Market Observations with Rob Kirby

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History Rhymes and Old Habits Die Hard

by Rob Kirby, Kirby Analytics. October 5, 2009

Over the past couple weeks some interesting historical documents relating to the gold market have surfaced. First up is Zero Hedge’s, Exclusive Smoking Gun: The Fed On Gold Manipulation which features an official document uncovered by researcher/historian Geoffrey Batt - a June 3, 1975 memorandum from Fed Chairman Arthur Burns to [then] President Gerald Ford.

Writes Zero Hedge,

“[the memorandum was sent] to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon's actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971. In a nutshell Burns' entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would "easily frustrate our efforts to control world liquidity" but also "dangerously prejudge the shape of the future monetary system." Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished.”

Quoting from pg. 4 of the Burns memorandum,

...a large measure of freedom for governments to trade in gold a market-related price may easily frustrate efforts to control world liquidity. For example, such freedom would provide an incentive for governments to revalue their official gold holdings at a market-related price. [France has already done so.] This in turn could result in the addition of up to $150 billion to the nominal value of countries’ reserves. Liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control. This is a matter of great concern to Mr. Witteveen, the head of the I.M.F., and to many other financiers.

Funny, ehh, the Fed worried about the inflationary impact of a nominal increase in reserves?

Source: Hugo Salinas Price

And regarding the IMF [and World Bank], there are some esteemed market watchers who claim these institutions have recently “panned” the dollar. For anyone who wants to take their heads out of the sand, here are a few words about the role of the IMF from my friend Rhody, an astute market watcher,

“The IMF and the World Bank are American institutions added to the Bretton Woods Agreement on the insistance of the U.S. The World Bank was added to facilitate the lending of U.S. dollars to the developing world. This fostered debt and control. The IMF was the bully organization used to enforce the lending agreements of the World Bank. In a sense, the World Bank was a loan shark and the IMF was the enforcer that went around and broke legs when borrower nations got in trouble financially. Add to this the occasional surge in American interest rates to 20% (1981) and America literally pillaged the world here. This is the sick system that the G20 seeks to support. I really doubt that the World Bank and IMF have panned the dollar. They can't. Their continued survival depends on the dollar. The IMF, for example is hardly likely to pan the dollar and then turn around and sell 403 tonnes of gold in return for dollars! Get real.”

There were two companion pieces to the Exclusive Smoking Gun piece, published by Zero Hedge about week earlier; the first of which was a “declassified” 1968 U.S. State Dept. document explaining the inner workings of gold price manipulation [broadly defined as “re-shuffling”] during the days of the London Gold Pool –- here.

The second companion piece is “linked” in the Exclusive Smoking Gun piece - a declassified 1968 CIA brief, but it’s apparently no longer available. What the CIA brief outlined was the existence of two markets for gold – The Official and Private market. The brief went on to outline how South Africa [by far the world’s largest gold producer at the time] should be encouraged to sell their output on the “Private” market so as to help suppress the world gold price.

Then, Bretton Woods was abrogated by President Nixon in August, 1971.

But do look at this,


What this document shows is [then] N.Y. Fed President, Paul Volcker [post Bretton Woods] acknowledging the existence of the same two gold markets [Official and Private] instructing the Vatican to sell “their” gold in the “Private” market – the one acknowledged by the CIA back in 1968 to be utilized for gold price suppression.

I’m going to suggest that when you take the words of Fed Chairman Arthur Burns together with the words of N.Y. Fed President, Paul Volcker – both circa 1975 – it’s very clear that the gold price was highly managed during the “melt-up” in price throughout the 1970’s. Almost sounds like history repeating itself, eh?

This would seem to make a mockery of Mr. Volcker’s own words [or show him as having selective memory, perhaps?] since excerpts of his memoirs were published in the Nikkei Weekly on Nov. 15, 2004 – referencing a 1973 [10%] U.S. Dollar devaluation – where Mr. Volcker stated,

“That day, the U.S. announced that the dollar would be devalued by 10%. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.”

Mr. Volcker may be technically correct when he states that “joint” intervention in gold sales was not undertaken; but, it would appear we can all rest assured, unilateral [American] intervention was.

None of this should surprise anyone when we all stop and consider the sage words of Mr. Alan Blinder Esq. – former Vice Chairman of the Federal Reserve – who appeared on PBS television in the 1990’s and uttered,

"The last duty of a central banker is to tell the public the truth."

It would seem that old habits really do die hard.

Today’s Market

Overseas equity markets began the week on a negative note with Japan’s Nikkei Index dropping 57 points to 9,674. North American markets shrugged that off with the DOW gaining 112.10 to 9,599.80, the NASDAQ up 20.04 to 2,068.15 and the S & P ahead by 15.25 to 1,040.45. NYMEX crude oil futures added .42 to close at 70.35 per barrel.

Benchmark interest rates: the 5 yr. government bond finished the day at 2.20% while the 10 yr. bond ended the day at 3.22%.

On foreign exchange markets the U.S. Dollar Index lost .36 to 76.68.

Precious metals did better across the board with COMEX gold futures adding 14.30 to 1,017.60 per ounce while COMEX silver futures added .46 to 16.64 per ounce. The XAU Index gained 4.86 to 162.03 and the HUI Index advanced by 14.58 to 409.32.

There is no economic news of note to be released tomorrow.

Wishing you all a pleasant evening!

Rob Kirby

© 2009 Rob Kirby

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Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
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