Commodities | Feb 20 2007
By Greg Peel
It’s been nine years since the Gold Antitrust Action (GATA) committee was formed to alert the world to the implementation of short sales and other derivative transactions by central banks for the purpose of artificially suppressing the gold price. In so doing, central banks are able to artificially maintain the value of fiat currencies, particularly the US dollar.
(A fiat currency is one backed by no more than a government promise).
While GATA’s work has been met with staunch criticism, and often derision, there is a growing acceptance that such accusations are not simply the stuff of deluded conspiracy theorists. A leap in credence was granted by gold-mining heavyweight Barrick Gold when it admitted being the agent of central banks in the US District Court in order to obtain immunity from litigation.
Now Richard Russell, described as “the most venerable of US financial letter writers”, has published an unusual weekend edition questioning why the US dollar is not lower and the gold price is not higher. In short, Russell has concurred with GATA’s claims.
First, Russell drew upon the analysis of Morgan Stanley chief economist Stephen Roach with regards to the unusually low December TIC measure of US foreign capital inflows (See “US Foreign Capital Inflows Fading”, FNArena today).
When foreign inflows fail to match current account deficit funding needs, notes Russell, the usual response would be to force a recession in order to cut back on US spending. Or rates could be raised to attract more foreign investment. But with the US housing sector in crisis, these are not options available at present.
“One result should be a weaker dollar and rising gold. If the shortfall continues, we can be sure of one thing – something has got to give.”
In the meantime, central banks across the world have allowed money supply to balloon substantially. Russell notes year-on-year measures show M3 increasing by 13% in Australia, 9.3% in the Eurozone, 13% in Britain, 10.3% in Korea, and 10.7% in the US. M2 is up in China by 16% and in Russia by 45%. In other words, fiat currencies are in abundant supply.
“I’ve described the situation previously as ‘money gone wild.’ It’s a blizzard of fiat paper and credit beyond anything ever seen before in world history. The mystery is that gold isn’t higher, much higher.”
Russell now suggests that central banks have been holding back the gold price with derivatives and “massive” short sales. Says Russell: “I doubt this can continue”.
GATA further points out that if the gold price had held its traditional ratios to both money supply and commodity prices, it would be in the thousands of US dollars by now.
Nevertheless, there are still the non-believers.