THE PRICE OF GOLD AND THE ART OF WAR Part II
If you wait by the river long enough, the bodies of your enemies will float by
Sun Tzu, The Art of War, fifth century BC
THE 1999 GOLD CRISIS
The 1999 gold crisis was the turning point in the bankers’ war on gold. Intended to disguise the falling value of fiat paper money, a lower gold price signaled that monetary distress caused by the removal of gold from the international monetary system did not exist, that capital markets would continue to expand despite the ever-increasing amounts of constantly compounding debt; and that the already indebted could safely borrow even more, certain that future economic growth would create sufficient opportunities to pay whatever sums already owed ad infinitum.
During the 1980s and 1990s, central banks forced the price of gold lower by loaning gold to investments banks at 1 % interest. The banks then sold the gold pushing down the market price and invested the proceeds in notes paying 5% – 6%, pocketing the difference and later repaying the loans with gold later purchased at a lower price.
Known as the gold-carry trade, this forced gold down for almost 20 years as the amounts of central bank gold sold, estimated between 10,000 – 15,000 tonnes (metric tons), were more than enough to oversupply the market demand for gold.
By 1999, however, the banks’ leveraged bets on gold’s falling price were so large that if the price of gold rose, the massive losses would force at least one investment bank into bankruptcy, setting in motion a financial tsunami that bankers’ feared could take down Wall Street and the global economy with it.
In Topic 17 of Time of the Vulture (3rd ed. 2012), I described what the bankers did to force the price of gold lower.
On May 8, 1999 Chancellor Gordon Brown of Britain suddenly announced that Britain would be selling 415 tonnes of gold, fully 58% of its total reserves, leaving Britain with only 300 tonnes, the lowest amount of any major country in the world. Eleven days earlier, on April 27, 1999, Brown had requested the IMF sell $10 billion [1,000 tonnes] of its gold on the open market.
…The radical action taken by the Bank of England was not to raise money. The purpose of the gold sales by the Central Bank of England was to drive the price of gold lower still in order to avert a financial meltdown. The price of gold had to be lowered quickly and the announcement of a gold auction by the Bank of England of over half its gold reserves was required in order to do so.
The rumor in London at the time was that New York investment bank Goldman Sachs had a 1,000 tonne short gold position in the market and if the price of gold were to rise they would suffer catastrophic losses…The rumors also included speculation that Goldman Sachs had shorted the gold on behalf of the US government; that the US government was actively colluding with Goldman Sachs to manipulate the price of gold, and the market had turned against them.
The May 8th announcement by the UK of the pending sale of 415 tonnes of gold had the desired effect. Two months later, the August 1999 futures contract settled at $257.80 per ounce, a 20-year low, allowing Wall Street banks, Goldman Sachs et. al., to profitably exit their dangerous trades.
The 1999 gold crisis, however, wasn’t over. On September 26th, fifteen European central banks unexpectedly announced a five-year moratorium on new gold sales and limits on the amount of gold they would lend.
Known as the Washington Agreement, the banks’ moratorium stunned gold markets. News that most central bank gold would no longer be leased and/or sold meant previously suppressed gold prices would rise. The announcement triggered a crisis at COMEX, The New York commodities exchange, where exposed shorts betting on a lower price of gold frantically attempted to limit their losses resulting in an overwhelming avalanche of orders.
A CFTC investigation reported: … [on September 27th] gold options volume, which had averaged approximately 6,434 contracts during the first seven business days of September 1999, quintupled to 34, 893 contracts, and gold options price volatility began to increase.
… [On September 28th] COMEX had 2,636 unmatched gold options trades (as compared with a normal average of less than three), which amounted to approximately 17.52 percent of all gold options trades for the day…
…The floor brokers and FCMs [futures commission agents].. stated that the number of orders sent to the floor on September 28 exceeded anything in their memory…the number of gold options trades increased more than twelve-fold over normal levels, and trading volume increased more than eight-fold over normal levels.
… One FCM [futures commission agent].. stated that nearly 2,500 of its orders were not executed, mostly limit orders attempting to liquidate calls. One FCM said that in a few instances orders reported as executed in fact were not…
During the more typical trading days of September 1 through September 24, 1999, COMEX averaged less than three unmatched gold options trades out of approximately 1,300 trades per day, for an average unmatched trade percentage of approximately 0.18 percent. In contrast, on September 28th, 2,636 gold options trades out of a total of 15,044, or approximately 18 percent, were unmatched.
COMEX also had an exceptional number of miscleared trades on September 28th. Miscleared trades are those that match on all clearing criteria but are incorrectly cleared on one or both sides to the wrong clearing member… that there were significantly more miscleared trades than unmatched trades from September 28th, and that miscleared trades constituted the larger part of their clearing problems from that day…
September 28 is the one day in this business no one in the pit will ever forget.
COMEX gold options floor trader
The crisis at COMEX on September 28, 1999 is but the precursor to a far greater crisis yet to come. When gold finally gains sufficient momentum to overcome the bankers’ decades-long opposition to a free-market price of gold, markets like COMEX will again seize up; but the chaos and losses will be far greater and far more destructive.
When capitalism’s paper markets collapse, the rush of investors exiting paper assets, e.g. stocks, bonds, commodities, etc., will become a stampede of terror as frantic buyers desperately seeking the safety of gold instead find themselves in a market suddenly bereft of sellers.
THE PRICE OF GOLD GOES UP THEN DOWN
On September 21st, five days before the Washington Agreement limiting central bank gold sales was announced, the price of gold began to rise, indicating insider trading. From a 20-year low of $257, gold reached an intraday high of $339 in London on September 29th, a spectacular 32% rise in only nine days. Then, the bankers attacked.
Just as the London bullion market was peaking, the bankers’ attacked on COMEX in New York. Lacking the bullion they had previously used to suppress gold, the bankers instead used ‘paper gold’, i.e. gold derivatives, to do in New York what they could no longer do in London.
Gold derivatives (futures, options, etc.) are paper assets, i.e. securities, whose value is derived from an underlying asset, i.e. gold. Prior to 1971, paper money itself was a derivative as its value was a function of its convertibility to gold. No longer convertible, paper currencies, today, are merely trading stamps issued by sovereign states with expiration dates written in invisible ink.
The investment bank that led the attack on gold was JP Morgan. The large Wall Street bank took massive short positions, i.e. bets that gold will fall, in order to force the price of gold lower. In JP Morgan to the Rescue (May 2000), John Hathaway wrote:
Bullion banks expanded their short position in gold by dramatic proportions in the fourth quarter of 1999. Gold derivatives outstanding increased by a record $24.2 billion to $87.6 billion, the largest quarterly increase ever…JP Morgan reported the largest exposure to gold derivatives, $38 billion, over 40% of the total.
…The unprecedented quarterly increase in paper gold took place just subsequent to the late September-early October 1999 short covering rally that took gold from its twenty year low around $250 to an intraday peak of $339…The flood of new paper appears to have played a role in snuffing out the short squeeze that began with the announcement of the Washington Agreement.
JP Morgan’s September 1999 attack on gold was successful. Gold’s price on December 31, 1999 was virtually unchanged from what it had been on January 1st one year earlier, exactly what the bankers wanted.
In Time of the Vulture (3rd. ed. 2012), I summed up the 1999 gold crisis as follows:
A financial crisis had brought the world to the brink of disaster. Once again, the gamblers and speculators in charge of today’s investment banks had leveraged their positions in such a way as to endanger the financial health of nations and indeed the world.
Once again, government had come to the rescue of the private sector, the investment bankers. The lesson was again clearly evident—the even hand of the marketplace is reserved only for the lesser players; those who sit at the head of the table get a pass, gratis of course, paid for by a citizenry that doesn’t enjoy the luxury of such privileges.
The collapse of the present financial edifice can come from many directions and from many causes. So will it be in the TIME OF THE VULTURE. When the abyss is no longer avoidable, it may be a dollar crisis that pushes us over the edge or it might be a failure of a major investment bank such as Goldman Sachs, JP Morgan, Citicorp, or Deutsche Bank or another overleveraged hedge fund like Long Term Capital Management or the inability of a small bank somewhere in the daisy chain of financial institutions to meet its obligations on a Monday morning.
In 1931 the failure of an Austrian bank, Credit Anstalt, set in motion a series of bank failures that was to plunge the world into the abyss now known as the Great Depression. Who knows what will be the cause this time? What bank? What currency? What default? What event?
Only one thing is sure. The present financial edifice, built on an inherently unstable foundation of paper money and ever-increasing mountains of debt, is vulnerable as never before. It may be a sudden movement or a gust of wind or a sonic boom; but whatever it is:
IT CAN NO LONGER BE SAID IT WILL BE UNEXPECTED
CHINA, THE TIME OF THE VULTURE AND GOLD
China’s rapid modernization transformed it into an economic power just as the bankers’ 300-year old ponzi-scheme of credit and debt was about to self-destruct. Late to capitalism’s table, China became a global economic power just as aggregate levels of debt exacerbated by continual and excessive injections of central bank credit after 1980 plunged the West into a series of cataclysmic financial crises beginning with the collapse of the US dot.com stock market bubble in 2000.
Rising in an empty city
I Ching, hexagram 46, line 3
In 1991, I ‘heard’ the words that predicted the Time of the Vulture, the crisis that would later plunge the world—now including China—into economic chaos.
In times of expansion, it is to the hare the prizes go. Quick, risk taking, and bold, his qualities are exactly suited to the times. In periods of contraction, the tortoise is favored. Slow and conservative, quick only to retract his vulnerable head and neck, his is the wisest bet when the slow and sure is preferable to the quick and easy.
Every so often, however, there comes a time when neither the hare nor the tortoise is the victor. This is when both the bear and the bull have been vanquished, when the pastures upon which the bull once grazed are long gone and the bear’s lair itself lies buried deep beneath the rubble of economic collapse.
This is the time of the vulture, for the vulture feeds neither upon the pastures of the bull nor the stored up wealth of the bear. The vulture feeds instead upon the blind ignorance and denial of the ostrich. The time of the vulture is at hand.
Deeply embedded in China’s long history, however, was the memory of the dangers of fiat paper money and the value of silver and gold when paper money’s inevitable crises occurred resulting in economic chaos and the fall of dynasties, e.g. the Sung, Chin, Southern Sung, Yuan, and Ming.
China’s tumultuous and tragic 600-year history with paper money is chronicled in Fiat Paper Money – the History and Evolution of our Currency by Ralph T. Foster. First issued by the Sung Dynasty in 1024 and outlawed by China in 1661, the deadly virus of paper money would return to haunt China when England forced China to accept its paper banknotes (invented in 1694) in trade along with opium after the opium wars in 1839-1842 and 1856-1860.
But China’s modernization was to be accompanied by a powerful and reflexive return to gold, the age-old palliative to paper money; and, as the West’s empire based on debt-based paper money declined, China would become the largest buyer and miner of gold in the world.
THE WAR ON GOLD: OFFENSE, DEFENSE & PRETENSE
There is nothing more stimulating than a case where everything goes against you.
Sherlock Holmes, Hound of the Baskervilles, 1902
In the 20th century, the bankers were on the offensive. Dwindling supplies of gold, however, would necessitate a different strategy in the 21st. After 2000, the pressure on the bankers would exponentially grow. Not only did gold demand exceed mining production by 40%, central banks themselves, previously net sellers, would become net buyers.
In the 21st century, Russia and China would become important factors in the war on gold. But the West and the bankers would not give up easily. Their franchise of debt-based paper money was at stake as well as the vast wealth and power accruing from that franchise.
The threat to the West’s 300 year economic hegemony was growing. A new order was in the making and bankers would be hard pressed to respond to the increasingly severe financial shocks they had neither foreseen nor prepared for.
Beneath the intended opacities of smoke and mirrors, there are clear indications that the bankers’ war on gold is nearing its inevitable end; nothing lasts forever, not even an empire masquerading as a neo-liberal wet dream intended to indebt humanity so as to benefit the very, very, very few.
The promotion dates for Time of the Vulture’s special low price has been changed to October 4, 5 and 6. My other books will be discounted as well. Part II of Stories the US and CIA Don’t Want Told is now posted on youtube, at http://youtu.be/r3khwdTCtgs.
The Price of Gold and the Art of War, Part III will show how in the 21st century the bankers responded to gold’s rising price and to the increasingly consequential shocks to their global ponzi-scheme of credit and debt.
The end game is in motion. A better world is coming.
Buy gold, buy silver, have faith.
Darryl Robert Schoon