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Gordon Brown Sold Britain’s Gold at Artificially Low Prices to Bail Out a Large American Bank

George Washington's picture




 

The Telegraph’s Thomas Pascoe reported Thursday:

One decision stands out as downright bizarre, however: the sale of the majority of Britain’s gold reserves for prices between $256 and $296 an ounce ….

 

When Brown decided to dispose of almost 400 tonnes of gold between 1999 and 2002, he did two distinctly odd things.

 

First, he broke with convention and announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”, but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory.

 

Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model. The price of gold was usually determined at a morning and afternoon “fix” between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply.

 

The auction system again frequently achieved a lower price than the equivalent fix price. The first auction saw an auction price of $10c less per ounce than was achieved at the morning fix. It also acted to depress the price of the afternoon fix which fell by nearly $4.

 

It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was.

 

One of the most popular trading plays of the late 1990s was the carry trade, particularly the gold carry trade.

 

In this a bank would borrow gold from another financial institution for a set period, and pay a token sum relative to the overall value of that gold for the privilege.

 

Once control of the gold had been passed over, the bank would then immediately sell it for its full market value. The proceeds would be invested in an alternative product which was predicted to generate a better return over the period than gold which was enduring a spell of relative price stability, even decline.

 

At the end of the allotted period, the bank would sell its investment and use the proceeds to buy back the amount of gold it had originally borrowed. This gold would be returned to the lender. The borrowing bank would trouser the difference between the two prices.

 

This plan worked brilliantly when gold fell and the other asset – for the bank at the heart of this case, yen-backed securities – rose. When the prices moved the other way, the banks were in trouble.

 

This is what had happened on an enormous scale by early 1999. One globally significant US bank in particular is understood to have been heavily short on two tonnes of gold, enough to call into question its solvency if redemption occurred at the prevailing price.

 

Goldman Sachs, which is not understood to have been significantly short on gold itself, is rumoured to have approached the Treasury to explain the situation through its then head of commodities Gavyn Davies, later chairman of the BBC and married to Sue Nye who ran Brown’s private office.

 

Faced with the prospect of a global collapse in the banking system, the Chancellor took the decision to bail out the banks by dumping Britain’s gold, forcing the price down and allowing the banks to buy back gold at a profit, thus meeting their borrowing obligations.

 

I spoke with Peter Hambro, chairman of Petroplavosk and a leading figure in the London gold market, late last year and asked him about the rumours above.

 

“I think that Mr Brown found himself in a terrible position,” he said.

 

“He was facing a problem that was a world scale problem where a number of financial institutions had become voluntarily short of gold to the extent that it was threatening the stability of the financial system and it was obvious that something had to be done.”

 

***

 

Responsibility is evaded by all bar those on whose shoulders it ought to rest. The gold panic of 1999 was expensively paid for by the British public.

JP Morgan was wildly short gold in 1999.  See this and this.  As Reginald Howe has noted:

Prior to 1999, [JP] Morgan had never held more than about $20 billion in total gold derivatives, nor more than 28% of the total outstanding for all banks. But beginning in the second quarter of 1999 [before Brown announced the British gold sales], Morgan took on a much larger role in the under-one-year maturities, possibly presaging the the British gold sales. Then, during the last half of 1999, Morgan more than doubled its total gold derivatives, taking them from $18.4 billion to $38.1 billion, which amounted to 43% of the total for all U.S. banks reporting to the Comptroller of the Currency. What is more, Morgan’s over 40% dominance stretched across all maturities. In the fourth quarter alone, it increased its gold derivatives with maturities over one year by more than 80% to $17.1 billion from $9.4 billion.

(The American bank with a huge short gold position in 1999 – in addition to Goldman and JP Morgan – was Citi.)

But would government employees actually manipulate the price of gold?

Yes, actually.  As Fed chairman Alan Greenspan said in official remarks in 1998:

Private counterparties in oil contracts have virtually no ability to restrict the worldwide supply of this commodity. (Even OPEC has been less than successful over the years.) Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.

Many other governmental sources have confirmed gold manipulation as well.

As CNBC reports today:

Gold may have been manipulated like the London interbank rate or Libor over a long time frame, Ned Naylor-Leyland, investment director at Cheviot [with around $300 million under management], told CNBC.

 

The scandal surrounding the fixing of the Libor has opened markets up to “more scrutiny and more investigation,” Naylor-Leyland said.

 

He expects to see revelations over the next few months that the price of gold was also manipulated because “gold and silver reflect the true value of money the same way interest rates do.”

 

“It is effectively an intervention in two ways; one would be the fact that for central banks, gold and silver going up doesn’t make their currency look any good, and secondly a number of the big commercial banks have very large short positions which they like to manage and make easy money from,” he said.

 

***

 

Chris Powell, Secretary and Treasurer of the Gold Anti-Trust Action Committee told CNBC in June that “as central banks are interested in supporting government bonds and the dollar and keeping interest rates low, they continue to manipulate the gold market”.

And raiding so-called “allocated” gold accounts is another form of manipulation.

 

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Wed, 07/11/2012 - 13:49 | 2606758 Robsabi
Robsabi's picture

Okay, so the claim here is that Gordon Brown spent three years keeping the price of gold as low as possible to bail out a bank that, based on this article, found itself in an untenable situation at presumabely just a single point in time - early 1999, to be exact? That doesn't explain Brown's actions throughout the rest of 1999 through 2002.  Also, so we are to believe that Gordon Brown's actions re 400 tonnes of gold over this three year period was due to his attempt to bail out a financial instituion that was short only 2 tonnes, or just 0.5% of the total amount of gold sold throughout the period in question.

Also, why was the British governemnt leaping to the aid of a US bank? I thought only the American gov't and central bank was in the business of bailing out overseas financial institutions.

Wed, 07/11/2012 - 11:21 | 2606139 MFL8240
MFL8240's picture

I wouldnt sell a pair of dirty underwear to help JP Morgan.  Now to see them go under, and Dimon in prision stripes along with Corizine I would happily contribute what I could.

Wed, 07/11/2012 - 08:45 | 2605463 Bagbalm
Bagbalm's picture

So any time they want the old tanks in the street threat gets what they want? (Has doubts)

Wed, 07/11/2012 - 05:50 | 2605186 paulypaul
paulypaul's picture

foxenburg -

c'mon, this isn't plausible. the total value of 2 tons at around $275 an ounce would only have been worth $20 million - and in any case, how short could they have been? Surely $20 million is petty cash for "a globally significant bank"?

It isnt the value of the asset that is the important part.  Its the value of the derivatives built upon the cost and its future direction.

Wed, 07/11/2012 - 06:37 | 2605225 OmNamah
OmNamah's picture

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Wed, 07/11/2012 - 04:18 | 2605145 foxenburg
foxenburg's picture

One globally significant US bank in particular is understood to have been heavily short on two tonnes of gold, enough to call into question its solvency if redemption occurred at the prevailing price.

 

c'mon, this isn't plausible. the total value of 2 tons at around $275 an ounce would only have been worth $20 million - and in any case, how short could they have been? Surely $20 million is petty cash for "a globally significant bank"?

Wed, 07/11/2012 - 11:47 | 2606189 amanfromMars
amanfromMars's picture

c'mon, this isn't plausible. the total value of 2 tons at around $275 an ounce would only have been worth $20 million - and in any case, how short could they have been? Surely $20 million is petty cash for "a globally significant bank"? ..... foxenburg, Wed, 07/11/2012 - 04:18

What does that tell you about the bank, foxenburg? And they have Tony Blair on their payroll and he is a pariah unable to step out anywhere free and always in fear of personal reprisals for what he chose to do. And what does that tell you?

Wed, 07/11/2012 - 04:36 | 2605157 Sandmann
Sandmann's picture

So the US Treasury was short of Gold too ? Why does Britain bail out a US bank ?

Wed, 07/11/2012 - 00:02 | 2604826 silverdragon
silverdragon's picture

Politicians will whore their countries for a suitcase full of cash or higher position. Brown should be charged with treason.

Tue, 07/10/2012 - 23:30 | 2604732 palmereldritch
palmereldritch's picture

Early Cash-For-Gold customer.  Little did he know how soon that business would take off!

Tue, 07/10/2012 - 22:57 | 2604633 mjk0259
mjk0259's picture

So they sold 400 tons of gold to help a bank get a lower price on 2 tons of gold? Makes no sense. They could just have lent them 2 tons of gold. And why a US bank? The US government could have lent them gold or money if it was such a risk.

Wed, 07/11/2012 - 01:50 | 2605020 Temporalist
Temporalist's picture

Well if the derivatives in question were mostly short then they stood to gain a lot and in turn buy a lot more gold with the paper gains if they chose.  Or they used it to pay of a secret debt with an unsavory leader in an oil rich country or weapons dealings or to mask nefarious gold rehypothication by getting the physical...

 

And why a US bank may be because the system was already primed for cover-up when it's owned by friends in corrupt places.

Wed, 07/11/2012 - 00:41 | 2604932 tip e. canoe
tip e. canoe's picture

theory makes much more sense with those playas.

p.s. tyler : was that survey today from the paper st. soap co.? 

Wed, 07/11/2012 - 01:48 | 2605037 reload
reload's picture

It was not long after the Gold sale that a rift betweeb Brown and Blair started to get attention. Blair now enjoys a multi million annual retainer from JPM as an `advisor`. He does not pay tax on it though.

Tue, 07/10/2012 - 23:35 | 2604750 palmereldritch
palmereldritch's picture

UK's Gold...that's funny

Tue, 07/10/2012 - 21:39 | 2604366 silverdragon
silverdragon's picture

The goods news is the idiots manipulating the price of Gold downwards are doing a crap job and they are running out of cards to play.

Tue, 07/10/2012 - 20:20 | 2604150 Abner Doon
Abner Doon's picture

Did Wells Fargo CEO John G. Stumpf profit from stock and option compensation while not disclosing material information?

http://hartzman.blogspot.com/2012/07/did-wells-fargo-ceo-john-g-stumpf.html

Tue, 07/10/2012 - 20:06 | 2604119 Forgiven
Forgiven's picture

The game only lasts as long as you are willing to play it.  Take your metals and walk away.  Every chance you get, convert their stupid paper into more metal.  Rinse. Repeat.

Tue, 07/10/2012 - 19:08 | 2603962 OdinsBeard
OdinsBeard's picture

Can't believe some of the comments on here

http://ftalphaville.ft.com/blog/2012/07/10/1077461/propping-up-the-gold-...

How blind are those that won't see!!

Wed, 07/11/2012 - 01:40 | 2605023 Reptil
Reptil's picture

Amusing.

The original article of that Izabella Kaminska is as clueless as they come. Rising demand is (but without the demand) eeeehhh bearish. riiiggggghhhhhttt

In the comments I read someone accusing people who invest in Gold of "hoarding (future) demand in a recession"? (Isn't "hoarding" assets that might have value in the future called "investing"?)
When that "recession" is nothing but a predictable, preventable and methodical takedown of the world's economy to benefit the controllers of the financial one?
I think we're seeing the first (twisted, wrong) calls for confiscation here; "hoarding" (investing in a scarce commodity) is considered a hindrance for the global economy. Those that do accept there's manipulation (BIS, CB), welcome it."gold hoarding" is supposedly "anti-social" and something the 1% would do. That's right, they'd do that. They know the system is going under, since they themselves rigged it. The geniusses in the comments (apart from a few) can't seem to figure out why CBs are buying gold, of the disparity between the facts of a rising demand for physical metal and slumping prices. (paper gold/silver = fiat money manipulation) What is also an obvious blind spot is the use of silver as "peoples money" in the 19th century (and beyond) in tandem with gold. And that Gold (as underlying asset for sound money) would destroy the middle class. What middle class? The one that CB are vigorously trying to protect? (sarc)

I just got some political party financial statements for the election in two months: In order to "calm the markets" new sacrifices (of everyone) are needed. yeah right

Homer Simpson does investing. DOH

Wed, 07/11/2012 - 02:21 | 2605040 Temporalist
Temporalist's picture

Regarding hoarding, the demagoguery is just going to start.

 

I would ask them if keeping money in a 401(K) or pension or retirement plan, fine art, collectible literature (collectible anything) or real estate "hoarding?"

Wed, 07/11/2012 - 02:23 | 2605078 Reptil
Reptil's picture

Not yet. But that time will come as well. (if these people are allowed to continue)

Tue, 07/10/2012 - 18:20 | 2603775 jomama
jomama's picture

the first mistake is to assume that those in power are there to empower and protect the plebeians. 

Tue, 07/10/2012 - 19:49 | 2604090 spencer
spencer's picture

utter B/S

 

"heavily short on two tonnes of gold" ???? WTF???

 

I don't even know what to say here - does ZH have any editorial staff or what?

1 ton equals 32150 troy ounces therefore 2 tons = 64300oz times say 300 bucks a shot = 19 million bucks and change.

So are we here to believe the Treasury sold 400 tons to cover 2 tons of bull shit from "a large institution" being heavily short 19 million bucks?

What a stupid article

 


Wed, 07/11/2012 - 09:47 | 2605703 GMadScientist
GMadScientist's picture

a) Carry implies massive leverage (assume the usual 40X from these reprobates)

b) Being short leaves you an unlimited downside (each $100 rise -> $250M)

c) Take a look at the Au graph from '99 on...they knew that was coming if they didn't keep a lid on it

The loss would be ~$4B at current Au prices. i.e. on the same order of magnitude as their 'whale hedge' fuck-up


Wed, 07/11/2012 - 01:52 | 2605041 Reptil
Reptil's picture

It's not known what else was "covered". :-)

Reason I'm siding with GW (despite this disparity in numbers) is because there was a motive for Brown transferring that gold away from public accounts (and replacing it with increasingly worthless paper). Just like other CBs did in the nineties.

I do not believe in incompetence. It's been THE trick to "sell" huge "fuckups". The "gold is a barbaric asset" was, and is just some mumbo jumbo to make us believe CBs or the BIS have been clueless.

Tue, 07/10/2012 - 21:53 | 2604423 SubjectivObject
SubjectivObject's picture

Hafta agree with spencer, if 2 tons is accurate, it's a trivial basis to justify selling .... the family jewels.

Tue, 07/10/2012 - 18:03 | 2603725 tony wilson
tony wilson's picture

announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”,

 

what utter bullshit this was a fraud.

that rothshield mcfuck is a scotch mctool.

he along with blair need to be in jail now.

Tue, 07/10/2012 - 17:37 | 2603655 LawsofPhysics
LawsofPhysics's picture

The U.K. is certainly one of the larger dominos that is still in denial.

Tue, 07/10/2012 - 17:24 | 2603611 Racer
Racer's picture

And now as a result of lack of money in the UK coffers, pensioners have their winter fuel allowances cut by 25% when fuel is increasing at about 30% or more. they aren't baled out because they are dying from cold!  No, ..gold was sold and keeps them cold so they would die instead of being a burden to the banksters in their cosy warm mega mansions with huge fat bonuses and fat pensions

Tue, 07/10/2012 - 20:40 | 2604195 smiler03
smiler03's picture

Liar. They haven't had their winter fuel allowances cut. It is a proposal by one MP. It will not happen, not even over the dead body of Nick Clegg.

 

Wed, 07/11/2012 - 08:06 | 2605342 Racer
Racer's picture

No I am not a liar,..... it is a fact... and I know because a close relative is in receipt of it.. it went from £400 to £300 last year

http://www.bbc.co.uk/news/business-12846318

"The yearly tax-free payment to help people pay for their heating in the winter was worth £250 for the over 60s last week, and £400 for the over 80s.

But the payment will revert to £200 and £300 for the two age groups in the winter of 2011-12."

Tue, 07/10/2012 - 20:53 | 2604226 HungrySeagull
HungrySeagull's picture

And it was a london bookstores that reported sales of very large tomes at very cheap prices instead of a bucket of coal to keep warm.

Tue, 07/10/2012 - 17:23 | 2603609 world_debt_slave
world_debt_slave's picture

ah, yes, Brown's bottom, ever since the 1776 Revolution, England has always had it's plans for the US, there is no escaping the banksters.

Tue, 07/10/2012 - 19:11 | 2603970 OdinsBeard
OdinsBeard's picture

Your nationalism blinds you.  The English are as much slaves to the system as you are.  Recent history would suggest that it's the US that has it's plan for the British, not the other way round

Tue, 07/10/2012 - 23:20 | 2604701 world_debt_slave
world_debt_slave's picture

Au contraire, read some history, not just the History channel.

Tue, 07/10/2012 - 17:15 | 2603587 PMakoi
PMakoi's picture

Afterwards,...  "Gordon, you twit!  You weren't actually to sell it!  The idea was simply to announce that you would to drive the price down.  Bloody hell, man!  At least you didn't hand over the opium franchise to the C.I.A.!" 

"Why do you look like that Gordon?  Oh my Gawd, say that you didn't give that away too!"

 

Tue, 07/10/2012 - 17:07 | 2603566 JohnKozac
JohnKozac's picture

House boxes have plunged 40% in many places...while gold and tripled and is still rising. What a store of value!

Tue, 07/10/2012 - 17:01 | 2603548 Getting Old Sucks
Getting Old Sucks's picture

I just want to say thank you.  That's when I bought most of my gold.

Tue, 07/10/2012 - 18:37 | 2603838 Vidar
Vidar's picture

Hear, Hear! I second that. Thanks, Gordan!

Tue, 07/10/2012 - 16:59 | 2603544 vato poco
vato poco's picture

OK, somebody help a brother out here.

I have no doubt that Brown was/is a moron and a tool and a puppet of the banks. None whatsoever. But there he was, trying to look all bankerly as Chancellor of the Exchequer, when all this happened. Goldman? Morgan? Citi? comes to him and tells him, "We fucked up, old chap. Now you gotta save our arses." And he does so by selling the bulk of Engalnd's gold at bargain-basement prices. OK, I get the idea: the guy's a fucking idiot.

But even fucking idiots have some ration of common sense. Why wouldn't Brown have told the bank in question, "You want me to go to my boss and tell him I wanna sell _our_ gold at rock-bottom prices? Just so's we can help you *American* banks out? My country's one-sixth the size of yours, both in population and GDP. Piss off, mate. Go ask your puppet Clinton and/or Rubin." There's a lot of dipshit drug dealers out there who don't know history and can't read, but they can do sums in their head easily - and they know quick quick if you're trying to fuck 'em. Politicians have a lot in common with drug dealers: they are ignorant, but shrewd, especially when a situation arises that might put their asses on the line, or worse, jeopardize their sacred re-eelction.

So it ought to be with Brown - or if he really IS that dumb, then with his boss, Blair. Why'd they sell all **their** gold? The story says the bank in question was a "globally significant *US* bank" whose failure might 'threaten the stability of the financial system', right? So why didn't they send the banksters packing off to NYC or Washington? Are we supposed to believe they sold most of their country's gold reserves just because "Goldman's commodities chief was married to the gal who ran Brown's office"? Oh, OK. "ANYthing for a friend of Sue's!" This story does not compute with basic human nature. Or am I just missing something?

Wed, 07/11/2012 - 11:59 | 2606287 i-dog
i-dog's picture

.

Tue, 07/10/2012 - 23:44 | 2604781 Cathartes Aura
Cathartes Aura's picture

when the notion of nations is seen through, then the game is more obvious.

if there were no nations, therefore no loyalty to a fiction, who's left?  the rich and powerful.

which is who Gordy worked/works for.  and Blair - please he's so obvious, check into the many pies his sticky fingers still sample!

the great trick is to get folks believing in "nations" and believing in the false history fairy tale of nations, and what they do, and how they fight, and who, and what for, and who "wins" and who gets to plant their flag on the same land next.

if you were merely examining all these stories sans the nationstate fiction, it really would be more clear. . .

they work for them, not you.  you don't even factor into their minds.  ever.

and within that awareness, we exist, and we act accordingly.

Wed, 07/11/2012 - 00:26 | 2604896 palmereldritch
palmereldritch's picture

You nailed it CA.  It's all part of the two-bit grifter hologram they've constructed ever since cash met conspiracy.

Wed, 07/11/2012 - 00:33 | 2604913 Cathartes Aura
Cathartes Aura's picture

two bit grifter hologram. . .

very evocative!

Tue, 07/10/2012 - 18:40 | 2603858 Shigure
Shigure's picture

I can't get my head round this either.  Or the motive behind Blair's enthusiasm for Bush's war.  Deeply troubling.

Wed, 07/11/2012 - 02:03 | 2605053 Reptil
Reptil's picture

Take another, simular example; the Netherlands.

After a political murder, the orders for the F-37 multi role fighter plane were signed (called "Joint Strike Fighter" here to give it some semblance of coöperation). No planes yet, and it almost has doubled in price but that's besides the point. ;-) Then the appointed (minority) Prime Minister Balkenende went to Washington DC to have an audience of his majesty GW Bush. Coming back our dutch hero leader exclaimed; "We've seen the evidence of WMD, we can't tell you though, since it's secret." And thus the Lowlands went to war.

Most of our gold is in a vault in NY. (or is it?) I hope it's a segregated account. LOL

Tue, 07/10/2012 - 17:29 | 2603630 AlmostEven
AlmostEven's picture

It had nothing to do with who married who. The game plan was this:

Find the lowly reptile who dreams of being a dragon. Find the unpopular kid who'll do anything to be popular. Find the guy who'll climb over his mother's dead body to get to the top.

In Seattle in the early 1990s, a certain billionaire wanted to build a sports stadium with public money. The original proposal would have eaten up more city funds than the entire school system. The public was outraged. The issue was a hot potato. The governor wouldn't push for it. The mayor wouldn't push for it. Voters voted against it. However, a brown-nosing, ass-sucking, unelected city treasurer with lofty goals crafted a clever, underhanded way of funding the stadium. For his efforts, Gary Locke became governor of Washinton state a few years later. Whatever became of that accountant Gordon Brown? Oh yeah, he got a nice little promotion a few years later.

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