From Rothschild to Wong

Last week, the unthinkable happened. N. M. Rothschild, the heirs of the famous banking family, got out of the gold business.

Over the last decade, the company had been the great promoter of gold hedging, i.e., getting gold mining firms to sell their future gold output at a fixed price. When gold’s price fell, this was great for the mining companies. But now gold’s price tends to rise rather than fall. This means that forward sales of future output hurts the mining companies. They lock in a price that turns out to be lower than what the market would have provided. So, hedging has dried up. So have Rothschild’s profits.

Ever since 1919, N. M. Rothschild had been the driving force on the London gold market. It was the dominant price-fixer, helping to set the London gold price every day, twice a day.

As to why anyone should have to set a price for the world market, the company never quite explained. There was no comparable price-setting organization for other investment assets. Prices rise and fall all day long on investment exchanges, and now all night long if you count foreign markets, which you should. A Mineweb story reports — three generations too late — that, “It is also likely that the morning and afternoon Fixing ritual may be done away with; physical meetings possibly replaced by teleconferencing and digital exchange.” Apparently the telephone had not been sufficiently advanced technologically.

When I read about the departure of Rothschild from the gold business, my mind went back to November, 1962. I could see Richard Nixon standing in front of the press corps and saying, “You won’t have Dick Nixon to kick around any more.” I mean, what’s a conspiracy theorist to do?

If the Rothschilds are abandoning gold, what does this mean for the rest of us? Or is it a trick, like the Old Man’s pretending to unload British consols, the T-bonds of his day, just before the news of Waterloo hit the London stock exchange?

Gold is coming out of a two-decade period of bearish sentiment. The dollar is looking more shaky than ever as the world’s sole reserve currency. Why sell your seat on the London Bullion Market Association? The retail price today is high.

I think the company had bet its profits on a falling price of gold. Now that this market has dried up because of rising demand for gold, the company’s in-house experts in gold — “gold always goes down” — are facing a world that they don’t understand. They have quit. They have no expertise in a bull market for gold.


Europe’s central bankers are officially abandoning gold. They have been selling off gold reserves for decades, bar by bar, asking the great-grandchildren of the victims of the Great Gold Heists of 1914 and 1933 to pay for the gold that the central banks confiscated. Now comes word that the Bank of France, the gold buggiest central bank of all, is threatening to sell off 16% of its gold reserves, nearly 500 tonnes.

One of the strategies used by central bankers to hold down the price of gold is to announce gold sales. This tactic no longer works well. The gold market has found enthusiastic buyers every time a central bank unloads some of its gold.

Why do the West’s central bankers do this? There are three main reasons. First, they really don’t believe that gold has a role to play any more. There is no gold standard for the general public. Central bankers settle accounts with each other, moving their gold back and forth inside the vault at the Federal Reserve Bank of New York. These shifts refer to the banks’ ownership of gold as one monetary reserve among many, but not as a true gold standard. The gold standard died in 1914 in Europe and in 1933 in the United States. So, why hold gold? Why not sell it and invest the money in interest-paying assets? This is what European central banks have been doing.

Second, and more relevant in my view, central bankers have been involved in a deceptive scheme to earn money from their gold reserves, but without officially selling gold. They “lease” it to a group of favored investment houses called bullion banks, which do not hold bullion and are not banks. These firms borrow the gold, paying about 1% per annum, and sell it. Then they invest the money generated by the sale at interest rates way above 1%. The “leased” gold is not recorded as a sale. The governments don’t have to admit to the voters that the central banks have unloaded the nation’s gold for 1% per annum.

Legally, the bullion banks must repay the central banks in gold. But no one expects them to, any more than anyone expects a nation’s national debt to be repaid. These “loans,” meaning “leases,” meaning sales paying 1% per annum will not be re-paid.

When gold’s price rises at rates above 1% per annum, the central banks face a problem. They have in effect sold an asset for much less than it now turns out to have been worth. This is bad publicity. So, to hide the truth, central banks sell — or threaten to sell — gold into the market directly, thereby (1) getting money and (2) forcing the price down.

Now, in no other commodity market do sellers announce in advance, “we may decide to sell our hoard,” thereby pushing down the price in advance. This is why I regard all such announcements by central bankers as phony. They may sell, but not for the reason offered, namely, to generate cash to invest in other assets. What assets? They buy Treasury bills of this or that nation. But they can do this at any time, just by printing money. They can do this without increasing the money supply when they sell gold and buy Treasury debt. But if this is really their plan, they are dunderheads for announcing sales in advance. They are not dunderheads. They are money-manipulators of the highest order. I mean, they got the governments to give them a monopoly over the domestic money supply as a kind of favor. Then, in 1914 and 1933, they persuaded the governments to turn over to the central banks all of the commercial banks’ gold and the governments’ gold. These people are not dolts.

So, I pay no attention to announcements by central banks of their plans to sell gold. The plan is rarely executed, and these days, the price of gold is not affected by the sale to the same degree that it is affected by the initial announcement.

There is a third reason for gold sales. The central bankers know that the price of gold is a price inflation indicator. It has served this purpose for over three centuries. If they can distort this indicator by selling gold, the inflationary results of their present policies will not be revealed by this traditional indicator. That is, the investing public will not be tipped off in advance regarding the looming rise in prices generally.

A generation ago, when I was just getting started as a writer, reason #3 was the main one. The gold exchange standard was still operating. Foreign governments and central banks could hold U.S. T-bills as surrogates for holding bullion, because the United States guaranteed to deliver gold at $35/oz to governments and central banks. Nixon broke this contract on August 15, 1971. “Gotcha!” After that, gold had a great run, especially 1976—80. Then it ceased to perform as an inflation indicator. Its price fell by over 60%, 1980—2000, while general prices denominated in dollars doubled.

I believe that the second reason is the main one today: hiding the reality of the gold leasing system. Central banks have leased their gold, but they are not going to be re-paid in gold. The bullion banks sold the leased gold to the public, and to get it back in order to repay the central banks would drive gold’s price back to 1980’s levels. This would bankrupt the bullion banks. That would mean that their debts to the central banks would go sour. The central bankers would be exposed as fools who sold off the government’s stolen treasure for a mere 1% per annum. The central bankers today are doing what they can to hold off any public exposure of the one-way outflow of physical gold. How? By selling off the banks’ remaining reserves of gold to hold down its price.


The problem the West’s central banks face today is Asia. The Asians have discovered capitalism. They have discovered the wonders of fractional reserve banking. They have also discovered the boom-bust cycle: Japan in the 1990s, the rest of non-Communist Asia in 1997. China’s rude awakening will come soon enough.

The Asian masses have grown richer since 1950. Japan led the way. But the Asian masses still honor their parents. They have not been Westernized completely. There are still grandparents alive. All of them went through mass inflation, either during World War II or, in the case of China, under Chiang Kai-shek, 1946—49. All of them know the truth about gold and silver: they hold their value in bad times.

The Mongols had invented paper money by the 13th century. It went hyperinflationary within three generations. Asians know that paper money cannot be trusted, meaning that governments cannot be trusted. They have experienced its results.

Now the Asian masses are getting richer than they ever dreamed possible. There is no way around the reality of increasing wealth in Asia: increased demand for oil and increased demand for gold. They want motorbikes in China. Then they will want cars. In the large cities, cars are in high demand. There are now 20 million cars in China. The government expects sales of 2.6 million cars in 2004.

If China continues to inflate its money supply at double-digit rates, it will get price inflation. This will increase the demand for gold by grandparents. They still remember the horrendous Chinese inflation that brought Mao to power in 1949. If, on the other hand, the Chinese central bank stops creating money, a bust is sure. China will learn about the Austrian theory of the trade cycle first-hand. There will be many bankruptcies. There will then be a heightened interest in gold as a safe asset to own when one’s debtors are refusing to pay and one’s creditors are demanding payment. Gold is a liquid asset that is not part of the fractional reserve banking system. It is a form of money that is not a legal liability for a pyramid asset scheme.

Gold is not money in Asia, at least not in official, visible markets. But in a world of bribery, gold is always a much-desired asset. It leaves no paper trail. Asians have been paying bribes to corrupt rulers for millennia. Gold or silver has been the preferred money for bribery for the entire period.

These orientals are inscrutable to Westerners because Asians still understand that gold is money. They are familiar with the power of gold in gaining one’s goals on a face-to-face basis. The West has forgotten.


We are seeing the flow of consumer products from east to west. To the extent that the West runs a negative balance of trade with the East, the flow of capital ownership is west to east. Asia is lending to the West, especially to Americans, the money to buy trinkets. Japan in 1950 sold cheap manufactures. Then, year by year, quality improved. This was first evident in its 35 millimeter cameras, which by the late 1950s beat anything that America produced for the price. China is following in Japan’s footsteps. It is exporting low-tech products. This will continue as manufacturing moves to China’s vast interior. Low-skilled, low-paid people will produce low-tech products. In the port cities, high tech will dominate within two decades or less. In Taiwan, it dominates now. The mainland Chinese regard Taiwan as a province, not as a separate nation. In terms of the flow of capital from Taiwan to mainland China, this assumption is correct, economically speaking.

The demand for gold as a monetary asset in the West is minimal. The West has been sold an ideological bill of goods. It has been sold on the idea of a government-created monetary monopoly, run by fractional reserve bankers, as a replacement for gold coins that are used by citizens as a way to protect themselves against monetary manipulation by elites. Gold is democratic money. When the public abandons gold, it transfers power to governments and banking elites, who abuse the privilege by debasing the money.

East Asians in the emerging nations are not democrats in their politics, but they are democrats in their economics. They are gold bugs. This long democratic tradition has been broken only since World War II. Asians are now getting their hands on the West’s digital money in such quantities that a percentage can go into grandfather’s money.

Their central banks are buying T-bills with newly created money. This is the Keynesian formula for wealth. These bankers were educated in Western universities and by national professors who were trained in Western universities. They have adopted Western monetary theories. They are following the prescription of export-driven economies: subsidize the export sector by keeping down the international value of your currency. Make it easier for foreigners to afford your money, and therefore your products. They are mercantilists, but without a gold standard. They are fiat money mercantilists.

Central bankers are all sons of the West. They all play the games developed by the Bank of England after 1694. But the man in the Asian street is a son or grandson of someone who was not educated in a Western university, and who remembers all too well what happens to paper money.

The demand for gold in Asia will rise. The faster that the new money economy spreads to the interior of China, the faster that the transfer of gold from west to east will take place. China is still living in the past culturally. High tech products have not yet transformed low tech distrust of governments and their paper money.

So, as Western central bankers exchange physical gold for promises to pay digits, Asians will politely say, “Thank you so much,” and think, “almond eyed fools,” and carry off the stolen goods of earlier generations of Westerners, who believed the promises of bankers to sell gold at a fixed price to anyone who walked in the door. That promise was violated when World War I broke out and, in America, in 1933. Now, Asians are walking through the door with fists full of digital promises. They can either buy Western promises to pay, or they can buy gold and take delivery. Some of them will buy gold. Grandfather knows best.


If and when the French central bank sells its gold, there will be lots of buyers. Thus, we will at last discover the answer to Pepsodent Toothpaste’s long-unanswered prediction in my youth: “You’ll wonder where the yellow went.” It went to Asia.

April 22, 2004

Gary North [send him mail] is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

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