Submitted by reader JMD.
A follow up to “The ‘Moneyness’ Of Debt“
During 1997 the Australian government, through the central bank (RBA), ‘sold’ some two-thirds of Australia’s gold reserves. The official version of events goes that since gold is no longer important to the international monetary system, the central bank no longer needs to hold it as an asset against its liabilities, there are much better assets to hold, ones that even pay interest!1 And certainly, gold is not money now, even if it was in the olden days.
On the other hand there are many who believe that central bank gold sales – not just Australia’s – were the deliberate policy of faceless bankers to suppress the price of gold. I think that the reality is better described by applying the central tenet of the Gold Standard Institute, that money is what extinguishes all debt, which, owing to the fact that governments’ and their central bank obligations are irredeemable debt, they cannot possibly extinguish debt, which makes gold the only true money. Which means that central bank gold sales were nothing more than extinguishing debt.
Who’s debt? Ours.
As graphs 1. & 2. show, RBA gold sales were about the time of the Asian Financial Crisis.
Coincidence? Maybe but I doubt it (click images to enlarge):
Graph 3. gives the percentage change 12 months ended of M3 and Broad Money, two measures of the growth of system credit, or, the money market. From graph 4. it is clear that the increased issuance of government debt2 is a response to rapidly declining credit growth, or, economic recession. Note the peak in total holdings of government debt in 1997, about the time of the Asian Financial Crisis.
During the crisis, governments’ of the nations affected were unable to simply issue more irredeemable obligations to assuage their creditors. At its low point the Indonesian rupiah had fallen by 86% against the US dollar3 and civil strife was prevalent throughout the archipelago. In desperation Thailand even encouraged people to hand over their gold jewellery to be melted down to boost the central banks’ reserves3. In in least one case – the Solomon Islands – the no doubt weaker credit of the government failed entirely. The Solomon Islands descended into a state of murder and mayhem from – you guessed it – 1997 through to 2003. The Solomon Islands dollar was devalued by 20% in December 1997 alone.
Considering the outstanding level of Australian government debt at the time, I think it likely that the Australian government was forced to extinguish a portion of its debt, rather than roll it over – issue new debt – or face a significant devaluation of the Australian dollar (AUD), with any attendant social consequences. It did this with the only commodity that can extinguish government debt, true money…. gold. Like many Asian currencies, the AUD did depreciate against the USD from….1997. So the government did not ‘sell’ its gold at all, rather it redeemed part of its financial obligations.
The USD gold price did not rise in 1997 but rather fell, albeit slowly, until 2001. There was no financial crisis in the US in 1997 thus no pressing need to extinguish US government debt. Instead the US financial crisis began a few years later in 2001 and continues to this day, along with every other nation. In fact only the other day I read of civil strife in Indonesia, reminiscent of 1997 onwards.
Looking at the current level of outstanding government debt, it seems the Treasury has forgotten any lessons given by the Asian Financial Crisis and looking at the current gold reserves of the RBA, I have to ask, where’s the gold going to come from next time?
Notes:
1. This explanation conveniently ignores the fact that the RBA had been loaning its gold reserves, according to the Australian Bureau of Statistics, since 1986. These gold loans of course accrue interest.
2. Data for Treasury note issuance is not available pre June 1989.
3. From The Economist
Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.
Barnaby Is Right 
i think you will find that Canada, Australia, Austria, Belgium,Netherlands, Swede and Portugal CB’s all sold gold at around the same time. There is a bit more going on than just gold sale to cover paper debt.
More going on? Maybe but like what?
It’s not enough just to say there’s more going on without giving any details. That just makes me assume you don’t know what else might be going on.
Hi JMD, thanks for your article, it is a interesting subject.
in response to your comment, im not totally sure, but id guess it involves the BIS, LBMA and support of the USD as reserve currency. Would be interesting to know what they replaced those gold reserves with, did they just buy US T bills. Also is the gold they sold still at the RBA, was it a physical sale or just a paper game.
If you look at the currency of all those gold selling countries, their dollar gets alot weaker after they sell gold, so is it possible they just swapped gold for USD as a reserve?
The Jamaica Accord(1996) technically made gold not a reserve asset for CBs, but that does not explain why they waited so long to change it out. Does the RBA operate like the FED? as in government debt is not the RBA’s problem?
On your comment about “where’s the gold going to come from next time?” i remember reading that RBA hinted that it would take “gold in the ground” if needed. watch out gold miners.
anyway thanks again, this is not a subject that gets enough study.
Cheers for your response Daniel, nice to know at least one other person is thinking about this subject.
I would have to say that during the 1990’s the USD didn’t need any support, maybe in 1979-80 but not during the Asian Crisis. There was also some kind of rolling debt crisis in the European Monetary Union (EMU) during the ’90’s which would be reason enough I think for European gold sales.
The gold has never been at the RBA but is held overseas, probably at the Bank of England.
This Jamaica Accord may have professed to strip gold of its reserve status but that’s just obfuscation. Government bureaucrats are neither alchemists nor gods, they cannot turn lead into gold or water into wine. Gold is the ‘moniest’ of monies & always will be the highest financial asset no matter what the government says. Central bankers are well aware of this, not that they make it public, so I doubt it was a ‘swap’ for UST bills.
The gold was not replaced with anything, it extinguished outstanding debt, though the RBA certainly went on a spree after that expanding its balance sheet tremendously with all sorts of USD & AUD denominated junk, which is why it got caught ‘holding the bag’ in 2008 & had to borrow from the Fed.
The one purpose of Federal Government Gold Reserves being sold-off across the world was to convince markets that the USD was the new ‘gold-standard’.
JMD, at the end of the 90s, the USD was barely holding on to it’s status. Saddam wanted Euros and food for his oil, and it was because the Kuwaitis would not get on his side that he overran Kuwait (by the bye, I was born in Kuwait, and am not an Arab).
As Max Keiser has rightly said so many times, the USA has been terrorising the world to use its currency as the reserve, thereby giving it cheap access to the most sough-after commodity on the market – oil.
The Australian, British and North-West European nations have had a history (since the 40s, anyway) of licking US bum for breakfast.
What better way to hold up the value of the USD than to exchange Sovereign gold for the USD?
IMHO, it is the protection of the USD that warranted that sovereign gold be sold-off by many nations across the world.
Did you know that the USA tried to do the same to India? Instead, since the Indians had a PM who was also a doctoral degree holder from the best of universities, the Indians took the hard way out, and devalued their currency to build-up vast reserves of USD. China did the same. Russies did the same after the breakup of the USSR.
This was also why the USA / IMF nearly attacked Japan when Japan wanted to set up the Asian Monetary Fund. Today, Japan’s doing it anyway by writing-off Myanmar’s debts. Japan has actually saved the people of Myanmar from having to beg the IMF, and being bounded by US shackles.
These vast dollar reserves are now being thrown into circulation, and gold is being used to make up for it – given that and a couple of other Oil-nations are not accepting USD any more. With Russia, China and India buying oil from Iran come sanctions or not, the USD is history and American bullying is dead.
“The World seems to be on an inevitable path to a war between the IFUKUS-coalition and Iran”
http://www.gasandoil.com/editorials/the-iran-hoax