The London Gold Pool and the New Currency Wars

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While reviewing the 1968 collapse of the London Gold Pool I realised how similar the then gold wars were to the currency wars of today. At that time the world was under the gold exchange standard better known as the Bretton Woods accords of 1944 as opposed to the fiat currencies’ standard today dominated by the US dollar and more commonly known as the dollar standard. By “temporarily suspending the convertibility of the dollar into gold”, US president Richard Nixon unilaterally ended the gold exchange standard in 1971. De facto the US decision ended indefinitely and permanently the gold exchange standard. Since then we have been in a fiat currency standard largely dominated by the US dollar. Still, gold remained an important international reserve asset for most world central banks.

The Bretton Woods agreement made the dollar and gold the world’s reserve currencies, and stipulated that all member nations’ reserves had to consist of either physical gold or currency convertible into gold. The US dollar was convertible into gold at a fixed exchange rate. Countries in the Bretton Woods gold exchange standard started to manipulate their currencies on their national level, often trying to devalue their currencies at the same or slightly higher rates than what the dollar was being devalued, or inflated. The US had inflated the money supply by too much to fund the Vietnam War and President Johnson’s Great Society, and the US was no longer able to redeem foreign-held dollars into gold. In October 1960, gold trading on the London gold exchange reached $40/oz, which was $5 higher then the central bank’s target price. The world entered the twilight zone of freely floating exchange rates. To protect the international gold exchange system from collapse the London Gold Pool was secretly created.

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The London Gold Pool was the pooling of gold reserves by a group of eight central banks from the US and Western Europe that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market. The members of the London Gold Pool and their initial gold contributions in tonnes to the gold pool were:

                                      United States, 120 tonnes                 United States, 120 tonnes
                                     Western Europe, 120 tonnes             Germany, 27 tonnes
                                                                                                         United Kingdom, 22 tonnes
                                                                                                         France, 22 tonnes
                                                                                                         Italy, 22 tonnes
                                                                                                        Belgium, 9 tonnes
                                                                                                        Netherlands, 9 tonnes
                                                                                                        Switzerland, 9 tonnes

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The beginning of the end for the London Gold Pool was the devaluation of the pound sterling in November 1967. Thursday evening March 14, 1968 emergency meetings were held in Buckingham Palace in London, with the Queen subsequently declaring Friday March 15, 1968 a “bank holiday”. The London gold market remained closed for two weeks, during which time the London Gold Pool was officially disbanded. This lead to the creation of Special Drawing Rights (SDR) by the IMF in 1969 originally defined in grams of gold (0.888671 grams) and equal to the US dollar (35 SDR = 35 USD = 1 oz Gold). In 1971 US president Richard Nixon unilaterally ended the gold exchange standard. In 1973 the SDR was also delinked from gold and redefined as a basket of 16 fiat currencies.

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I am sure you already see the resemblance with the recent currency wars that started in 2008. The collapse of the gold exchange standard started with gold wars because at that time currencies were linked to gold and concluded with the collapse of the gold exchange standard. Since the 2008 financial crisis we have again currency wars because of excessive debt created by a major war. In the 60s it was the Vietnam war and in 2008 it was the Iraq war. Since 2008 we have been in currency wars with short periods of truce and even some collaboration. As with the London Gold Pool we have now similar attempts to manipulate the international monetary system in order to save it from collapse. In the 60s gold was at the core of the manipulation and today it’s the fiat currencies. In a recent article, author Jim Rickards reveals a similar pool but not on the gold market but rather the foreign exchange markets. He mentions a secret agreement reached by the G4 (Japan, China, US and the EU) and the IMF at a meeting of the G20 in Shanghai. Like the London Gold Pool “the Shanghai Accord happened in stealth, but it will go down in history as a major turning point in the international monetary system” says Jim Rickards. The purpose of the agreement, according to Jim Rickards is to weaken the yuan on a relative basis by strengthening the currencies of China’s major trading partners, Japan and Europe. In other words, says Jim Rickards, if the yen and euro get stronger, that’s the same as making the yuan weaker, but without the shock of a Chinese devaluation.

However, competitive devaluations in the end are zero sum game and end again in a collapse of the international monetary system like in the 1971 but this time of the de facto dollar standard. Since the collapse of Bretton Woods, the international monetary system is based on fiat currencies with the US dollar at its core. Because of its dominance even though not “official” it is called the dollar standard. As you can see in the chart bellow the US dollar still dominates the official international reserves (63.6%) followed by the EU euro (20.4%). So almost 2/3 of forex reserves are in US dollars.

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The problem that collapsed the gold exchange standard is the same that will collapse the present dollar standard and that is the excessive global debt and more specifically that of US. Actually what happened in 1971 was just pushing the can down the road without solving the problem. Today the problem is the same but just several times larger and it will not be possible to kick it again.

All the efforts to push gold permanently out of the international monetary system evidently failed. Gold remained in the shadow and has come back in the limelight since the 2008 financial crisis as the increase in central banks’ reserves clearly show. It is also evident that gold never left the system. From the top official holdings reached in 1965 they only decreased by 22% until 2007. They are increasing again since 2007, retracing almost half of the drop as of 2016. The two major official gold buyers being China and Russia. Official gold reserves still represent today if included in official international reserves 15.4%.

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There is talk of replacing the US dollar by the SDR but that will only push the can into the future and that is if not too late already. Remember that the problem is not just the dollar but also all the other fiat currencies that are included in the SDR, like the EU euro, British pound, Japanese yen and from October 2016 the Chinese yuan. Diversification will have the same effect as the CDS baskets had, that almost collapse the entire financial system in 2008. The chart bellow shows very well what I mean. It is the evolution of the SDR since its creation in 1969. In 1980, just 10 years after the delinking of the hard SDR from gold, the new fiat SDR basket lost 93% of its value in gold. As of July 2016 it lost 96%. All fiat currencies are correlated and we have today a systemic problem. Fiat currency diversification will not solve the problem.

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As before the gold exchange standard collapse we had the London Gold Pool attempt to save the standard, we have today the Shanghai accord and similar initiatives to save the dollar standard. I am sure it will also fail as the London Gold Pool did. The collapse of the London Gold Pool was initiated by an insider (France) and followed by the other European countries. Don’t be distracted by the apparent collaboration of the G20. Today the equivalent of France could be China followed very close by Russia if not both at the same time. The Shanghai accord could be the prelude to the collapse as the London Gold Pool was in the 60s.

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