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May 22, 2009

Golden Toilets, Paper Dollars
by Adrian Ash

"The backdraft blows both ways. But repeated attempts to wean the world away from gold only served to send its price higher..."

A SCATTERING of random-looking dates to kick off...

Mon 21 Sept, 1931

• Hot on the heels of Japan, Great Britain suspends its Gold Standard, never to resume.
• It nabs No.2 spot in climbing out of the Great Depression (again, just behind Japan) - a fact not missed by Germany (1932), the US (1933), France (1936), eventually Switzerland (1936) and then every economist analyzing and advising on today's global slump.
• Gold's purchasing power pretty much doubles inside the domestic UK within 5 years.

Sun 15 Aug, 1971

• The United States finally kills the post-war Bretton Woods monetary settlement, refusing to pay gold in exchange for foreign-owned dollars.
• Gold's US purchasing power trebles over the next 3 years.

Weds 2 June, 1976

• The International Monetary Fund (IMF) begins selling 1,555 tonnes of gold - one-third of its hoard.
• The aim of the central-bankers' central-bank? "To reduce the role of gold in the international monetary system."
• The Gold Price initially dips from $125 to $100 an ounce, but ends the year higher and doubles inside 30 months.

Sat 1 April, 1978

• Still continuing its gold sales, the IMF's Second Amendment to its Articles of Agreement finally eliminate Gold Bullion "as the common denominator of the post-World War II exchange rate system".
• In May, the US Treasury resumes its own gold sales program, divesting more than 550 tonnes by November.
• Gold meantime vaults four-fold by Jan. 1980, hitting $850 an ounce just before the IMF concludes its gold sales.

Tues 7 Oct, 1980

• An "allegedly impartial" US Gold Commission (as Murray N. Rothbard of the Mises Institute described it) is appointed by President Reagan to review going back to the Gold Standard - and if so, at what exchange rate.
• "Served one paramount objective of its sponsors," say monetary economists Milton Friedman and Anna Schwartz: "Promoted discussion of gold in the media, on television and among a lay public...a rallying call for the faithful."
• Amid all the media interest, gold halves over the 18 months the Commission takes to report its findings.

Weds 31 Mar, 1982

• The US Gold Commission finally reports, announcing that "a return to the gold standard is not desirable".
• At least performs "the very valuable service of reclaiming gold from the gold bugs" according to the Wall Street Journal.
• A minority report, dissenting from the anti-gold standard conclusion, celebrates the return of Treasury-minted gold bullion coins for retail sale.
• The majority report recommends that, instead of a gold standard, "the growth of the nation's money supply be maintained at a steady rate which insures long-run price stability."
• Over the following two years, the US money-supply swells by one-fifth. Gold rises from $320 to average more than $400 an ounce.

Fri 7 May, 1999

• The UK government shocks the London gold market by announcing 395-tonne gold sales - one half of the national reserves - joining pretty much all other European states (bar France and Germany) in reducing its hoard.
• The Treasury gives the market two-months' notice of the first auction.
• The Gold Price initially drops by 12% before the sales begin; the Financial Times calls the sales "sensible".
• Gold puts in a two-decade floor and quadruples over the coming 10 years.

Highly selective? Yes. Wilfully so? Of course. But you get the picture, right?

"Any actual program of official gold sales," as The Privateer recently noted, "has always resulted in time in a HUGE leap in the price of gold. That's why the US in particular, and especially now, is so reluctant to embark on any type of official gold sales again."

Closer still to the ebb and flow of monetary history, political statements about the value of gold-as-money tended to create unintended consequences - inevitably hilarious for gold buyers, if not immediate or obvious without hindsight - throughout the 20th century. (And you could choke on the irony, let alone the politics, of the Financial Times leaning in favor of gold here in mid-2009).

The backdraft blew both ways, of course. But repeated attempts to diminish gold's role only served to boost its price as open-market investors bid up the metal time and again.

"The incompetence is staggering," as a BullionVault customer wrote to us earlier this week. He was in fact commenting on a little-seen detail of Gordon Brown's 1999 Gold Sales, but the description holds good for much more than the horrors he went on to reveal.

"As you probably know, Britain's gold is held by HM Treasury in the Exchange Equalisation Account. Reports back to 1998/99 can be found at the Treasury website.

"You have to go through the reports quite carefully, but I found the following...

Yes, the UK Treasury - just before it launched gold sales that initially knocked the price lower by one-eighth - actually helped gold traders profit from the resulting fall.

Genius!

Lending out more than a fifth of its stockpile, the Treasury gave short-sellers the gold they needed to borrow, to sell, and then to buy back lower down...returning it to the government's vaults and pocketing a fat wad as difference.

In fact, by the time that Gold Prices in Sterling broke back to five-year highs above £200 an ounce, the UK government had facilitated more shorting of gold than it actually sold itself into the market!

More fools than knaves? We'd like to hope so here at BullionVault, sticking with our patented Idiot's Theory of Political History. And "they may have learned their lesson," as our gumshoe customer notes. "In the year ended March 31st 2008, the maximum loan was 6 tonnes."

Looking forwards, not back, "It would seem that central banks are not all-knowing," writes Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York to the Financial Times. He has a point.

"They too have an information set that is fundamentally incomplete, like private sector participants. [And] while the central banks have sold gold, the price of gold has indeed gone up. Yet many observers seem to take for granted that if and when central banks begin selling dollars the Dollar will fall."

Hmmm, let's see now. If they turned seller, would China and Russia loan out their Dollars to enable short selling by currency dealers? And would private-market investors step up to buy all the Dollars they've got?

Perhaps. They might find a good use for them. "When we are victorious on a world scale," said Lenin, writing in Pravda on the Complete Victory of Socialism in 1921, "I think we shall use gold for the purpose of building public lavatories in the streets of some of the largest cities of the world."

And long before the global soviet takes over, you might find US Dollars hanging off a nail on the back of the toilet door.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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