Netanyahu, Obama and the Geopolitics of Speeches

March 3, 2015 | 08:49 GMT 

By George Friedman

Israeli Prime Minister Benjamin Netanyahu is visiting the United States this week to speak to Congress on March 3. The Obama administration is upset that Speaker of the House John Boehner invited Netanyahu without consulting with the White House and charged Boehner with political grandstanding. Netanyahu said he was coming to warn the United States of the threat of Iran. Israeli critics of Netanyahu charged that this was a play for public approval to improve his position in Israel's general election March 17. Boehner denied any political intent beyond getting to hear Netanyahu's views. The Obama administration claimed that the speech threatens the fabric of U.S.-Israeli relations.

Let us begin with the obvious. First, this is a speech, and it is unlikely that Netanyahu could say anything new on the subject of Iran, given that he never stops talking about it. Second, everyone involved is grandstanding. They are politicians, and that's what they do. Third, the idea that U.S.-Israeli relations can be shredded by a grandstanding speech is preposterous. If that's all it takes, relations are already shredded.

Speeches aside, there is no question that U.S.-Israeli relations have been changing substantially since the end of the Cold War, and that change, arrested for a while after 9/11, has created distance and tension between the countries. Netanyahu's speech is merely a symptom of the underlying reality.

There are theatrics, there are personal animosities, but presidents and prime ministers come and go.

What is important are the interests that bind or separate nations, and the interests of Israel and the United States have to some extent diverged. It is the divergence of interests we must focus on, particularly because there is a great deal of mythology around the U.S.-Israeli relationship created by advocates of a close relationship, opponents of the relationship, and foreign enemies of one or both countries.

Building the U.S.-Israeli Relationship

It is important to begin by understanding that the United States and Israel did not always have a close relationship. While the United States recognized Israel from the beginning, its relationship was cool until after the Six-Day War in 1967. When Israel, along with Britain and France, invaded Egypt in 1956, the United States demanded Israel's withdrawal from Sinai and Gaza, and the Israelis complied. The United States provided no aid for Israel except for food aid given through a U.N. program that served many nations. The United States was not hostile to Israel, nor did it regard its relationship as crucial.

This began to change before the 1967 conflict, after pro-Soviet coups in Syria and Iraq by Baathist parties. Responding to this threat, the United States created a belt of surface-to-air missiles stretching from Saudi Arabia to Jordan and Israel in 1965. This was the first military aid given to Israel, and it was intended to be part of a system to block Soviet power. Until 1967, Israel's weapons came primarily from France. Again, the United States had no objection to this relationship, nor was it a critical issue to Washington.

The Six-Day War changed this. After the conflict, the French, wanting to improve relations with the Arabs, cut off weapons sales to Israel. The United States saw Egypt become a Soviet naval and air base, along with Syria. This threatened the U.S. Sixth Fleet and other interests in the eastern Mediterranean. In particular, the United States was concerned about Turkey because the Bosporus in Soviet hands would open the door to a significant Soviet challenge in the Mediterranean and Southern Europe. Turkey was now threatened not only from the north but also from the south by Syria and Iraq. The Iranians, then U.S. allies, forced the Iraqis to face east rather than north. The Israelis forced the Syrians to focus south. Once the French pulled out of their relationship with Israel and the Soviets consolidated their positions in Egypt and Syria in the wake of the Six-Day War, the United States was forced into a different relationship with Israel.

It has been said that the 1967 war and later U.S. support for Israel triggered Arab anti-Americanism. It undoubtedly deepened anti-American sentiment among the Arabs, but it was not the trigger. Egypt became pro-Soviet in 1956 despite the U.S. intervention against Israel, while Syria and Iraq became pro-Soviet before the United States began sending military aid to Israel. But after 1967, the United States locked into a strategic relationship with Israel and became its primary source of military assistance. This support surged during the 1973 Arab-Israeli War, with U.S. assistance rising from roughly 5 percent of Israeli gross domestic product to more than 20 percent a year later.

The United States was strategically dependent on Israel to maintain a balance of power in the eastern Mediterranean. But even during this period, the United States had competing strategic interests. For example, as part of encouraging a strategic reversal into the U.S. camp after the 1973 war, the United States negotiated an Israeli withdrawal from Sinai that the Israelis were extremely reluctant to do but could not avoid under U.S. pressure. Similarly, U.S. President Ronald Reagan opposed an Israeli invasion of Lebanon that reached Beirut, and the initial U.S. intervention in Lebanon was not against Arab elements but intended to block Israel. There was a strategic dependence on Israel, but it was never a simple relationship.

The Israelis' national security requirements have always outstripped their resources. They had to have an outside patron. First it was the Soviets via Czechoslovakia, then France, then the United States.

They could not afford to alienate the United States — the essential foundation of their national security — but neither could they simply comply with American wishes. For the United States, Israel was an important asset. It was far from the only important asset. The United States had to reconcile its support of Israel with its support of Saudi Arabia, as an example. Israel and the Saudis were part of an anti-Soviet coalition, but they had competing interests, shown when the United States sold airborne warning and control systems to the Saudis. The Israelis both needed the United States and chafed under the limitations Washington placed on them.

Post-Soviet Relations

The collapse of the Soviet Union destroyed the strategic foundation for the U.S.-Israeli relationship. There was no pressing reason to end it, but it began to evolve and diverge. The fall of the Soviet Union left Syria and Iraq without a patron. Egypt's U.S.-equipped army, separated from Israel by a demilitarized Sinai and token American peacekeepers, posed no threat. Jordan was a key ally of Israel. The United States began seeing the Mediterranean and Middle East in totally different ways.

Israel, for the first time since its founding, didn't face any direct threat of attack. In addition, Israel's economy surged, and U.S. aid, although it remained steady, became far less important to Israel than it was. In 2012, U.S. assistance ($2.9 billion) accounted for just more than 1 percent of Israel's GDP.

Both countries had more room to maneuver than they'd had previously. They were no longer locked into a relationship with each other, and their relationship continued as much out of habit as out of interest. The United States had no interest in Israel creating settlements in the West Bank, but it wasn't interested enough in stopping them to risk rupturing the relationship. The Israelis were no longer so dependent on the United States that they couldn't risk its disapproval.

The United States and Israel drew together initially after 9/11. From the Israeli perspective, the attacks proved that the United States and Israel had a common interest against the Islamic world. The U.S. response evolved into a much more complex form, particularly as it became apparent that U.S. forces in Afghanistan and Iraq were not going to pacify either country. The United States needed a strategy that would prevent jihadist attacks on the homeland, and that meant intelligence cooperation not only with the Israelis but also with Islamic countries hostile to Israel. This was the old problem.

Israel wanted the United States focused on Israel as its main partner, but the United States had much wider and more complex relations to deal with in the region that required a more nuanced approach.

This is the root of the divergence on Iran. From Israel's point of view, the Iranians pose an inherent threat regardless of how far along they are — or are not — with their nuclear program. Israel wants the United States aligned against Iran. Now, how close Tehran is to a nuclear weapon is an important question, but to Israel, however small the nuclear risk, it cannot be tolerated because Iran's ideology makes it an existential threat.

The Iran Problem

From the American perspective, the main question about Iran is, assuming it is a threat, can it be destroyed militarily? The Iranians are not fools. They observed the ease with which the Israelis destroyed the Iraqi nuclear reactor in 1981. They buried theirs deep underground. It is therefore not clear, regardless of how far along it is or what its purpose is, that the United States could destroy Iran's nuclear program from the air. It would require, at the very least, special operations on the ground, and failing that, military action beyond U.S. capabilities. Aside from the use of nuclear weapons, it is unclear that an attack on multiple hardened sites would work.

The Israelis are quite aware of these difficulties. Had it been possible to attack, and had the Israelis believed what they were saying, the Israelis would have attacked. The distances are great, but there are indications that countries closer to Iran and also interested in destroying Iran's nuclear program would have allowed the use of their territories. Yet the Israelis did not attack.

The American position is that, lacking a viable military option and uncertain as to the status of Iran's program, the only option is to induce Iran to curtail the program. Simply maintaining permanent sanctions does not end whatever program there is. Only an agreement with Iran trading the program for an end of sanctions would work. From the American point of view, the lack of a military option requires a negotiation. The Israeli position is that Iran cannot be trusted. The American position is that in that case, there are no options.

Behind this is a much deeper issue. Israel of course understands the American argument. What really frightens the Israelis is an emerging American strategy. Having failed to pacify Afghanistan or Iraq, the United States has come to the conclusion that wars of occupation are beyond American capacity.

It is prepared to use air power and very limited ground forces in Iraq, for example. However, the United States does not see itself as having the option of bringing decisive force to bear.

An Intricate U.S. Strategy

Therefore, the United States has a double strategy emerging. The first layer is to keep its distance from major flare-ups in the region, providing support but making clear it will not be the one to take primary responsibility. As the situation on the ground deteriorates, the United States expects these conflicts to eventually compel regional powers to take responsibility. In the case of Syria and Iraq, for example, the chaos is on the border of Turkey. Let Turkey live with it, or let Turkey send its own troops in. If that happens, the United States will use limited force to support them. A similar dynamic is playing out with Jordan and the Gulf Cooperation Council states as Saudi Arabia tries to assume responsibility for Sunni Arab interests in the face of a U.S-Iranian entente. Importantly, this rapprochement with Iran is already happening against the Islamic State, which is an enemy of both the United States and Iran. I am not sure we would call what is happening collaboration, but there is certainly parallel play between Iran and the United States.

The second layer of this strategy is creating a balance of power. The United States wants regional powers to deal with issues that threaten their interests more than American interests. At the same time, the United States does not want any one country to dominate the region. Therefore, it is in the American interest to have multiple powers balancing each other. There are four such powers: Turkey, Iran, Saudi Arabia and Israel. Some collaborate, some are hostile, and some shift over time. The United States wants to get rid of Iran's weapons, but it does not want to shatter the country. It is part of a pattern of regional responsibility and balance.

This is the heart of Israel's problem. It has always been a pawn in U.S. strategy, but a vital pawn. In this emerging strategy, with multiple players balancing each other and the United States taking the minimum possible action to maintain the equilibrium, Israel finds itself in a complex relationship with three countries that it cannot be sure of managing by itself. By including Iran in this mix, the United States includes what Israel regards as an unpredictable element not solely because of the nuclear issue but because Iran's influence stretches to Syria and Lebanon and imposes costs and threats Israel wants to avoid.

This has nothing to do with the personalities of Barack Obama and Benjamin Netanyahu. The United States has shown it cannot pacify countries with available forces. The definition of insanity is doing the same thing repeatedly and expecting a different outcome. If the United States is not involved on the ground in a conflict, then it becomes a problem for regional powers to handle. If the regional powers take the roles they must, they should balance against each other without a single regional hegemon emerging.

Israel does not want to be considered by the United States as one power among many. It is focused on the issue of a nuclear Iran, but it knows that there is no certainty that Iran's nuclear facilities can be destroyed or that sanctions will cause the Iranians to abandon the nuclear program. What Israel fears is an entente between the United States and Iran and a system of relations in which U.S. support will not be automatic.

So a speech will be made. Obama and Netanyahu are supposed to dislike each other. Politicians are going to be elected and jockey for power. All of this is true, and none of it matters. What does matter is that the United States, regardless of who is president, has to develop a new strategy in the region.

This is the only option other than trying to occupy Syria and Iraq. Israel, regardless of who is prime minister, does not want to be left as part of this system while the United States maintains ties with all the other players along with Israel. Israel doesn't have the weight to block this strategy, and the United States has no alternative but to pursue it.

This isn't about Netanyahu and Obama, and both know it. It is about the reconfiguration of a region the United States cannot subdue and cannot leave. It is the essence of great power strategy: creating a balance of power in which the balancers are trapped into playing a role they don't want. It is not a perfect strategy, but it is the only one the United States has. Israel is not alone in not wanting this.

Turkey, Iran and Saudi Arabia don't want it, either. But geopolitics is indifferent to wishes. It understands only imperatives and constraints.

Oil, Jobs, Consumer Confidence, and Humpty Dumpty

Tony Sagami

March 3, 2015

Politicians, Wall Street, and the Federal Reserve Bank want you to think the economy is doing great thanks to the big improvements in the labor market. 

However, Janet Yellen, who testified before the Senate Banking Committee last week, admitted that the labor market isn’t so rosy.

“Too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective,” said Yellen.

What Yellen is trying to say in her special brand of Fedspeak double-talk is that the job situation is going to get worse.

There are currently 30 million unemployed or severely underemployed Americans and I doubt that many of them are celebrating the drop in the unemployment rate.

Case in point: Take a look at the oil industry.

One of the biggest drivers of recent job growth was the oil industry, thanks to improvement in fracking technology.

The collapse in crude prices has sidelined hundreds of oil- and gas-drilling rigs in recent months. Some 1,300 rigs are active through February 13 in the US and Canada, down 30% from about 1,860 rigs in November 2014.

Energy consulting company Wood Mackenzie predicted that another 15% of oil rigs will be idled by the summer. Drilling rigs “are currently being stacked at an alarming rate,” said Scott Mitchell of Wood Mackenzie.

Staffing firm Challenger, Gray & Christmas put out some actual job numbers related to the collapse of oil prices:

Job cut announcements surged to their highest level in nearly two years, as falling oil prices prompted cost-cutting efforts in energy and related industries. In all, US-based employers announced plans to shed 53,041 jobs from their payrolls to start 2015; with 40% of those directly related to oil prices.

Of the 53,041 job cuts announced in January, 21,322 were directly attributed to the recent and sharp decline in oil prices. Most of these cuts occurred in the energy industry, where employers announced a total of 20,193 layoffs. The January total is 42% higher than the 14,262 job cuts announced by the energy industry in all of 2014.

Don’t forget; these oil jobs are among some of the highest-paying blue-collar jobs in the country, so losing one oil job is like losing five or eight or ten hospitality-industry (“Would you like some fries with that, sir?”) Jobs.

Maybe that’s why despite the stock market hitting all-time highs and President Obama taking economic victory laps on TV, Americans aren’t very optimistic about their futures.

The Conference Board Consumer Confidence Index dropped from 102.9 to 96.4 in February, well below the 99.4 that the Wall Street geniuses were expecting.

That’s a bomb, but the real meat of the survey was the LABOR MARKET conditions.

Jobs Plentiful? 20.5% of Americans said that jobs are “plentiful.” Sounds good, right? Wrong! That’s a decrease from January, but more importantly, the number of Americans that described jobs as “hard to get” jumped from 24.6% to 26.2% in the last month.

Jobs plentiful declined; jobs hard to get increased.

Income Expectations? 15.1% of the households surveyed said that they expected their incomes to rise over the next six months. Sounds good, right? Wrong! That’s a decline from the 19.5% in January, AND another 12.0% said their incomes will decline over the next six months… up from 10.8% in January.

Expected income to increase declined; expected income to decrease grew.

The big mistake that Wall Street and most optimistic investors are making is they assume that an improving labor market will translate into strong consumer spending, the main driver (70%) of US economic activity.


What drives consumer spending is rising real wages, not a drop in the unemployment rate, and that is why Americans are becoming more pessimistic.

The stock market is NOT the economy, and the disconnect between Main Street and Wall Street won’t last forever. You can read about the biggest challenge facing Wall Street in 2015—brought on by the stronger dollar—by clicking here. Main Street certainly isn’t prepared for this…

Do you have a plan for when Humpty Dumpty takes a big fall?

Yellen Turning from Friend to Foe for Dollar Bulls

by Lukanyo Mnyanda

7:00 PM EST
March 2, 2015

(Bloomberg) -- Janet Yellen is turning from currency traders’ best friend to their biggest foe.

The most popular trade in the $5.3 trillion-a-day foreign-exchange market has been betting on a stronger dollar, leaving investors exposed when the Federal Reserve chair damped speculation last month of an imminent increase to interest rates. As the dollar slowed its advance, an index of currency returns snapped a record winning streak, prompting traders to reassess how much higher the greenback can go.

“Currency managers had been doing well because they’ve been long dollars, and the dollar had been pretty much on a straight-line trajectory higher,” said Adam Cole, the global head of currency strategy at RBC Capital Markets in London. The dollar’s slowdown is “a major factor behind returns looking less positive,” he said.
While Bloomberg’s Dollar Spot Index climbed to a record on Tuesday, the measure is rising at the slowest pace since June and speculators including hedge funds are paring bets on how much the currency will strengthen. Yellen told Congress last week she won’t be locked into a timetable for boosting borrowing costs, just days after minutes of the Fed’s January meeting underlined the damage a stronger dollar can do to the economy.

Returns Falter

Parker Global Strategies LLC’s gauge of 14 top currency funds fell 0.1 percent in February, ending seven months of gains, the longest run in data going back to 2003. The index rose to a 3 1/2-year high in January as investors boosted long-dollar positions, or bets the U.S. currency would appreciate.

That wager worked out until the Fed undermined speculation it was planning to raise its zero-to-0.25-percent target rate in the next couple of policy meetings.

The minutes of its more recent gathering, published Feb. 18, described the strong dollar as “a persistent source of restraint” on U.S. exports, while Yellen told lawmakers on Feb. 24-25 not to assume an increase was imminent if the Fed drops a pledge to be “patient” on tightening policy.

The resulting pause in the dollar “accounts for some of that disappointment in the performance” of foreign-exchange funds, said Ian Stannard, Morgan Stanley’s head of European currency strategy in London.

Dollar Gains

Longer-term, though, he said the strong-dollar “trend should stay in place,” and predicted a gain of about 20 percent on a trade-weighted basis during the next three years.
Bloomberg’s dollar index -- which tracks the greenback against 10 major peers including the euro, yen and pound -- rose 0.4 percent last month, the smallest advance since it declined in June. The gauge had surged 16 percent from the middle of last year through the end of January. On Tuesday, it edged to its highest level since data began in 2004.

The prospect of the Fed’s first rate increase in almost a decade has lured cash to the dollar as other central banks across the globe ease. Policy makers from the euro region to China and Canada have been lowering borrowing costs or circulating unprecedented amounts of money in their economies, which tends to debase their currencies.

The dollar is forecast to strengthen versus all but four of its 31 major peers by Dec. 31, according to strategist estimates compiled by Bloomberg. At the end of last year, it was predicted to drop against 13 of them.

Biggest Bet

Still, traders have pushed out their expectations for a Fed rate increase, which is lessening the currency price swings that traders exploit for profit.

JPMorgan Chase & Co.’s index of anticipated global volatility fell to a low for the year of 8.93 percent on Feb. 25, based on closing prices. The measure peaked at a 1 1/2-year high of 11.52 percent in January and was at 9.34 percent as of 7:13 a.m. in New York.

Futures prices signal a 17 percent chance policy makers will boost rates to at least 0.5 percent by June, down from 44 percent odds six months ago, data compiled by Bloomberg show.

For the dollar to make the “next leg” higher, investors would need to “bring forward their expectations for the first rate hike,” Peter Dragicevich, a strategist at Commonwealth Bank of Australia in London, said by phone on Monday.

While bullish-dollar bets remain the biggest position in the market, investors are reducing the amount they’re speculating, according to data from the Commodity Futures Trading Commission in Washington. Net longs on the dollar versus eight major peers fell for the past three weeks to 404,276 contracts as of Feb. 27, down from a record 448,675 in January.

“They’ve been taking risk off the table because they’re seeing no clear or strong direction by the Fed that rates are going higher sooner than later,” said Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investment Management Inc., which oversees about $250 billion.

“There’s been some frustration.”

The Bank of England and the London Gold Fixings in the 1980s

by Ronan Manly

28 Feb 2015

With the current structure of the London gold price fixings disappearing in the very near future, there is an unusual story that I’d like to share about the gold fixings. It concerns the Bank of England’s ‘gold activities’ in the daily London Gold Fixings during the 1980s, and my attempts to get the Bank to explain what these ‘gold activities’ consisted of.


These ‘gold activities’ of the Bank came to light within some comments that senior Bank of England employee Oliver Page wrote about fellow senior Bank of England colleague and contemporary Terry Smeeton:


Before looking at Mr. Smeeton’s ‘gold activities’, it’s worth getting a sense of the roles of Terry Smeeton and Oliver Page at the Bank of England by briefly looking at the career profiles of these two gents.
Terry Smeeton and Oliver Page
In the 1980s and 1990s, Terry Smeeton was one of the Bank of England’s experts on the gold market, and he rose to attain the position of Head of Foreign Exchange and Gold at the Bank.

Smeeton joined the Bank of England in 1960 and remained at ‘The Old Lady’ until retiring in 1998.

After leaving Threadneedle Street in March 1998, Smeeton went on to be a non-executive director of Standard Bank from July 1998 to September 2007, and in 2002 was appointed as advisory board member to the Dubai Metals and Commodities Centre (DMCC) and head of the centre’s Gold Management committee. Terry Smeeton passed away in September 2007.

In the 1990s while still at the Bank, Smeeton was also the Bank of England’s representative on the G-10 Gold and Foreign Exchange Committee at the Bank for International Settlements in Basel, as these Committee meeting minutes from 1997 highlight.

Frank Veneroso of Veneroso Associates, who is well-known for his in-depth analysis of the gold lending market, has stated that it was actually comments about the gold lending market made by Terry Smeeton in 1995 that triggered Veneroso to undertake his ground-breaking gold lending market analysis. Veneroso has also highlighted previously that Smeeton was critical of HM Treasury’s 1999 decision to auction off a substantial part of the UK’s gold reserves.

Oliver Page joined the Bank of England in 1968 and went on to be Chief Manager, Reserves Management in 1989, and Deputy Director, Supervision and Surveillance in 1996. In 1998, when the Financial Services Authority (FSA) was established, Page moved from the Bank of England to become the FSA’s Director of its Complex Groups Division (later called Major Financial Groups Division), and was also the FSA’s representative on the Basel Committee of Banking Supervisors.

Page received an OBE in 2004, and retired from the FSA in April 2006, after which he became a non-executive director of Mitsubishi UFJ Securities International. Oliver Page passed away in 2012.

After Terry Smeeton died in September 2007, Oliver Page wrote Mr. Smeeton’s obituary which was published in the industry journal ‘Central Banking’, and on the journal’s website.

In the obituary, Oliver Page said of Smeeton:

On his work, the foreign exchange and gold markets were his great enthusiasms. So his work in the Bank of England, mainly in the Foreign Exchange Division, suited him perfectly. The gold markets were an aspect of the financial world where he became internationally renowned.
While I was in the foreign exchange division in the 1980s, I was responsible for the risk management and performance system used to monitor activity. Through this period, Terry’s gold activities, often partly aimed at helping the London Market’s daily gold fixes, produced an overall profit.
So he was not just a talker on gold, he was a successful operator. He was very disappointed when large-scale gold sales were made in the 1990s at what turned out to be the 30-year low of the market.”
Certain phrases in Page’s tribute to Smeeton, specifically in relation to the gold fixings, struck me as very odd and raised a number of questions in my mind:

Firstly, what were Smeeton’s ‘gold activities‘ in the daily gold fixes ‘through this period’ during the 1980s?

Secondly, what was the Bank of England foreign exchange and gold division doing entering the London gold fixings to ‘help’ the daily gold fixes? And why did this activity happen ‘often’?

These ‘gold activities’ do not sound like normal Bank of England customer deals being placed into the daily fixings. However it does sound like central bank intervention into the price setting process.

(Note that at this time in the 1980s, NM Rothschild was the permanent chair of the fixings and the Bank used Rothschild as its broker. The other four fixing members during the 1980s were Mocatta, Sharps Pixley, Samuel Montagu/Midland, and Johnson Matthey/Mase Westpac. Rothschild departed from the gold fixings in 2004.)

Thirdly, why exactly is it so noteworthy for Oliver Page to have mentioned that Smeeton “produced an overall profit” from his ‘gold activities‘. Could it be that Smeeton’s activities were not primarily motivated by profit maximisation? Regular Bank of England ‘buy and hold’ or sell orders on behalf of central bank customers would not fall under the ‘noteworthy at having made a profit’ category.

Interestingly, in the London Gold Pool in the 1960s (which comprised both a buying syndicate and a selling syndicate), making a profit on the Pool’s gold transactions was considered a bonus, since that was not the primary purpose of the Pool’s consortium.


The Fix is In

In February 2012, after reading Oliver Page’s observations on Smeeton, I emailed the Bank of England, and asked them to explain Mr. Page’s 1980s references to Mr. Smeeton. My question was:

“What were Terry Smeeton’s “gold activities” while he was in the foreign exchange department that “partly aimed at helping the London Market daily gold fixes” and that produced “an overall profit” over the period, while being monitored by Oliver Page using the risk and performance monitoring system?”
The Bank of England “Public Information & Enquiries Group” responded as follows:

“The Bank of England does not have a role in the daily fixing of gold prices. There are five members (listed below) of the Gold Fixing, all of whom are Market Making members of the LBMA:
•    Bank of Nova Scotia
•    Barclays Capital
•    Deutsche Bank AG London
•    HSBC USA NA London
•    Societe Generale”
Since the bank didn’t address my question, I responded back to the Bank with a second email, reiterating the question:

But if the Bank of England has no role in the fixing then what role was Terry Smeeton in the foreign exchange department playing, with “gold activities” that “partly aimed at helping the London Market daily gold fixes” and that produced “an overall profit” over the period, while being monitored by Oliver Page using the risk and performance monitoring system?

A different person from the Bank’s Public Information & Enquiries Group then responded to my second email as follows:

“The Bank no longer plays a role in the daily gold fixing. But for many years the Bank had a supervisory role in the London gold market,and was involved in the fixing process, as described in the following excerpt from the Bank’s Quarterly Bulletin (1964, p16 ‘The London Gold Market‘):
'The Bank of England are not physically represented at the fixing. But they are able, like any other operator, effectively to participate in the fixing by passing orders by telephone through their bullion broker and at the fixing they use exclusively the services of the chairman of the market, namely, Rothschilds. The Bank opérate for a number of different parties; they are first the managers of the Exchange Equalisation Account, which may be a natural buyer or seller of gold : secondly, they are the agent for the largest single regular seller of gold in the world, namely the South African Reserve Bank, which is responsible for the disposal of new production in South Africa : thirdly, they execute orders for their many other central bank customers : fourthly, the Bank aim, as in the case of the foreign exchange and gilt-edged markets, to exercise, so far as they are able, a moderating influence on the market, in order to avoid violent and unnecessary movements in the price and thus to assist the market in the carrying on of its business.'
From 1968, the Bank was a less regular participant in the daily gold fixings, although contact between the Bank and the members of the gold market remained close.
In particular, the Bank (including Mr Smeeton in his role in the Bank’s Foreign Exchange Division) continued to execute orders for central bank customers of the Bank, and to manage gold held in the Exchange Equalisation Account.
The Bank no longer has supervisory responsibility for the London bullion market. Responsibility for the regulation of the major participants in the market lies with the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000.
Guidelines for the conduct of gold business not covered by the Act are set out in The London Code of Conduct for Non-Investment Products (the NIPs code).”
London gold fixing
Avoiding the Question
Yet again, the second response from the Bank of England didn’t address my question directly, but while circumventing a direct answer, it did contain some very interesting information. Let’s examine the Bank’s second response in more detail.

1. There was no attempt in the Bank’s answer to address the crux of the issue, i.e. what Smeeton was doing in the 1980s ‘helping’ the fixing with ‘gold activities’ that produced an overall profit and that required risk management.

Executing physical gold orders for the Exchange Equalisation Fund (EEA) or for other bank customers via one of the five gold fixing members is not an activity that could reasonably be described as ‘helping’ the fixing and not the type of activity that would be noteworthy as ‘producing an overall profit’, or that would need risk management monitoring.

Nor is gold lending between central bank customers of the Bank of England and the London gold market bullion bank participants something that would have required the Bank’s foreign exchange and gold desk, and Terry Smeeton, to ‘help’ the twice daily London gold price auction fixings.

Gold lending only began in the London gold market in the early to mid 1980s and initially was only undertaken on a limited scale.

So, why the reluctance by the Bank to answer my question directly?

2. Interestingly, the Bank’s response contained an extract (see grayed area above) from a 1964 Bank of England publication about the London Gold Market which explained the four main reasons why the Bank was involved in the gold fixings, and referred to the Bank of England as being “a moderating influence” on the gold market so as “to avoid violent and unnecessary movements in the price.”

Was the inclusion of this 1964 extract about the Fixings by the Bank’s Enquiries and Information Office a tacit admission from the Bank that it continued to be a ‘moderating influence’ on the gold price into the 1980s and perhaps beyond? Why include this Fixing explanation from 1964 to explain a question about the 1980s?

3. The Bank’s email response to me also mentioned 1968 and stated that “From 1968, the Bank was a less regular participant in the daily gold fixings”. This reference to 1968 is a reference to the collapse of the London Gold Pool in March 1968 before which the Gold Pool (managed by the Bank of England) attempted to control the gold price and keep it near $35 per ounce. Since I had asked about the 1980s and not 1968, the inclusion of this reference is, in my view, highly unusual but telling.

The comment from the Bank that since 1968 “contact between the Bank and the members of the gold market remained close” is also noteworthy.

4. The Bank’s response said that Smeeton executed orders for central bank customers and also ‘managed gold’ held in the Exchange Equalisation Account. The Bank did not elaborate on what was meant by ‘managing’ EEA gold. (Note, the UK gold reserves are owned by HM Treasury and held within the Exchange Equalisation Account which is somewhat similar to the US Exchange Stabilization Fund. The Bank of England acts as custodian of the UK gold reserves on behalf of HM Treasury.)

If you look at the data on UK official gold reserves over the 1980s, such as in ‘Central Bank Gold Reserves: A historical perspective‘ by Timothy Green, you will see that the official UK gold reserves were totally static throughout the 1980s at between 591 tonnes and 592 tonnes. i.e. They did not change (see table below, last row). In fact, most of the large gold holding countries maintained static gold reserve holdings throughout the 1980s which would suggest very little customer order activity for the Bank of England gold order desk.

Therefore the unchanging nature of the EEA gold reserves during the 1980s again does not explain the Bank’s reference to Smeeton as ‘managing’ the EEA gold in the 1980s.

What were these ‘Gold activities’?
I had previously come across the Bank of England’s 1964 London gold market essay and it’s reference to the Bank acting as a ‘moderating  influence’ on the gold price. The same passage that the Bank quoted to me is also in a 1976 book called “The Arena of International Finance” by Charles Coombs (page 46). Coombs was head of foreign open market operations at the Federal Reserve Bank of New York from the 1950s until the 1970s.

The Bank of England’s 1964 essay is from it’s Q1 quarterly bulletin and was published in March 1964. This was soon after the launch of the London gold pool but the reference to the role of the Bank as a ‘moderating influence’ against ‘violent and unnecessary movements in the price’ goes back to before the beginning of the London Gold Pool.

Prior to the Gold Pool commencing operations in 1962, the Bank of England was already single-handedly intervening into the London good market aiming to ‘smoothen’ the gold price so that it reverted to near $35 per ounce, by participating in the daily fixing (there was only one fixing at that time, the morning fixing). The Bank aimed to keep the London price near the U.S. Treasury gold window price so as to prevent speculative arbitrage between the two prices (excluding 1/4% US Treasury fee and transport costs).

It was based on these Bank of England operations that Charles Coombs at the Federal Reserve Bank suggested to the Bank of England in 1961 that they consider creating a gold pool amongst the U.S. and major European central banks.

Charles Coombs stated in his 1976 book, ‘The Arena of International Finance’ (page 50), that in 1960:

“The Bank of England, having assumed some responsibility for selling gold to maintain orderly market conditions, was in the awkward position of being squeezed out of the market by other central bank buyers whenever gold became available.”

A recent history of the Bank of England also refers to the Bank of England’s intervention prior to the commencement of the London Gold Pool in 1962:

“The selling consortium was in operation to prevent an unduly rise in the price when demand was strong. It had to be specifically activated by the members. It’s operations did not affect the extent of intervention in the market and the Bank continued to intervene in its own judgement.”

(Source: Page 190, ‘The Bank of England: 1950s to 1979′ by Forrest Capie, Cambridge University Press).

The Bank of England have historically used the terms ‘smoothing operation’ and ‘stabilisation operation’ when referring to operations and interventions into the gold and foreign exchange markets.

A price smoothing operation is a softer, less radical version of a price stabilisation operation.

Upon reading Oliver Page’s comments about Smeeten, my initial theory was that Terry Smeeton and the Bank’s Foreign Exchange Division had also been intervening into the daily gold fixings during the 1980s so as to smoothen the gold price, via offering and bidding from a special account that sold/lent at one price (high) and bought back again at a lower price (low).

Since I asked the Bank to explain Oliver Page’s comments and they declined to do so, this even crystallised my theory somewhat. I usually prefer not to speculate. My approach is to clarify information first and try to validate it. Only if it cannot be validated can some speculation come into play. But if the Bank of England can’t answer a simple question directly, then they are inviting speculation.

My speculation thesis is that in the 1980s, Smeeton and the Bank were using a pool of gold to create artificial supply into the gold fixings so as to influence the gold price, either selling gold directly during the fixings, or lending gold short-term to the chair or lending short-term to some of the four other fixing members.

Intervention of course is two-way, so could also consist of creating demand in the fixings so as to support the price. Keeping a price within a trading ‘band’ is often a goal of financial market intervention. The mechanics of a demand side intervention would merely be the opposite of the possible tactics illustrated below.

Supplying or selling metal into the fixings and buying it back later is a gold trading tactic that would (in the Bank’s eyes) “partially help the fixings” while “producing an overall profit” for the Bank’s Foreign Exchange Division, and also a set of transactions where the trading P & L would need monitoring and risk management (from Oliver Page). The profit creation would be generated by selling high and buying low, much like a trader’s short sell trade and similar to what the Bank of England and the London Gold Pool selling syndicate did in the 1960s.

Within this scenario, I think Smeeton could have been doing a number of things via these ‘gold activities’:

- influencing the opening price of the fixing in the hours before a fixing by trading in the market so that the fixing Chair would call a certain opening price targeted by the Bank
- putting in orders to the fixing from a special gold account so as to affect overall supply and demand and target a certain opening Price
- using an open line to the Chair to put in offers based on the market’s natural business and the quotes from the order books on the call
- lending to some of the five gold broker participants on a short-term basis from the EEA account or another account so as to influence supply (the five brokers all had allocated gold accounts at the Bank of England from the late 1970s onwards)
- and finally, buying back or squaring off the above transactions at some point so as to try to “produce an overall profit”
Maternal Eye

By the 1980s the five London gold brokers and fixing members all maintained allocated gold accounts at the Bank of England and had storage space in the  Bank’s vaults. This development occurred in the late 1970s, and was done initially for security reasons so as to minimise the transport of gold bullion around the City of London.

It would therefore be very straightforward in the 1980s for the Bank to manage transfers and allocations between a gold pool account and gold accounts of one or more of the five London gold market brokers held at the Bank.

[In fact, gold transfers between the Bank of England and the London gold market regularly happen to this day in a different guise via the Bank acting as clearer of last resort with the six bullion bank members of London Precious Metals Clearing Ltd (LPMCL).]

As to whether a 1980s Bank of England gold pool would be sourced from EEA gold, or include other customer gold, or would be a distinct separate account is not that important. Even if such an operation within the Bank’s Foreign Exchange Division was stand-alone and not coordinated with other central banks, the G10 central banks would obviously be briefed on it given their perennial close coordination on gold market issues via Basel.

The February 1998 edition of the LBMA’s Alchemist magazine features an interview with Terry Smeeton just before he retired from the Bank of England in March 1998. In the interview, on pages 2 and 3, when asked about his view on the relationship between the Bank and the London gold market, particularly in light of gold market supervision moving from the Bank to the FSA in 1998, Smeeton said:

“When I started in the Bank of England’s foreign exchange area, we really only had the operational role, which we still, of course, have today. There was no formal supervision of the gold market, but the Bank has always maintained a maternal eye on the market, and that remained the case until the Financial Services Act and the introduction of the Section 43 regime.”
Could this Bank of England ‘maternal eye’ that Terry Smeeton refers to have extended to intervention into the gold fixings in the 1980s so as to be a ‘moderating influence’, and to “avoid violent and unnecessary movements” in the gold price?

To answer that question, you’d have to ask the Bank of England. And they probably wouldn’t tell you one way or the other.

Why the U.S. is Letting China Accumulate Gold

by James Rickards.

Posted Mar 2, 2015.

A lot of people think about gold as a percentage of a country’s total reserves. They are surprised to learn that the United States has 70 percent of its reserves in gold. Meanwhile, China only has about 1 percent of its reserves in gold. People look at that and think that’s an imbalance. But those are not very meaningful figures in my view.

The reason is that a country’s reserves are a mixture of gold and hard currencies, and the currencies can be in bonds or other assets. The United States doesn’t need other currencies. We print dollars, so why would we hold euros and yen?

The U.S. doesn’t need them, so it makes sense that the country would have a very large percentage of its reserves in gold. China, on the other hand, has greater need for other currencies.

A better metric, in my opinion, is to look at a country’s gold holdings as a percentage of GDP.

GDP is a representation of how big a country’s economy is. It’s the gross value of all the goods and services.

There are different measures of money supply — M3, M2, M1, and M0. In a money economy, however, you can say that the country’s gold holdings are the real money. I call a country’s gold reserves gold “M-subzero”.

The IMF officially demonetized gold in 1975. The U.S. ended the convertibility of gold in 1971. Gold disappeared “officially” in stages in the mid-1970s. But the physical gold never went away.

Today, the US has about 8,000 tons. We haven’t sold a significant amount of gold since 1980.

We dumped a lot of gold in the late 1970s to suppress the price, but none after that. So one of my questions for central bankers is, if gold is such a ridiculous thing to have, why are we hanging onto it? But that’s a separate question.

Right now, China officially does not have enough gold to have a “seat at the table” with other world leaders. Think of global politics as a game of Texas Hold’em.

What do you want in a poker game? You want a big pile of chips.

Gold serves as political chips on the world’s financial stage. It doesn’t mean that you automatically have a gold standard, but that the gold you have will give you a voice among major national players sitting at the table.

For example, Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power — but their economy’s only one-eighth as big. So, they have about the right amount of gold for the size of their economy.

The U.S. gold reserve at the market rate is about 2.7 percent of GDP. That number varies because the price of gold varies — but it’s around 2.7 percent. For Russia, it’s about 2.7 percent. For Europe, it’s even higher — over 4 percent.

In China, that number is 0.7 percent officially. Unofficially, if you give them credit for having, let’s say, 4,000 tons, it raises them up to the US and Russian level, but they want to actually get higher than that because their economy is growing.

Here’s the problem: If you took the lid off of gold, ended the price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because their economy’s growing faster and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus while the Chinese would be off.

When you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. That’s why the global effort has been to keep the lid on the price of gold through manipulation. I tell people, if I were running the manipulation, I’d be embarrassed because it’s so obvious at this point.

The price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then the cap on gold’s price can come off. At that point, it doesn’t matter where gold goes because all the major countries will be in the same boat. As of right now, however, they’re not, so China has though to catch-up.

There is statistical, anecdotal and forensic evidence piling up for this. All of it is very clear. I’ve also spoken to members of Congress, the intelligence community, the defense community and very senior people at the IMF about it.

China is our largest trading partner.  It’s the second largest economy in the world.  The US would like to maintain the dollar standard.

I’ve described some catastrophic scenarios where the world switches to SDRs or goes to a gold scenario, but at least for the time being, the US would like to maintain a dollar standard. Meanwhile, China feels extremely vulnerable to the dollar.  If we devalue the dollar, that’s an enormous loss to them.

That’s why, behind the scenes, the U.S. needs to keep China happy.  One way to do that is to let China get the gold.  That way, China feels comfortable.

If China has all paper and no gold, and we inflate the paper, they lose.  But if they have a mix of paper and gold, and we inflate the paper, they’ll make it up on the gold.  So they have to get to that hedged position.

Gold is liquid, but it’s a fairly thin market.  If I call JP Morgan and say, “Hey, I want to buy 500 tons of gold,” I can’t do it.  That would be a huge order.  An order like that has to be worked between countries and central banks behind the scenes.

It’s done at the BIS, the Bank for International Settlements, in Basel, Switzerland.  They’re the acknowledged intermediary for gold transactions among major central banks and private commercial banks.

That’s not speculation.  It’s in the footnotes of the annual BIS report. I understand it’s geeky, but it’s there.  They have to acknowledge that because they actually get audited.  Unlike the Fed and unlike Fort Knox, the BIS gets audited, and they have to disclose those kinds of things.

The evidence is there. China is saying, in effect,  “We’re not comfortable holding all these dollars unless we can have gold.  But if we are transparent about the gold acquisition, the price will go up too quickly.  So we need the western powers to keep the lid on the price and help us get the gold, until we reach a hedged position.  At that point, maybe we’ll still have a stable dollar.”

The point is that is that there is so much instability in the system with derivatives and leverage that we’re not going to get from here to there.  We’re not going to have a happy ending.  The system’s going to collapse before we get from here to there. At that point, it’s going to be a mad scramble to get gold.