February 19, 2007 – On January 15th the Financial Times published a series of questions from its readers about gold that were answered by James Burton, CEO of the World Gold Council. The article can be found at this link: www.ft.com
There were two answers given with which I completely disagree. These are:
“Q: How do you see the relationship between oil and gold prices evolving over the coming years?
James Burton: There is not, in my view, a natural direct relationship between gold and oil since the price drivers for the two are very different; if you look at the two prices over the long term you will not see any clear association.
Q: So-called gold bugs have floated conspiracy theories on how gold prices have been kept artificially low. Is there any truth to these theories?
James Burton: We have seen no evidence to support these theories. And we note that the two companies which have done actual field research into the gold derivative markets – GFMS Ltd and Virtual Metals – have not found any evidence either.“
Given my disagreement with the above answers, I have penned the following letter to the editor of the Financial Times.
Sir, Whilst most of the answers by provided by James Burton to your readers’ questions about gold are spot on (“Ask the expert: Gold”, February 15), two are contrary to available facts.
First, there is indeed a natural, direct relationship between gold and oil. Mr. Burton accepts the premise that gold is money, but inexplicably does not apply it in this case by looking at the price of crude oil in terms of gold.
Since the end of World War II, one barrel of crude oil has risen from $1.17 to present levels near $60. But one barrel of crude oil today is 2.6 goldgrams, a price not much different from its average price of 2.3 goldgrams over this 62-year period. This relationship between crude oil and money is made clear by the accompanying chart, prepared on a base-100 scale.
There is no natural, direct relationship between oil and the dollar, but there is one between gold and oil, just like there is between gold and all goods. It is well documented, for example, that the British pound had essentially the same purchasing power in 1914 as it did when Sir Issac Newton as Master of the Mint invented the classical gold standard circa 1704.
Second, Mr. Burton states that the World Gold Council, GFMS Ltd. and Virtual Metals have not found any evidence that the gold price is being kept artificially low. The position of the two companies may be explained because they appear conflicted, as some of their clients participate in the gold price fixing scheme. But Mr. Burton is not conflicted in this way. Given his responsibility for representing the interests of gold mining companies and their shareholders, one can only conclude that Mr. Burton has not been looking very hard.
That the gold price is being artificially suppressed is beyond question. The body of evidence established by the Gold Anti-Trust Action Committee is overwhelming, and is based upon – among other available facts – testimony of Alan Greenspan before the US Congress and a self-published admission by the Bank of International Settlements. The full scope of the gold price suppression scheme and the supporting documentation is freely available to the public at www.GATA.org.
James Turk, Founder & Chairman, GoldMoney
Jersey, Channel Islands
Even though the facts supporting the gold price suppression are clear and beyond dispute, one only needs logic to understand why governments are trying to cap the gold price. Their motivation to manage the gold price is simple. Under the classical gold standard, gold and national currencies were complementary to one another. Because it is money, gold served as the unit of account, and also imposed an essential discipline on the money creation process. But national currencies were more efficient and easy to use as a circulating medium, so these money-substitutes created by banks and governments circulated hand-to-hand in place of gold coin.
Their complementary relationship changed, however, to an adversarial one when governments jettisoned the classical gold standard. Governments were irritated by the discipline the classical gold standard imposed on their ability to create ‘out of thin air’ their national currency money-substitutes. Governments did not want to be bound in any way or to have their spending aspirations restrained. But while they could and did break the formal link between gold and their national currencies, governments can never stop gold from doing what it has always done – serving as a useful unit of account that very effectively measures value, as the above chart demonstrates so clearly.
In other words, governments can not demonetize gold. All they can do is what in fact they have already done – they stopped gold from circulating as currency. This reality creates the adversarial relationship between gold and national currencies that exists today.
The consequence of this post-classical gold standard adversarial relationship is that gold and national currencies are competitors, and it is this competition that motivates governments to manage gold. Under the classical gold standard, governments managed their national currencies to maintain the currency’s equivalent value in gold. But governments now fiddle with the other end of the stick. Instead of managing a currency to maintain its equivalent purchasing power in terms of gold, governments now try to cap the gold price to disguise the ever-declining purchasing power of national currencies. In other words, they manage gold trying to keep its price low to make national currencies look better.
Importantly, all price fixing schemes end eventually, even those with gold. For example, governments could not keep gold at $35 per ounce in the 1960’s, despite their considerable efforts. Because governments today continue to inflate away the purchasing power of national currencies, people will continue to convert national currency into gold, and gold’s exchange rate in terms of those inflated currencies will continue to rise.
So just like the price suppression scheme in the 1960’s was in time broken, the current one will inevitably be broken too. And the sooner the better, thereby allowing gold’s rate of exchange to the dollar and other national currencies to quickly reach the level it would otherwise be in a free market without government intervention. Only then can shareholders of gold mining companies earn the full potential return of their investments.
Thus, by not acknowledging the gold price suppression scheme, Mr. Burton does a harmful disservice to the gold mining companies he represents and more importantly, to the shareholders of these companies. The more publicity this price suppression scheme receives, the sooner government intervention will end, and the sooner will gold rise to its free-market level.