Whisperings of a gold conspiracy

John Rapley
Jamaica Gleaner
Friday, October 26, 2007

Last week, the Freemarket Gold and Money Report broke the news that the United Sates (U.S.) Treasury had been removing gold from its vaults and moving it to banks throughout the country. From there, these supplies presumably made their way on to the world market.

Nuggets of minutiae like this are just what make the gold bugs yell, "I told you so!", and indeed, such a chorus erupted on the Internet last week. 'Gold bug' is, among other things, the name given to students of gold who allege that its price has been driven down by an international bankers' conspiracy.

Unlike other loopy conspiracy theories said to involve Jews, Freemasons or the Vatican, this one actually has a ring of plausibility to it. The basic thesis is that some of the world's central banks, working with some of the planet's largest financial institutions, have together depressed the value of gold and, thereby, maintained the U.S. dollar as the world's principal reserve currency. They have done this by selling their gold reserves whenever gold prices rallied.

What John Maynard Keynes once called a "barbarous relic" long served as the reserve currency for the world economy - the medium used by central banks to stash their savings, which they could later use to fund international trade. In the post-World War II period, the dollar largely replaced gold as the world's reserve currency.

Gold became useless

By the 1990s, many economists were alleging that the U.S. dollar was here to stay, and that gold had, therefore, become useless for anything other than jewellery. Billionaire investor Warren Buffett put it best when he said that gold was something people dug out of the ground, then buried back in the ground, paying guards to stand over it.

However, the gold bugs allege that the switch from gold was engineered by central banks. The advantage to these banks of the dollar, they suggested, was that its supply could be boosted by printing money. In contrast, nature had fixed the supply of gold. This meant that central banks could augment the world's money supply, driving the global boom of the last two decades. Hence, the interest of the private banks in this arrangement: The surge in money supply led to massive financial speculation, driving the bubbles that made them rich these last two decades.

Some see even more sinister forces at work. They point out that no less a mainstream figure than Nobel-winning economist Joseph Stiglitz has argued that Wall Street controls Washington. Close personal links between the U.S. Treasury and the Federal Reserve Board, on one hand, and major banks, on the other, stand as evidence to conspiracy theorists that a cabal of bankers really do control the world economy.

Economic rationale

Still, there appeared to be an economic rationale to switching the world economy to the dollar. But in the repeated bursting of financial bubbles these last few years - the subprime mess in the U.S. being the latest of them - the gold bugs detect the end of the line for this era of speculation. They see central bank manoeuvres to now sell gold as desperate last efforts to turn the tide of a war that is going against them.

In recent years, gold has risen as the dollar has fallen. And in recent months, global investors appear to be losing confidence in the U.S. Federal Reserve's willingness to defend the dollar. Some economists even believe the Americans are deliberately weakening their currency to regain the competitive edge U.S. firms have lost to Asian rivals.

But whatever the motives of central bankers, it does seem that until all these bubbles stop exploding, it will remain a good time to own gold.

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