We welcome your inquiry.


Gold: Historic spike ahead?

March 22, 2006

by Brian Durrant

It is common knowledge that the British government sold more than half of the nation's gold reserves at the bottom of the market in mid-1999. It's less well-known why.

The Treasury sold 395 tonnes of gold from July 1999 to March 2002 at an average price of $275 per oz. The sale raised $3.5bn.

Why? The Treasury claimed that gold was expensive to store and keep secure. It was also inconvenient to trade if transactions involved a change of storage location. But in other words gold was too traditional and old-fashioned, an anachronism for New Labour.

Now gold is twice the price at which the government sold it. The cost to the taxpayer of this policy to "modernise our reserves" equals some £2 billion. You may recall that the Conservative Party irretrievably lost its reputation for economic competence in September 1992 when it spent £800m trying to keep the pound in the ERM. But alas, the media, the electorate and the opposition now take a kinder view of wasting taxpayers' money.

According to Tony Blair's comment to the House of Commons, the gold sale "was carried through perfectly sensibly and we actually got the best deal for the country". We know the second part of his statement was rubbish. But were the gold sales carried out sensibly?

Psst! Sell gold now...

On 7 May 1999 the government announced in advance that it would sell 415 tonnes of gold. This public announcement seemed to ensure that the UK would achieve the lowest possible price rather than the highest. The first auction of 25 tonnes in July was $26 per oz lower than the price at the time of the announcement!

In selling our gold the government was a great believer in overt sales. In other words, showing its hand to the market. The Treasury reckoned that predictability and transparency would increase revenue by increasing participation in the sale. The government bent over backwards to be "fair" to buyers of gold, wanting to maximise sales rather than striving to get the best price. The issue of "fairness" for the taxpayer took a back seat.

So is that the end of the story, just another example of government incompetence? Or was there a hidden agenda? There is an extremely controversial piece of research that, if true, suggests the British government is more knave than fool.

A recent report from metals and mining analysts at Cheuvreux -- part of France's largest bank, Credit Agricole -- says that the sale was in fact designed to keep the gold price down. The British Government's actions of mid-1999 are cited as clear evidence of a global conspiracy to rig the gold market.

Easy money... until gold took off

The conspiracy theory begins in the 1980s. Central banks began to lend or deposit part of their gold holdings with leading bullion banks like JP Morgan Chase, Goldman Sachs and Citibank. In return the central banks earned a fee known as the gold lease rate.

At the time this seemed a sensible use of gold. Otherwise it earned no income for the central banks. But the bullion banks who borrowed it then sold this gold into the physical market. There it was most likely turned into jewellery, and was lost from the global bullion market forever.

The bullion bank used the proceeds of these gold sales to buy a higher yielding asset like bonds. This was a classic "carry trade". Borrow at a low gold lease rate, lend at a higher government bond rate. Money for old rope, in fact... provided the gold you borrowed in the first place didn't rise in price.

Not surprisingly this transaction was very popular in the 1990s. The gold price was flat on its back. In fact, Cheuvreux reckon central banks loaned out between 10,000 and 15,000 tonnes more from their gold reserves than they've declared!

And you can see the problem. Sooner or later the bullion bank will be obliged to deliver the borrowed gold back to the central bank. It has to buy it in the physical market, incurring substantial losses at today's 25-year highs, and also squeezing the gold price higher still -- thus making the situation worse for other bullion banks that are also short of gold. The risk of a serious global 'crunch' becomes very real.

Huge short covering ahead

Was the Bank of England aware of the risks posed by a rising gold price? Cheuvreux's research cites a lawsuit filed in December 2001 by Reginald Howe, a member of the Gold Anti-Trust Action Committee (GATA), a group hitherto seen as on the lunatic fringe of the "goldbug" community, but now supported in its claims by the French bank's report.

Mr Howe charged the Bank of International Settlements, Alan Greenspan, the leading investment banks and many others with rigging the gold market -- which is illegal under US law. In his suit, he alleged that in 1999 the then Governor of the Bank of England, Sir Edward George, made the following comment to the Chief Executive of Lonmin, the gold mining company:

"We looked into the abyss if the gold price rose further. A further rise would have taken one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price and at any cost, the central banks had to quell the gold price, manage it. It was difficult to get the gold price under control but we have now succeeded."

What might Steady Eddie have been referring to? The UK government's announcement that it would sell half the nation's gold reserves came just eight months after the notorious bail out of Long Term Capital Management (LTCM) in September 1998. That collapse had indeed threatened the global banking system. Cheuvreux now claims there were strong rumours that LTCM, a hedge fund, was short of 300 tonnes of gold when the company crashed. This short position is thought to have been assumed by those banks involved in the bailout operation.

In other words, the new revelations from Cheuvreux add weight to the circumstantial evidence surrounding a global conspiracy to suppress the gold price. But history tells us that governments cannot rig prices forever. At some point, the free market will out.
The US could not hold the gold price down at $35/oz in 1971. The Tin Council failed to hold up the price of tin in 1985. And the British government, thankfully, couldn't stop the pound falling out of the ERM in September 1992.

Why gold shot higher last year

The scale of official gold reserves that have been lent on to bullion banks mean there is a huge 'short' position which needs to be covered by gold purchases in the physical market. Indeed, this short covering seems to be underway.

From mid-2004 to mid-2005, the central banks' official short position in the market fell by 2,430 tonnes. During the same period some 232 tonnes of new mined gold was delivered back to the central banks. So there was short covering of gold of some 2,198 tonnes. This figure dwarfs official central bank sales, which would have been 500 tonnes at most. No wonder the gold price shot up during this period!

And according to Cheuvreux there is much more short covering to come. Its conservative estimate of the central banks' total short position is 10,000 tonnes. Only a fraction of this will be met by new production. The rest will be made up of either physical purchases of gold or the bullion banks' cash settling. In either event, the central banks must give up any hope of getting their gold back.

Or so the story goes. What do other members of the gold market think of Cheuvreux's claim? There has been no official statement rejecting the thesis. But the word in the City is that no one in the gold market believes it. It's a crackpot piece of research playing into the hands of the conspiracy theorists.

Indeed, a spokesman at the World Gold Council believes the research has zero credibility. But what's for sure, is that the Cheuvreux story is not remotely priced into the value of gold today.

In other words, Cheuvreux's thesis may indeed be proved as nonsense. But the gold price will not flinch if this is the case. And you can conclude, as we did in 1999, that the British government was simply incompetent in disposing of half the nation's gold.

On the other hand, however, Cheuvreux's claims -- if correct -- mean that Britain sold gold to shore up the global financial system. The verdict of government incompetence would be changed to one of duplicity.

There are plenty of other reasons to hold gold -- as a hedge against inflation, an alternative asset to paper currencies, and as a safe haven in times of heightened geopolitical tension. But in holding gold you are also paying nothing for the option that Cheuvreux's controversial thesis might be true! If you haven't bought gold already, we advise you take a position in the physical market, buying gold coins that trade for a small premium to the spot price.

Original article at The Daily Reckoning, March 22, 2006
by Brian Durrant

A Cambridge economics graduate with nearly 25 years experience in the City, Brian Durrant is investment director of The Fleet Street Letter, (founded 1938). He has worked in stockbroking, the foreign exchange markets and headed the research department at one of London's leading futures and options brokers.

Return to the The Gilded Opinion Index Page

USAGOLD sider, what we have to offer

Great prices. Quick delivery. All the time.
Contemporary gold and silver bullion coins
Bullion-related historic gold coins
U.S. $20 gold pieces

Order Desk
Extension #100
6am to 5pm USMT weekdays.

Prefer e-mail to get started?

Reputation Matters!
Few can match our golden credentials

Zero complaints
stars client review record
(All reviews verified by BBB)

A+ Rating
Click for details
includes client reviews

Gold coins & bullion since 1973
Better Business Bureau accredited since 1991
American Numismatic Association since 1975
Industry Council for Tangible Assets since 1985
Website in continuous operation since 1997

Recipient of BBB Gold Star Certificate

for zero complaints 2003 to 2015
(Program suspended 2016)

What separates us from the competition

News & Views
Forecasts, Commentary & Analysis
on the Economy and Precious Metals

––OCTOBER, 2017––

Gold is up this year not just in dollars but in every major currency

Plus, How professional investors radically altered the gold market, and much more.

We invite you to sign-up for our free monthly newsletter with appreciation to our current and prospective clientele.

Immediate access to this month's edition.

Thinking about what to include in your precious metals portfolio?

We can help! We invite you to put our many years experience in the gold business to work for you. Helping you to assemble a portfolio designed for the times and your particular objectives is what we do. And we've been doing it for over 40 years with everyone from the small to the high net worth investor.

By e-mail or phone.

Contact information immediately above.
We welcome your inquiry.


Current Special Offers
Stuff our clients love

Our specials feature unusual and hard-to-find historic gold coins that trade at bullion-related prices.

These limited offers often sell-out quickly. For more information on our current offer, please call the Order Desk or visit this link at your earliest convenience.

Add a little scarcity and history to your precious metals portfolio.



For those seeking a deeper understanding of gold's role in the modern investment portfolio

A sovereign tale of gold's
historic undervaluation

Oil, gold and a hoard of British sovereigns
stashed in an old piano

BlackSwans YellowGold
The standard reference on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation

Gold Chartography 101
The case for gold ownership in ten charts
you will never see on CNBC


How would you invest money you didn't need for ten years?
"Perhaps we spend too much energy trying to foretell the future, and too little trying
to be resilient whatever happens."


mkMichael J. Kosares, the author of these articles, has more than 40 years experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views, Forecasts, Commentary & Analysis on the Economy and Precious Metals," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.


"I keep six honest serving men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who."

– Rudyard Kipling –

Book Order Form (US)


Tuesday October 24
website support: sitemaster@usagold.com
Site Map - Risk Disclosure - Privacy Policy - Terms of Use - Shipping Policy
© 1997-2013 CPM, INC./ USAGOLD All Rights Reserved