While many remain skeptical that the precious metals markets are being manipulated (despite ample evidence provided by GATA, Ted Butler, and countless others), it’s worth considering that we’ve actually seen virtually the same scenario play out at least once before. Which provides fascinating insight into how the current situation might also ultimately unfold.
Over 45 years ago the world witnessed the collapse of what was known as the London Gold Pool, which shares amazing similarities to today’s gold market. As essentially the world’s economic powers were colluding to maintain a gold price of $35 per ounce, while at the same time the U.S. was rapidly expanding the supply of dollars.
The Bretton Woods Agreement negotiated after World War II set the value of the dollar at $35 dollars to one ounce.
(Yet) a massive US balance of payments deficit began to appear in the 1950s, driven in part by government spending overseas including military expenditures and foreign aid to a rebuilding Europe.To fund these expenditures, the Federal government issued bonds which were bought by the Fed with newly printed dollars.
But as is often the case, while governments and central banks are able to distort markets in the short-term, market fundamentals and basic math have a way off holding true over greater periods of time.
Which is exactly what happened with the London Gold Pool. Because as foreign governments and central banks eventually wised up to the expansion of the U.S. money supply, the pool began to collapse when France pulled out of the agreement.
Things only got worse with the exit of the French from the gold pool in early 1967, tensions in the Middle East, and the collapse of the British pound in November 1967. The Tet offensive of early 1968 indicated the US commitment to Vietnam would only grow. Speculators bought (gold) en masse in London through the remainder of 1967 and into March 1968.
Given the recent actions of China and others who continue to build financial infrastructure to eliminate any dependence or involvement with the PetroDollar system, there’s ample reason to believe that it won’t be too much longer before a nation pulls the cord on the current scheme.
Also worth noting (and just one of the reasons why part 1 and part 2 of this incredible essay by John Paul Koning is so fascinating and worth reading) is how on March 14, 1968, the U.S. requested that the London gold markets be closed the following day to combat the heavy demand for gold.
Central banks asked for the London gold market to be closed and dismantled the gold pool on March 15, 1968. Without price suppression from pool sales, the market price of gold immediately vaulted to $39 upon the market’s reopening.
All of which ultimately culminated with the Nixon shock, where Nixon removed the final ties to the gold backing of the dollar, while also imposing a 10% tax on goods imported into the United States and implementing price controls (which on a slight side note, Dick Cheney fascinatingly describes the meeting of how that all occurred in his autobiography, while at the same time calling Nixon one of the country’s great free-market thinkers).
A decade later both gold and silver reached all time highs.
A last note is that in his article Konig also mentions the similarities between the London Gold Pool and what’s been taking place in the gold market since the last collapse of the economy in 2008.
The United States and its allies would sell huge quantities of gold at prices below what a free market would have borne. In 2009, amidst some of the largest central-bank rescues and bailouts in history, let the 1960 gold rush and the eventual collapse of the London gold pool in 1968 stand as a reminder to us that central planning of monetary matters is doomed to fail.
The rapid acceleration of debt accumulation and unbacked short precious metals contracts has only further exacerbated market dynamics since Konig wrote his essay in 2009. Which means that conditions are in place for a move in the price of gold that might outdo even the 1980 jump from $35 to $850 per ounce.
And given that there’s no one in sight at the Fed who’s demonstrated any inclination to raise interests rates anywhere near the 20% former Fed Chairman Paul Volcker once did, it will be interesting to see how far the price rises this time around.