Cheuvreux, the brokerage arm of the French Credit Agricole, has issued a report on the gold market. The Cheuvreux report cites Mises in three places (pages 4, 41, and 43). The report endorses the research of GATA, an organization that has been alleging central bank manipulation of the gold market. The major conclusion of the report is that the western central banks have sold a larger fraction of their gold reserves than they acknowledge in their offical statements. The gold has entered the market through derivatives such as leases, swaps, the writing of call options against the gold. The sale of the gold is obscured in the central banks books through the representation of leased, swapped, and otherwise encumbered, aggregated together with actual physical gold held in vaults as a single asset on their books. An estimated 10,000-15,000 tons of gold has entered the market since 1996 (compared to an official number of 2,000-3,000) through these mechanisms, according to the report.
The purpose of these covert gold sales is part of a larger effort to disable the functioning of inflation indicators, which operate to limit central bank credit expansion. Appendix 2 of the Cheuvreux report, The Covert War on Inflation Indicators mentions the rigging of the CPI, the end of M3 reporting, and the discontinuation of issuance of the 30-year treasury bond as other prongs in this effort. The realization by financial market participants that their money is losing purchasing power is one check on the extent of credit expansion. To the extent that financial market participants look to these indicators (the CPI, the gold price) as measurements of excessively loose monetary policy, if the government can distort the ones it controls and manipulate the others, the perception of inflation can be controlled and credit expansion can be continued to a greater extent than would otherwise be possible. But, as the Cheuvreux report notes on page 43:
While the US was in a mild recession during 2001, US consumers continued to take on more debt, but the rate has been slowing. The year-on-year growth is now at its slowest for more than a decade and could indicate that US consumers are almost “tapped out”. The words of Ludwig von Mises come to mind:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”.
The report contains an excellent discussion of the new Fed Chair, Benjamin Bernanke. Their discussion covers someof the same ground that I covered in an article on LRC. In a series of speeches and research papers by Bernanke and other Fed staff economists, “unconventional measures” for fighting deflation, starting with the purchase of bonds and other securities, to a direct tax on bank accounts, to a tax on cash, to the monetization of goods and services, are proposed.
How serious are they about these plans? Cheuvreux quotes from a speech by Bernanke in 2003, regarding “unconventional measures”
Should the funds rate approach zero, the question will arise again about so-called nontraditional monetary policy measures. I first discussed some of these measures in a speech last November. Thanks in part to a great deal of fine work by the staff, my understanding of these measures and my confidence in their success have been greatly enhanced since I gave that speech.
Chevreux concludes:
Our suspicion is that Bernanke will try to keep the US credit expansion going as long as possible (probably with the inevitable consequences). A further leg in the current credit expansion and inflationary boom in assets (with hyperinflationary risk) seems most likely outcome at this stage. At the same time, the heavily debt-laden US economy is also at risk of a deflationary slowdown. There is only one asset class that will perform under both of these extreme scenarios: gold (and precious metals).
