Tag Archives: Gold pool

Central Banks Care about the Gold Price – Enough to Manipulate it!

In early March, RT.com, the Russian based media network, asked me for comments and opinion on the subject of central bank manipulation of gold prices.

The comments and opinion that I supplied to RT became the article that RT then exclusively published on its website on 18 March under the title “Central banks manipulating & suppressing gold prices – industry expert to RT“.

This article is now transcribed below, here on the BullionStar website.

Central bank gold price suppression is a well-documented fact. Central banks have a long and colorful history of manipulating the gold price. This manipulation has taken many shapes and forms over the years. It also shouldn’t be surprising that central banks intervene in the gold market given that they also intervene in all other financial markets. It would be naive to think that the gold market should be any different.

n fact, gold is a special case. Gold to central bankers is like the sun to vampires. They are terrified of it, yet in some ways they are in awe of it. Terrified since gold is an inflation barometer and an indicator of the relative strength of fiat currencies. The gold price influences interest rates and bond prices. But central bankers (who know their job) are also in awe of gold since they respect and understand gold’s value and power within the international monetary system and the importance of gold as a reserve asset.

So central banks are keenly aware of gold, they hold large quantities of it in their vaults as a store of value and as financial insurance, but they are also permanently on guard against allowing a fully free market for gold in which they would not have at least some form of influence over price direction and market sentiment.

The Central Bankers’ Central Bank

The Bank for International Settlements (BIS) crops up frequently in gold price manipulation as the central coordination venue and the guiding hand behind a lot of the gold price suppression plans. This is true in all decades from the 1960s right the way through to the 2000s. If you want to know about central bank gold price manipulation, the BIS is a good place to start. Unfortunately the BIS is a law onto itself and does not answer to anyone, except its central banks members.

In the 1960s, central bank manipulation of the gold price was conducted in the public domain, predominantly through the London Gold Pool. This was in the era of a fixed official gold price of $35 an ounce. Here the US Treasury and a consortium of central banks from Western Europe explicitly kept the gold price near $35 an ounce, coordinating their operation from the Bank for International Settlements (BIS) in Basel, Switzerland, while using the Bank of England in London as a transaction agent. This price manipulation broke down in March 1968 when the US Treasury ran out of good delivery gold, which triggered the move to a “free market” gold price.

Central banks continued to suppress gold prices in the 1970s both through efforts to demonetize gold and also dump physical gold into the market to dampen price action. These sales were unilateral e.g. US Treasury gold sales in 1975 and over 1978-1979, and also coordinated (and orchestrated by the US) e.g. IMF gold sales across 1976-1980.

Gold Pool 2.0 – Force it Down Quick and Hard

Collusion to manipulate the price also went underground, for example in late 1979 and early 1980 when the gold price was rocketing higher, the same central banks from the London Gold Pool again met at the opaque BIS in Switzerland at the behest of the US Treasury and Federal Reserve in an attempt to launch a new and secretive Gold Pool to reign in the gold price. This was essentially a revival of the old gold pool, or Gold Pool 2.0.

These meetings, which are not very well known about, were of the G10 central bank governors, i.e. at the highest levels of world finance. All of the discussions are documented in black and white in the Bank of England archives and can be read on the BullionStar website.

Gold for Oil: A Novel Twist to the Gold Pool Operation

The wording in these discussions is very revealing and show the contempt which central bankers feel about a freely functioning gold market.

Phrases used in these meetings include:

there is a need to break the psychology of the market” and “no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area” and  “to stabilise the price within a moving band” and “it would be easy and nice for central banks to force the price down hard and quickly“.

And these meetings of top central bankers were in early 1980, 11 years after the London Gold Pool and 8 years after the US Treasury reneged on its commitment in August 1971 to convert foreign holdings of US dollars into gold.

Whether this new BIS gold pool was rolled out in the 1980s is open to debate, but it was discussed across the board for months by the Governors at the BIS, and may have been introduced in a form which would provide physical gold to the oil producers (gold for oil trades) without putting a rocket under the gold price. Their main worry was to allow the Middle Eastern oil producers to acquire some gold for oil without pushing the gold price up.

The Bank of England was also involved in the 1980s in influencing prices in the London Gold Fix auctions, in what an ex Bank of England staffer described euphemistically as ‘helping the fixes’. And the Bank of England has even at times used terminology in the 1980s such as “smoothing operations” and “stabilisation operations” when referring to coordinated central bank efforts to control the gold price.

This article first appeared on RT.com on 18 March 2018

Paper Gold Ponzi

Probably two of the most influential changes on the gold market in the modern era are structural changes to the gold market which channel gold demand away from physical gold and into paper gold. These two changes were the introduction of unallocated accounts and fractionally backed gold holdings in the London Gold market from the 1980s onwards, and the introduction of gold futures trading in the US in January 1975.

In unallocated gold trading in the London OTC market, gold trades are cash-settled and there is rarely any physical delivery of gold. The trading positions are merely claims against bullion banks who don’t hold anywhere near the amount of gold to back up the claims. Unallocated bullion is therefore just a synthetic paper gold position that provides exposure to the gold price but doesn’t drive demand for physical gold.

When gold futures were launched in the US in January 1975, the primary reason for their introduction, according to a US State Department cable at the time, was to create an alternative to the physical market that would syphon off demand for gold, creating trading that would dwarf the physical market, and which would also ramp up volatility which in turn would deter investors from investing in physical gold. Gold futures are also fractionally backed and overwhelmingly cash-settled, and their trading volumes are astronomical multiples of actual delivery volumes.

Central banks as regulators of financial markets are therefore ultimately responsible for allowing the emergence of fractional reserve gold trading in London and New York. This trading undermines the demand for physical gold and allows the world gold price to be formed in these synthetic gold trading venues. Price discovery is not happening in physical gold markets. Its is happening in the London OTC (unallocated) and COMEX derivative markets. So this is also a form of gold price manipulation since the central banks know how these markets function, but they do nothing to crack down on what are essentially gold ponzi schemes.

Imagine, for example, that central banks were as tough on paper gold as they seem to be now on crypto currency markets. Now imagine if central banks outlawed fractional gold trading or scare-mongered about it in the same way that they do about crypto currencies? What would happen is that the gold market participants would panic and unwind their paper positions, precipitating a disconnect between paper gold and physical gold markets. So by being lenient on the fractional structure of trading in the gold markets, central banks and their regulators are implicitly encouraging activities that have a dampening effect on the gold price.

Gold Lending – A Riddle wrapped in a Mystery inside an Enigma

The gold lending market, mostly centred in London, is another area in which central banks have the ability to cap the gold price. Here central banks transfer their physical gold holdings to bullion banks and this physical gold then enters the market. These transactions can either be in the form of gold loans or gold swaps. This extra supply of gold through the loans and swaps disturbs the existing supply demand balance, and so has a depressing effect on the gold price.

The gold lending market is totally opaque and secretive with no obligatory or voluntary reporting by either central bank lenders or bullion bank borrowers. The Bank of England has a major role in the gold lending market as the gold used in lending is almost all sourced from the central bank custody holding in the Bank of England’s vaults.

There is therefore zero informational efficiency in gold lending, and that’s the way the central banks like it. furthermore, freedom of information requests about gold lending are almost always shot down by central banks, even sometimes on ‘national security’ grounds.

Many central banks have lent out their gold long ago, and just hold a ‘gold receivable’ on their balance sheet, which is a claim against a bullion bank or bullion banks. These bullion banks roll over the liability to the central bank for years on end and the original gold is long gone. Since central bank gold is never independently audited, there is no independent confirmation of any of the gold that any central banks claim they have.

Gold receivables are another fiction that allows central banks to fly under the radar in the gold lending market, and central banks go to great lengths to make sure the market does not know the size and existence of outstanding gold lending and swapped gold positions.

In Febuary 1999, the BIS was again the nexus for secretive discussions about the gold market when a number of the large powerful central banks basically ordered the IMF to drop an accounting change that would have split out gold and gold receivables into two separate line items on central bank balance sheets and accounting statements. These discussions are documented in the IMF document which is available to see here.

This accounting change would have shone a light on to the scale of central bank gold lending around the world, information which would have moved gold prices far higher.

Gold Price Manipulation Hub at the BIS: the Central Banker’s Central Bank

Gold Loans and Gold Swaps – Highly Market Sensitive

However, a group of the large central banks in Europe comprising the Bank of England, the Bundesbank, the Bank de France and the European Central Bank (ECB) applied pressure to torpedo this plan as they said that “information on gold loans and swaps was highly market sensitive” and that the IMF should “not require the separate disclosure of such information but should instead treat all monetary gold assets including gold on loan or subject to swap agreements, as a single data item.” 

Central banks also at times sell large quantities of gold, such as the Swiss gold sales in the early the 2000s, and the Bank of England gold sales in the late 1990s.While the details of such gold sales are always shrouded in secrecy, and the motivations may be varied, such as bullion bank bailouts or redistribution of holdings to other central banks, the impact of these gold sales announcements usually has a negative impact on the gold price. So gold sales announcements are another tactic that central banks use to at times keep the pressure on the price.

There are many examples of central bankers discussing interventions in the gold market. In July 1998, former Federal Reserve chairman Alan Greenspan testified before the US Congress saying that “central banks stand ready to lease gold in increasing quantities should the price rise.

In June 2005, William R. White of the BIS in Switzerland, said that one of the aims of central bank cooperation was to “joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.

In 2008, the BIS at its headquarters in Switzerland even stated in a presentation to central bankers that one of the services it offers is interventions in the gold market.

In 2011, one of the gold traders from the BIS even stated on his LinkedIn profile that one of his responsibilities was managing the liquidity for interventions. After this was published, he quickly changed his LinkedIn profile.

The Bank of England and the London Gold Fixings in the 1980s

With the current structure of the London gold price fixings disappearing in the very near future, there is an unusual story that I’d like to share about the gold fixings. It concerns the Bank of England’s ‘gold activities’ in the daily London Gold Fixings during the 1980s, and my attempts to get the Bank to explain what these ‘gold activities’ consisted of.

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These ‘gold activities’ of the Bank came to light within some comments that senior Bank of England employee Oliver Page wrote about fellow senior Bank of England colleague and contemporary Terry Smeeton:

Smeeton

Before looking at Mr. Smeeton’s ‘gold activities’, it’s worth getting a sense of the roles of Terry Smeeton and Oliver Page at the Bank of England by briefly looking at the career profiles of these two gents.

Terry Smeeton and Oliver Page

In the 1980s and 1990s, Terry Smeeton was one of the Bank of England’s experts on the gold market, and he rose to attain the position of Head of Foreign Exchange and Gold at the Bank. Smeeton joined the Bank of England in 1960 and remained at ‘The Old Lady’ until retiring in 1998. After leaving Threadneedle Street in March 1998, Smeeton went on to be a non-executive director of Standard Bank from July 1998 to September 2007, and in 2002 was appointed as advisory board member to the Dubai Metals and Commodities Centre (DMCC) and head of the centre’s Gold Management committee. Terry Smeeton passed away in September 2007.

In the 1990s while still at the Bank, Smeeton was also the Bank of England’s representative on the G-10 Gold and Foreign Exchange Committee at the Bank for International Settlements in Basel, as these Committee meeting minutes from 1997 highlight.

Frank Veneroso of Veneroso Associates, who is well-known for his in-depth analysis of the gold lending market, has stated that it was actually comments about the gold lending market made by Terry Smeeton in 1995 that triggered Veneroso to undertake his ground-breaking gold lending market analysis. Veneroso has also highlighted previously that Smeeton was critical of HM Treasury’s 1999 decision to auction off a substantial part of the UK’s gold reserves.

Oliver Page joined the Bank of England in 1968 and went on to be Chief Manager, Reserves Management in 1989, and Deputy Director, Supervision and Surveillance in 1996. In 1998, when the Financial Services Authority (FSA) was established, Page moved from the Bank of England to become the FSA’s Director of its Complex Groups Division (later called Major Financial Groups Division), and was also the FSA’s representative on the Basel Committee of Banking Supervisors. Page received an OBE in 2004, and retired from the FSA in April 2006, after which he became a non-executive director of Mitsubishi UFJ Securities International. Oliver Page passed away in 2012.

After Terry Smeeton died in September 2007, Oliver Page wrote Mr. Smeeton’s obituary which was published in the industry journal ‘Central Banking’, and on the journal’s website.

In the obituary, Oliver Page said of Smeeton:

On his work, the foreign exchange and gold markets were his great enthusiasms. So his work in the Bank of England, mainly in the Foreign

Exchange Division, suited him perfectly. The gold markets were an aspect of the financial world where he became internationally renowned.

While I was in the foreign exchange division in the 1980s, I was responsible for the risk management and performance system used to monitor activity. Through this period, Terry’s gold activities, often partly aimed at helping the London Market’s daily gold fixes, produced an overall profit.

So he was not just a talker on gold, he was a successful operator. He was very disappointed when large-scale gold sales were made in the 1990s at what turned out to be the 30-year low of the market.”

Certain phrases in Page’s tribute to Smeeton, specifically in relation to the gold fixings, struck me as very odd and raised a number of questions in my mind:

Firstly, what were Smeeton’s ‘gold activities‘ in the daily gold fixes ‘through this period’ during the 1980s?

Secondly, what was the Bank of England foreign exchange and gold division doing entering the London gold fixings to ‘help’ the daily gold fixes? And why did this activity happen ‘often’?

These ‘gold activities’ do not sound like normal Bank of England customer deals being placed into the daily fixings. However it does sound like central bank intervention into the price setting process.

(Note that at this time in the 1980s, NM Rothschild was the permanent chair of the fixings and the Bank used Rothschild as its broker. The other four fixing members during the 1980s were Mocatta, Sharps Pixley, Samuel Montagu/Midland, and Johnson Matthey/Mase Westpac. Rothschild departed from the gold fixings in 2004.)

Thirdly, why exactly is it so noteworthy for Oliver Page to have mentioned that Smeeton “produced an overall profit” from his ‘gold activities‘. Could it be that Smeeton’s activities were not primarily motivated by profit maximisation? Regular Bank of England ‘buy and hold’ or sell orders on behalf of central bank customers would not fall under the ‘noteworthy at having made a profit’ category.

Interestingly, in the London Gold Pool in the 1960s (which comprised both a buying syndicate and a selling syndicate), making a profit on the Pool’s gold transactions was considered a bonus, since that was not the primary purpose of the Pool’s consortium.

fixing

The Fix is In

In February 2012, after reading Oliver Page’s observations on Smeeton, I emailed the Bank of England, and asked them to explain Mr. Page’s 1980s references to Mr. Smeeton. My question was:

“What were Terry Smeeton’s “gold activities” while he was in the foreign exchange department that “partly aimed at helping the London Market daily gold fixes” and that produced “an overall profit” over the period, while being monitored by Oliver Page using the risk and performance monitoring system?”

The Bank of England “Public Information & Enquiries Group” responded as follows:

“The Bank of England does not have a role in the daily fixing of gold prices. There are five members (listed below) of the Gold Fixing, all of whom are Market Making members of the LBMA:

•    Bank of Nova Scotia
•    Barclays Capital
•    Deutsche Bank AG London
•    HSBC USA NA London
•    Societe Generale”

Since the bank didn’t address my question, I responded back to the Bank with a second email, reiterating the question:

But if the Bank of England has no role in the fixing then what role was Terry Smeeton in the foreign exchange department playing, with “gold activities” that “partly aimed at helping the London Market daily gold fixes” and that produced “an overall profit” over the period, while being monitored by Oliver Page using the risk and performance monitoring system?

A different person from the Bank’s Public Information & Enquiries Group then responded to my second email as follows:

“The Bank no longer plays a role in the daily gold fixing. But for many years the Bank had a supervisory role in the London gold market,and was involved in the fixing process, as described in the following excerpt from the Bank’s Quarterly Bulletin (1964, p16 ‘The London Gold Market‘):

'The Bank of England are not physically represented at the fixing. But they are able, like any other operator, effectively to participate in the fixing by passing orders by telephone through their bullion broker and at the fixing they use exclusively the services of the chairman of the market, namely, Rothschilds. 

The Bank operate for a number of different parties; they are first the managers of the Exchange Equalisation Account, which may be a natural buyer or seller of gold :

secondly, they are the agent for the largest single regular seller of gold in the world, namely the South African Reserve Bank, which is responsible for the disposal of new production in South Africa : 

thirdly, they execute orders for their many other central bank customers : 

fourthly, the Bank aim, as in the case of the foreign exchange and gilt-edged markets, to exercise, so far as they are able, a moderating influence on the market, in order to avoid violent and unnecessary movements in the price and thus to assist the market in the carrying on of its business.'

From 1968, the Bank was a less regular participant in the daily gold fixings, although contact between the Bank and the members of the gold market remained close.

In particular, the Bank (including Mr Smeeton in his role in the Bank’s Foreign Exchange Division) continued to execute orders for central bank customers of the Bank, and to manage gold held in the Exchange Equalisation Account.

The Bank no longer has supervisory responsibility for the London bullion market. Responsibility for the regulation of the major participants in the market lies with the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000.

Guidelines for the conduct of gold business not covered by the Act are set out in The London Code of Conduct for Non-Investment Products (the NIPs code).”

London gold fixing
Avoiding the Question

Yet again, the second response from the Bank of England didn’t address my question directly, but while circumventing a direct answer, it did contain some very interesting information. Let’s examine the Bank’s second response in more detail.

1. There was no attempt in the Bank’s answer to address the crux of the issue, i.e. what Smeeton was doing in the 1980s ‘helping’ the fixing with ‘gold activities’ that produced an overall profit and that required risk management.

Executing physical gold orders for the Exchange Equalisation Fund (EEA) or for other bank customers via one of the five gold fixing members is not an activity that could reasonably be described as ‘helping’ the fixing and not the type of activity that would be noteworthy as ‘producing an overall profit’, or that would need risk management monitoring.

Nor is gold lending between central bank customers of the Bank of England and the London gold market bullion bank participants something that would have required the Bank’s foreign exchange and gold desk, and Terry Smeeton, to ‘help’ the twice daily London gold price auction fixings.

Gold lending only began in the London gold market in the early to mid 1980s and initially was only undertaken on a limited scale.

So, why the reluctance by the Bank to answer my question directly?

2. Interestingly, the Bank’s response contained an extract (see grayed area above) from a 1964 Bank of England publication about the London Gold Market which explained the four main reasons why the Bank was involved in the gold fixings, and referred to the Bank of England as being “a moderating influence” on the gold market so as “to avoid violent and unnecessary movements in the price.

Was the inclusion of this 1964 extract about the Fixings by the Bank’s Enquiries and Information Office a tacit admission from the Bank that it continued to be a ‘moderating influence’ on the gold price into the 1980s and perhaps beyond? Why include this Fixing explanation from 1964 to explain a question about the 1980s?

3. The Bank’s email response to me also mentioned 1968 and stated that “From 1968, the Bank was a less regular participant in the daily gold fixings”. This reference to 1968 is a reference to the collapse of the London Gold Pool in March 1968 before which the Gold Pool (managed by the Bank of England) attempted to control the gold price and keep it near $35 per ounce. Since I had asked about the 1980s and not 1968, the inclusion of this reference is, in my view, highly unusual but telling.

The comment from the Bank that since 1968 “contact between the Bank and the members of the gold market remained close” is also noteworthy.

4. The Bank’s response said that Smeeton executed orders for central bank customers and also ‘managed gold’ held in the Exchange Equalisation Account. The Bank did not elaborate on what was meant by ‘managing’ EEA gold. (Note, the UK gold reserves are owned by HM Treasury and held within the Exchange Equalisation Account which is somewhat similar to the US Exchange Stabilization Fund. The Bank of England acts as custodian of the UK gold reserves on behalf of HM Treasury.)

If you look at the data on UK official gold reserves over the 1980s, such as in ‘Central Bank Gold Reserves: A historical perspective‘ by Timothy Green, you will see that the official UK gold reserves were totally static throughout the 1980s at between 591 tonnes and 592 tonnes. i.e. They did not change (see table below, last row). In fact, most of the large gold holding countries maintained static gold reserve holdings throughout the 1980s which would suggest very little customer order activity for the Bank of England gold order desk.

Therefore the unchanging nature of the EEA gold reserves during the 1980s again does not explain the Bank’s reference to Smeeton as ‘managing’ the EEA gold in the 1980s.

image

What were these ‘Gold activities’?

I had previously come across the Bank of England’s 1964 London gold market essay and it’s reference to the Bank acting as a ‘moderating  influence’ on the gold price. The same passage that the Bank quoted to me is also in a 1976 book called “The Arena of International Finance” by Charles Coombs (page 46). Coombs was head of foreign open market operations at the Federal Reserve Bank of New York from the 1950s until the 1970s.

The Bank of England’s 1964 essay is from it’s Q1 quarterly bulletin and was published in March 1964. This was soon after the launch of the London gold pool but the reference to the role of the Bank as a ‘moderating influence’ against ‘violent and unnecessary movements in the price’ goes back to before the beginning of the London Gold Pool.

Prior to the Gold Pool commencing operations in 1962, the Bank of England was already single-handedly intervening into the London good market aiming to ‘smoothen’ the gold price so that it reverted to near $35 per ounce, by participating in the daily fixing (there was only one fixing at that time, the morning fixing). The Bank aimed to keep the London price near the U.S. Treasury gold window price so as to prevent speculative arbitrage between the two prices (excluding 1/4% US Treasury fee and transport costs).

It was based on these Bank of England operations that Charles Coombs at the Federal Reserve Bank suggested to the Bank of England in 1961 that they consider creating a gold pool amongst the U.S. and major European central banks.

Charles Coombs stated in his 1976 book, ‘The Arena of International Finance’ (page 50), that in 1960:

The Bank of England, having assumed some responsibility for selling gold to maintain orderly market conditions, was in the awkward position of being squeezed out of the market by other central bank buyers whenever gold became available.”

A recent history of the Bank of England also refers to the Bank of England’s intervention prior to the commencement of the London Gold Pool in 1962:

“The selling consortium was in operation to prevent an unduly rise in the price when demand was strong. It had to be specifically activated by the members. It’s operations did not affect the extent of intervention in the market and the Bank continued to intervene in its own judgement.”

(Source: Page 190, ‘The Bank of England: 1950s to 1979’ by Forrest Capie, Cambridge University Press).

The Bank of England have historically used the terms ‘smoothing operation’ and ‘stabilisation operation’ when referring to operations and interventions into the gold and foreign exchange markets. A price smoothing operation is a softer, less radical version of a price stabilisation operation.

Upon reading Oliver Page’s comments about Smeeten, my initial theory was that Terry Smeeton and the Bank’s Foreign Exchange Division had also been intervening into the daily gold fixings during the 1980s so as to smoothen the gold price, via offering and bidding from a special account that sold/lent at one price (high) and bought back again at a lower price (low).

Since I asked the Bank to explain Oliver Page’s comments and they declined to do so, this even crystallised my theory somewhat. I usually prefer not to speculate. My approach is to clarify information first and try to validate it. Only if it cannot be validated can some speculation come into play. But if the Bank of England can’t answer a simple question directly, then they are inviting speculation.

My speculation thesis is that in the 1980s, Smeeton and the Bank were using a pool of gold to create artificial supply into the gold fixings so as to influence the gold price, either selling gold directly during the fixings, or lending gold short-term to the chair or lending short-term to some of the four other fixing members.

Intervention of course is two-way, so could also consist of creating demand in the fixings so as to support the price. Keeping a price within a trading ‘band’ is often a goal of financial market intervention. The mechanics of a demand side intervention would merely be the opposite of the possible tactics illustrated below.

Supplying or selling metal into the fixings and buying it back later is a gold trading tactic that would (in the Bank’s eyes) “partially help the fixings” while “producing an overall profit” for the Bank’s Foreign Exchange Division, and also a set of transactions where the trading P & L would need monitoring and risk management (from Oliver Page). The profit creation would be generated by selling high and buying low, much like a trader’s short sell trade and similar to what the Bank of England and the London Gold Pool selling syndicate did in the 1960s.

Within this scenario, I think Smeeton could have been doing a number of things via these ‘gold activities’:

– influencing the opening price of the fixing in the hours before a fixing by trading in the market so that the fixing Chair would call a certain opening price targeted by the Bank

– putting in orders to the fixing from a special gold account so as to affect overall supply and demand and target a certain opening price

– using an open line to the Chair to put in offers based on the market’s natural business and the quotes from the order books on the call

– lending to some of the five gold broker participants on a short-term basis from the EEA account or another account so as to influence supply (the five brokers all had allocated gold accounts at the Bank of England from the late 1970s onwards)

– and finally, buying back or squaring off the above transactions at some point so as to try to “produce an overall profit”

Maternal Eye

By the 1980s the five London gold brokers and fixing members all maintained allocated gold accounts at the Bank of England and had storage space in the  Bank’s vaults. This development occurred in the late 1970s, and was done initially for security reasons so as to minimise the transport of gold bullion around the City of London.

It would therefore be very straightforward in the 1980s for the Bank to manage transfers and allocations between a gold pool account and gold accounts of one or more of the five London gold market brokers held at the Bank.

[In fact, gold transfers between the Bank of England and the London gold market regularly happen to this day in a different guise via the Bank acting as clearer of last resort with the six bullion bank members of London Precious Metals Clearing Ltd (LPMCL).]

As to whether a 1980s Bank of England gold pool would be sourced from EEA gold, or include other customer gold, or would be a distinct separate account is not that important. Even if such an operation within the Bank’s Foreign Exchange Division was stand-alone and not coordinated with other central banks, the G10 central banks would obviously be briefed on it given their perennial close coordination on gold market issues via Basel.

The February 1998 edition of the LBMA’s Alchemist magazine features an interview with Terry Smeeton just before he retired from the Bank of England in March 1998. In the interview, on pages 2 and 3, when asked about his view on the relationship between the Bank and the London gold market, particularly in light of gold market supervision moving from the Bank to the FSA in 1998, Smeeton said:

“When I started in the Bank of England’s foreign exchange area, we really only had the operational role, which we still, of course, have today. There was no formal supervision of the gold market, but the Bank has always maintained a maternal eye on the market, and that remained the case until the Financial Services Act and the introduction of the Section 43 regime.”

Could this Bank of England ‘maternal eye’ that Terry Smeeton refers to have extended to intervention into the gold fixings in the 1980s so as to be a ‘moderating influence’, and to “avoid violent and unnecessary movements” in the gold price?

To answer that question, you’d have to ask the Bank of England. And they probably wouldn’t tell you one way or the other.