The Global Monetary Phenomenon That Almost No One Is Seriously Discussing

Guest Post by Jesse

I wish to present, in just a few charts, a remarkable monetary phenomenon that almost no one is discussing publicly.

As you can see below, the central banks of the world, largely those of the West led by the US and the UK, were net sellers of gold throughout the 1990’s and through the turn of the century.

As the Bankers to the world’s reserve currency and sole global superpower, the Western central banks will make no major international policy decisions without the involvement of the Treasury, and especially the Federal Reserve and its constituent global banking machinery including the behemoth Banks and the SWIFT system.

Gold purchases by central banks, at least those they were willing to publicly acknowledge, turned positive by 2010 at most.

The pundits did not expect this change to continue, as is shown in the ‘forecast section’ for 2012 and after in this first chart from RBC/Bloomberg below.

This chart shows most clearly perhaps how the Western central banks stepped up their gold selling attempting to control and then crush the price of gold, driving it down to a low of $250 in 1999-2001.

Interestingly enough this came to be known as Brown’s Bottom.   England, under the leadership of Gordon Brown, then UK Chancellor of the Exchequer, very publicly sold 400 tonnes of its sovereign gold starting in late 1999 and 2001, reportedly to bail out some of the Banks who had gotten over their heads on short sale positions.

The largest net sales amount of gold reserves was in 2005, as the central banks attempted to dampen the price of gold which had risen from $250 to $450. This selling was co-ordinated under the Washington Agreement, which was a so-called gentleman’s agreement amongst some of the Western central banks, first created in 1999 and thereafter revised and extended in 2004.

The banks included the ECB, Sweden, Switzerland, the UK. Although it was not a signatory, the Federal Reserve was obviously involved. In August 2009 this agreement amongst 19 central banks was extended for another five years.

Spun positively by the financial media as ‘good for gold,’ this coordination of selling was designed to allow the Banks to coordinate their efforts, and not clumsily disrupt the markets as the Bank of England had done in 1999, allowing them to manage their sales and announcements for a smoother effect on price.

As can be seen on the chart below, the central bank gold selling was unable to obtain traction, and the price of gold continued to rise as the Banks began to taper off their attempts to control the price through outright physical selling which seems to have had its last hurrah in 2007 as noted by Citigroup.

“Official sales ran hot in 2007, offset by rapid de-hedging. Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price. Our sense is that central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils. This reflationary dynamic also seems to be playing out in oil markets.”

There are other non-bullion instruments which the central banks may employ to manage the price of gold which include strategic leasing, derivatives, and the use of proxies to influence markets in the manner in which certain financial entities have been recently exposed to be manipulating many other global prices and benchmarks, over periods of many years. Yet there is still a great deal of denial over the central bank attempts to manage the price of gold relative to their currencies, despite an abundance of circumstantial, historical, and direct evidence.

This simple chart more vividly portrays how the forecasts of declining purchases of gold by central banks after 2011 were wrong-footed.

Since that time, central bank purchases have risen to 48 year highs.

Here is my own depiction below of the sea-change called ‘The Turn’ in global central bank purchases of gold.

This turn coincides with what I along with more important others have called the currency war, most notably in a bestselling Chinese book published in 2007 by Song HongBing called Currency Wars (货币战争), and a book published in Nov. 2011 by Jim Rickards by the same name.

This is different from the ‘currency war’ which the financial media likes to portray, as the devaluation of national currencies to obtain competitive advantage, is more of an artifact from the 1930’s. This new currency war involved a rethinking of the US as the global reserve currency, an unusual condition for a fiat currency which has been in place since at least 1971 when Nixon closed the gold window.

From the end of WWII the Bretton Woods Agreement had set up the US dollar reserve as a proxy for gold, redeemable at least by other central banks and their governments. After the closing of the gold window the world was pushed into a scenario of central monetary authority it had not experienced in recorded history: a single country, through a semi-public banking entity controlled the issuance of the world’s global reserve currency unencumbered by a hard reference to some neutral external standard.

This currency regime has been maintained by military and political power, informal agreements, treaties and trade sanctions, between 700 to 900 foreign bases of power and influence, and the indirect control of key global resources such as oil, the so-called petrodollar.

I certainly cannot predict where this will end, except to point to the example of past endeavours such as the London Gold Pool,, and suggest that absent draconian government actions, market forces tend to overcome and overwhelm such efforts over time.

As I have forecast for many years, at least from 1999, the natural objective of a global fiat currency regime is a unipolar, or quite possibly a multipartite global government that is more centrally directed oligarchy than sovereign democracies.

The relationships of the various countries with the central authority in the evolving Eurozone are an approachable example on a small scale, a test run for the inverted totalitarianism, or neo-corporatism, of the bureaucrats and their corporate sponsors, to be a bit extrapolative. Although I think that the TTP and TTIP are glaring signposts along the way.

One particular point of frustration has been how slow on the uptake so many economists and financial commentators have been in thinking through the various monetary schemes that they promote. I doubt if they understood where they were leading that they would support them, even as their objectives are thought to be good.