Price Gap Portends Gold Price Boom
John Browne
Jan 15, 2009
Most consider the New York market 'spot' price for an accurate indication of the true price. However, investors now buying physical or 'fabricated' gold, are paying a premium of between $20 and $30 per ounce. When these gaps existed in the past, major increases in the price of gold were imminent.
For much of the 20th Century, gold continuously defied global government efforts to restrain its price. The premium currently in place may be evidence of the latest round of such policies.
In 1934, President Roosevelt devalued the U.S. dollar by some 75 percent by raising the official price of gold from $20 to $35 an ounce. This opened the door to the first great wave of inflation of the 20th Century. Following World War II, national governments, particularly the American Treasury, held the vast bulk of the free world's gold. The official $35 price was maintained, almost by official dictate.
However, in the 1960's, a 'free' market gradually developed that traded gold at a premium to the official $35 price. In response, the London Gold Pool, a central bankers' gentlemen's agreement led by the Bank of England and the New York Fed, was established to hold the so-called 'free' market price of gold "to more appropriate levels"... to "avoid unnecessary and disturbing fluctuations in price" which could erode "public confidence in the existing international monetary structure." The agreement lasted until 1968. Thereafter, the price of gold was set solely by the free market.
As the inflationary financing of the Vietnam War began to filter into the international economy, private investors and nations with trade surpluses began to buy gold to protect their wealth. The 'free' market price began to soar above $35 an ounce. Far from reducing the demand for gold, as many esteemed Keynesian economists had predicted, this free market price increased the demand for gold.
Surplus nations demanded gold from the American Treasury at the official price. Experiencing a serious run on the national official gold reserves, President Nixon broke the U.S. dollar gold exchange link in August 1971. It unleashed a wave of competitive international currency devaluations and the second great inflation of the 20th Century. Subsequently, the U.S. dollar was devalued further, by some 20 percent, as gold officially was revalued to $42 an ounce.
However, led by America, the central banks then made a determined attempt, through the IMF, to "demonetize" gold. Central banks agreed not to fix their exchange rates against gold and agreed 'voluntarily' to the removal of their obligation to conduct transactions between themselves at the official price.
In addition, the IMF was persuaded to 'distribute' some 153 million ounces of gold into the market and to minor nations. This had the perverse effect of greatly increasing the interest in owning gold.
An even stronger 'free' market began to operate alongside the official price. As inflation continued to clime, so did gold. In the early 1980's the free market price reached $850 an ounce, while the official price remained at $42 an ounce.
In 1999, the Central Bank Gold Agreement (CBGA), also known as the Washington Gold Agreement, led to the coordinated sales of central bank gold via the IMF. Clearly designed to depress the free market price, it is widely believed that the IMF sales were timed to magnify volatility in the free market price in order to destroy gold's perceived worth as a 'store of value'. The CBGA was renewed on September 27, 2004, for a further five years.
More recently, market dealers have become increasingly aware of a covert official 'blessing' for large naked short positions opened by major 'bullion' banks. These bets are designed to force down the free market price of gold.
In the mainstream investment community, gold has been consistently scorned as an investment. Many respected analysts have even suggested that gold's allure is wholly based on perception and that the metal lacks intrinsic value. And yet, in terms of U.S. dollars, gold returned about 5.8 percent in 2008, following a 31.4 percent return in 2007. Thus far in the 21st Century, gold has delivered an average annual return of some 16.3 percent.
Despite the powerful attempts of governments to eradicate gold's role in monetary affairs, the free market price has risen continuously. Today, although the possibility of global depression acts as a head wind, the existence of an "above market" premium for fabricated gold, may foretell a major threat to the credibility of paper currencies, a major U.S. dollar devaluation and a consequent strong rise in the price of gold in the months ahead.
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Jan 14, 2009
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
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