Gold: Foreign Central Banks Versus The US Government

By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com

An important market shift has occurred, as I expected, that now pits a growing number of foreign central banks against the plans of the US government.

The US government, including its primary trading partners and a dwindling number of foreign allies, has a strong interest in holding down gold and silver prices.  The price of gold is an unofficial report card on the health of the US dollar, the US economy, and the US government.  

As long as the US dollar appears strong, it can maintain its status as the effective world reserve currency.  This status generates a multi-trillion dollar interest-free subsidy of the US government by other nations.  Further, a strong dollar allows the US government to finance its huge deficits at lower interest rates.

In the past few years, some gold and silver price suppression tactics by the US government have become so flagrant that more foreign central banks have stopped turning a blind eye to the continuing decline in the value of the US dollar.

As a result, central banks are no longer net sellers of gold reserves.  In fact, the latest statistics of acknowledged official gold reserves shows central banks to be net buyers.  And not only are they buying, they are adding reserves at the fastest pace since 1965!  Most of the acquiring central banks are from the undeveloped and developing nations, which need a reserve currency that is safe from collapse.

As a perfect example of what is going on, the price of gold rose 4% on Friday, June 1 after the horrible monthly report for US civilian non-farm jobs was released.  Normally, US government officials who are aware of the contents of this release before it is made public have plans in place to knock down gold and silver prices as the data are released.  This has occurred almost every month for the past five years.

On June first, the results were different.  For whatever reason, the US government did not act to hold down gold and silver prices that day.  In response, gold had one of its highest daily percentage price increases of the past decade.

However, the US government couldn’t allow higher gold and silver prices to continue.  They were forced to wait for a counterattack until the following Wednesday, June 6.  The reason they had to wait is because the London market is the world’s largest gold and silver trading market.  It was closed on June 4 and 5 for the celebration of the Queen’s Jubilee.

The perfect opportunity on June 6 was when Federal Reserve Chair Ben Bernanke was to speak before Congress.  One hour before Bernanke appeared, there was virtually no physical gold available for purchase on the London market.  However, a flood of paper contracts for gold and silver began to be sold.  Within four hours, more than 16.5 million ounces of paper gold was sold.  My understanding is that almost of this gold, which represents more than 20% of recent annual worldwide gold mine output of about 76 million ounces, was purchased by foreign central banks.  Even though the reported purchases of central bank gold reserves are at their highest levels since 1965, central banks such as in China and Russia are aggressively purchasing gold and not reporting anything!

So, while the US government succeeded in knocking down gold and silver prices last Wednesday, all it did was provide another bargain opportunity for foreign central banks to add to their reserves at the ultimate expense of the American taxpayers.

In effect, the efforts of the US government to hold down gold and silver prices are now being actively, though on a low-key basis, opposed by a growing number of foreign central banks.

Last Wednesday, the mainstream media reported the gold and silver prices were down because of Bernanke’s remarks to Congress.  That was absolutely false as the price suppression started an hour before that.  That leaves it for people like me to tell you what really is going on.

And, what’s going on is that markets have shifted so that more foreign central banks are buying gold as part of their planning for the coming decline and possible collapse of the US dollar.  It they are doing so, shouldn’t you do the same?

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed athttp://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.