Today’s Gold Market Increasingly Resembles The London Gold Pool

The mainstream and alternative media mostly belong to one of the two camps when it comes to gold. Most gold market enthusiasts draw parallels between today’s secular trend in gold and the one of the 70ies. The charts are quite similar and the ongoing correction in gold is, up until now, resembling the 2-year bear market of 1974-1976. On the other hand, the other camp of commentators are rather unanimous that gold has been in a bubble and that it has burst in the fall of 2011.

History does not repeat itself, but it does rhyme. The question is: with which period exactly does it rhyme? This article presents a scenario that has remained rather underexposed: today’s gold market resembles the one of the 60ies, in particular the London Gold Pool. It shows increasingly more compelling similarities, and all recent developments point to an unfolding London Gold Pool scenario.

 The article is written by Jeroen Vandamme, analyst behind the Dutch premium service Analyse (founded by Roland Vandamme who holds an Economics degree at the University of Gent) and published a couple of months ago.

The London Gold Pool came into existence to bring stability into the monetary system at a time when the US trade balance had been deteriorating by the Cold War (among other reasons). The 60ies saw an increasing pressure on the gold price because of a rise in demand, which resulted in a decline of the reserves of the London Gold Pool. In 1967, France was the first country to exit the London Gold Pool. France was no longer willing to offer its gold reserves in order to suppress the gold price. At that time, the French had been purchasing hundreds of tonnes of gold (on a yearly basis) from the US. It was part of a strategy from Charles de Gaulle which was engineered by Jacques Rueff. The gold rush from France at that time is highly comparable with today’s gold rush from China.

Along with other financial developments, one of which was the devaluation of the British Pound in 1967, the French gold rush resulted in the collapse of the London Gold Pool in 1968. It remains rather unknown to the public that between 1968 and the end of the gold standard in 1971, there was a two-tier gold market. London had been using the official gold price of $35 while other exchanges like the one in Zurich had a variable gold price; in the latter markets it was not unusual to see a gold price of $42 or $45, a difference of 20% to 25% compared to the price in London. This two-tier market was not sustainable neither because of arbitrage. The US was “obliged” to exit the gold standard. In the decade that followed, the gold price rose 20 times.

What are the learnings from these historical events?

First, gold market manipulation is nothing new. It existed in the 60ies, so why wouldn’t it exist today?

Second, history teaches that manipulation, no matter how clever, always fails. No government has the power to manipulate the free market for an extended period of time. The London Gold Pool is no exception of this principle. In addition, those who try to manipulate the market end up with big losses eventually. The members of the London Gold Pool did lose billions of dollars worth of gold.

Even more important, it is a characteristic of markets to seek balance on the long term. The longer a market is being suppressed, the more significant the opposite reaction. During the era of the London Gold Pool, the gold price had been suppressed for an extended period of time; after termination of the suppression scheme, however, gold started a rise which catapulted the price twenty times higher a decade later.

We have a very similar situation today. Western central banks try to suppress the gold price; they are doing so during a debt crisis that is already out of control. Although officially there is no London Gold Pool, it is widely known that bullion banks are leasing gold (behind the scenes) and, simultaneously, short gold in the futures markets. China is acting in a similar way today as France in the 60ies. It is very likely that the explosion in Chinese demand will break the manipulation mechanism. Chart courtesy: Koos Jansen.

Gold_shanghai_withdrawals-2014-week-1

In that respect, it will be interesting to follow the potential spreads between the different gold exchanges, in particular the mainstream exchanges like COMEX and LBMA versus the new gold markets like the new Shanghai exchange. Russia and South-Korea had announced the opening of their own gold exchange right after the historic precious metals price crash; the timing of the announcements were undoubtedly no coincidence(*). It is obvious how several countries are more than willing to stop the gold intervention(s).

(*) Meantime, the Russian gold exchange started business a month ago and the South Korean exchange will start operations in the first quarter of 2014.

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