The Next Washington Agreement

August 30, 2004 – Next month central bankers from around the world will gather in Washington D.C. for another annual meeting of the Int’l Monetary Fund. No one benefits from the conspicuous self-indulgence and excessive revelry accompanying these meetings except Washington’s hookers, but in between the caviar, lavish parties and limousines, these pooh-bahs of finance will meet behind closed doors to decide what they must do to keep foisting fiat currency on the world economy. When they emerge, they will then tell the public what they want the public to hear.

Five years ago they announced their Washington Agreement on Gold (WAG). You will probably recall that the WAG stated that central banks would restrict the amount of gold credit they were creating as well as the amount of gold they would dishoard from their vaults. But their agreement was full of the usual double-talk, and left open holes big enough to drive a Mack truck through. After all, no self-respecting central banker would ever limit his ability to maneuver with self-imposed restraints, which explains not only why central bankers chafed so much under the classical Gold Standard, but also, why they worked so hard to make sure that it was eventually jettisoned. But the WAG had an effect on gold that I think no central banker was expecting.

In fact, they were probably still high on champagne or the more powerful stuff when they made their announcement because it caused gold to rally $60 in a matter of days, which is an outcome that no central banker would want, given their obvious anti-gold prejudice. But upon realizing what had happened, the central bankers ‘circled the wagons’, got hold of the gold market once again around $325, and then in the weeks and months following their announcement drove gold back down to where the rally began below $300 per ounce ($9.65 per goldgram).

Their heavy hand lasted for a while, during which time central bankers had their way with gold. By February 2001, gold was back down in the $250’s, re-testing the pre-WAG low made in July 1999. But then something different happened. Gold started climbing. It began a new bull market, notwithstanding the determined efforts of central bankers to thwart higher gold prices. Here we are three years later, with gold in a clear uptrend and above $400 per ounce ($12.86/gg).

The WAG expires in a few weeks, as it was only a 5-year agreement. So will there be a WAG II? And if so, what are the implications to the gold market?

The first question is easy to answer. The central bankers have already stated that there will be a WAG II. There has been some speculation about its form and substance, and earlier this year, a number of central bank pronouncements about it were offered in bald attempts to talk down the price of gold.

The most obvious of these was the ‘leak’ that this new WAG would result in central banks dishoarding 2,500 tonnes of gold over five years, 25% more gold than the 2,000 tonnes agreed to in September 1999 – nearly all of which has now been dishoarded. Moreover, they let it ‘slip’ that much of this gold under WAG II would be dishoarded by Germany, Italy and even France, new parties to their dishoarding game.

That turn of events was viewed to be particularly bearish because the French have steadfastly refused to lend or dishoard any of their gold, in contrast to most of the other European central banks, which have dishoarded gold (e.g., England, Holland and Belgium in particular) and/or removed much of their gold from the vault and put it out on loan (most notably Germany, Holland and Italy).

The market did take this news bearishly, for a day or two. But that was it. For the most part, gold bounced right back. In contrast to other central bank pronouncements about gold in years past, the gold market just shrugged off this news, which was not only a sign of underlying strength in gold but also, and perhaps just as importantly, a strong indication that central banks were losing control of the gold market – that they could no longer keep the gold price from rising regardless of their actions, and above all, that the anti-gold propaganda from their jawboning was becoming noticeably ineffective in influencing the market.

Any diminution of the influence and control by central bankers would indeed be good news for all of us who have been accumulating cheap and undervalued gold for years. This development would mean that gold is returning to a free-market liberated from government intervention and as a consequence, it would likely attain a more normal price level. And by normal, I mean some level over $500 ($16.08/gg).

Interestingly, after putting out a lot of news about gold earlier this year, central bankers for months now have been deadly silent about WAG II and what they have planned for gold. Why? I think the answer to this question is tied into the second question I posed above, namely, what will be the impact of WAG II on the gold market? In a word, I think it will be bullish. Here’s my thinking.

In a nutshell, it appears that the central bankers so anxious to dishoard the gold from their vaults have been unable to get their governments to play along. For example, Germany was supposed to provide some 500-600 tonnes of gold that would be dishoarded under WAG II. But earlier this year, their head central banker resigned in disgrace for accepting a gift from one of the German banks he was supposed to be regulating. And his replacement has been particularly coy about gold, avoiding any statement to suggest that he would be following his predecessor’s policy positions.

What’s more, the German government shocked market observers a couple of months ago by omitting from its latest budget any plan to dishoard gold. Simply put, without this budget approval, it seems that the German government has ruled out the possibility of any gold sales for at least the first year of WAG II.

Interestingly, even the French are backing away from loose statements made earlier in the year. But the situation in France is the reverse from Germany – the easy money proponents in the government have been unable to persuade that country’s central bankers to dishoard some gold, despite the government’s statement earlier this year that their central bank had agreed in principle to dishoard 500-600 tonnes

While the French government announcements a few months ago to dishoard gold made headline news, a tiny article buried in the August 19^th Financial Times said: “The Bank of France has already sought to renew France’s love affair with gold by rebuffing government attempts to sell some of its 3,000-tonne hoard to ease the budget deficit.” [Thanks to Bill Murphy of www.lemetropolecafe.com for bringing this news item, buried in the back of the FT to my attention.]

Lastly, as another sign that central bankers are losing control of the gold market, Argentina has announced that it purchased 42 tonnes of gold so far this year. Considered by central bankers to be the ‘bad-boy’ of the global economy because it defaulted on billions of dollars of loans, Argentina is in effect telling central bankers to ‘stuff it’.

The Argentines know that gold is the most liquid money because it is a tangible asset, and not the deposit liability of some bank. They can therefore now do anything they want with their gold. If they held a national currency instead, the bank holding that national currency could easily put a freeze on it to restrict how it is spent, or worse, offset the national currency against Argentine debt owed to it. The Argentines have made a very clever move here – holding gold has given them a lot more options than if they were holding dollars.

So what does all of this mean for WAG II? Well, there is one thing that we can be sure of – regardless what happens, central bankers will claim that they are in control. Consequently, disregard their self-serving pronouncements and their anti-gold propaganda and look instead to what the gold market says by observing what the gold market does.

My expectation now is that gold will start climbing after WAG II is announced because the underlying news that has been driving gold higher for three years remains very bullish. Regardless what central bankers may say next month, it looks like they will dishoard less gold over the next five years than they had planned. And that news is bullish, and is particularly important since it is news that is not widely understood by the market.

In other words, central bankers have already put into the market the news that 2,500 tonnes will be dishoarded by central banks under WAG II. They did that earlier this year when they were trying to talk down the price of gold. Thus, the market has already discounted this news. Consequently, the market is not expecting the central banks to announce a smaller weight of gold. So WAG II will probably be for 2,500 tonnes.

But regardless what weight the central bankers do announce under WAG II, it seems likely that they will not announce which governments will provide the 2,500 tonnes for the simple reason they do not have these governments lined up. The implication is that as the five years of WAG II pass by, the WAG signatories will dishoard less than 2,500 tonnes.

So the net result is that if any surprising or unexpected news comes from WAG II, the surprise will be bullish for gold. The bearish aspects of WAG II have already been discounted, and the market does not appear to be expecting any bullish news.

So prepare for some upside fireworks in gold to begin in September, either in the days leading up to the IMF meeting as market participants try to fathom the implications of WAG II, or in the days after WAG II is announced. As was the case of the first WAG, we could see a $60 rally in a matter of days. But this time there are enough bullish reasons driving gold higher to expect that central bankers will not be able to stop gold’s inevitable ascent to more normal price levels.

In summary, the absence of any news from central bankers in recent months about WAG II is a clear sign that central banks are having trouble behind the scenes. If there were any news that was to the central banks’ advantage, you would be hearing about it.

What’s more, the recent strength in gold suggests that people in the know behind the scenes understand that the news for the new WAG will be bullish, and are therefore buying gold, which explains the beauty of technical analysis. Not all knowledge about the markets is known to the public, but one need not be an insider to act on this knowledge. All one has to do is follow the footprints in the sand. Right now those footprints – as evidenced by gold’s recent action – are bullish. I think the insiders are buying gold, and that’s why we have also been buying (see my page 3 trading recommendations).

The upshot is that gold looks ready for a big rally. It seems poised just as it was back in August 1999 when I wrote about the similarities prevailing then to those before the massive short squeeze in gold engineered in 1869 by Jim Fisk and Jay Gould: “I believe that within two weeks, another gold squeeze will start from the depths of a typically hot and humid New York summer. Like the squeeze of 1869, the market now is far too complacent about both gold and the fiat currency of our day, the Federal Reserve dollar, which differs from the Greenback dollar [of Fisk’s and Gould’s day] in name only.” These words – written just a few weeks before anyone except the insiders knew about WAG – are just as relevant to today’s gold market.