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IMF beats gold-auction drum
By Antal E Fekete
Some years ago I penned a paper with the title "The Supply of Oxen at the Fed".
I am indebted to former Federal Reserve chairman Alan Greenspan for a great
line in one of his speeches, entitled "The History of Money", from where I
borrowed my title. He wrote: "If fiat money falters, we may have to go back to
oxen as our medium of exchange. In that event, I trust, the Federal Reserve
will have an adequate inventory of oxen." 
My article was designed to reassure Mr Greenspan that the supply of oxen at the
Fed was very secure indeed, in no small measure due to his stewardship. 
In my missive I related a story my father was fond of telling us
about his geography professor lecturing on Switzerland. A short fellow, he was
extolling the agriculture of that country as he would say: "In our country oxen
are not even as tall as I am. In some countries you will see oxen as big as I.
But, ladies and gentlemen, believe it or not, on the fat mountain pastures of
Switzerland there are oxen even greater than myself."
For the sake of emphasis the good professor stood on his tiptoes and stretched
his arm to reach above his head. "We don't believe so!" - someone shouted from
the back benches of the lecture theater.
The story bears repeating because, as events of the intervening years have
proved, the prize specimen of the supply of oxen at the Fed is the chairman
(past and present). When the faltering of paper money looms large on the
horizon, his first thought of an alternative is not gold. It is oxen. Nor is it
a nick of time too early, as fiat money is faltering as never before. But even
if the Fed should get caught short-handed, it can always rely on a backup. The
supply of oxen at the International Monetary Fund (IMF) is infinite.
The IMF is trotting out its old war-horse, the threat of auctioning off its
monetary gold. This time it appears to be for real. The IMF is making
preparations to get rid of a sizeable chunk of that part of its capital that
has no counterparty liability attached in the form of central bank
IOU-nothings, or government bonds alias certificates of guaranteed
The IMF sounds very emphatic about its intentions of doing the self-mutilation
in such a delicate manner as not to disrupt the gold markets. Pity the IMF. It
is worried about upsetting the gold market, not about frittering its capital
away. The IMF promises to do the auctions in a "transparent" fashion. It is
true that the gold market is small in today's metric system, where the
trillion-dollar unit will soon appear inadequate. Still, the IMF's sting
operation, and the accompanying soothing words sound more like the mosquito
saying to the elephant before the blood-meal: "Baby, my darling, it won't
It is abundantly clear that the IMF and its puppet-masters behind the screen
want to hurt the gold bugs, and hurt them badly. As paper currencies without
exceptions are engaged in a game of "all fall down", and do it impulsively and
competitively, gold is the only money that stands up. It must be clubbed down,
or else. That has been the rule of the game ever since president Richard Nixon
on the advice of Milton Friedman "made the gold markets free" in 1971.
In the beginning it was US Treasury gold that was auctioned off in order to
club down the rising gold price. But then the managers of the paper dollar
found it cheaper to auction off other people's gold for that purpose through
arm-twisting tactics. The selling of paper gold through futures markets and the
leasing of gold through bullion bank intermediaries has been thoroughly
Only fools believe that those outstanding forward contracts will be settled in
specie. Holders of paper gold will be lucky if their contracts will be settled
in paper. The market is crying for physical gold. Nothing less will pacify it.
By now the US Treasury has run out of arms to twist, after it has twisted the
arms of smaller countries holding gold such as Belgium, the Netherlands, and
Switzerland making them to sell their gold reserve. The recalcitrant US
congressmen who had blocked the IMF gold sales in the past have been bought
off. The IMF gold is now ripe for the picking.
Not to see the life-and-death struggle of the managers of global paper money
fighting gold - the stern taskmaster of all banks, real or virtual, and of all
governments - is tantamount to turning a blind eye to reality.
The question is whether the IMF - like the proverbial kid in the forest playing
false alarm on the lumberjacks - "has cried wolf" once too many times. The wolf
around the corner may be real this time, ready to devour the prankster. To be
sure, the gold price will fall on the news that the gold auction has started in
earnest. The market will obligingly bring down the price to make it easier for
the IMF to unload its burden. But after the IMF has relieved itself, the price
will go back and on to new records. It's inevitable. It can be predicted with
the certainty of science.
Why will the price of gold reach new highs after the IMF gold auctions have
been completed? There is a very simple reason: the assets backing the dollar,
against which the gold is being sold, will have been diluted. The IMF is
exchanging its hard asset, that is nobody's liability, for the soft: the
liability of the Fed printing money as if there is no tomorrow. Under these
circumstances it is suicidal to sell hard assets. Yet there it is: IMF gold is
on the block.
The excuse the IMF uses to justify the gold sale is to raise funds for bailing
out over-indebted countries. It is a lame excuse indeed. A bank, if it is run
on a rational basis, will worry about its capital structure before embarking
upon a course of extended lending, especially lending to bankrupt governments.
You never ever dilute your capital base.
This does not mean that gold bugs will not be fooled - again. Some, perhaps
many, will be. They will sell their gold into weakness, making it look like the
bloom is off the golden roses. But all what this game of hoopla means is that
gold is passing from weaker into stronger hands. The weak hands are fading into
oblivion, as they must.
To really understand gold and its true strength one must see that it is not the
speculative leveraged segment of the market that is animating it. Of course,
speculators will ever be ready to sell off at the sound of the whistle from the
IMF. But time is coming when they will be unable to replenish their supply. The
IMF tells them to sell their cash gold, but it will not tell them how to buy it
That's the catch. The unemotional holder of gold follows the gold basis, rather
than the gold price. Only the gold basis will tell you whether you can
reasonably expect physical gold to be available tomorrow and the day after.
(See Gold 101:
The basics of basis , Asia Times Online, May 9, 2007). Or whether it is
more likely that one day, soon, we wake up to find that "gold is no longer for
sale at any price". Gold mines will hang out the notice: "Holders of dollars
need not apply".
This is going to be the exact replica of what happened to holders of assignats,
mandats, Reichmarks and, more recently, of Zimbabwe dollars. These finely
embellished bank-notes were once exchangeable for gold at a variable price -
for a while. People took it for granted that they would always remain so. Then
one day, when least expected, the supply of gold against paper went dry. The
music stopped on this particular game of musical chairs. Those who had the
paper in hand were out of luck.
There is nothing in monetary science that would make the future outlook for the
US dollar more rosy than that of the Zimbabwe dollar. Of course, there are more
tricks that can be pulled out of the hat of the Fed than those available to the
managers of the paper mill in Harare. But a paper mill is just a paper mill.
The fact that it is on the Potomac river won't make its product immune to
rotting, that congenital disease of all paper currencies.
The IMF has been around scarcely for 65 years. By its original charter it was
supposed to make foreign exchange rates fixed, and currencies gold-backed,
albeit indirectly. It was supposed to be the linchpin of the international
monetary system. In less than 25 years it has managed to go through the
goodwill that was its endowment. One-by-one the obligations of the IMF were
shed, leaving the institution without a mission or a purpose.
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