LESSONS FROM THE LONDON GOLD POOL

As we examine 6000 years of monetary history, several very clear"Monetary
Constants" seem to emerge. These very same constants have appeared
throughout time and millennia, regardless of the empire, ruler or social structure of
the day. While there are several, three of these constants are important to our
journey into history today;

1.Money is the result of the function of the free market. As long as man has
traded his goods and services in a market place, money (or a medium of
exchange) has always emerged as a result of this free market process.
Almost without exception, gold and silver have always appeared as the"free
market money" of choice. No other form of money has functioned as well or
as long as the precious metals. Gold, reserved for larger transactions and
international trade, and silver, the money of everyday trade, have emerged
naturally and not as the result of some government or ruler's decree.

2.Government has always intervened. As long as money has existed, the
rulers or governments of the day, have entered and become deeply involved
in this free market process, in an attempt to control, manipulate and ultimately
debase money and the process of its issuance. Often we observe the rulers
of the day working closely with the moneychangers or bankers to achieve this
end. Ultimately government intervention has led to the ruin of entire empires
and economies along with the government issued and controlled money.

3.The free market always wins. Eventually the free market process overrides
the process of government interference. As government intervention and
regulation of markets and money eventually fails, the free market again
emerges, leading to a resurgence of"free market" gold and silver money.

Over recent centuries, while money itself and methods of government intervention
have changed, and become increasingly more sophisticated, these basic
immutable laws of the free market have not changed.

In recent months, due in large to the work of GATA, speculation as to whether there
has been covert manipulation within the gold market has again taken center-stage
amongst the last of the faithful"goldbugs" and contrarian investors.

In light of almost overwhelming evidence, still for many, the possibilities of powerful
central banks and financial institutions concluding to suppress the price of gold
seems unlikely, if not farfetched and extreme. However, one only needs to turn to
the pages of history to realize that there have been several examples of
governments' unsuccessful intervention into the gold market in recent decades,
including the US Treasury gold auctions of the mid 70's, and most notable, the
London Gold Pool of the 1960's. As in any other time in history, this government
intervention into the gold market was motivated by a monetary issue, namely to
shore-up and protect the world's reserve currency, the US dollar.

London Gold Market
Throughout the first half of last century, London enjoyed the elite position of the
world's premier gold market. Since the early 1900's virtually all of South Africa's
gold production was shipped to London for sale. Rhodesian, Ghanaian and even a
large amount of the Russian gold production found its way to the London Market. In
fact up until the Gold Crisis of 1968, nearly 80% of all newly mined gold passed
through London.

Each morning all eyes turned to London as the world eagerly awaited the London
Gold Fix, a daily ritual that was shrouded with mystery since its inception in
September 1919. It was not until 1968 that a 3 p.m."afternoon Gold Fix" was
introduced, to coincide with the opening of the US markets. Interestingly,
throughout the post war years of the 50's and most of the 1960's, the daily price of
gold rarely moved outside of a 20 cent trading range of $35 to $35.20. During this
era, a daily move of 2 cents made headlines.

The US Dollar Era
In 1944, the Bretton Woods Conference saw the US dollar emerge as the sole
reserve currency of the world. Under Bretton Woods, nations currencies were
pegged to the US dollar which in-turn was pegged to gold at $35.20 dollars per oz.
Under the terms of the Bretton Woods Agreement, foreign central banks and
treasuries were entitled to convert US dollars to gold at the rate of $35.20 per oz.

Throughout the early 1950's there was generally a shortage of dollars
internationally. However, as years went by, the US began to send ever-larger
amounts of dollars overseas to fund their increasing trade deficits with the rest of
the world. Overtime, the glut of US dollars held abroad began to threaten U.S. gold
reserves. By the late 50's, US gold reserves, which had peaked in 1949, began to
rapidly dwindle. Worldwide, demand for gold had increased dramatically,
particularly during any perceived crisis.

$40 Gold
Critically important to maintaining US gold reserves was the London gold price. If it
could be maintained at $35.20, it would be cheaper to purchase gold through
London than across the Atlantic, where shipping and insurance would add another
20 cents or more.

Late 1960 was election time in the US. Concern and speculation prevailed whether
the incoming President would do anything to solve the balance of payments
problem, or even devalue the US dollar. Reacting to this uncertainty, one October
afternoon, sudden panic buying of gold saw a drastic price rise to over $40 per oz.
An agreement was reached, after emergency overnight calls between the Bank of
England and the US Federal Reserve, that the Bank of England should make
available for market substantial supply to reduce and stabilize the price.

The London Gold Pool
President Kennedy was inaugurated in January 1961. Throughout that year,
reports circulated of government and banks formulating policy and safeguards to
prevent future price rises. The US had made it clear that it wanted to stop the drain
on its own gold reserves.

Newly-appointed Under-Secretary of the US Treasury Robert Roosa and officials
of the Federal Reserve suggested that the U.S., the Bank of England and the
central banks of the West Germany, France, Switzerland, Italy, Belgium, the
Netherlands, and Luxembourg should set up a sales consortium to prevent the
market price of Gold from exceeding $US 35.20 per oz.

Under the"London Gold Pool" arrangement, member banks provided a quota of
gold into a central pool, with the Federal Reserve matching the combined
contributions on a one to one basis. During a time of rising prices, the Bank of
England, the agent, could draw on the gold from the pool and sell into the market to
cap or lower prices. In the fall of 1961, London gold prices again began to creep
up. In November, with the scheme now up and running, prices were once more
stabilized in the $35 - $35.20 range.

By February 1962, the gold pool was buying gold as the price dipped and selling
as the price rose. This pattern continued over the next few years, somewhat
stabilizing London gold prices, despite extraordinary demand during the Cuban
Crisis and as a result of increasing tensions between Washington and Moscow.

Fires on all Fronts
By 1965 the gold pool was consistently supplying more gold to cap prices than it
was winning back. The beginning of the end for the London Gold Pool was the
devaluation of the pound sterling in November 1967, causing yet another run to
gold. Through December that year, London sold close to 20 times its usual amount
of gold at market. Under pressure from the pool, both London and Zurich ceased
the sale of forward gold. In a matter of weeks the pool had laid out in excess of
1000 ton, in those days valued at the not insignificant amount of over $1.1 billion.

Meanwhile France, led by outspoken Charles de Gaulle and his fiery economist
Jacques Rueff, withdrew from the pool and confirmed their position to send dollars,
earned by exporting to the U.S., back, in demand for US gold rather than US
Treasury debt. At this point, the drain on U.S. gold became acute. Escalation in the
Vietnam War in early 1968 brought renewed pressure on the dollar, with the US
now running massive balance of payment deficits with the world. As in all of history,
during a crisis, gold was again on center stage; demand was skyrocketing.

World Gold Crisis
On Friday March 8th, London sold 100 ton of gold at market, up from around 5 ton
on a normal day. The following Sunday evening, the pool released the statement
"the London Gold Pool re-affirm their determination to support the pool at a fixed
price of $35 per oz". Fed chairman William McChesney-Martin announced the US
would defend the $35 per oz gold price"down to the last ingot". That week the
London Gold Pool continued to fight the free market process and defend $35.20
gold. By midweek it had emergency airlifted several planeloads of gold from the US
to London to meet demand. On Wednesday the London market sold 175 ton, 30
times its normal daily turnover, and by Thursday demand exceeded 225 tons.

That evening emergency meetings were held in Buckingham Palace, with the
Queen subsequently declaring Friday 15th March a"bank holiday". Roy Jenkins,
Chancellor of the Exchequer, announced that the decision to close the gold market
had been taken"upon the request of the United States".

Two-tier Market
The London gold market remained closed for two weeks, during which time the
London Gold Pool was officially disbanded. During that two weeks, Zurich and
French markets continued to trade with open market prices for gold exceeding $44
per oz (up 25% from London's official price of $35.20 per oz).

A fortnight later, an official"two-tiered" price was announced to the world, where
the official price of $35.20 would remain for central banks dealings, while the free
market could find its own price, the London market re-opening again on the 1st
April.

Lessons from the London Gold Pool
The ill-fated London Gold Pool affords us many clear lessons today.

1.Manipulation of markets by governments, aided by central bankers and
powerful financial institutions does exist, especially when nations' currencies,
and particularly the world's reserve currency, are at risk. As stated at the
outset, throughout all of history, governments have eventually become deeply
involved in the free market process, for their own ends. It is not unreasonable
to expect that, if governments became heavily involved in suppressing the
price of gold in the 1960's, there is no reason why they would not today.

2.History has conclusively shown that manipulation of the free market process
ultimately fails; no amount of government control, regulation or price
manipulation can change the workings of the free market over the long term,
the London Gold Pool being no exception. No amount of gold, air-shipped to
market by the gold pool could satisfy demand when investors decided, on
mass, to storm the market.

3.Those behind orchestrating market intervention suffer great loss when their
efforts eventually end. By the time the gold pool was officially disbanded in
early 1968, it had cost the member countries many billions of dollars (a lot of
dollars in those days). The Bank of England never again regained its former
position and prestige within the world gold market after the collapse of the
London Gold Pool. As one London bullion dealer put it"the Bank of England
are no longer the masters, they are just a post office or warehouse where
gold is stored before it comes to the market".

4.Markets that have been artificially capped, catapult dramatically when market
suppression ends. In the 12 years from 1968 to the peak of the bull market,
the price of gold had rallied by 2300%. It has been said that"the greater and
the longer the manipulation, the greater the eventual price is going be".
Today, with far greater amounts of gold involved in the price suppression
scheme (10,000 - 15,000 ton versus 3,000 ton in the gold pool era), over a
longer period of time, and with far more at stake, it can only be concluded
that the eventual price of gold may well run much higher than the 2300% of
the late 60's and 70's. At today's prices, a similar move of just 2300% would
price gold at a staggering $6,400 per oz.


May 21, 2001

Philip Judge

Philip Judge is an administrator of the Gold Heritage Certificate, an offshore silver
and gold bullion fund, and editor of www.millennium-money.com. He was producer
and director of the 2-hour feature documentary"Millennium Money" which won a
1st place Gold Award at the 1998 US International Film Festival. Philip can be
reached at pjudge@goldheritagecertificate.com and
www.goldheritagecertificate.com














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