On Friday, May 7, 1999, the Bank of England under First Lord of the Exchequer Gordon Brown (now England's prime minister) announced that England would sell most of its gold reserves in bi-monthly sales of 25 tons each.
This would take England's gold reserves from 715 tons down to 300 tons over the course of 3 years....ie over the same time the gold market bottomed from its 1980 high 21 years before.
Let's look at what the announcement and the first sale of 25 tons dumped on the gold market did to the gold fix and the gold forward rates around those two dates:
Thursday, May 6, 1999
Gold Fix AM: $288.10 PM: $287.95
3-M GOFO: 4.15
Friday, May 7, 1999
Gold Fix AM: $283.40 PM: $282.40
3-M GOFO: 4.15
Monday, May 10, 1999
Gold Fix AM: $280.65 PM: $278.00
3-M GOFO: 3.90
The announcement of the sale makes the GOFO drop by 25 basis points. IE, each ton is roughly one basis point. The POG drops only $3 on the news....~$1/10 tons
Monday, July 5, 1999
Gold Fix AM: $262.85 PM: $261.80
3-M GOFO: 3.71
Tuesday, July 6, 1999
Gold Fix AM: $261.30 PM: $257.60
3-M GOFO: 3.71
Friday, July 7, 1999
Gold Fix AM: $256.20 PM: $257.10
3-M GOFO: 3.26
The actual sale makes the GOFO drop by 45 basis points....about 2 basis points per ton. The POG has already discounted the sale over the preceeding 2 months by ~$30.....ie $1/ton.
----->total GOFO damage per ton (32,150 ounzes): 3 basis points
total POG damage per ton: $1.
This might help gold bugs as an approximate yeard stick to evaluate POG drops in terms of supply and demand.
None of this would have happened in my Great Great Great Grandfather's Ben Franklin I time. Gold, silver, and all the elements would be free to roam the plains...sail the seas of freedom.
Actually Benjamin Franklin was a fan of paper money as long as it was backed by a real asset so that
1) it could not be either counterfeit or destroyed (thus causing inflation or deflation)
2) its underlying asset not be drained out of the country by international trade imbalance depleting money for domestic trade (like gold or silver). This caused Nixon to close the gold window, e.g.
3) it be proportional to economic activity (trade) and not to a spot value of gold or silver subject to depreciation as productivity of mining it improves.
In "A Modest Enquiry into the Nature and Necessity of a Paper Currency.” written by "your Grandfather" Ben, Franklin argues against gold and silver and for paper based on these principles.
Gold-standardized fiat currency proposals continue to raise criticisms based on these fundamental principles of demands on a funational currency formulated by Franklin. For example, as barbershores correctly points out in this post, the gold standard had to be repeatedly "relaxed" to expand the money supply as the US economy grew.
reseau_neurologique suggests in this post that money should be controlled by a nationalized bank with metrics similar to what Franklin demanded, ie productivity
So the Europeans, Asians, and we Americans are all struggling with how to make money work for us without causing financial catastrophe's. I suspect that our difficulties stem from a fundamental flaw in our assumptions, ie that in order to protect the citizens' money it must come from a central source subject to judgement by a small number of people relying on delayed data of economic performance and with often either under- or over-leveraged, poorly transmitted, and similarly delayed monetary injections.
if brown has been active against suppressing "inflation expectations" like the rest of the west, why would he now be so keen on revisiting bretton woods?
if they're looking to supplant gold as an anchor, why not use meaningful metrics in setting monetary inflation rates? i'd consider using independent demographic (especially mortality rates), education (especially math and science benchmark scores) and productivity data as primary components, while giving prices lower ratings. this would force capital to go where economies make more efficient use of it. i would abolish the banking system as it stands to prevent the loss of confidence we now see - and have only a single bank that is owned and operated by the citizens (congressional representatives). bankers lose confidence in each other because they realize how corrupt they really are. on the other hand, if your country sees the value in the silicon valleys of the world - faith will not only be restored but it will grow like never before.
who doesn't appreciate the value of google or iphone or (insert cash rich, highly productive big tech name here) ...? who doesn't see the complete failure and corruption of lehman, bear stearns or (insert wall street bankster name here) ...?
ok batty, call me an idealist and a technology elistist... but what do you see coming out of bretton woods iii?
First of all, I think Brown is calling the meeting because England is out of gold and other reserves. England may be on the verge of bankruptcy, hence the urgency.
Second, the likely purpose of the meeting is to establish an institution that has oversight of the big globalized banks by instituting the Basel II framework of three pillars: Risk Capital requirements, internal supervision, and market discipline. This is basically the foundation of an international central bank that enforces reserves and regulates internal and exernal bank action. The only thing missing is a common currency, but that's probably the next step. By the way, Basel II comes out of an office of the Bank of International Settlements, the central bank of central banks, where international claims are settled.....the perfect set-up for an international CB, once it gains regulatory authority.
Third, what should the US do?
I think it is time for the United States of America to re-declare its independence from England. Not from the crown of England this time, but the British Banker Association (LIBOR) and the British Bullion Market Association (gold). The reason is that our dependency on rate- and gold fixing at the hands of bankers, most of which are not American is a clear and present danger to our national security.
Therefore, if I were the preseident of the United States, I would not sign Bretton Woods III, and instead re-establish the United States and its currency as THE PLACE TO BE by putting a firm anchor under the Dollar.....gold.
.....and if you predicted that this drop is GOFO would encourage a gold carry trade by raising USD LIBOR rates to further increase the LIBOR/GOFO spread and profit from this carry trade: You are 100% correct.
3-Month USD LIBOR having been stable and steady for months at 5.00% started creeping up after the announcement to reach 5.30% by the time the sale occured.
LIBOR panel member quotes set the stage for a 2% gold lease rate (LIBOR - GOFO = 5.30-3.30), which further rose over the course of 3 months to reach a whopping >5% margin by October 1999.......what an incredible rate of return on Dollars in 1999, when the Fed Funds cost of borrowing Dollars was 5%!
In conclusion of this little excercise, it can be clearly seen that physical gold sales into the London market, may encourage and enable certain bullion banks and certain cash banks sitting on GOFO and LIBOR panels to quote gold and Dollar lending rates in such a way to encourage further gold sales and Dollar lending for a wide profit margin normally not easily attainable in interbank credit markets.
This is called the gold carry trade. It erodes the gold market and has been alleged by GATA. These allegations have been commonly dismissed, especially without corrborating evidence. Here, you can clearly see that the verbal quoting system for gold and Dollars creates opportunities for this to happen.
This does not constitute an allegation of any wrong-doing, only that the system appears to present the opportunity for it to happen.