The long view - The battle over bullion
Conspiracy theorists have a field day as gold edges higher again, writes Barry
Riley
All the attempts over the years to downgrade gold to the
status of a routine commodity such as, say, zinc or
aluminium have failed. This week, the gold price has
again looked quite frisky at above $300 an ounce. The
sector was also enlivened by Barrick's refusal to abandon
its hedging programme and by the sad plight of Ashanti
Goldfields, which is teetering on the edge of collapse
after losing a court action in Ghana.
Gold naturally attracts controversy. There is a kind of religious zeal about the gold
bugs; they see the yellow metal as nature's own store of value which is far superior
to the corrupt paper money churned out on high-speed printing presses controlled
by the politicians.
The weakness of the gold price, which tumbled from $400 in 1996 to $250 last
summer, has encouraged elaborate conspiracy theories. Now, though, the gold
bugs are getting excited. The bullion price, they claim, could be on the edge of a
break-out; many years of oppression by the central banks and their collaborators
might be about to end. Gold, say the conspiracy theorists, could be about to
reclaim its leading position among precious metals. There is, after all, plenty of
action in platinum and palladium, which have both risen in price by about
two-thirds since last summer.
Should we care about gold? It has moved from the core of the global monetary
system to the fringe. All the same, leading central banks continue to hoard 20,000
tonnes of it in their vaults, worth around $200bn.
You might think that they would welcome a higher price as a reward for their
investment. But that is the same as saying they would welcome a lower price for
their own currencies. That might undermine public confidence when times are
tricky. They are forced to grapple with an awful contradiction.
The gold bugs of GATA (it stands for Gold Anti-Trust Action) have an entertaining
web site where the conspiracy theory is debated endlessly. GATA blames the US
government: it has more or less accepted the Federal Reserve's pleas of
innocence but thinks the Treasury has been operating heavily through the
Exchange Stabilisation Fund, aided by big bullion traders such as Goldman
Sachs.
Top mining companies have tagged along for several years by selling large
quantities of gold forward. The price went down and down. Last summer, the affair
began to turn into a re-run of the old post-second world war battle over gold
between the US and the UK on the one hand, and the continental Europeans on
the other.
In May, the UK Treasury announced - unexpectedly - a high profile bullion sale
programme of 435 tonnes (in approximately 25-tonne instalments) that looked
more calculated to drive the price down further than to realise good value for the
British taxpayer, especially as the proceeds were to be largely switched into
shrinking euro. By late September, the continentals retaliated and announced
curbs on bullion sales. The price spiked up, to the great embarrassment of many
of the gold producers.
When mining companies behave more like hedge funds than metal producers,
they actually can be bankrupted by a rising price. But, allegedly, the US Treasury
then intervened on a bigger scale to limit the damage. The bullion price hovered
around $280 an ounce for several months but recently has pushed higher again.
The reasons, as always, are obscure. But some of the mines are changing or
abandoning their hedging strategies and one or two might even collapse, while
bullion banks are running some very dangerous positions. The market could be
vulnerable to a speculative attack.
Certainly, some strange things have been going on in the gold market. What GATA
does not really explain, however, is why the US Treasury would go to such lengths
to distort the bullion price. A strong gold price might be an embarrassment; but, in
this world of rampant technological change and overwhelming American economic
power, would it matter very much?
True, gold inspires a kind of religious faith. It provides an alternative to fiat money
and, at times of instability, it might prove a disruptive force. That is what happened
in the 1970s. But surely the US Treasury is not that scared about the dollar -
though it is true that, as the annual current account deficit moves from $300bn
towards $400bn, the potential risks of a loss of confidence are becoming more
daunting.
Gold is also an alternative to conventional financial assets such as bonds and
stocks. Historically, the bullion price has wilted when the stock market has been
strong. Then, when the stock market has crashed, gold has prospered, as in the
early 1930s and late 1970s.
Time has passed, however. A few people might be frightened out of stocks by a
strong gold price which, they think, signals a coming crash, but not many. The
howls of outrage from the gold bugs are not very convincing. Most governments
believe it is their right (and duty) to intervene secretly in foreign exchange markets,
and gold is just a kind of foreign currency. Speculators in currency have to learn to
outwit the central bankers, and they cannot expect much sympathy when they keep
crying "Foul!"
The gold manipulation might well have started as a minor smoothing operation
that got out of control. For central banks to lend out their gold reserves has
seemed a promising way to earn modest revenues from an otherwise
unrewarding asset. But the speculative institutions that borrowed it realised that, if
they could drive down the bullion price, they could make useful profits from short
sales.
The miners, meanwhile, decided they could protect their profits by selling forward
for future delivery at roughly today's price - although now they are starting to realise
that a long-term downtrend in the price cannot possibly be in their interests, quite
apart from the dangers of an incompetently-run hedge book vulnerable to
enormous margin calls if the gold price takes an unscheduled upturn.
That the US Treasury apparently has helped to mess up the gold market is
perhaps not very surprising when it has plunged even its own domestic bond
market into near-chaos. Last week, Larry Summers, the Treasury Secretary,
effectively lowered long-term bond yields at the same time that the Fed was raising
short-term rates. He did this by announcing he would focus buy-back activities on
the 30-year bond.
This week, he tried to repair the damage by saying that intervention in bonds would
be all along the yield curve rather than just at the long-dated end. But bond experts
were not amused. Thursday's Treasury bond auction was a disaster.
Fixed-interest bonds and gold bullion represent two very different asset classes.
One depends on faith in the long-term probity of politicians, the second offers a
crude defence against their wars, taxes and inflations. Both markets have become
huge speculative casinos, and neither seems to be under very good control.
Contact Barry Riley by e-mail barry.riley@ft.com |
