Last week, the
unthinkable happened. N. M. Rothschild, the heirs of the famous
banking family, got out of the gold business.
Over the last
decade, the company had been the great promoter of gold hedging,
i.e., getting gold mining firms to sell their future gold output
at a fixed price. When gold’s price fell, this was great for the
mining companies. But now gold’s price tends to rise rather than
fall. This means that forward sales of future output hurts the
mining companies. They lock in a price that turns out to be lower
than what the market would have provided. So, hedging has dried
up. So have Rothschild’s profits.
Ever since 1919,
N. M. Rothschild had been the driving force on the London gold
market. It was the dominant price-fixer, helping to set the London
gold price every day, twice a day.
As to why anyone
should have to set a price for the world market, the company never
quite explained. There was no comparable price-setting organization
for other investment assets. Prices rise and fall all day long
on investment exchanges, and now all night long if you count foreign
markets, which you should. A
Mineweb story reports – three generations too late – that, "It
is also likely that the morning and afternoon Fixing ritual may
be done away with; physical meetings possibly replaced by teleconferencing
and digital exchange." Apparently the telephone had not been
sufficiently advanced technologically.
When I read
about the departure of Rothschild from the gold business, my mind
went back to November, 1962. I could see Richard Nixon standing
in front of the press corps and saying, "You won’t have Dick
Nixon to kick around any more." I mean, what’s a conspiracy
theorist to do?
If the Rothschilds
are abandoning gold, what does this mean for the rest of us? Or
is it a trick, like the Old Man’s pretending to unload British
consols, the T-bonds of his day, just before the news of Waterloo
hit the London stock exchange?
Gold is coming
out of a two-decade period of bearish sentiment. The dollar is
looking more shaky than ever as the world’s sole reserve currency.
Why sell your seat on the London Bullion Market Association? The
retail price today is high.
I think the
company had bet its profits on a falling price of gold. Now that
this market has dried up because of rising demand for gold, the
company’s in-house experts in gold – "gold always goes
down" – are facing a world that they don’t understand.
They have quit. They have no expertise in a bull market for gold.
ROTHSCHILD
IS NOT ALONE
Europe’s central
bankers are officially abandoning gold. They have been selling
off gold reserves for decades, bar by bar, asking the great-grandchildren
of the victims of the Great Gold Heists of 1914 and 1933 to pay
for the gold that the central banks confiscated. Now
comes word that the Bank of France, the gold buggiest central
bank of all, is threatening to sell off 16% of its gold reserves,
nearly 500 tonnes.
One of the strategies
used by central bankers to hold down the price of gold is to announce
gold sales. This tactic no longer works well. The gold market has
found enthusiastic buyers every time a central bank unloads some
of its gold.
Why do the West’s
central bankers do this? There are three main reasons. First, they
really don’t believe that gold has a role to play any more. There
is no gold standard for the general public. Central bankers settle
accounts with each other, moving their gold back and forth inside
the vault at the Federal Reserve Bank of New York. These shifts
refer to the banks’ ownership of gold as one monetary reserve among
many, but not as a true gold standard. The gold standard died in
1914 in Europe and in 1933 in the United States. So, why hold gold?
Why not sell it and invest the money in interest-paying assets?
This is what European central banks have been doing.
Second, and
more relevant in my view, central bankers have been involved in
a deceptive scheme to earn money from their gold reserves, but
without officially selling gold. They "lease" it to a
group of favored investment houses called bullion banks, which
do not hold bullion and are not banks. These firms borrow the gold,
paying about 1% per annum, and sell it. Then they invest the money
generated by the sale at interest rates way above 1%. The "leased" gold
is not recorded as a sale. The governments don’t have to admit
to the voters that the central banks have unloaded the nation’s
gold for 1% per annum.
Legally, the
bullion banks must repay the central banks in gold. But no one
expects them to, any more than anyone expects a nation’s national
debt to be repaid. These "loans," meaning "leases," meaning
sales paying 1% per annum will not be re-paid.
When gold’s
price rises at rates above 1% per annum, the central banks face
a problem. They have in effect sold an asset for much less than
it now turns out to have been worth. This is bad publicity. So,
to hide the truth, central banks sell – or threaten to sell – gold
into the market directly, thereby (1) getting money and (2) forcing
the price down.
Now, in no other
commodity market do sellers announce in advance, "we may decide
to sell our hoard," thereby pushing down the price in advance.
This is why I regard all such announcements by central bankers
as phony. They may sell, but not for the reason offered, namely,
to generate cash to invest in other assets. What assets? They buy
Treasury bills of this or that nation. But they can do this at
any time, just by printing money. They can do this without increasing
the money supply when they sell gold and buy Treasury debt. But
if this is really their plan, they are dunderheads for announcing
sales in advance. They are not dunderheads. They are money-manipulators
of the highest order. I mean, they got the governments to give
them a monopoly over the domestic money supply as a kind of favor.
Then, in 1914 and 1933, they persuaded the governments to turn
over to the central banks all of the commercial banks’ gold and
the governments’ gold. These people are not dolts.
So, I pay no
attention to announcements by central banks of their plans to sell
gold. The plan is rarely executed, and these days, the price of
gold is not affected by the sale to the same degree that it is
affected by the initial announcement.
There is a third
reason for gold sales. The central bankers know that the price
of gold is a price inflation indicator. It has served this purpose
for over three centuries. If they can distort this indicator by
selling gold, the inflationary results of their present policies
will not be revealed by this traditional indicator. That is, the
investing public will not be tipped off in advance regarding the
looming rise in prices generally.
A generation
ago, when I was just getting started as a writer, reason #3 was
the main one. The gold exchange standard was still operating. Foreign
governments and central banks could hold U.S. T-bills as surrogates
for holding bullion, because the United States guaranteed to deliver
gold at $35/oz to governments and central banks. Nixon broke this
contract on August 15, 1971. "Gotcha!" After that, gold
had a great run, especially 1976–80. Then it ceased to perform
as an inflation indicator. Its price fell by over 60%, 1980–2000,
while general prices denominated in dollars doubled.
I believe that
the second reason is the main one today: hiding the reality of
the gold leasing system. Central banks have leased their gold,
but they are not going to be re-paid in gold. The bullion banks
sold the leased gold to the public, and to get it back in order
to repay the central banks would drive gold’s price back to 1980’s
levels. This would bankrupt the bullion banks. That would mean
that their debts to the central banks would go sour. The central
bankers would be exposed as fools who sold off the government’s
stolen treasure for a mere 1% per annum. The central bankers today
are doing what they can to hold off any public exposure of the
one-way outflow of physical gold. How? By selling off the banks’ remaining
reserves of gold to hold down its price.
INSCRUTABLE
ORIENTALS
The problem
the West’s central banks face today is Asia. The Asians have discovered
capitalism. They have discovered the wonders of fractional reserve
banking. They have also discovered the boom-bust cycle: Japan in
the 1990s, the rest of non-Communist Asia in 1997. China’s rude
awakening will come soon enough.
The Asian masses
have grown richer since 1950. Japan led the way. But the Asian
masses still honor their parents. They have not been Westernized
completely. There are still grandparents alive. All of them went
through mass inflation, either during World War II or, in the case
of China, under Chiang Kai-shek, 1946–49. All of them know
the truth about gold and silver: they hold their value in bad times.
The Mongols
had invented paper money by the 13th century. It went
hyperinflationary within three generations. Asians know that paper
money cannot be trusted, meaning that governments cannot be trusted.
They have experienced its results.
Now the Asian
masses are getting richer than they ever dreamed possible. There
is no way around the reality of increasing wealth in Asia: increased
demand for oil and increased demand for gold. They want motorbikes
in China. Then they will want cars. In the large cities, cars are
in high demand. There are now 20 million cars in China. The government
expects sales of 2.6
million cars in 2004.
If China continues
to inflate its money supply at double-digit rates, it will get
price inflation. This will increase the demand for gold by grandparents.
They still remember the horrendous Chinese inflation that brought
Mao to power in 1949. If, on the other hand, the Chinese central
bank stops creating money, a bust is sure. China will learn about
the Austrian theory of the trade cycle first-hand. There will be
many bankruptcies. There will then be a heightened interest in
gold as a safe asset to own when one’s debtors are refusing to
pay and one’s creditors are demanding payment. Gold is a liquid
asset that is not part of the fractional reserve banking system.
It is a form of money that is not a legal liability for a pyramid
asset scheme.
Gold is not
money in Asia, at least not in official, visible markets. But in
a world of bribery, gold is always a much-desired asset. It leaves
no paper trail. Asians have been paying bribes to corrupt rulers
for millennia. Gold or silver has been the preferred money for
bribery for the entire period.
These orientals
are inscrutable to Westerners because Asians still understand that
gold is money. They are familiar with the power of gold in gaining
one’s goals on a face-to-face basis. The West has forgotten.
FROM WEST
TO EAST
We are seeing
the flow of consumer products from east to west. To the extent
that the West runs a negative balance of trade with the East, the
flow of capital ownership is west to east. Asia is lending to the
West, especially to Americans, the money to buy trinkets. Japan
in 1950 sold cheap manufactures. Then, year by year, quality improved.
This was first evident in its 35 millimeter cameras, which by the
late 1950s beat anything that America produced for the price. China
is following in Japan’s footsteps. It is exporting low-tech products.
This will continue as manufacturing moves to China’s vast interior.
Low-skilled, low-paid people will produce low-tech products. In
the port cities, high tech will dominate within two decades or
less. In Taiwan, it dominates now. The mainland Chinese regard
Taiwan as a province, not as a separate nation. In terms of the
flow of capital from Taiwan to mainland China, this assumption
is correct, economically speaking.
The demand for
gold as a monetary asset in the West is minimal. The West has been
sold an ideological bill of goods. It has been sold on the idea
of a government-created monetary monopoly, run by fractional reserve
bankers, as a replacement for gold coins that are used by citizens
as a way to protect themselves against monetary manipulation by
elites. Gold is democratic money. When the public abandons gold,
it transfers power to governments and banking elites, who abuse
the privilege by debasing the money.
East Asians
in the emerging nations are not democrats in their politics, but
they are democrats in their economics. They are gold bugs. This
long democratic tradition has been broken only since World War
II. Asians are now getting their hands on the West’s digital money
in such quantities that a percentage can go into grandfather’s
money.
Their central
banks are buying T-bills with newly created money. This is the
Keynesian formula for wealth. These bankers were educated in Western
universities and by national professors who were trained in Western
universities. They have adopted Western monetary theories. They
are following the prescription of export-driven economies: subsidize
the export sector by keeping down the international value of your
currency. Make it easier for foreigners to afford your money, and
therefore your products. They are mercantilists, but without a
gold standard. They are fiat money mercantilists.
Central bankers
are all sons of the West. They all play the games developed by
the Bank of England after 1694. But the man in the Asian street
is a son or grandson of someone who was not educated in a Western
university, and who remembers all too well what happens to paper
money.
The demand for
gold in Asia will rise. The faster that the new money economy spreads
to the interior of China, the faster that the transfer of gold
from west to east will take place. China is still living in the
past culturally. High tech products have not yet transformed low
tech distrust of governments and their paper money.
So, as Western
central bankers exchange physical gold for promises to pay digits,
Asians will politely say, "Thank you so much," and think, "almond
eyed fools," and carry off the stolen goods of earlier generations
of Westerners, who believed the promises of bankers to sell gold
at a fixed price to anyone who walked in the door. That promise
was violated when World War I broke out and, in America, in 1933.
Now, Asians are walking through the door with fists full of digital
promises. They can either buy Western promises to pay, or they
can buy gold and take delivery. Some of them will buy gold. Grandfather
knows best.
CONCLUSION
If and when
the French central bank sells its gold, there will be lots of buyers.
Thus, we will at last discover the answer to Pepsodent Toothpaste’s
long-unanswered prediction in my youth: "You’ll wonder where
the yellow went." It went to Asia.
April
22, 2004