.

The decision you must make now is whether the London gold market should be closed at once.

(a) Arguments for closing:

- Avoid losing perhaps $1 billion in gold tomorrow (we lost $372 million today).

- Such a gold loss would further shake the confidence of central banks and trigger their coming to us for gold.

- Makes it easier to arrange an emergency meeting of the gold pool countries this weekend.

- Evidence of U.S. decisiveness.

(b) Arguments against closing:

- Involves U.S. taking the lead in throwing in the towel.

- Closing the market will strengthen the hand of those who believe the official price of gold will be increased.

- May reduce the U.S. bargaining position with the Europeans.

- Gives us another fling at the Gold Certificate proposal.

Walt”



The London Gold Pool collapsed. That night, the Queen declared a Bank Holiday for the following day and British Chancellor, Roy Jenkins, closed the London gold market “on the request of the United States”. It remained shut for two weeks although gold continued to trade in Zurich and Paris where the price rose from US$35/oz to US$44/oz – implying a 26% devaluation of the US dollar. This led to a two-tier gold market, with gold transfers between nations continuing at US$35/oz.

Here is part of a memo from National Security Adviser, Kissinger, to President Nixon on 25 June 1969:

“we have already moved a long way towards suspension of the gold convertibility of the dollar. Germany has explicitly agreed not to convert (under the implicit threat of troop withdrawals as part of an earlier “offset” agreement). All other major countries are afraid to queue up for gold for fear that we will close the window. We are thus already achieving much of the gain from suspension - essentially through accumulation of dollars by others - while minimizing the political costs of blatantly unilateral U.S. action.”

So while the French were converting their balance of payments surpluses from US dollars into gold, the US basically strong-armed the Germans, an even bigger surplus nation, into not following suit – which ended up being very costly for them.

Nixon finally ended the two-tier gold market in 1971 when he closed the “gold window”.










Second: Second Gold War: late-1970s

Having lost the first gold war to the French (and the speculators), the US lost the next one to Saudi Arabia - well Arab nations, a German bank and speculators - as James Sinclair highlighted earlier. Obviously for “speculators”, read “Smart investors and believers in sound money who saw the writing on the wall”. The first shot was fired in December 1974 when the US announced the first gold sale of 2.0m oz (62 tonnes) in December 1974 and followed this with a second of 0.5m oz in June 1975.

Before the second gold war had even really got going, the US Treasury and Federal Reserves were already squabbling (wait for this) about the extent to which OTHER countries would be allowed to buy gold and the strategy of limiting the role of gold in the financial system. Let’s just call it manipulation.

Here is the memo from Chairman of the Federal Reserve, Arthur Burns, to US President, Gerald Ford, on 3 June 1975 ahead of the IMF’s Interim Committee meeting a week later:

“The broad question at issue is whether central banks and governments should be free to buy gold, from one another or from the private market, at market-related prices. (Market prices have recently been in the range $160 to $175 per ounce; the official price is $42.22 per ounce.) The Treasury is willing to accept a large measure of freedom for such transactions. The Federal Reserve is opposed.

The specific point of controversy is whether to allow individual governments to increase their gold holdings above a specified ceiling. The Treasury is willing to agree to the position, taken strongly by the French Government, that there should be no ceiling on the gold holdings of an individual government. The Federal Reserve believes that individual ceilings are essential, and that the United States should not agree to any new international arrangements on gold unless they incorporate such ceilings.

The January 1975 communique of the International Monetary Fund’s Interim Committee, an internationally agreed document, stated that freedom for national monetary authorities to enter into gold transactions should ‘ensure that the role of gold in the international monetary system would be gradually reduced.’ Individual country ceilings on gold holdings, which the Federal Reserve favors, would contribute to this objective. The Treasury’s position, on the other hand, will be interpreted by many as a withdrawal from the January understanding.”


Burns then outlines reasons for the Fed’s stand on gold which included:

“Third, early removal of the present restraints on inter-governmental gold transactions and on official purchases from the private market could well release forces and induce actions that would increase the relative importance of gold in the monetary system. In fact, there are reasons for believing that the French, with the support of one or two smaller countries, are seeking such an outcome. Countries such as France that are opposed to ceilings on their individual gold holdings undoubtedly want the freedom to buy in the private gold market so as to support the market price. It is an open secret among central bankers that, at a later date, the French and some others may well want to stabilize the market price within some range. In my judgment, therefore, there is a significant risk that the Treasury’s recommended position would inadvertently foster, or at least permit, an increase in the relative importance of gold in the monetary system.”

“Fourth, a large measure of freedom for governments to trade in gold at a market-related price may easily frustrate efforts to control world liquidity. For example, such freedom would provide an incentive for governments to revalue their official gold holdings at a market-related price. (France has already done so.) This in turn could result in the addition of up to $150 billion to the nominal value of countries’ reserves. Liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control.”

Burns goes on to moan about how he had already “gone some distance to try to conciliate the French view” – a whole 5%:

“I have suggested some lifting of the ceiling that would apply to an individual country’s gold holdings (e.g., from 100 per cent to 105 per cent of the actual holdings as of May 1, 1975).”

Before moving on to filthy politics:

“I have consulted Henry Kissinger as to whether there is some political advantage we might want to extract from the French in exchange for acceding to some part or all of their desired position on gold. But Henry tells me there is none at this time...I few do ever accede to French views on gold, we should at least use our bargaining leverage to achieve some major political advantage.”

Then we have a prime example of the dirty dealings that are done between central bankers in the gold market. Burns explains why he doesn’t see any disadvantage from taking a stand against the French in the current negotiations – the British won’t support the French and he’s already done an under-the-counter deal with the Germans (who always seem to get taken to the cleaners by the US where gold is concerned).

“I have a secret understanding in writing with the Bundesbank – concurred in by Mr Schmidt – 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.”

One of my other gold market heroes is even less well known today than Jacques Rueff. He is Hans-Joachim Schreiber, who worked for Germany’s Dresdner Bank in the 1970s. He was the biggest player in the gold market when the second gold war really got going during the late-1970s. Once again, the US and its ally, the IMF, conducted an overt war by selling gold into the market:



So despite selling 1,308 tonnes of gold on to the open market, the US and IMF failed to stop the gold price rising from US$193/oz at the end of 1974 to its then all-time high of US$850/oz.

In the middle of all this, Schreiber saw straight through the shenanigans of the US and IMF and encouraged his bank’s clients to buy gold. Some of the biggest buyers were believed to be Arab nations, including Saudi Arabia – as mentioned by Jim Sinclair. Here is quote from Time Magazine on 17 September 1979 in an article “Lift for the Bullion Boom”:

“Remarkably, almost half of the 1,000 tons of gold that the IMF and the US Treasury have put on to the market in the past five years have been scooped up by one buyer: West Germany’s Dresdner Bank. And its drive into gold has been pressed by one man, Hans Joachim Schreiber, 46, who was appointed to the bank’s board of directors five years ago. His faith in the metal dates to his youth in postwar Germany, where, he recalls ‘some people owed their survival to the possession of a few ounces of gold’.”

The article goes on to discuss the most famous of all the gold auctions of that period. This was one for 750,000 oz (23 tonnes) in August 1979 by the US Treasury. Schreiber and Dresdner Bank bid for the whole lot (he was “the man”!), receiving an allocation of 720,000 oz. According to Time:

“At the US Treasury’s auction late in August, Schreiber bid $301 per oz. for gold that had been selling the day before for $299…Some of the gold goes to the bank’s own account, but most is for its clients. Dresdner is rumoured to be active as an agent for Middle Eastern investors…Schreiber keeps tight control over his agents in Frankfurt, New York, London, Hong Kong and Singapore, contacting his team almost instantly to find out who is buying, where and why…Says Schreiber ‘Even after we submit written bids, we usually adjust them by a few cents via Telex write down to the deadline’.”

Two weeks after this auction the price had risen to US$320/oz and according to Professor R.M. Gidlow in his essay, “Review of the gold sales policy of the United States Treasury (1978-79)”:

“this auction result stimulated the demand for gold rather than dampened it, and threatened possibly to weaken the dollar in foreign exchange markets…the position of gold was strengthened by the evidence provided by the auctions that the market can absorb large tonnages of gold…In retrospect the Americans could have retained greater influence over the bullion markets by staying out or selling less, because of the greater uncertainty which they could have exerted over the market.”

Going back to October 1979, the US Treasury announced that regular monthly gold sales would be discontinued and moved to a policy of ad hoc auctions in variable amounts. This move, together with the tensions caused by Iran seizing the US hostages, saw gold rise from just under US$400//oz to its high of US$850/oz on 21 January 1980. Then Volcker started hiking rates, eventually taking Fed Funds up to 18% which eventually killed the gold price rise.





Three: The current Gold War and China

Having twice had their *rse handed to them on a plate, the US Treasury/Federal Reserve and other fine western institutions learned that overt intervention in the gold market was a doomed strategy:

Monkey see…monkey see again…monkey do something different next time.

They realised that it’s much better to keep the gold market permanently off-balance with a covert strategy. Key elements of the current strategy are:


It’s a smarter strategy and it’s why a covert version of the London Gold Pool is operating today and has been in operation for more than a decade. Along the way, some tactics have been jettisoned, e.g. hedging [“hedging” according to Antal Fekete.] by at least one major “connected” gold miner.

Jim Sinclair correctly observed that the biggest adversary faced by the US in the current gold war is China, although it is being joined by other countries (not least of which is Russia) and a growing hoard of institutional and private investors – as more and more “prisoners” escape. The reality is that the “phony” part of this gold war was 6 years into existence before most people even realised that China had entered the fray. China’s official gold reserves were reported by the World Gold Council (WGC) to have remained unchanged during 2002-07.

More kudos to GATA – here is Bill Murphy’s comment on China back in 2007:

“They have been discreetly buying up natural resources for at least the last five years…(we) have known for years they have been accumulating gold via our STALKER source.”

It came as a surprise to the WGC and the rest of the market in April 2009 when China announced that it had increased its gold reserves by 454 tonnes to 1,054 tonnes since 2003. Talking of GATA’s famous “Stalker” source, there was some interesting feedback from a conversation he had with a former member of the WGC. The Stalker reported him as saying:

“…the most important factor for gold was the growing population of India and China…and their population has a propensity for gold. In his opinion, this dwarfs all the other factors regarding the gold price, i.e. don’t stand in the way of the inevitable.”

It’s important to realise here that in this gold war, the US authorities are taking on both the Chinese state AND its citizens and we need to consider both. In recent months, the only illuminating information about gold to come from an “official” Chinese source was reported by Ambrose Evans-Pritchard on his Daily Telegraph blog. His story “Gold now enjoys the Beijing put” followed a meeting with Cheng Siwei, China’s former Vice Chairman of the Party’s Standing Committee and now a “sort of economic ambassador for China around the world”. On his blog, Evans-Pritchard commented:

“What he said about US monetary policy and gold - this bit on the record - would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation. He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth. ‘Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,’ he said. In other words, China is buying the dips, and will continue to do so as a systematic policy…As I have written in today’s paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve. ‘If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,’ he said.”

One might assume that Cheng’s off the off-the-record comments were even more bullish for gold and/or damning for the dollar. Nice one Ambrose – sometimes a shining light in the mainstream media. The theory that China is “buying the dips” also fits with the market action we are seeing.

One question which remains unanswered is why hasn’t the Chinese government purchased at least some of the 403 tonnes that the IMF claims that it wants to sell? However, the combination of gold and the IMF (as ever) means that things aren’t clear cut. India acquired 200 tonnes of the IMF gold in November 2009 which was one factor behind the gold price reaching its all-time high of US$1,222/oz in December 2009. Sri Lanka subsequently bought 10 tonnes and Mauritius bought 2 tonnes.

There was talk in the gold market that India had beaten China to the punch and that the latter would only buy gold from the IMF at a price the same or lower than the c.US$1,045/oz paid by India. This is possible since the gold price hasn’t broken down below US$1,050/oz since. There was also speculation that the IMF would be reluctant to sell to China either because it would be an even more bullish signal for the gold price than the sale to India and/or India’s central bank might have agreed to lease some or all of the 200 tonnes back to the market after the deal (neither of which would surprise me).

In the meantime, the long drawn out saga of IMF gold sales (the US was promoting IMF sales back in the late-1990s) took another twist in March this year. Eric Sprott of Sprott Asset Management, a high profile Canadian portfolio manager, approached the IMF to buy the remaining 191.3 tonnes. He was turned down. The “businessinsider.com” phoned up the IMF to ask why not:

“We spoke with Alistair Thomson, external relations officer at the IMF, who cleared up the matter for us. Here’s the breakdown of what he told us:


Eric Sprott called the IMF’s bluff beautifully. What a shameful institution it is when the reason for the gold sale was outlined by the G20 leaders in their communiqué following the April 2009 meeting in London as providing:

“additional concessional and flexible finance for the poorest countries over the next 2-3 years.”

Like they really care.