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 Post subject: World Revolution, War Spending Send Gold Soaring
PostPosted: Thu Feb 25, 2016 3:23 pm 
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World Revolution, War Spending Send Gold Soaring

William Gottlieb, 4 February 1980, pp. 90-92, Intercontinental Press.

The waves of gold buying that have been sweeping world money markets since late 1979 reached a frenzy during the first month of 1980. The price of an ounce of gold rose to $850 in the third week of January, before falling back below $700 in the final week. As recently as mid-1979, gold was trading below $300 an ounce.

What does it mean? Is the price rise simply the result of irrational speculation?

No. The rush to gold reflects the growing convergence of the political crisis of the world imperialist system with the economic crisis of the world capitalist system.

In the most immediate sense, gold's recent dizzying ascent has been caused by political factors.

Over the past year, U.S. imperialism has faced revolts across the globe – from Iran to Indochina, from Afghanistan to Nicaragua, from El Salvador to Saudi Arabia. The U.S., European, and Japanese imperialists fear that the revolutionary wave sweeping the Mideast and central Asia will cause them to lose control of their most important source of raw materials, the oil fields of that region.

Another important political factor has been the effect of Carter's freeze of Iranian governmental assets on deposit in U.S. banks late last year. This was a reminder to the bourgeoisie not only of Iran but of other countries as well that, unlike gold, a bank deposit is just a promise to pay – a promise that can be broken.

Right now, the anti-imperialist mobilizations in Iran and blows to U.S.-backed counterrevolution in Afghanistan are among the gravest source of concern in capitalist political and financial circles.

The inability of Washington to stage a major military intervention with its own troops since its historic defeat in Indochina has given increased confidence to the toiling masses internationally. They sense, and correctly so, that their enemy has been gravely weakened.

What does this have to do with the recent wave of gold buying?

Where the bourgeoisie has doubts that tomorrow their political power, not to speak of their currency, may no longer exist, they tend to "take the money and run." Many capitalists in countries facing political turmoil are doing just that.

The result is more hoarding of gold and other precious metals, further erosion of paper values including the dollar and other major currencies, still more financial instability, and so on. The process tends to feed on itself in a vicious circle.

For example, the financial section of the January 22 New York Times attributed the previous day's jump in gold prices to rumors of a Soviet military build-up in Afghanistan and in Southern Yemen, which borders on Saudi-Arabia.

Henry G. Jarecki, head of one of the world's leading corporations dealing in gold bullion, cited "fear of political turmoil, which is most pronounced in the Middle East. ..."

"International politics has been far more of a factor in precious-metal prices than economics, particularly in the last year," says Jarecki.

But this bullion baron is begging the question. The economic and political factors cannot be so simply separated.

Permanent Inflation

Clearly a central factor underlying the repeated flights into gold over the past several years has been the weakness of the U.S. dollar and the permanent inflation that undermined it after two decades of internationally acknowledged strength and stability.

But why can't Washington and Wall Street bring inflation under control? There are numerous reasons, but uppermost among them is the mammoth U.S. was budget.

Despite all its talk about fighting inflation, Washington has in fact continued to run considerable budget deficits. Despite all the talk about "tight money," the Federal Reserve Board has continued to allow a rapid increase in bank reserves, in effect cranking out more paper money.

With a massive new U.S.-fueled arms race looming, even bigger budget deficits and greater currency inflation are indicated.

But here the political and economic needs of U.S. capitalism are in polar contradiction.

The capitalists need to put world trade back on a stable and predictable basis, reestablish profits on a firm foundation, and end inflation. Doing this requires a return to currencies with a fixed rather than fluctuating exchange rate with gold and with each other, liquidation of "unviable" enterprises such as Chrysler, and deflationary cuts in government spending, including arms spending.

Of course, this would mean a major decline in production, vastly increased unemployment, and sharp cuts in wages and social benefits – in a word, a depression.

And a depression is the only way to put world capitalism back on a footing for a profitable long-term expansion such as it enjoyed during the quarter century following World War II. One of capitalism's most glaring irrationalities is that its "health" requires periodic recessions, depression, and all the human misery and social dislocation that this entails.

But the relationship of class forces, both at home and abroad, rules out such a scenario for the U.S. capitalists today.

The bosses are intent on austerity, but they aren't yet ready for a full-scale confrontation with the American labor movement and a generation of rebellious young workers. The rulers are out to weaken the industrial unions and take back as much as they can. But their profit needs outstrip what is politically realistic.

On an international level, the deepening of the class struggle in Iran, Indochina, Central America, and Afghanistan has spurred Washington to up its war expenditures even more than it had previously planned – and to pressure its Japanese and West European allies to follow suit. And that means even bigger deficits and more inflation.

War Spending

Carter is projecting a 1980 war budget of $142 billion, a real increase of 3.4 percent over 1979, that is, after accounting for inflation. And Pentagon spending over the next five years is projected to increase by 4.85 percent each year— that's an increase of $38 billion by 1985 without taking inflation into account!

And Carter's 1980 "defense" projection doesn't include: $400 million in aid to the military dictatorship in Pakistan, which is funneling money and equipment to Afghan rightists; a planned $1.1 billion over two years in military credits to Egypt a part of the Camp David package; and $5 billion in interest on the national debt, two-thirds of which was incurred through past war spending.
What this means for the U.S. and world economies has been a growing topic in the big business press over the past several months. Irving Kristol, a member of the Wall Street Journal's Board of Contributors, wrote in the November 26 issue of that daily:

Today it is military rearmament that is the first priority, economic as well as political. And if there are going to have to be massive increases in military spending, then we shall have to put up with more inflation, for a longer time than any of us would like. Should the rate of inflation in the 1980s stabilise at, say 8%, that would represent a not inconsiderable achievement.

In this article, headlined "The Worst is Yet to Come," Kristol continues:

'The truly important problems of the American economy in the years to come will result from what economists so chastely call "exogenous shocks" – i.e., things that happen elsewhere in the world, things that will profoundly affect us and to which we shall have to respond. ...

The Middle East is the most obvious source of trouble. Even if the Arab-Israeli conflict were not a constant irritant, the chances for stability in that area seem slight. ...

Egypt under Sadat is indeed a remarkable exception, but one can properly doubt whether Egypt after Sadat will remain so. Iran will surely be hostile to American interests, whatever kind of regime is eventually established there. The days – at best, the years – of Saudi Arabia's anachronistic feudal oligarchy are numbered, to be succeeded by Lord only knows what.'

And that was before the events in Afghanistan!

Since Afghanistan, Business Week has featured two consecutive cover stories on "The New Cold War Economy" and "The Shrinking Standard of Living." In the latter issue, dated January 28, the big business weekly explained:

'... the burden of increased defense spending – a consequence of Afghanistan – [will] put the federal budget deeper in the red, push inflation even higher, and doom any chance that Americans will get a tax break. In the wake of these blows, the American credo that each generation can look forward to a more comfortable life than its predecessor has been shattered.

Shattered, too, is the optimism about the future that uniquely characterized the U.S. economy.'

The Business Week article documents the decline in buying power among U.S. workers over the past decade and predicts even harder times down the road.
So the real wages of U.S. workers will continue to be eroded by rising prices even as they are hit by unemployment, speedup, plant closings, and cutbacks in government spending for schools, hospitals, and other social programs.

And no working person anywhere in the world benefits from a further expansion of the Pentagon's deadly nuclear arsenal or military network abroad.

Underlying Stagnation

The gold panic, then, reflects this coming together of the political and economic crises of world capitalism and the contradictory alternatives this poses for the rulers.

The economic problems of the imperialists stem from a worldwide crisis of profits. Capitalists are thirsty for productive investment outlets, but cannot find them in saturated world markets. Of course, the markets are saturated from the standpoint of profits only; from the standpoint of human needs, massive new investment and production are required.

During the two decades of economic expansion following the end of World War II, Europe and Japan created technologically advanced new industries that have challenged the virtual monopoly that American industry enjoyed coming out of the war. (On a much more modest scale and only in particular industries, this has occurred in some semicolonial countries as well – South Korea and Taiwan, for example.)

The resulting international cutthroat competition has increasingly saturated markets for capital and commodities, undercutting prices and profit rates. The severe worldwide recession of 1974-75 failed to overcome all the contradictions that have been piling up since 1945. Competition has heated up all the more, even spurring protectionist reactions.

For the reasons already cited, the U.S. rulers today are not following a tight deflationary course that would trigger a major depression. In 1979, the U.S. suffered stagnation but not an overall decline, although there were sharp declines in industries such as auto, steel, and housing. But the crisis temporarily buffered in the sphere of trade and industry has, for both political and economic reasons, resulted in spiraling instability in the sphere of currency. If governments simply keep on increasing military spending and issue more and more paper money to cover the deficits, the devaluation of paper currency will accelerate. The bottom line is hyperinflation, the destruction of savings, and economic collapse.

Writing in the January 18 New York Times, veteran financial columnist Leonard Silk pointed, in his own way, to an economic fact that Karl Marx explained more than a century ago in Capital.

"Hence gold at least holds its own against other commodities," says Silk, "and climbs in value against a rising flood of paper money and credit in times of inflation. In what might be called 'normally inflationary' circumstances – in which there is no gold panic – commodities hold their value against each other and against gold.

"But today something abnormal is going on in the gold market," Silk adds. "As Alan Greenspan, who served as chief economic adviser to former President Ford, has noted, gold has been climbing a lot faster than other commodities. In effect there has been a flight from commodities as well as from currencies."

Paper and Gold

To understand the significance of what Silk seems to sense, it is necessary to recognize that the expression the "price of gold" simply means the rate at which paper monies, at any given time, exchange against gold. Paper money— whether U.S. dollars, West German marks, or Swiss francs — has no value in and of itself. Only commodities — actual products of human labor – have value.
When times are good, this statement can seem of little or no practical importance. Ultimately, however, paper currencies can function as money only insofar as they are exchangeable for money commodities. In times of crisis capitalists flee out of paper monies, as they are doing today, first into gold[*1] and silver, and then increasingly into other commodities as well.

[*footnote 1: Gold, like other commodities, has value because it takes human labor to find it, mine it, and refine it. Because a great quantity of labor is required to produce even small quantities of gold, small amounts of it contain a great amount of value. It is a storehouse of value. This is one of the reasons that gold has long served as the socially acknowledged money commodity, the universal yardstick of value.

The rise of the dollar price of gold, then, reflects not a rise in the value of gold – which could come about only through a decline of gold mining productivity – but instead of the dollar vis-à-vis gold.

If the price of gold is $300 an ounce (as it was in mid-1979), this means that one dollar exchanges for 1/300 of an ounce of gold. If the price of gold rises to $800 (as it did in mid-January), then a dollar exchanges for 1/800 of an ounce of gold.

In other words, the value represented by the dollar, measured in gold, was more than cut in half in only six months.

Of course, this does not mean that the purchasing power of the dollar was cut in half during this brief period. However, such a sharp decline of the dollar with respect to gold is symptomatic of economic and political factors that do point to the danger of drastic increases of dollar prices. ]

Writing about the relationship between hard cash (gold) and other commodities in Capital, Marx explained:

This contradiction bursts forth in that aspect of an industrial and commercial crisis which is known as monetary crisis. Such crisis occurs only where the ongoing chain of payments has been fully developed, along with an artificial system for settling them. Whenever there is a general disturbance of the mechanism, no matter what its cause, money suddenly and immediately changes over from its merely nominal shape, money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities become valueless, and their value vanishes in the face of their own form of value. The bourgeois, drunk with prosperity and arrogantly certain of himself, has just declared that money is a purely imaginary creation. 'Commodities alone are money,' he said. But the opposite cry resounds over the markets of the world: only money is a commodity. As the hart pants for fresh water, so pants his soul after money, the only wealth. [Capital Vol.1 (New York: Vintage Books, 1977), p. 236.]


The panicky lack of confidence reflected in the rush on gold shows that the capitalist political and economic system us increasingly characterized by conditions similar to those described by Marx – "a general and extensive disturbance in this mechanism, no matter what its cause."

The tempo at which these built-in contradictions of the profit system will unfold cannot be predicted. The U.S. and other imperialist governments and financial institutions still have room to maneuver. They can increase gold sales on the market to help moderate the price. They can tighten credit, increasing the chances of a serious recession. The temporary sharp decline in gold prices in late January was almost inevitable. And no one can foresee the outbreak of new world events that will shake the imperialists.

But two things can be said with certainty:

The class struggle is heating up both in the imperialist centers and around the world.

And the world capitalist crisis will inevitably provide more tinder.

In a speech in 1921, Leon Trotsky summed up the meaning of periods such as these for workers and for the revolutionary socialist movement:

"Prices are steeply rising, wages keep changing in and out of consonance with currency fluctuations. Currency leaps, prices leap, wages leap and then come the ups and downs of feverish fictitious conjunctures and of profound crises.

"This lack of stability, the uncertainty of what tomorrow will bring in the personal life of every worker is the most revolutionary factor of the epoch in which we live .."[*2]

[* footnote 2: Trotsky, The First Five Years of the Communist International, Vol.1 (New York: Monad Press, 1972), p. 234.]

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 Post subject: Re: World Revolution, War Spending Send Gold Soaring
PostPosted: Tue Mar 01, 2016 3:27 pm 

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And so??? No world revolution, no world war; just variations on the theme of pre-emptive counterrevolution.

And then there's the recent decline of gold prices, indicating precisely........nothing. Which is the point.

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 Post subject: Re: World Revolution, War Spending Send Gold Soaring
PostPosted: Fri Sep 23, 2016 5:31 am 
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It wasn't a good article, just some Trotskyist commentary, perhaps interesting from a historical point. Here's another article (from a financial journalist) on gold, which largely reports on the Financial Times World Gold Conference: The Outlook for Gold and Silver, Lugano, Switzerland, 22 & 23 June, 1983.

I post it because it talks a bit about gold loans (swaps). Perhaps we should look at the interest rate on actual gold, instead of on mere money symbols. There is no data unfortunately prior to 1990s and it seems again that the recent info no longer is made available (Gold lease rate, GLR). I sometimes read the interest is paid in gold itself, though this is not certain.

Anyway, the following article is not really useful, but just for the sake of historical point of view:

“Gold's Monetary Status: Neither Unused Nor Unloved” (July 1983) The Banker pp. 47-52; Marsh, David; Paris.

(also translated in French: LE RÔLE MONÉTAIRE DE L'OR : SITUATION ET PERSPECTIVES, Problèmes économiques)

Ways have been found for central banks to mobilise their holdings of gold in spite of the official demonetarisation of the metal. But its monetary role will remain discreet

Back in 1973, at the height of the US-led drive to phase out the monetary role of gold after the end of the fixed-exchange-rate Bretton Woods system, the Bank for International Settlements tossed into the fray this discreetly-worded formulation: 'Down in the vaults, gold remains – unused but not unloved' (BIS annual report for 1973).

In 1983 after a decade in which gold has gradually, although unofficially, regained an important place in international financial transactions, the BIS observation still accurately sums up the monetary status of the metal. The roughly 35,000 tonnes in the reserves of central banks and governments around the world – equivalent to about 30-40% of al lthe gold ever dug out of the ground – accounts for about 60% of total monetary reserves when valued at current prices. The major industrial countries, which own about 85% of monetary gold, have no wish to sell their stocks.
The Group of 10 countries and Switzerland (now formally the Group of 11) view their gold holdings, in the words of René Larre, BIS general manager from 1971 to 1981, as an asset 'at the bottom of the pie' to be used only as 'a last emergency resource'.

The same view of gold as a 'war chest' – sometimes in a literal sense – is held by the developing countries, both with and without oil, some of which have spent a large amount of effort and dollars in building up their gold stocks in recent years. As many as two dozen nations from the developing word and teh East bloc – including prominent oil producers such as Irq, Iran, Libya and Indonesia – embarked on a gold buying campaign in the aftermath of the 1979-80 rise in the metal's price. Over the last 12 months, these purchases have dried up: the ebbing of interest in gold has mirrored the fall in the oil price and the slide by many Opec members into current account deficit. Many of these countries' hopes of a quick return from their asset diversification have been dashed in the wake of the halving of the gold price since the short-lived peak of $850 an ounce in January 1980. But, in spite of increased financial difficulties, their attachment to gold – as the BIS indicated a decade ago — remains strong. Although there has been a welter of press reports of actual or attempted gold sales to raise finance for hard-pressed third world central banks over the past year or so, official off-loading of the metal by developing countries has in reality been fairly small up to now. Many countries facing payment difficulties have managed to mobilise their gold holdings without permanently disposing of their stocks, by arranging gold 'swaps' or other forms of collateral loans with commercial or even central banks.

'Central banks prefer to swap rather than sell', says Robert Guy, director of London bullion dealer N. M. Rothschild and one of the key figures on the London gold market. Mr Guy, one of the principal speakers at the gold conference organised by The Financial Times and The Banker in Lugano in June, pointed out that this amounted to an extension of gold's reserve role.

Collateral deals

This desire to mobilise gold through collateral deals or swaps (under which gold is sold spot and simultaneously repurchased forward, and therfore is not used as collateral in the formal sense of the word) is not new. In the mid-1970s, Italy (with the Deutsche Bundesbank), Portugal (through the BIS and other central banks) and Uruguay (through comemrcial banks on the Euromarket) pledged part of their gold reserves to raise balance of payments loans. Britain appears to have done the same in the late 1960s when it raised what were in effect gold-backed credits from the BIS during the tumultuous period surrounding the 1967 sterling devaluation.

The setting up of the European Monetary System at the end of 1978 marked a further landmark in this gradual remobilisation of bullion reserves. Member countries – including the UK which does not participate in the exchange rate part of the scheme – were allowed to exchange 20% of their gold and dollar reserves for European currency units. These can be used to settle inter-central-bank debts. The gold-into-ECUs mechanism (which uses a market-related price for valuing bullion stocks) in fact marked a clear watershed in the post-Bretton-Woods history of the monetary use of gold.

Only few commentators realised it at the time (although US monetary officials complained about the remonetisation overtones in discussions with the German government in the summer of 1978, when the outlines of the EMS mechanism were being formulated). However, it is clear enough now, more than four years after the system actually started in March 1979, that the EEC nations with large gold holdings and with currencies that have come habitually under pressure (principally Belgium and during the last two years, France) have profited greatly from the ability painlessly to use gold reserves to finance exchange rate intervention.

Financing tool

What is new about the current wave of gold mobilisation deals is simply the widespread nature of such transactions. Central banks, particularly in the developing countries, have become a great deal more aware, mainly as a result of prompting by commercial bankers, of the possibilities of 'having their gold and utilising it too'. Some bankers at the Lugano conference spoke of as many as 50 central banks around the world now being ready to use their gold as a financing tool. The possibilities of employing the metal to raise foreign exchange — other than by actual sales – include:

• Gold swaps of the kind that South Africa hias carried out from time to time in recent years with commercial banks (mainly from Switzerland and Germany). Under these swaps – which, in the case of the South African Reserve Bank, are reflected in a fall in the country's published bullion reserves – gold is transferred physically into the vaults of a commercial bank. In effect, a loan is granted for the duration of the swap (which may be three or six months), with the interest cost reflected in the (higher) price at which the commercial bank agree to sell back the gold when the swap is unwound.

Iran is believed to have made extensive use of gold swaps to finance the cost of the war with Iraq which started in September 1980. Some of the countries whose gold reserves have fallen over the past year, according to the statistics published by the International Monetary Fund, (including the Philippines, Brazil, Hungary, Chile and Uruguay) have certainly used swaps rather than outright sales to raise cash.

• Gold loans or leasing deals. Under these transactions, gold is effectively lent from the vaults of a central bank to a commercial bank or bullion dealer, which will pay an interest rate based loosely on going Euromarket rates.

• Location swaps of different grade gold. The Swiss and Austrian central banks pioneered the practice some years ago of selling high purity 99-99% gold stored in New York and simultaneously buying (at a slightly lower price) lower grade gold in Europe. Several other countries have since joined in this excercise. The Soviet foreign trade bank Vneshtorgbank, which masterminds Russian gold sales to the west, has on occassion over the past two years sold 99-99% metal in in Europe and Japan and bought 99-5% grade bullion for for storage with Swiss and German banks.

The BIS itself is an important participant in the business of swapping and 'collateralising' gold. Apart from the recently-published gold backed credits arranged by the BIS for Yugoslavia and Portugal, the central bankers' bank has been quietly active in a range of similar but more discreet operations. Former general manager René Larre told the Lugano conference that gold has been used to back up an important part of the refinancing of internation debt over the past two years, including many cases involving the BIS. Only some of these operations, he pointed out, has come to the attention of the press.

There are two important limitations on the collateral use of gold. One is the insistence of some central banks that gold stocks mobilised in the way should truly remain sterilised in the vaults of the creditor bank and should not themselves be further mobilised on the market.

Sterilised gold

The reasoning behind this is simple. South Africa, for instance, turns to gold swaps with commercial banks, precisely when the bullion price is weak (as it was when Pretoria's latest swaps were carried out in mid-1982). The aim is to avodi a vicious circle. Outright sales would depress the price further, worsen South Africa's balance of payment and create the need for more gold sales. If the creditor bank itself were to sell the swapped gold on the market, or mobilise it in some other way, an important element of the gold swap would become inactive.

Therefore South Africa's public position at least (as Chris Stals, the Reserve Bank's senior deputy governor, told the Lugano conference) is that swapped gold is sterilised. The Reserve Bank claims that the reason it does not carry out gold swaps with the BIS (of which it is one of the shareholding banks) is because the BIS is not willing to agree to keep the swapped stocks immobilised. In fact, it appears that some commercial banks with which the South Africans have recently carried out swaps have not abided by the pledge to keep the stocks sterilised, and in fact have used them in market operations (if only to offset 'short' positions carried out elsewhere). It appears that South Africa can do little to check such apparent irregularities. As Rothschild's Robert Guy observed, gold swaps are fundamentally a sign of borrower weakness.

Many bankers are worried that if too many swap operations are carried out – especially on an 'unsterilised' basis – the gold so pledged could amount to a serious potential depressant on the price. If the creditor bank were forced to sell the gold in the event of non-payment, this could trigger off a price fall which would force foreclosure of other gold loans and bring an avalanche of metal on to the market.

The other limitation on the use of the use of gold-backed loans is the prevalence of 'negative pledge' clauses in governments' existing credit agreements. Under these clauses, borrowers agree to give no creditor better security than that granted to any other – effectively prohibiting the formal use of gold as collateral for individual loans. Fritz Leutwiler, the president of the BIS and of the Swiss National Bank, drew attention at the BIS annual meeting in June to the fact that widespread negative pledge clauses could complicate gold-backed debt rescheduling deals.

René Larre has pointed out that many countries had resisted making negative pledges during the 1970s. But they were being forced, he said, by tighter borrowing conditions into granting such clauses in more recent Euromarket deals. France in particular has come under growing pressure – so far resisted – from US banks to agree such clauses in recent state-guaranteed Euromarket borrowings. In fact, the normal way around such pledges – as Dr Stals of the South African Reserve Bank admitted to the Lugano conference – is to carry out gold swaps, in which the metal is not formally collateralised, to avoid giving a clear-cut gold pledge.

US attitude

If gold is clearly 'loved' as much as ever by the world's central banks, and is also becoming increasingly 'used' as a means of overcoming balance of payments difficulties, is on the way to becoming formally reinstated as a pivotal part of the monetary system? The answer appears to be no, for two main reasons.

The first concerns the attitude of the US which, as the world's largest gold holder (about 8,200 tonnes in the stocks of the US treasury or more than twice the volume of the next largest holder, the Bundesbank), still plays a pivotal role in the debate. The much- vaunted US gold commission in its report to the treasury in March last year rejected any idea – which had always seemed illusory – of restoring a firm gold-dollar link. Its only positive recommendation was the rather lame proposition that the US should follow a range of other countries in starting to mint coins.

Beryl Sprinkel, the US treasury undersecretary for monetary affairs, hinted at the administration's pragmatic stance on gold when he pointed out recently that a resumption of IMF gold sales might lower the value of the stocks in the treasury's reserves and thus, implicitly, weaken the backing for the dollar. This is a far cry from the demonetisation ideology of the Nixon years – but also falls a long way short of overt blessing for remonetisation favoured by some Reagan supporters.

In fact the US gold stance even under President Carter had already moved some way from a dogmatic desire to phase out the metal's monetary role. In December 1979 – a month after the treasury's last gold auction – Anthony Solomon, Beryl Sprinkel's predecessor at the treasury (and now president of the New York Federal Reserve Bank) gave a pragmatic summing up of gold's role which could almost have been gleaned from a BIS annual report. In Congressional testimony he pointed out that gold's former role in the monetary system – use as a common denominator and unit of account, gold convertibility and its central role in the IMF – had been effectively eliminated. But, he said, echoing the 'war chest' theme which has gained so much ground recently, 'gold remains a significant part of the reserves of central banks, available in times of need. This is unlikely to change in the foreseeable future'.

European central banks

The other main factor arguing against any formalisation of gold's role is the attitude of the big gold-owning central banks in Europe. Grouped around the Germans, French, Italian and Swiss (the largest national gold holders after the US and before Belgium, the Netherlands, Japan and the UK), these central banks were the ones resisting the US demonetisation drive of the late 1960s and early 1970s. But, equally, they are now resisting any attempts to put gold back firmly on the monetary map by reinstating central bank gold transactions.

The last publicised gold dealings by these European countries (apart from the regular small transactions by the Bank of England in connection with UK sovereign production) were the small purchases by the Swiss National Bank and the Bank of France in 1976 at the time of the first IMF gold auction. Fritz Leutwiler of the Swiss National Bank launched a campaign for central bank intervention during the rise in the metal's price in the winter of 1979-80. But the idea was opposed by the Bundesbank which saw the idea of concerted sales to dampen the price rise – and concerted purchases to prevent it falling too far afterwards – as tantamount to reviving the ill-fated gold pool which collapsed in 1968. The French at the time made it clear that they were interested only in buying. So the idea was never taken up.

Since then, the only central banker publicly to have espoused the idea of a return by the central banks to the gold market has been Jelle Zijlstra, former president of the Dutch central bank and Mr Leutwiler's predecessor at the BIS. In a valedictory speech at the IMF annual meeting in September 1981, shortly before his retirement from both jobs, he launched a strong call for central bank gold sales and purchases in order to 'regulate' the bullion price 'within fairly broad limits'.

Other central bankers have no wish to step back into a market from which they have been absent so long, which is influenced by outside political events, and where the weight of private sector speculation (in spite of the great mass of central bank gold pitted against it) can be strong. Mr Zijsltra's call in a speech marking the end of a 15-year career at the top of central banking, fittingly entitled Central Banking with the Benefit of Hindsight may indeed have been intended to have been more of a provocation to debate than a serious idea.

Policeman role

Central bankers' reluctance to return to a policeman role in the gold market can best be understood by referring to the events leading up to the abandonment of the gold pool 15 years ago. Mr Zijlstra's remarks at the time (only reported much later) are themselves highly illuminating. At the monthly central bankers' meeting at the BIS in Basle in March 1968 – just a week before the final breakdown of the gold pool discussions centred on snowballing private gold speculation and the heavy losses incurred by the pool in the final throes of efforts to hold price at $ 35 an ounce. According to the late Charles Coombs*, in charge of foreign exchange operations at the New York Fed up to 1975 and a regular attender of the Basle meetings, Mr Zijlstra at that crucial gathering called for an end to the gold pool declaring: 'we central bankers are behaving like a rabbit that has been hypnotised by a snake.'

In the event the central banks bowed to US pressure to continue gold sales at $ 35 an ounce and issued a communique to that effect. It was designed to restore confidence that the central banks could outwit the private sector speculators. But no-one was fooled. According to Mr. Coombs, Mr Zijsltra addressed the gathering thus: 'If we were commercial bankers, I wonder what advice we would give to our customers after reading the communique tomorrow. I suspect we would all urge them to go on to the gold market and buy even more more heavily than before.'

The Bundesbank – whose consent for a revival of central bank gold operations now would be essential – has not forgotten the lesson of the gold pool experience. It is determined to continue its low profile on the bullion market ad infinitum. So the BIS's 1973 restatement of Gresham's Law looks likely to remain valid for the foreseeable future. Gold will remain in the vaults. And its monetary role, in line with central bankers' general preference in the running of their affairs, will remain discreet rather than shouted from the rooftops.

* In his book The Arena of International Finance, published by John WIley.

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 Post subject: Re: World Revolution, War Spending Send Gold Soaring
PostPosted: Tue Dec 27, 2016 12:17 pm 
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The above article that I posted mentions that the BIS arranged gold backed credits.

The 53rd annual report of the BIS (a year runs from April 1982 to March 1983) comments on the example of the gold-secured loan to Yugoslavia as follows:

The last example of central-bank financial co-operation through the BIS which
should be mentioned here is the US$ 500 million facility in favour of the National
Bank of Yugoslavia negotiated towards the end of the financial year under review.
Yugoslavia's external position had been deteriorating gradually for some time, and
new financing became virtually impossible to obtain from a market which had
grown very cautious in the light of recent experience in eastern Europe and in Latin America. Yugoslavia's financing problem seemed, however, to be not so much of a
temporary as of a medium-term nature. The IMF was already in regular contact with
the Yugoslav authorities and had in fact made a standby agreement, but
implementation of the Yugoslav programme had become very difficult. A fresh
initiative was taken at government level to make a concerted effort to provide
medium-term assistance to Yugoslavia. Meanwhile the National Bank of Yugoslavia
had approached the BIS with a view to obtaining bridging finance in advance of
future IMF disbursements and in advance of some financial credits to be included in
the inter-governmental assistance package. The US$ 500 million facility is backed in
part by a group of central banks, including the US monetary authorities, and in part
by a gold deposit made by the National Bank of Yugoslavia in favour of the BIS.

Amounts outstanding under these facilities appear in the Balance Sheet under
the item "Time deposits and advances". They are not identified separately, nor is it
intended that they should be in future.

Keep in mind that until 2003 the BIS reported its figures in gold francs (thereafter their unit became the SDR).

The gold franc is the equivalent of 0.290 322 58... grammes fine gold - Article 4 of the
Statutes. Assets and liabilities in US dollars are converted at US$ 208 per fine ounce of
gold (equivalent to 1 gold franc = US$ 1.941 49...), and all other items in currencies on
the basis of market rates against the US dollar

On the asset side of the BIS's balance sheet, collateralised gold in (March) 1983 was 20.7 million gold francs:

Time deposits and advances

Not exceeding 3 months 20,756,401

Not exceeding 3 months 10,302,505,225
Over3months 2,449,157,408


Notice the relatively small amount of gold compared to the "currencies" (by which is to be actually understood debt denominated in currencies) held as collateral.

In the 54th annual report of the BIS (April 1983- March 1984) we read:

The US$ 500 million facility in favour of the National Bank of Yugoslavia was
also backed by a group of central banks which included the US monetary
authorities. US$ 300 million was disbursed fairly rapidly; but the conditions which
would permit the disbursement of the remaining US$ 200 million could not be met
until mid-September, when problems in connection with negative pledge clauses on
gold collateral were resolved. A combination of inter-governmental credits and
disbursements of IMF funds enabled the National Bank to complete repayment of
the facility by mid-November.

On the BIS's balance sheet (March 1984) we see that the outstanding gold pledged as collateral was 19.3 million gold francs:

Time deposits and advances

Not exceeding 3 months 19,333,968

Not exceeding 3 months 11,386,473,981
Over 3 months 2,126,684,368


Of course the balance sheet records a snapshot picture, so that the $200 million of Yugoslav gold did not appear on the balance sheet, since they repaid their loan by mid-November 1983.

This method of reporting collateralised gold on the balance sheet was followed until 1995.

Time deposits and advances

Not exceeding 3 months 282 781 538
Over 3 months 259 069 808

Not exceeding 3 months 36 127 056 275
Over 3 months 6 351 633 262

Thereafter it was reported under the category "Gold" as "Time deposits and advances":

Held in bars
Time deposits and advance

And now these are placed together on the balance sheet in one figure as:

Gold and gold loans

So now one has to look into the text of the report to find what part is composed of "gold loans".

As at 31 March
SDR millions 2016 2015

Gold 9,834.8 12,639.9
Gold loans 3,342.0 1,515.6

Total gold and gold loan assets 13,176.8 14,155.5

So in the snapshot moment of March 2016 the amount of gold pledged to the BIS was worth 3.3 billion SDR.

By the way, the reports provide some detail about the maturation of the loans, on which continent the borrowers are located, effective interest rate, etc. Curiously, there is also a table with a line about the form of currency in which gold is held. The vast majority is listed just as bullion, but the line does always give a very tiny amount also in dollars (2.8 million SDR in March 2016). I think these are US gold certificates.


Also by the way:

On another thread (a-bank-depositing-its-money-at-another-bank-t1297.html) I posted an article from 2010 which claimed that the BIS gave dollar credits to distressed European commercial banks in exchange for gold collateral.

One would expect collateralised gold to appear on the BIS's balance sheet as an increase of the "Total gold loans".

However it was put under the category of "Gold bars held at central banks":

Gold bars held at central banks 41,596.9 (in 2010) 22,616.5 (in 2009)
Total gold loans 1,442.9 (in 2010) 2,799.7 (in 2009)

Included in “Gold bars held at central banks” is SDR
8,160.1 million (346 tonnes) (2009: nil) of gold, which the
Bank held in connection with gold swap operations, under
which the Bank exchanges currencies for physical gold.
The Bank has an obligation to return the gold at the end of
the contract.


Seen at a snapshot, the amount of gold backed credits extended by the BIS is relatively small.

However, loans can be very short-term, from a couple of days to even intraday (daylight).

On the thread I linked, I showed that the actual deposit reserves held by commercial banks at the central bank were very tiny (before the crisis, in the US eg just a couple of billion) and thanks to overnight repos and intraday loans, could handle payments transactions of $3 trillion a day.

To get a glimpse of the total amount of gold backed credits by the BIS, perhaps we should look at the interest ("profit") that it makes on them.

Gold loans comprise fixed-term gold loans. Gold loans are
included in the balance sheet on a trade date basis at their
weight in gold (translated at the gold market price and USD
exchange rate into SDR) plus accrued interest.

Accrued interest on gold loans is included in the profit and loss
account under “Interest income” on an effective interest rate

In 2016 the "Interest income" table mentions (in million SDR):

Assets designated as loans and receivables

Sight and notice accounts 0.4
Gold investment assets 6.7
Gold banking assets 0.2


Very tiny when compared to other sources of interest income for the BIS (total for 2016: 1.8 billion SDR).

However, perhaps this doesn't say much about the total amount of gold backed loans - maybe their interest rate is very low or non-existent (the loans are very short term).


A thought:

The BIS (like any bank) does not hold much actual currency reserves (at accounts with central banks), and it doesn't have its own currency, so when someone gives gold collateral to the BIS, the BIS must get the currency that is being demanded: either from the commercial banks or (which seems more likely) directly from the relevant central bank (eg the Fed).

Suppose the BIS asks the dollars directly from the Fed, what collateral does it itself provide to the Fed? We don't not see on the balance sheets of Western central banks today that they are getting gold collateral.

But if these central banks have a correspondent account (in gold) at the BIS, then maybe they could provide gold backed credits. The BIS would function like an intermediary.

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 Post subject: Re: World Revolution, War Spending Send Gold Soaring
PostPosted: Fri May 05, 2017 3:50 am 
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The Banque de France also appears to provide gold storage services to bullion banks (commercial banks) for gold that the bullion banks borrow from central banks. These transactions are known as gold deposits. [...]

These services would therefore require that commercial banks maintain gold accounts at the Banque de France in the same way that gold deposit transactions are facilitated at the Bank of England in London.

Gautier also confirmed in the same speech that the Banque de France was also actively managing its own gold reserves or at least a portion of its gold reserves. Although he didn’t provide any details, he said that the gold desk was “was in the market nearly on a daily basis”:

“We are still active in the gold market for our own account. We have a desk dedicated to FX activity, which is small, but now we are diversifying into gold, meaning that we are in the market nearly on a daily basis. The question of loan restart is pending.”[10]

In a May 2012 article in industry publication Central Banking, George Milling-Stanley, formerly of the World Gold Council, said that the Banque de France:

“recently become more active in this space [mobilising gold into the market], acting primarily as an interface between the Bank for International Settlements in Basel [BIS] and commercial banks requiring dollar liquidity. These commercial banks are primarily located in Europe, especially in France”

The transactions referenced by Milling-Stanley also resonate with a series of gold swaps mentioned by the Financial Times in July 2010 when it stated that “three big banks – HSBC, Société Générale and BNP Paribas – were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals.” ... #heading-7

For that FT article on the 2010 BIS gold swap see: a-bank-depositing-its-money-at-another-bank-t1297.html

First the WSJ reported that it was central banks who collateralized their gold to the BIS for dollar credits, but it later corrected it to European commercial banks. We see now that the French central bank acted as an interface, hence the confusion. But still, the FT's correction indicated that also central banks mobilized their own gold (and besides, these can act through commercial banks).

At present the BIS reports that it has outstanding a gold-collateral loan of similar or even bigger size than the one from 2010. I think the speculation is that it is from Venezuela.


Now it turns out that also Sweden mobilized its gold in the crisis:

When the Riksbank revealed its gold storage locations back in October 2013, this news was covered by a number of Swedish media outlets, one of which was the Stockholm-based financial newspaper Dagens Industri, commonly known as DI. [...]

In the DI article, Göran Robertsson, Deputy Head of Riksbank’s asset management department, noted that historically the Swedish gold was stored at geographically diversified locations for security reasons, but that this same geographic distribution is now primarily aimed at facilitating the rapid exchange of Swedish gold for major foreign currencies, hence the reason that nearly half of the Swedish gold is held in the Bank of England gold vaults – since the Bank of England London vaults are where gold swaps and gold loans take place.

Robertsson noted that over the 2008-2009 period, 50 tonnes of gold Swedish gold located at the Bank of England was exchanged for US dollars:

“London is the dominant international marketplace for gold. We used the gold 2008-2009 during the financial crisis when we switched it to the dollar we then lent to Swedish banks”

One of these Riskbank gold-US Dollar swap transaction was also referenced in a 2011 World Gold Council report on gold market liquidity. This report stated that in 2008 following the Lehman collapse:

“In order to be able to provide liquidity to the Scandinavian banking system, the Swedish Riksbank utilised its gold reserves by swapping some of its gold to obtain dollar liquidity before it was able to gain access to the US dollar swap facilities with the Federal Reserve.”

In the October 2013 DI interview, Göran Robertsson also noted that at some point following this gold – dollar exchange, “the size of the reserve was restored“, which presumably means that the Riksbank received back 50 tonnes of gold. As to whether the restoration of the gold holdings was the exact same 50 tonnes of gold as had been previously held (the same gold bars) is not clear.

Sophie Degenne, Head of the Riksbank’s asset management department, also noted that:

“The main purpose of the gold and foreign exchange reserves is to use it when needed, as in the financial crisis” ... l-secrecy/

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