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Robert Lambourne: Where should gold go if price suppression policy ever fails?
By Robert Lambourne
Monday, December 6, 2021
From time to time I am fortunate enough to have conversations with Chris Powell of GATA, who discusses his opinions on all matters concerning the gold market. Powell and Bill Murphy have done so much to expose the manipulation of the gold markets by the U.S. monetary authorities, which always seem to be trying to keep the gold price suppressed. This year seems to have been an extreme, almost maniacal example of this policy, which impairs price discovery by the international gold market.
Anyone who is prepared to read the material that GATA has archived on its internet site can have little doubt that things are not as they should be in the gold market.
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For example, see Powell's presentation from the October 2021 New Orleans conference:
https://www.gata.org/node/21512
Or read Murphy's regular commentaries at LeMetrpoleCafe.com. Here is his presentation to the New Orleans conference, covering the peculiar trading patterns so often seen in gold:
https://www.gata.org/node/21509
One of my more interesting discussions with Powell involves estimating what might happen to the gold price if the suppression ever ends. The comments below set out briefly the reasons for gold price suppression, some of the corroboration for it being a policy still being implemented, and the apparent stupidity of it as the U.S. Treasury bond markets already seem hopelessly overvalued.
The onset of inflation with extreme low interest rates and massive debt seems certain to smash bond values at some point.
The branch of modern mathematics known as catastrophe theory points to the possibility that there will be a very fast unraveling of this valuation anomaly, despite the best efforts of the Federal Reserve to maintain its grip on these markets. The G30 report cited below, while written in relatively supportive language, demonstrates how febrile the background of the U.S. Treasury bond markets is.
Our discussions usually start by going back to basics, at least as far as GATA supporters are concerned, and reviewing the principal reasons for gold price suppression. Keeping the gold price under control has clearly been important for much of the 20th century, and the London gold pool, which collapsed in 1968, provides plenty of historical context.
For a brief reprise of the main events with the gold pool see:
https://en.wikipedia.org/wiki/London_Gold_Pool
This effort to control the gold market and keep the price down ended on March 18, 1968, when the U.S. Congress repealed the requirement for a gold reserve to back the U.S. dollar. This essentially marked the beginning of the end of gold's being the anchor for the global monetary system, with President Nixon completing this process in 1971.
The principal modern reason for controlling the gold price even after gold had ceased to be the anchor for the world monetary system was first examined outside official channels by Reginald Howe, who produced a report in 2005 --
http://goldensextant.com/gibsonsparadox/
-- examining a relatively obscure economic study published in August 1985 authored by Professors Robert B. Barsky and Lawrence H. Summers titled "Gibson's Paradox and the Gold Standard":
https://www.gata.org/files/GibsonsParadox-OriginalVersion.pdf
As the study explains, Gibson's Paradox was the observation that the price level and nominal interest rates were positively correlated over long periods. In essence this paper claims to have found empirical evidence of an inverse relationship between the real price of gold and the real interest rate, a relationship that was examined by the authors over long periods both including and excluding operation of a gold standard.
Essentially the paper suggests that lower interest rates are correlated to higher gold prices. This implies that if gold prices are surreptitiously suppressed with the financial markets unaware of the suppression, then the market comes to accept that interest rates are sufficiently high, and it then become much easier for the monetary authorities to sustain lower real interest rates.
In Reg Howe's paper is a chart suggesting that around 1995 the Gibson relationship between gold prices and interest rates broke down and this seems to have been the result of a policy decision by the U.S. monetary authorities, Perhaps not coincidentally, Professor Summers was deputy Treasury secretary at the time.
GATA has collected more evidence that since the 1990s gold prices have been suppressed by way of gold leasing by central banks and the use of gold derivatives, plus the occasional dumping by central banks of physical gold. This period has coincided with a sharp fall in both nominal and real interest rates.
In a recent paper published by the Bank for International Settlements, "The Natural Rate of Interest Through a Hall of Mirrors --
https://www.bis.org/publ/work974.pdf
-- it is asserted that real interest rates have fallen by 5% since the 1980s, fitting with the original analysis by Howe concluding that gold price suppression started in 1995 with the objective of reducing interest rates.
In this context it is also sensible to consider a book by Sidney Homer, "A History of Interest Rates," whose second edition was published in 1977. In the preface to the revised edition the author writes that during the 14 years since his first edition was published, "interest rates, both here and abroad, have made more history than they did in several preceding centuries."
The chapter titled "Interest Rates in Western Europe and North America since 1900," which was revised for the 1977 edition, contends that the 20th century provided both peak bond yields, higher than anything ever experienced in the 17th, 18th, and 19th centuries, while "the lowest rates of the 20th century were likewise below the earlier low rates."
It is easy enough to deduce from this statement and the remarks from the BIS paper above that current interest rates in the European Union, the United Kingdom, and North America have never been lower in more than 400 years. While this in itself proves nothing about gold price suppression, it is, in GATA's view, persuasive that a policy of gold price suppression is being carried out by U.S. financial authorities. This policy is almost certainly being supported at least tacitly by other Western countries and international financial organizations such as the International Monetary Fund and the BIS.
Another BIS paper --
https://www.bis.org/publ/work851.pdf
-- demonstrates that the Federal Reserve has a long history of using dollar swap lines to central banks, often making use of the BIS to provide liquidity to overseas dollar money markets and that the Fed conveyed dollars through swaps "to alleviate funding liquidity shortages in the offshore dollar market. Finally, the archival evidence speaks clearly to the U.S. interest in swaps as a means to provide funding to the eurodollar market, to manage yields there, and to prevent interest rate spillovers in the global dollar market at the source."
Hence extensive efforts have been made for many years by the Fed to keep dollar interest rates low.
Hence GATA considers that there is plenty of corroboration that efforts to reduce dollar interest rates via the policy of gold price suppression have been continuing right through to current times. Anybody following the gold market in 2021 has to accept that trading patterns are entirely consistent with a policy of pushing down gold and silver prices more or less throughout the year and that most of the effort seems to involve the amassing of concentrated short positions in gold and silver futures contracts on the New York Commodities Exchange.
Lately this concentration of short futures positions has been so blatant that little attempt is being made anymore to hide what is going on. This alone may well indicate that the suppression is fast approaching a tipping point where sufficient numbers of market participants will start gaming the suppression for their own profit.
Before proceeding with the main thrust of this note, it is appropriate to make some observations about the extent of public knowledge of what is really happening in the gold market.
Documents about gold holdings and policies by governments and central banks are often treated as state secrets. For example, freedom-of-information requests to the U.K. Treasury and the Bank of England regarding gold leasing are not answered. Despite the treasure trove of information archived by GATA at the links above, public knowledge of the activities of central banks and governments in the gold market is at best highly limited, and there are tremendous gaps that are not easy to fill.
Because of this intense reluctance to provide information it can be readily deduced that gold is still seen as crucial by the U.S. financial authorities regardless of their occasional comments that gold is unimportant or a relic. Given the evidence and the silence about gold, is it any surprise that a period of record low interest rates with sky-high government debt, as we have today, is linked with massive efforts to suppress gold prices?
Today the U.S. Debt Clock internet site shows that the federal debt now exceeds $29 trillion:
Of this amount, more than $5 trillion is owned by the Federal Reserve itself via its massive "quantitative easing" program. (See the appendix below for an attempt to conceptualize how vast $29 trillion is.)
While policy decisions taken more recently to counter the virus pandemic have contributed to this debt buildup, it is clear that for decades a number of U.S. government administrations have allowed this buildup to occur while interest rates have been suppressed. Not only has gold price suppression been used, but the measures of inflation have been distorted. For example, the internet site Shadowstats details many changes made to the calculation of official consumer price statistics to make inflation look lower than it is:
The market distortions created by these efforts to deceive financial market participants have apparently resulted in a massively inflated valuation of the overall Treasury bond market. For example, a report on the valuation of the full portfolio of Treasury bonds, which was updated and republished in April 2021 by the National Bureau of Economic Research, titled "The U.S. Public Debt Valuation Puzzle," written by Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh, and Mindy Z. Xiaolan, argues that the entire U.S. Treasury market is substantially overvalued:
http://www.nber.org/papers/w26583
The startling conclusion from this report is that the effective interest rate on the Treasury bond portfolio is lower than the relevant interest rate bond investors should be earning. The paper calls this the "government debt risk premium puzzle." Further on in the report it is asserted that the effective interest rate on the entire debt should be at least 3% higher than it is. The paper suggests that all U.S. federal public expenditure would need to be cut by 40% to sustain the current bond market valuation.
Hence it is already being debated in academic circles whether the Treasury market valuation is markedly out of line with rational expectations.
Even more evidence of unease among mainstream economists about the U.S. Treasury debt market is in a July 2021 report by the G30 group of economists. There is a key sentence in their recommendations -- namely, that "access to repo financing from the Federal Reserve be widened substantially beyond the small group of ‘primary dealers.'"
This is an admission that in effect current holders of US Treasury debt want to be able to turn them into dollars virtually on demand. This is not the behavior of satisfied long-term investors. It implies that much of the U.S. Treasury market is already effectively financed by the promise of money printing over and above the amount already financed by QE. See:
Meanwhile the BIS seems to be busy producing research that highlights problems with a low-interest rate environment. An example published recently was titled "Losing Traction? The Real Effects of Monetary Policy When Interest Rates Are Low":
https://www.bis.org/publ/work983.htm
Again unease is expressed about low interest rates in the U.S.
It is arguable how far the effective monetization of U.S. Treasury debt has already gone with QE, but the sustainable level of U.S. Treasury debt with anything like the present maturity profile seems to be way below the current market value. Unless the authorities are prepared to see a debt default by the U.S. Treasury or a collapse in the market value of the debt, keep interest rates low can be achieved only by monetizing government debt -- "QE to infinity."
As bond investors become more nervous, especially about longer-term bonds, because of things like the G30 report, who else is going to lend to the government at such low rates of interest? It will have to be the Fed, even if it acts through intermediaries.
Monetary history teaches us that this will result in serious inflation and probably hyperinflation if allowed to run too far. "The Economics of Inflation," a book published in 1931 by Constantino Bresciani-Turroni, was one of the first studies of the depreciation of the German mark from 1914-23. The author concludes in Chapter XI: "German experiences show us the fundamental importance in the determination of the level of internal prices and of the currency's external value of the quantity of money issued by the government."
Neither the Federal Reserve nor the U.S. Treasury seem to agree with this conclusion in view of the size of the borrowings they have overseen and the use of QE to assist this expansion.
Sensible monetary policymakers at central banks like the Fed or at the U.S. Treasury should already have managed the end of the super-low-interest-rate bubble by revaluing gold or perhaps by ceding control of the world reserve currency to the IMF. Maybe the latter course is unacceptable politically, but something should already have been done to halt what many knowledgeable market analysts are expressing concern about.
Perhaps some sort of diversionary tactic involving cryptocurrencies will be tried, but despite reams of papers by central bankers and the BIS on introducing their own cryptocurrencies, the elephant in the room continues to be ignored. Bitcoin is based on the issue of a strictly limited number of coins, and no central bank so far seems to be prepared to accept any such limit on their own new cryptocurrencies. So who will prefer these currencies to bitcoin?
Gold revaluation is essentially what President Franklin D. Roosevelt did all those years ago while confiscating the public's gold holdings. Imagine the fire and fury if this was attempted today, especially after years of official trashing of gold.
No doubt there will be strenuous efforts to pretend that gold hasn't been revalued, but when it happens it will be clear enough. It seems that any first effort at a gold revaluation initiated by U.S. monetary authorities is unlikely to be enough, as it would be an admission that forcing interest rates down was a huge policy error.
It is doubtful if the so-called masters of finance will be willing for the world to see how much they have held back gold. Hence further revaluations are probably going to be forced on these officials as the market reclaims control.
As already noted, we do not understand enough of the real state of the gold market to know if price suppression policy has already eaten deeply through reported levels of gold reserves. How much gold do the Fed and U.S. Treasury really own or control? With gold leases and other gold derivatives seemingly too important to disclose, it is reasonable to fear that things are bad in this respect, even really terrible.
So let's look at a few indications of where gold prices might be headed once suppression ends and gold returns, even unofficially, to a role in the world financial system. Because knowledge of the real state of the physical gold market is so scarce, these should not be considered as forecasts, more like straws in the wind.
The most recent published balance sheet of the Federal Reserve reveals liabilities of $8.6 trillion. If a classical gold standard was in place, these liabilities should be covered by gold. The U.S. monetary authorities currently report holding 286,852,641 troy ounces of gold. A gold price of $29,981 would be needed to effect a complete level of cover. That is a massive leap from today’s gold price, and it highlights perversely the long success of gold price suppression.
An argument could be made that these liabilities would be reduced by selling the assets held by the Federal Reserve. The trouble is that such sales would almost certainly cause massive losses.
There is talk that a less onerous gold standard might be introduced, which might cover, say, 25% of the Fed's liabilities. If this was the case, then a gold price of $7,500 still would be required, well above today's price.
If, as suspected, much of the gold supposedly owned by U.S. monetary authorities is already leased out, then both of the figures would be far too low.
So this points to big upside potential in the gold price almost regardless of what monetary authorities do for a financial reset. The uncomfortable fact is that under both the Trump and Biden administrations the growth in U,S, dollar debt because of the government's spending vastly more than its income has driven the relationship between the dollar and gold to an extreme.
Unless the gold price rises soon, this is going to worsen to the extent that more thorough questioning of Fed Chairman Jay Powell and Treasury Secretary Janet Yellen will occur. It seems doubtful now that either would be prepared to commit to a denial of gold price suppression if questioned under oath.
Things are probably already even worse than this. It is arguable how far the effective monetization of U.S. Treasury debt has gone so far, but the sustainable level of Treasury debt without Fed intervention is apparently much lower than the existing total of around $23 trillion. So perhaps the real sustainable value in the Treasury bond market is maybe 60% of the current level.
This may imply that instead of $8.6 trillion, the real monetary liabilities of the Federal Reserve are perhaps $12 trillion. This would turn the indicated gold price of $29,981 into an indicated price of $41,833.
Because our knowledge of the real state of the official gold market is so uncertain, we cannot hope to make sensible price predictions. But things are clearly massively out of step in terms of where the gold price should be if historical norms are applied – and, crucially, things are worsening because of the incessant unfunded spending. It seems credible that gold at $50,000 per troy ounce is much nearer than seems possible. And maybe silver should be over $2,000 if the gold-to-silver price ratio returns to, say, 25 times.
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Appendix
Such large numbers are particularly difficult to grasp. But one way to help understand them is to use time.
Consider a printing press creating one dollar a second. It will produce $60 in one minute and $3,600 in an hour. This becomes $86,400 per day and $31,536,000 per annum.
To produce 29 trillion dollar bills would take 919,583,968 years. So to print the number of dollar bills needed to repay the U.S. federal debt would require the printing press to have started before 900,000 B.C., even as apparently been on Earth only for 20,000 years or so.
Movie buffs may recall Raquel Welch starring in the 1960s movie "One Million Years B.C., a clip from which is here:
https://www.youtube.com/watch?v=Nd-kdrF6rxk
Going by current trends, it may seem ironic that by the spring of 2023 it would have taken the U.S. monetary printing press more than a million years to produce this number of dollar bills. To celebrate this achievement, perhaps the next face on the dollar bill should be Raquel's.
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Robert Lambourne is a retired business executive in the United Kingdom who consults with GATA about the involvement of the Bank for International Settlements in the gold market.
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