Cheuvreux, the brokerage arm of the French Credit Agricole, has issued a report on the gold market. The Cheuvreux report cites Mises in three places (pages 4, 41, and 43). The report endorses the research of GATA, an organization that has been alleging central bank manipulation of the gold market. The major conclusion of the report is that the western central banks have sold a larger fraction of their gold reserves than they acknowledge in their offical statements. The gold has entered the market through derivatives such as leases, swaps, the writing of call options against the gold. The sale of the gold is obscured in the central banks books through the representation of leased, swapped, and otherwise encumbered, aggregated together with actual physical gold held in vaults as a single asset on their books. An estimated 10,000-15,000 tons of gold has entered the market since 1996 (compared to an official number of 2,000-3,000) through these mechanisms, according to the report.
The purpose of these covert gold sales is part of a larger effort to disable the functioning of inflation indicators, which operate to limit central bank credit expansion. Appendix 2 of the Cheuvreux report, The Covert War on Inflation Indicators mentions the rigging of the CPI, the end of M3 reporting, and the discontinuation of issuance of the 30-year treasury bond as other prongs in this effort. The realization by financial market participants that their money is losing purchasing power is one check on the extent of credit expansion. To the extent that financial market participants look to these indicators (the CPI, the gold price) as measurements of excessively loose monetary policy, if the government can distort the ones it controls and manipulate the others, the perception of inflation can be controlled and credit expansion can be continued to a greater extent than would otherwise be possible.
But, as the Cheuvreux report notes on page 43:
- While the US was in a mild recession during 2001, US consumers continued to take on more debt, but the rate has been slowing. The year-on-year growth is now at its slowest for more than a decade and could indicate that US consumers are almost “tapped out”. The words of Ludwig von Mises come to mind:
- “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”.
The report contains an excellent discussion of the new Fed Chair, Benjamin Bernanke. Their discussion covers someof the same ground that I covered in an article on LRC. In a series of speeches and research papers by Bernanke and other Fed staff economists, “unconventional measures” for fighting deflation, starting with the purchase of bonds and other securities, to a direct tax on bank accounts, to a tax on cash, to the monetization of goods and services, are proposed.
How serious are they about these plans? Cheuvreux quotes from a speech by Bernanke in 2003, regarding “unconventional measures”
- Should the funds rate approach zero, the question will arise again about so-called nontraditional monetary policy measures. I first discussed some of these measures in a speech last November. Thanks in part to a great deal of fine work by the staff, my understanding of these measures and my confidence in their success have been greatly enhanced since I gave that speech.
- Our suspicion is that Bernanke will try to keep the US credit expansion going as
long as possible (probably with the inevitable consequences). A further leg in the current credit expansion and inflationary boom in assets (with hyperinflationary risk) seems most likely outcome at this stage. At the same time, the heavily debt-laden US economy is also at risk of a deflationary slowdown. There is only one asset class that will perform under both of these extreme scenarios: gold (and precious metals).
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Actually, the 30-year bond will be re-introduced
next week.
And besides, there’s nothing to worry about as we now, thanks to “the Maestro”, have “stable money” that “don’t distort prices” and so we now have an “honest economy”, at least according to “Hayekian” Don Boudreaux .
I ordinarily enjoy this site, but god we have got the conspiracy theorists even among the rationalists here.
Not to mention the gullible.
Conspiracy theory? Everything in the Cheuvreux report is demonstrable fact (besides the foreward looking discussion of the price of gold).
The Boudreaux piece is either intellectually dishonest or a seriously misguided piece of analysis.
I watch as many of the manipulations as possible, and of course even those like us watching the manipulations are manipulators of the market. It is a very difficult thing to track — what is gold worth? I don’t think we can be honest about it as long as we continue to tie it to any actually currency, the proper question is “How much is item Y worth in gold?”
It is almost impossible to understand how deep industry manipulations are for gold as very few of us actually “need” the metal for industrial purposes. Most people don’t use gold for fillings (although I do now) and most people can’t melt it or hammer it into something useful. For this reason, it is hard to actually value it for something other than just a store of wealth — also making it very easily manipulated.
For me, I’ve converted all my banking into gold and silver holdings (100% reserves if you will) and the fluctuations in the price of gold and silver don’t worry me. I’ve been watching gold versus consumer goods for about 7 years now, and I don’t really get wealthier or poorer in the long run — I just stay stable. GATA is the only group who really covers some of the more “tinfoil-hat” theories, but everything I’ve read of theirs I’ve been able to back up, so it is hard to call them nutjobs.
Phillip,
I suggest you familiarize yourself with Gold Anti-Trust Action — http://www.gata.org/Default.htm — and the fine work that’s being done there to expose what is very likely the most massive conspiracy in the history of the world — http://www.gata.org/GR21PowellSpeech.html
Assuming it is true that central banks have been selling more gold than they have revealed in an effot to secretely mute its price, these questions arises. At what point do central bankers conclude that given the decreased value over time of all fiat currencies that it has become just too risky to sell any more of their nation’s gold? As the ship of fiat money begins to sink, does not each central bank conclude, at some point, that it is every central bank for itself? Gold, in the end, is a life boat for fiat currencies. Which central banks shall sell so much of their gold so as to sink their currencies? These questions seem to imply that at some point, central bank sales of gold must significantly diminish or virtually end. Are we there yet?
Correction: “(T)hese questions arise.” Scratch “arises”.
Mr. Karlson and JMP;
“The Boudreaux piece is either intellectually dishonest or a seriously misguided piece of analysis.”
In his March 25 2005 post on Cafe Hayek (My Nonchalance About the Trade Deficit) you can see what I think are some of the basis of his errors. He was answering my e-mail in this post.
“Take the simplest example. Suppose that (for whatever reason) foreigners conclude that holding dollars is now a better investment than they’d previously thought. So they seek more dollars to hold. How do they get these additional dollars? By selling more things to Americans. When foreigners increase their sales of goods and services to Americans and then hold on to the dollars they earn from these sales (rather than spend these dollars on American goods and services), the U.S. current-account deficit increases. But there’s no downward pressure on the price of the dollar. The very reason the current-account deficit rose is because the dollar is now in higher demand abroad.
Or suppose that foreigners’ demand for American real-estate increases. Needing dollars to buy this real-estate, foreigners sell more goods and services to Americans and spend their extra dollar earnings on American real-estate. In consequence, The U.S. current-account deficit rises, but the extra dollars earned by foreigners are not flooding foreign-exchange markets. They’re back in the U.S., having purchased American real-estate rather than goods and services.”
He assumes that the major reason for foreigners to trade their goods and services for US dollars is a high demand for US’ goods and services. This is so very wrong…
Louis Sette,
That would seem to be the $64,000 question (make that $64,000,000,000,000, or whatever our national debt and unfunded liabilities are today). Gold is down sharply this morning, leading one to wonder whether TPTB are behind it. If they are, then one has to wonder, as you rightly do, how long they can continue such price manipulation, as it can only be a matter of time before they reach their equivalent of Peak Oil, at which time selling this most precious of commodities becomes self-destructive.
That said, insofar as “gold is the lifeboat of fiat currencies,” they aren’t fiat currencies at all but currencies backed by gold to one extent or another, in which case the soundest ones will prevail, until freegold is at long last achieved and the state as we know it passes into history.
Ok. The most nauseating thing about this 2,000 call is it’s sensational value in the market place. It has helped put a kink in arguably one of the most bullish 5 year charts on record.
The combination of the “Iran scare” and this ridiculous call has probably brought too many fools and longs into this space and a forced a short to medium term correction.
This is quite a shame as the chart had been painted about as pretty as they come for the bulls. THANKS for the call Cheuvreux! Hope it is working out for you! You are the best! Can I come work for you?
Long term – global property bubbles are the Giant inflation monster in the closet conveniently / deceptively left out out of the CPI picture. Gold is showing those with a brain that inflation is here. BUY the DIPs. We ARE going to 2,000!
No one is forced to borrow money. Our economy has been kept boiling by people who buy toys on credit. I should have sympathy when the bubble pops? For the people who look down at me for driving old cars and living in less than 1000 sq feet of house?
Jeff Marciniec,
Well said. And bear in mind that $2,000, when adjusted for inflation, doesn’t even get gold to its 1980 high of $850.
Yes, buy the dips!
If the findings about central banks gold lending ,leasing , selling.. ETC. — are true, the immediate conclusion would be: some central banks have been providing huge subsidy for commercial banks on the expense of their public. Doing so, not only severely mismanaging public funds under their supervision but also causing great damage to usually poor countries heavily dependent on gold export.
source: Gold global perspective
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