What If ‘Gold is Gone’?

February 24, 2003 – I highly recommend that you read an excellent article in the current issue of Insight magazine. Investigative journalist Kelly O’Meara boldly asks, what if the gold reserves reportedly stored in central bank vaults are gone? She answers, a “panic is near”.(www.insightmag.com)

Not only is this article an exceptional piece of journalism, it dares to explore what the rest of the American media has so far failed to report – the deceitful role of the International Monetary Fund. Insight‘s accomplishment is a great service for everyone seeking the truth about gold.

The article focuses upon a recent disclosure by the Bank of Portugal. What is “revealed in its 2001 annual report is that 433 tonnes of gold – some 70 percent of its gold reserve – either have been lent or swapped into the market.” The result in either case means that this gold is no longer stored in this central bank’s vault and is therefore no longer available as a monetary reserve. Nevertheless, Insight reports that this “gold remains a reserve asset under IMF regulations”. But how can that be? How can the IMF allow gold no longer in the vault to be reported as a reserve asset?

Good questions, but according to Insight the IMF “would not respond to questions about its gold-loan/swap requirements”. The reason the IMF would not respond is obvious from the Insight article; it has a lot to hide.

The article goes on to quote Bill Murphy of GATA (see www.GATA.org): “According to Murphy, “The cartel has been able to get away with lying about the amount of gold in reserve because the International Monetary Fund is the Arthur Andersen of the gold world.” He has provided to Insight documents from central banks confirming that the IMF instructed them to count both lent and swapped gold as a reserve.“

Unfortunately, the IMF has created a culture of deceit, and as a result, few central banks are as open and honest in their reporting as the Bank of Portugal. For example, Germany’s Bundesbank reports gold in the vault and gold loaned out as one line item on its balance sheet, which is a matter that I examined in Letter No. 290-13 published August 31, 2001.

That letter noted: “Yet, in obvious defiance and contravention to GAAP, the Bundesbank reports only one asset, “Gold und Gold Forderungen”, i.e., “Gold and Gold Claims”. Clearly its financial statement does not meet the requirements of Section 26(2) of the Bundesbank Act” which states: “The accounting system of the Deutsche Bundesbank shall comply with generally accepted accounting principles.”

Here’s the interesting point. A reader in Germany contacted the Bundesbank to ask them about this apparent violation of German law. Their response was that ‘they only comply with German law if it is not contrary to IMF regulations’. Further, the Bundesbank officials went on to say that ‘because the IMF requires gold in the vault and gold on loan be reported as one line item, their gold assets are not reported according to GAAP’.

The German people were once proud of the Bundesbank’s reported independence, namely, that it was not subject to the dictates of its politicians. But because it is now subject to the dictates of the IMF, I wonder if the German people are aware that the supposed Bundesbank independence is largely a myth? How many people in other countries are aware of this power of the IMF to overrule local authorities and even a country’s laws?

Probably not many, which highlights why Insight concludes that a “panic is near” when people realize that most of the gold supposedly stored in central banks is in fact gone. I wholeheartedly agree with this conclusion.

Readers know that I expect the US dollar to suffer either this year or next what I call a ‘flight from currency’. In other words, demand for the dollar will drop literally overnight when people realize that dollars are a risky way to hold one’s liquidity, much like there was a flight out of the Argentine peso. A break in confidence will cause this flight from dollars, which I think has already begun.

Though the flight from the dollar has been moderate in this early stage, the collapse of the dollar against the Swiss franc and the euro indicates that the flight out of the dollar started last year. But consider the implications of these money flows if the gold in European central banks is largely gone.

Right now, the euro is widely perceived to be a reasonable alternative to the dollar. But will this view prevail when people realize that 6,000-8,000 of the 13,000 tonnes of gold supposedly being stored in the vaults of European central banks is not there? I don’t think so.

So as the rush out of dollars gathers momentum over the next year or two, at some stage the flight will not be into euros or other national currencies. That moment of truth will occur when the recognition grows that central banks have placed most of their gold at risk and that their gold cannot be returned “without the price of gold going up hundreds of dollars per ounce” according to Murphy, and I agree. People will move out from national currencies into gold, just like the 1930’s.

Some readers may be scratching their heads at that statement. In the 1930’s, people wanted dollars not gold, didn’t they?

At first, yes, dollars were sought out. But as the monetary panic mounted, people wanted gold. Even though the dollar was still linked to gold through the gold standard, people demanded ‘money’ instead of a ‘money substitute’ – gold instead of dollars. This conclusion is clear from the decline in the gold reserves in the early 1930’s because of the growing redemptions of dollars for gold as the flight out of fiat national currencies gathered momentum.

The monetary problems that led to the Great Depression have relevance today in another way as well. Credit was greatly expanded during the Roaring 20’s. Because the dollar was linked to gold, there were more promises to pay gold than there was gold available to meet those promises.

When times were good, few people cared about this reality, but that attitude changed rapidly after the 1929 stock market crash. People holding those promises to pay gold began to question the safety and reliability of those promises and sought out alternatives.

Realizing that gold in their hand is better than just some promise to pay gold, people began converting dollars into gold. They wanted money instead of a money substitute. Now flash forward to the present.

Just like the Roaring 20’s, credit was greatly expanded during the 1990’s. And now that the stock market has largely ‘crashed’ so too are people today more sensitive to the quality of their money, as evidenced by the drop in the dollar’s exchange rate to the other major currencies. And just as was the case back in the 1930’s, there are today more promises to pay gold than there is gold available to meet those promises.

For example, Reg Howe reports on his website the total derivative position calculated by the BIS is some 32,000 tonnes.(www.goldensextant.com)

That weight of gold is far more than central banks hold in their vaults (allowing for the gold they have loaned and swapped).

In conclusion, a monetary crisis is looming large. But as Mark Twain observed – history doesn’t repeat, it rhymes. Circumstances today are different than they were in 1930; they are probably worse because the credit expansion is much larger today. But the monetary panic we face over the next couple of years will not be unlike the monetary panic that led to the Great Depression. It will again be a flight from money substitutes to money – from dollars and other national currencies into gold.