A gentleman by the name of Montagu Norman was the head of the Bank of England in 1931. On September 18, 1931, Mr Norman was telephoned by Dr. Vissering, the head of the Netherlands Bank (the Central bank), who asked him if it was "safe" for the Netherlands Bank to continue to hold the Pound Sterling. Mr Norman assured Dr Vissering that it was perfectly safe, and that the Bank of England had no intention whatsoever of going off the Gold standard. Dr Vissering took Mr Norman at his word and held onto the Netherland Bank's holding of the British Pound.
Three days later, on September 21, 1931, the Bank of England announced that Britain was abandoning the Gold Standard. Dr Vissering, and several other European Central Bankers, were caught out by the run on the Pound that immediately followed this announcement.
As recently as the evening of September 20, 2000, Mr Lawrence Summers, U.S. Treasury Secretary, was re-iterating his "strong Dollar" policy and stating that the U.S. had no intention of co-operating in any joint Central Bank intervention to prop up the Euro. Mr Summers had been saying this for weeks. Of course, at about 8:15 AM in New York, it was reported that the European Central Bank (ECB), the Fed, and the Bank of Japan (BOJ) had got together to sell Dollars and buy Euros.
On the very same evening, Mr Summers was quoted as saying that the U.S., or at least the U.S. Treasury, still maintained their "strong Dollar" policy. The $US index had just spent the preceeding 48 hours falling by 2.95 points or 2.5%.
Of course, 2000 is not 1931. The world is not now mired in depression. More important (for modern Central Bankers), there is no longer any constant against which any currency can be measured. Central Bankers intervene indirectly in currency markets every hour of every day nowadays. Only occasionally do they do so blatantly by means of official rate rises, or official currency intervention. The rest of the time, it is done through routine fiscal or monetary policy or by actions making use of the myriad derivative products available.
But 1931 and 2000 are similar in this respect. Then and now, a Central Banker or a Treasurer always denies that he has any intention of doing anything that they are not expected to do, unless it is perceived as being "necessary".
It was perceived as being necessary for Britain to abandon Gold in 1931. It was perceived as being necessary for the U.S. to outlaw private ownership of Gold in 1933. It was perceived as being necessary for the U.S. to repudiate Gold in 1971. In all these occasions, and in many others, the official line right up until the actual taking of the action was that no such action was contemplated.
So it has been in the case of Mr Summers and the Central Bank intervention of September 22, 2000. Central Bank intervention (especially JOINT Central Bank intervention) is the ultimate means of manipulating the relative exchange rates between currencies. This action is taken only rarely, because it is very risky and because it gives the strongest signal possible to the sharks of the currency markets that things have gone wrong - badly.
Gold, having no official connection with modern currencies, does not necessarily react to such instances of intervention. But Gold did react to this one, for a short while. In early trading in New York on Sept. 22. the $US Gold price was "gap up" and $US 5.80 above its close on the previous day. But once the intervention had done what it was intended to do, once it had stabilised stock markets first in Europe and then in the U.S., the $US Gold price fell back, closing for the day with an anaemic rise of $US 1.50.
The Captain and Crew of The Privateer are presently in the middle of preparing the latest issue for publication. We have already written part of this issue, in which we analyse the increasing pressure for exactly the kind of currency intervention which has now taken place. The remaining part of the current issue will analyse why it was deemed necessary to take this action NOW, and what the potential consequences may be.
Suffice it to say here that the U.S. has taken a huge risk. As Mr Greenspan has stated repeatedly, the current "health" of the U.S. economy and stock market is dependent on a continuing heavy inflow of foreign investment into the U.S.. But the election is in six weeks. Above everything, it is necessary to prevent any big falls in U.S. stock markets. That means fix the markets NOW, and then plan to hold the position at least until November 7.
In current circumstances, Gold "should" be up, and it is, albeit only marginally. It should be evident that any big spike in the $US Gold price between now and November 7 will take place ONLY if the situation has become too severe for the U.S. to control, either by itself or in cooperation with Europe and Japan.
And AFTER the election? The obvious conclusion is that the financial authorities plan to face that problem when they get to it.
The German Chancellor Bismark once stated this: "Never believe a course of action is government policy until it has been officially denied three times." Some things never change.