EDITORIAL & OPINION — Rumours swirl around gold sales — Fair or foul?

Tony Blair is probably the toniest prime minister Great Britain has ever had. He’s Britain’s answer to Bill Clinton, equally polished and urbane, and equally eager to build that proverbial bridge into the next century. But in his rush to be modern and hip, some believe he’s turning his back on what has made Britain great.

More than a year ago, the U.S. news program 60 Minutes poked fun at Blair’s fascination with ultra-modernism. To attract more high-tech ventures to the country, he began playing down the historical traditions and financial prudence that put the tiny island on the map as a world power. Bowler-and-brolly conservatism was being tossed out the window in favour of Cool Britannia, represented by the Spice Girls and The Full Monty.

Some argue that London’s status as a world financial centre has suffered as a result of this trend toward trendiness. And the most powerful trends in financial markets today are the “monetization” of hard and tangible assets, whether they be gold or other commodities, to create new financial “instruments” such as derivatives, and currency and commodity speculation.

The proliferation of hedge funds engaged in such activities is a testament to this global, non-investment-grade financial spree.

Great Britain’s announcement that it will sell more than half of its gold reserves is viewed by many as symbolic of Blair’s efforts to lead his nation away from investment-grade conservatism and into shark-infested speculative waters. For these old-fashioned types, the Barings Bank disaster is still too recent and painful a memory. Some see a more sinister motive at work, a conspiracy in which the gold price is held down to benefit financial institutions that were short hundreds of tons of borrowed gold.

It’s difficult to know what to make of such theories, particularly when they involve the murky world of currency and commodity speculators. But the timing of Britain’s announcement, and its subsequent negative effect on the gold price, has people wondering if there may indeed be substance to such murmurings.

As Peter Munk, chairman of Barrick Gold, pointed out during his speech at the World Economic Forum more than a year ago, funds of all sizes have found shorting gold to be a risk-free way to make millions. “All you have to do is sell gold ounces and buy U.S. treasuries; you have a positive spread of 3% because all you have to pay to borrow gold is 2%, and collect from the U.S. treasury 5% before you unwind the contract to collect your additional capital gain.”

That there has been a rush to short gold is without question; how organized the rush is remains debatable. There is no shortage of conspiracy rumours; indeed, they are increasing in intensity and have sparked debate in the British House of Commons.

Last June, opposition member Quentin Davis commented on a persistent rumour concerning gold sales and the position of international investment banks. “We cannot allow the rumours to grow,” he stated, “because they are extremely dangerous to public confidence. It has been suggested that the market is very short of gold, that the short positions may be a substantial multiple of the total amount of gold currently held by the Bank of England, and that the bank’s real motive is to save the bacon of the firms that are running these short positions. Has the government’s whole plan been simply to drive down the gold price by whatever means, fair or foul, to save the position of certain figures in the city which, apparently, are so such and potentially in such trouble?”

These insinuations have prompted some of the world’s leading gold producers to pester the British government to issue a public denial or to investigate them publicly. So far, mum’s the word. In the U.S., the Gold Anti-Trust Action Committee has retained a legal firm to assist in its investigation of alleged manipulation of the gold market.

An investigation into the matter is clearly warranted. But equally worrisome is that, in today’s “sophisticated” financial markets, about half of all bank profits result from trading (read gambling), whether in currencies or stocks or derivatives.

Risky business, to be sure, but the banks don’t appear to be worried. And why should they be? The good times are rolling and, through direct and indirect subsidies enacted by law, ordinary citizens effectively guarantee the banking system’s balance sheet.

On the other hand, citizens would do well to remember the savings and loan fiasco and the junk bond spree of Ivan Boesky and Michael Milken in the 1980s. The good times rolled then too, until the party came to a screeching halt and the big boys ran off without paying the bill.