April 19-20, 2003. Burning Bush: Pouring Oil on the Gold Wars

And the angel of the Lord appeared unto him in a flame of fire out of the midst of a bush: and he looked, and, behold, the bush burned with fire, and the bush was not consumed. (Exodus III:2)

Military intervention in Iraq divided the great powers along lines that should bring a sense déjà vu to veterans of the modern gold wars. Gold's archenemies, the United States and Britain, led the charge to disarm Saddam Hussein by force and overthrow his regime. Gold's traditional friend, France, spearheaded the opposition, which included the Continent's two other major powers, Germany and Russia, plus China. At a 2-to-3 disadvantage among the five permanent, veto-wielding members of the U.N. Security Council, the Anglo-American alliance was unable to secure express U.N. authorization for the war on Iraq that began March 20.

The stated Anglo-American rationale for war gave varying emphasis to several factors: regime change, weapons of mass destruction, links to terrorists, violations of human rights, and a brutal dictatorship. But without persuasive evidence of direct Iraqi involvement in the September 11, 2001, attacks in New York and Washington, the strongest justification for a preemptive strike failed to materialize. Accordingly, the U.S.-led invasion is viewed by much of the world as manifesting a new imperialism based on overwhelming American military power in a unipolar world, a perception that neoconservative studies like "Rebuilding America's Defenses: Strategies, Forces and Resources For a New Century," The Project for the New American Century (September 2000), do nothing to dispel. See, e.g., Jay Bookman, "The president's real goal in Iraq," The Atlanta Journal-Constitution (September 29, 2002); "Behind the Invasion of Iraq," Aspects of India's Economy (Nos. 33 & 34, December 2002).

On the other side, in opposing the use of military force, France and Russia were widely perceived as protecting economic interests secured in part by their support for Iraq's efforts to reduce or eliminate the U.N. sanctions imposed on that country following the 1991 Gulf War. See, e.g., David M. Shribman, "Russia, France Offer Gauge for Iraq Policy," Boston Globe (March 12, 2002); John Tagliabue, "Europeans Strive to Tighten Trade Ties with Iraq," New York Times (September 19, 2002); Edith M. Lederer, "Chipping Away at Sanctions," AP (November 14, 2000).

In The Right Man: The Surprise Presidency of George W. Bush (Random House, 2003), p. 224, former White House speechwriter David Frum claims credit for the "axis of evil" phrase used by President Bush to describe Iraq, Iran and North Korea in his 2002 State of the Union address. Mr. Frum recounts that he was asked "to provide a justification for war" and came up with the "axis of hatred" idea (later edited) as an excuse for "going after Iraq." But while the events of September 11 may have strengthened the hand of the "neocons" within the Bush administration, its aggressive policy in the Middle East involves too many risks, draws too much support from other quarters, and touches too many important and politically powerful interests to be attributed to any single event or small clique of advisors.

Oil Squeeze. Call it what you will -- the War of Southern Secession, the War Between the States, or the Civil War -- slavery was at its heart. So too, despite all official disclaimers, oil is at the heart of the military intervention in Iraq. See, e.g., "Oil War," BBCi (April 6, 2003); James A. Paul, "Oil in Iraq: the heart of the Crisis," (Global Policy Forum, December 2002). Put another way, if oil were not under the ground, Iraq would not have U.S. and British soldiers on the ground. According to reliable reports (see, e.g., "In Iraq Drama, Cheney Emerges As President's War Counselor," The Wall Street Journal (March 17, 2003), p. 1), Vice President Dick Cheney played a pivotal a role in the Bush administration's decision to disarm Saddam by force, just as he did -- perhaps not coincidentally -- in developing its energy policy.

Since the closing days of World War I, Britain has regarded control of Mesopotamia's oil as "a first-class war aim." See Daniel Yergin, The Prize: the Epic Quest for Oil, Money and Power (Simon & Schuster, 1991), p. 188; James A. Paul, "Great Power Conflict over Iraqi Oil: the World War I Era," (Global Policy Forum, October 2002). Indeed, even before the first drop was discovered, Britain and France were involved in secret struggles for its control. Ironically, the British even came up with an aborted 1920 plan to control the newly created but recalcitrant Iraq with mustard gas dropped from airplanes. Ultimately, following American demands for a share in the spoils and spectacular drilling results near Kirkuk in 1927, formal agreement was reached to give British companies an approximate half interest in Iraqi oil with quarter interests each for the French and an American consortium.

For the next thirty years, the so-called "Red Line Agreement" provided the basis for Western domination of Iraq's oil industry. In 1958, the first in a series of military coups overthrew British-installed Hashemite rule, resulted in Iraq's withdrawal from the sterling bloc and the anti-Soviet Baghdad Pact, and brought major change to its oil industry culminating in complete nationalization by 1975.

Not counting Canada's oil sands, Iraq's proven oil reserves are second only to Saudi Arabia's. What is more, they are especially attractive due to their high quality and low production costs, characteristics that would enable a rejuvenated post-Saddam Iraq to play an important role as a swing producer. In any event, with world oil demand threatening to outrun deliverable supplies, development of Iraq's known reserves and upgrading of its oil infrastructure stand as increasingly urgent tasks. See Matthew R. Simmons, "Are oil & Murphy's Law about to meet?" World Oil Magazine (February 2003); Marshall Auerback, "Venezuela and Iraq Enhance the Prospects of an Oil Shock (Gulf War II is Unlikely to be a repeat of Gulf War I)," (February 11, 2003).

Sanctions imposed after the first Gulf War curtailed Iraq's oil production and largely limited its legal oil exports to what could be sold through the oil-for-food program administered by the United Nations. Prior to the September 11 attacks, the United States faced a dilemma. By preventing any significant rebuilding or expansion of Iraqi oil production, sanctions were restricting Saddam's ability to fund new weapons programs but also depriving the world of much-needed oil and taking a heavy toll on Iraq's civilian population. With support for sanctions eroding under Iraqi complaints and increasing criticism from France, Russia and China, Saddam's government started awarding major contracts to French and Russian but not to American or British oil companies, thereby excluding them from future participation in Iraq's oil wealth and threatening to put them at a significant disadvantage versus other big international oil companies.

The ultimate effect of the Iraq war on oil prices is subject to debate. Oil analyst Tom Petrie, who expects prices to settle in the $25 to $30 per barrel range, says: "It will be clear within a year that Iraqi oil won't be a panacea for the world." Vito J. Racanelli, "The Next Gusher," Barron's (March 24, 2003), p. 16. But see Nelson D. Schwartz, "Oil: Why Prices Will Fall," Fortune (March 31, 2003), p. 68. Lower prices would be a plus for the world economy in general and of special benefit to the United States, which currently consumes a quarter of total world oil production.

Lower prices would of course be generally negative for producing countries, particularly Russia, which currently is the largest but a relatively high-cost producer. According to David G. Victor et al., "Axis of Oil?" Foreign Affairs (March/April 2003) (at p. 50): "Every $1 shift in world oil prices translates into about $1 billion for the Russian state budget." In their view at least, the principal driver of Russian opposition to the war was neither old debts nor future contracts, but a vital national interest in strong oil prices -- an interest that could be severely undercut by a U.S. vassal state in the role of swing producer with a mandate to keep a lid on oil prices.

Middle East oil is also of vital concern to China, the third largest oil consumer after the United States and Japan. Almost completely reliant on domestic production until 1993, China today depends on imported oil, mostly from the Persian Gulf area, to fill a third of its rapidly growing needs. See Pepe Escobar, "China, Russia and the Iraqi oil game," Asia Times Online (November 1, 2002). A recent study by The Brookings Institute (Sergei Troush, "China's Changing Oil Strategy and its Foreign Policy Implications," CNAPS Working Paper, Fall 1999) concluded:

Henceforth, with such a heavy dependence on the Middle East for oil, U.S. strategic domination over the entire region, including the whole lane of sea communications from the strait of Hormuz, will be perceived as the primary vulnerability of China's energy supply. It would not be an exaggeration to say that the key objective of China's oil strategy will be to avoid this strategic vulnerability.

Dollar Bubble. Oil and gold intersect at the dollar. Both are generally priced and traded internationally in U.S. dollars, simultaneously reflecting and reinforcing the dollar's current position as the world's principal reserve currency. Any serious threat to the dollar's hegemony -- described more accurately by General de Gaulle as "an exorbitant privilege" -- strikes at a crucial U.S. interest: the ability effectively to meet its international financial obligations by means of the printing press rather than with gold or net exports of real goods or services.

The dollar's position is particularly vulnerable today. Washington's long-continued "strong dollar" policy, backed by the official capping of gold prices, has left the greenback intrinsically overvalued. Technically, it appears to have topped out and started into a long, multiyear decline amidst a host of negative fundamental factors, including: a growing fiscal deficit made worse by costs for the war on terrorism, homeland security, and now the Iraq war; a trade deficit running at roughly 5% of gross national product, a level generally regarded by economists as unsupportable; and heavy reliance by U.S. stock and bond markets on foreign capital. In this environment, the United States, already portrayed in some quarters as a declining empire (see, e.g., Mark Tran, "Bush fiddles with economy while Baghdad burns," Guardian Unlimited (March 26, 2003)), cannot safely ignore challenges to the dollar that might have passed unnoticed in earlier years.

In November 2000, after threatening to withhold oil from the market, Iraq obtained U.N. approval to require payment for oil exports in euros rather than dollars -- the currency of an "enemy state." See " let Iraq sell oil for euros, not dollars," (October 30, 2000). In "The Federal Reserve's Worst Nightmare," Freemarket Gold & Money Report (Number 272, October 16, 2000), James Turk described this development as "pointing a dagger at the heart of the Dollar bubble," particularly should other oil-producing countries move in the same direction. Although regime change may bring Iraq back into the dollar camp, reaction to the Iraq war threatens the opposite result in other Muslim nations. See William Pesek Jr., "Indonesia May Dump Dollar; Rest of Asia Too?," (April 17, 2003); Robert Block, "Some Muslims Advocate Dumping the Dollar for the Euro," The Wall Street Journal (April 15, 2003), p. C1; Kazi Mahmood, "Economic Shift Could Hurt U.S.-British Interests In Asia," (March 30, 2003).

Until the collapse of the Ottoman empire in 1924, the gold dinar (4.22 grams equal to 0.135 ounce pure gold) was the currency of the Islamic world. With bitter memories of the 1997 Asian financial crisis, Malaysia is planning to use the gold dinar (weight as yet unspecified) to settle trade balances with certain Muslim nations starting later this year, most likely with Iran. See Sonia Kolesnikovar, "Gold dinar could soon be reality," UPI (November 15, 2002); Khaled Hanafi, "Islamic Gold Dinar Will Minimize Dependency on U.S. Dollar," (January 8, 2003); and articles collected on the gold dinar at On the retail side, in November 2001 the Islamic Mint ( launched an Islamic gold dinar coin (4.25 grams of 22 carat gold), which also circulates in electronic form ( Use of the gold dinar, it is hoped, will encourage growth of Islamic financial systems and promote the unity of the ummah (i.e., Islamic community).

Argentina, which is suffering through severe economic distress resulting in part from the failure of a once much admired currency board linked to the dollar, has presidential elections scheduled for April 27. A leading candidate, Nestor Kirchner, has proposed to restore gold-backing to the peso. See David DeRosa, "Currency Missteps Haunt Argentina," (March 14, 2003).

China, at the same time that it is reportedly diversifying its international reserves into euros and gold, is also in the midst of liberalizing its domestic gold market. See Wong Chia-Peck, "No Gold Bars: Looser rules in China could bring more demand," Barron's (March 24, 2003), p. MW13. Veteran market commentator Richard Russell recently observed ("China Accumulating Gold," Dow Theory Letters (Online ed., April 2, 2003):

The men who are running China's economy are not stupid, and China knows well the power of gold. I've said this before, and I'll repeat it -- it would not surprise me to read some day that China has decided to back its currency, the renminbi, with gold. I believe that China, quietly, has adopted a long-term policy of competing with the US for super-power status, if not in the world, at the very least in Asia. It's also clear that the battle, as China sees it and wants it, will be in terms of economic, not expensive military power.

The US depends heavily on the reserve status of the dollar. How best to compete with the US? My answer -- compete on the basis of having the stronger currency. Right now the Chinese have pegged the renminbi to the dollar. They'll keep it that way until they are ready to float the renminbi against all the world's currencies. The float will come at a time of China's choosing, despite the pressure from the rest of the world to float the renminbi now (since it's conceded by everyone that the renminbi is now drastically undervalued).

Shortly before the first bombs fell on Baghdad, the BBC reported that Fed chairman Alan Greenspan and a former Japanese finance minister had struck a deal ("US and Japan to protect markets," BBC News (March 19, 2003): "'There was an agreement between Japan and the US to take action co-operatively in foreign exchange, stocks and other markets if the markets face a crisis,'" Chief Cabinet Secretary Yasuo Fukuda said." This report did not surprise most close followers of the gold market, who assumed that it was among the "other markets" targeted. See, e.g., Nelson Hultberg, "Is the PPT an 'Urban Myth?'," (April 8, 2003).

More noteworthy, however, was the absence of denials from U.S. authorities and lack of coverage in major U.S. media. Again, veterans of the gold wars were not surprised. No one has yet denied the admission (see Complaint, paragraph 55) by its governor, Eddie George, that the Bank of England and the Fed actively cooperated to halt the rally in gold prices triggered by announcement of the Washington Agreement on Gold (WAG, see below) in the fall of 1999. Nor has GATA's work to expose the manipulation of gold prices received significant coverage in these same media. Like banks that must be saved because they are "too big to fail," financial market problems that require intervention but are "too big to talk about" are sure signs of severe economic distress.

New Old Europe: London's Bridge Falling. British foreign policy, later adopted by the United States, traditionally sought to maintain a balance of power in Europe such that no single power, either alone or in concert with others, had sufficient economic, political and military strength to threaten vital Anglo-American interests. Thus Britain and the United States supported France and Russia against a more powerful Germany in two world wars, and France and Germany against the old Soviet Union in the Cold War.

The Iraq war threatens to produce what two centuries of British diplomacy assiduously sought to avoid: a Franco-German-Russian alliance dominating the Continent. Indeed, the Russians had glimpsed the possibility before the war began. In "Russia - France: Old Friends are Best," International Affairs (Vol. 49, Number 1, 2003) (, Aleksandr Bregadze, a senior official in the Russian Ministry of Foreign Affairs, concludes (at p. 64, emphasis in original): "The more pronounced that Gaullist traditions in French policy toward Russia are, the more active and fruitful Russian-French relations will be."

The demise of the Soviet Union and the movement toward European integration have presented Washington and particularly London with a new challenge: how to prevent an economically strong and successful European Union from metamorphosing into a unified political and military power that would all but eclipse a sovereign Britain and could well challenge the American superpower. Accordingly, Anglo-American policy prefers a larger, loosely confederated EU -- one in which smaller states can more easily counter France and Germany -- to a smaller, more tightly organized EU effectively under Franco-German control.

In the "new Europe" of U.S. defense secretary Donald Rumsfeld, military strength resides primarily in a rejuvenated and enlarged North Atlantic Treaty Organization still led by the United States while political power is diffused by adding new members, especially the smaller states of eastern Europe, to the EU. Foot-dragging on adopting the euro reflects Britain's deep reluctance to give up monetary sovereignty, not to mention the power and prestige that comes from a long tradition of close Anglo-American cooperation on international monetary affairs. Both the survival of the pound and the continuation of the City of London as a major world financial center depend importantly on maintaining the dollar's role as the world's principal reserve currency.

Only this fundamental U.K. interest can explain or justify the series of 17 bimonthly British gold auctions, announced in May 1999 and concluded in March 2002 (, under which the Bank of England sold some 400 tonnes at an average price of approximately $275/oz. At great expense to British taxpayers, these auctions facilitated continuation of the U.S. strong dollar policy by slamming gold prices. Their early success in this regard, however, triggered a European response, especially since the new European Central Bank had adopted the practice of marking the euro area's gold reserves to market. Without informing either the British or the Americans, France and Germany, the two largest gold holders among the ECB's member banks, took the lead in putting together the WAG. See Pierre-Antoine Delhommais et al., "Les banques centrales européennes provoquent une flambée des cours de l'or," Le (Septembre 30, 1999). The British, invited to participate only after all other parties had reached agreement, signed on just before the surprise public announcement.

Until their joint opposition to military intervention in Iraq, the WAG stood as the strongest Franco-German rebuke to an important Anglo-American initiative since World War II. Yet the geopolitical ramifications of the WAG were nearly invisible to all save close followers of the gold market, and even they tended to think of its significance as limited largely to the competition between the euro and the dollar. Concluding what could prove to be an extraordinarily prescient article ("France's 'Non' On Iraq Is The First Of Many In The Future," (February 25, 2003)), Marshall Auerback wrote shortly before the war in Iraq began:

America's economic position has seldom appeared more vulnerable, even discounting the heightened risks that emanate from its ongoing war against terrorism.

Seeing this, France may now believe there is relatively little to lose by confirming its anti-war stance. ...

For all of the historical spats between the two great republics, France’s current relations with the US are the worst they have been in years and its position in the EU is being challenged by the countries of “new Europe”. While exclusion from a post-Saddam Iraq may cost it dear, France might be calculating that it can absorb these short term costs. In the case of Eastern Europe, it can single-handedly arrest the eastward expansion of the Union and thereby perpetuate its dominance in a smaller and more political and socially cohesive monetary union. The greater the success of this union, the more likely the euro can match or supplant the US as a legitimate reserve currency alternative, a clear long term French objective since the days that de Gaulle railed against the “unlimited overdraft facility” available to the Americans under the dollar reserve currency system. Rightly or wrongly, therefore, President Chirac might be calculating that staying out of a war could open other doors in the Middle East. The country may well conclude that its interests are best served by continuing to say, "Non", not just to the United States, but increasingly, to its Eastern European allies and the United Kingdom, all of whom the French public increasingly sees much as de Gaulle used to view “Perfidious Albion” when he rejected the UK’s entry into the EEC in the early 1960s: namely, as American Trojan Horses designed to perpetuate a split in the EU and thereby weaken France’s traditional dominance of this organisation. This is something Tony Blair might also wish to consider should he continue to make the case for Britain’s own embrace of the euro post the invasion of Iraq, assuming, of course, that he is still Prime Minister in a few months’ time.

Some consider France unlikely to adopt this course of action in light of Germany's strong support for EU enlargement, but even they recognize that "the Germans share some French worries about enlargement" and might in the right circumstances succumb to the "French embrace." "Jacques Chirac's Samson option," The Economist (February 20, 2003). Unlike its euro partners, France appears to have fully preserved what in this connection could prove a powerful economic weapon: its gold reserves.

French Gold Card. Rather astonishingly, the ECB and its member banks have no common gold policy other than the WAG, which for this very reason had to be cobbled together on an ad hoc basis. Under the WAG, the participants (i.e., the ECB, its 11 member banks, Swiss National Bank, Bank of Sweden, and Bank of England for the British Treasury) agreed for the five-year period ending September 26, 2004: (1) to limit their total gold sales to not over 2000 tonnes at a rate of about 400 tonnes/year in a coordinated program to include the British auctions plus all other then planned sales; and (2) not to expand their leasing of gold or their use of gold futures or options. However, compliance with the second provision is impossible to monitor because neither the ECB nor most of its member banks provide any detailed information on their gold lending or gold derivatives activities.

Including both the ECB and its individual member banks, the euro area reports gold reserves of almost 14,500 tonnes. However, so far as can be determined from publicly available information, only France -- the second largest individual holder with with just over 3000 tonnes -- keeps all its gold in physical form. The remainder, including Germany with almost 3450 tonnes and Italy with 2450 tonnes, all appear to participate significantly in gold lending or gold derivatives, and thus they hold a portion of their reserves as gold receivables rather than bullion.

Assuming a total short physical position in the range of 10,000 to 15,000 tonnes as most recently discussed in Gold Derivatives: Moving towards Checkmate, much of this short position must represent gold loaned or swapped by central banks of the euro area. [Note: The separate supply/demand and derivatives analyses on which this figure is based have recently received further support from a third analytic approach using gold export statistics. See James Turk, "More Proof," Freemarket Gold & Money Report (Letter No. 323, April 21, 2003).] As a practical matter, again for reasons discussed at length in the above-cited and earlier commentaries, this short position cannot be covered -- if at all -- at anything close to current gold prices, meaning that for all practical purposes the gold is gone, much of it to the Far East. What is more, as discussed in the last commentary, Gold: Cover or Cover-up?, the short physical position is continuing to grow.

Research by Mike Bolser indicates that of the euro area countries only Portugal, Austria and Finland disclose gold bullion and gold receivables separately. See Mike Bolser, "Gold Receivables and Gold in the Euro Area," Le Metropole Cafe (February 5, 2003; post ID 2794). Portugal had leased or swapped more than 70% of the 606 tonnes of gold reported on the 2001 balance sheet of its central bank (, p. 9). At the same time, gold receivables accounted for half of Finland's 50 tonnes and almost a fifth of Austria's nearly 320 tonnes. Aggregating these numbers, almost half the total gold reserves of these three nations were gold receivables. Half of total euro area gold reserves less France is nearly 6000 tonnes; 70% is over 8000 tonnes. Italy and Spain, which together hold almost 3000 tonnes, were like Portugal highly visible "coalition" members in the Iraq war, raising the possibility that they also participated quite actively in the U.S.-led gold wars.

Relative to a total short physical position of 10,000 to 15,000 tonnes, 6000 to 8000 tonnes from the euro area does not appear unreasonable. Absent a figure of this size, the upper ranges of the total short position are difficult to reconcile with "available" central bank gold supplies. Of total claimed central bank gold reserves amounting to roughly 32,000 tonnes, more than 14,000 tonnes are reportedly unavailable for lease or swap (U.S., 8150 tonnes; IMF, 3200 tonnes; France, 3000 tonnes), leaving a total available pool of less than 18,000 tonnes, of which the euro area less France accounts for roughly 11,500 tonnes or well over 60%.

Assuming the euro area less France has leased or swapped an aggregate 6000 to 8000 tonnes, France by itself would possess from over a third to nearly half of the total physical gold potentially available to support the euro. Should the international monetary system move in the direction of a greater role for gold, the strength of the euro would rest primarily on French gold and the German aversion to paper money inflation augmented by whatever gold remained in the Bundesbank's vaults. To the extent that its gold reserves had been leased or swapped (an issue of interesting debate but on which there is scant hard evidence), Germany would perforce be more amenable to the "French embrace." At the same time, other members of the euro area, having disposed of much of the gold that previously backed their national currencies, would have little practical choice except to remain wedded monetarily to France and Germany.

What is more, should France have added to its effective gold reserves through holdings not included in official reports, its leverage would be further increased. Indeed, French tolerance for the euro area's lack of a common gold policy might be explained by a Machiavellian policy directed at enabling France to acquire an increasing share of the area's total gold reserves at bargain prices. In this event, France might hold a huge trump card: unreported gold in sufficient amount that, were it transferred to Deutsche Bank, would facilitate physical rather than financial settlement its gold loans from the Bundesbank, and thus spare the German central bank from having to convert these loans to sales and admit to an embarrassing reduction in its officially reported gold reserves. See Deutsche Bank: Sabotaging the Washington Agreement? and The Gold Jungle Book.

Snow Job. U.S. Treasury Secretary Paul O'Neill and White House economic adviser Lawrence Lindsey resigned on November 6, 2002, in an unexpected reshuffling of the administration's economic team widely attributed at the time to the need for more effective top salesmen to push the president's new economic package. Before his departure, Mr. Lindsey had estimated the cost of a war in Iraq at from $100 to $200 billion dollars, possibly a factor in his dismissal given the Bush administration's later reluctance to provide specific cost estimates. See Kathleen Hays, "The cost of war," CNN/Money (February 6, 2003).

In contrast, although usually too outspoken and blunt for Washington's political culture (see Richard S. Dunham et al., "Nice Guys Finish Last: Ask Paul O'Neill," Business Week (December 6, 2002)), Mr. O'Neill had said very little about the potential cost of a war save for a bland comment on September 17: "Whatever it is that's finally decided to be done, we will succeed and we can afford it." The awkward and rushed nature of his departure has never fit well with the conventional explanation for it. What would fit better is an internal decision by the administration to pursue war in Iraq over the treasury secretary's privately stated objections, a scenario consistent with his complaint shortly after leaving Washington (AP story): "It’s all about sound bites, deluding the people, pandering to the lowest common denominator. I didn’t adjust and I’m not going to start now."

In any event, Mr. O'Neill exited quickly and with obvious hard feelings, leaving the Exchange Stabilization Fund suddenly without a captain. By statute (31 U.S.C. s. 5302), the ESF operates "[s]ubject to approval by the President ... under the exclusive control of the Secretary [of the Treasury]," whose decisions "are final and may not be reviewed by another officer or employee of the Government." Accordingly, until the evening of January 30, 2003, when the Senate confirmed John Snow, former CEO of CSX Corp., as Mr. O'Neill's replacement, the ESF would have faced some significant curtailment in its operating flexibility.

After climbing from around $280/oz. to over $320 during the the first half of 2002, gold prices over the next several months repeatedly tried but failed to push above $330, the same level at which the Bank of England and the Fed had turned back the rally following announcement of the WAG because, as the Bank of England's Eddie George put it (Complaint, paragraph 55):

We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it.

Just two days prior to Mr. O'Neill's abrupt departure from the Treasury, Gold Derivatives: Moving towards Checkmate was posted here. Within days, gold prices punched through $330 and then moved sharply higher over the next two months. By the time the next commentary (Gold: Cover or Cover-up?) was posted one day before Mr. Snow's confirmation, gold prices had reached $370. There were even some, as noted in that commentary, who believed (incorrectly in the proprietor's opinion, as also noted) that the prior commentary was in some measure responsible for the rally. Gold peaked at $385 on February 5, when the COMEX announced an increase in margin requirements on gold contracts.

The following two charts by Mike Bolser depict gold prices for two periods: (1) from Mr. O'Neill's resignation until Mr. Snow's confirmation (post-O'Neill period); and (2) since Mr. Snow's confirmation (Snow period). Strong gold prices during the first period are consistent with absent or muted intervention by the ESF, possibly combined with market knowledge of an internal administration consensus to go to war. The equally sharp decline before and during the war is consistent with the ESF under its new leader returning to the gold market in force to bring prices back below the $330 level, i.e., within the "comfort zone" of bullion banks heavily exposed to gold derivatives, as well as to keep gold "on message" with the administration's plans for regime change in Iraq.

By filtering out daily moves of less than 0.35% (e.g., $1.08 at $310 gold), Mike has tried to establish a meaningful level of intraday downward pressure from the London AM fix to the COMEX open outcry close. During the post-O'Neill period, the COMEX close was significantly lower than the AM fix on 23.1% of the days not filtered out versus 16% for the prior seven months. During the Snow period until March 25 when $330 was clearly breached to the downside, this percentage rose to 50%, suggesting considerable effort by the ESF under the new secretary to bring gold prices down in much the same manner as noted in previous periods of heavy gold price suppression. See Harry J. Clawar, "NY Strangulation of World Gold Market - 1 Year," (February 2, 2001); Dimitri Speck, "Tracks in the Trading: When Did the Gold Price Manipulation Begin?," (February 23, 2001).

From March 26 to April 17, the filtered percentage has reverted to 17.6%, very close to the 16% for the seven months prior to Mr. O'Neill's departure, suggesting that the authorities are content with gold prices at or under the $330 level. For how long they can hold gold here is uncertain, but snow jobs ultimately succumb to the heat of truth.

New Old Dinar: Acid Test for America. Under its former unlamented regime, Iraq had two currencies: the Saddam dinar, which replaced the former currency after the first Gulf War and circulated in most of the country; and (2) the Swiss dinar (the former currency originally printed in Switzerland and associated with that nation's reputation for sound money), which continued to circulate mostly in the northern Kurdish areas. In 1990 the Iraqi dinar was worth US$3.00 at the official rate. The Saddam dinar, bearing the dictator's picture and nearly worthless even before the war began, is no longer viable. The Swiss dinar, on the other hand, has moved in recent months from around 10 to as high as 6.5 to the dollar, reflecting both speculation on the war's outcome and the fixed supply. See "Saddam's currency under threat," BBC News (April 4, 2003).

One of the first orders of business in post-Saddam Iraq is establishing a new currency. See "Helping Iraq and the world to recover," (April 7, 2003). The United States apparently favors a plan to use the U.S. dollar as an "interim" currency. See Bob Davis et al., "Dollars Are Sent to Iraq to Replace Dinars," The Wall Street Journal (April 16, 2003), p. A8, and "Once an Economic Dynamo, Iraq Is Now Financial Riddle," The Wall Street Journal (April 9, 2003), p. 1. After the war in Afghanistan, a similar plan was rebuffed by the Afghans, who quickly introduced their own new currency. In Iraq, the oil-pricing issue gives the United States added incentive to push for the dollar. At the same time time, the relative absence of local leadership makes Iraqi resistance to the dollar more problematic. However, any U.S. effort to dollarize the Iraqi economy will smack of old-fashioned colonialism, and will give added credence to arguments that the principal war aim was liberation of Iraq's oil, not its people.

Of course, it is critical that Iraq's economy be put on the road to recovery as quickly as possible, not only for the benefit of Iraqis but also to hold down the costs of reconstruction imposed on outsiders, particularly the United States as the chief occupying power. For war-devastated economies, there is no more certain path to rebuilding and revival than the restoration of a credible gold-based monetary system. See, e.g., Alan Reynolds, "Gold and Economic Boom, Five Case Studies, 1792-1926," in B. Siegel ed., Money in Crisis (Ballinger, 1984). Among the more noteworthy examples are America after the adoption of the Constitution and again after the Civil War and Germany after World War II.

In a radio address on Sunday, June 20, 1948, Ludwig Erhard, then economic director of the American and British occupation zones, announced a comprehensive currency reform to start the next day, including reduction of the money supply, stabilization of the mark (under the Bretton Woods system effectively tying it to gold), and abolition of all price controls. Less well-known but apparently true, the future West German economics minister and chancellor acted without prior approval by General Lucius Clay, the Allied director of economic policy. See Gary North, Government by Emergency (American Bureau of Economic Research, 1983), pp. 44-45, and books cited. Nonetheless, General Clay backed Mr. Erhard, the "Wirtshaftwunder" began forthwith, and the mark commenced its rise to a premier position among the world's currencies.

Nothing could more quickly set Iraq on the right course than adoption of the gold dinar as its national monetary unit. As previously noted, a modern gold dinar of the historic weight is already minted and sold outside Iraq, and plans are in the works soon to start using the gold dinar in settlement of trade balances among Islamic nations. Besides all the normal benefits of a gold-based currency, adoption of the gold dinar by Iraq would promise several additional advantages: (1) negate charges of U.S. colonialism and dollar imperialism; (2) assist the United States to improve its relations with the rest of the Muslim world; (3) encourage the participation of Islamic nations in rebuilding Iraq; and (4) demonstrate genuine U.S. respect for Islamic beliefs and traditions that are not in conflict with basic American principles.

The most substantial obstacle to Iraq's use of the gold dinar is the Second Amendment to the Articles of Agreement of the International Monetary Fund, which prohibits member nations from linking their currencies to gold. While settling trade balances in gold as proposed by Malaysia and other Islamic nations arguably does not run afoul of this prohibition, use of the gold dinar as a national currency clearly would. Under Saddam, Iraq had ceased as a practical matter to participate in the IMF, so formal withdrawal would be relatively uncomplicated.

Far more preferable, however, would be repeal of the prohibition itself, thereby making gold-based currencies an option for all IMF members. Having expressed interest in the past on working towards this goal, the World Gold Council now has a unique opportunity to shake off its image of increasing irrelevance and at long last to do something truly useful both for the world of gold and the wider world beyond. See Ken Gooding, "WGC misses a beat," Mineweb (March 30, 2003). Because repeal of the prohibition would require a change in the IMF's articles, it could not be accomplished without the cooperation, or at least the vote, of the United States.

In short, U.S. policy on the currency issue will be a good early test of U.S. intentions in Iraq. Forced dollarization can only reinforce the arguments of America's enemies. However, U.S. respect for an Iraqi decision to use the gold dinar would confound them: proof positive that America is in fact the tolerant and principled nation that it claims to be.

New Old Money: Roadmap to Peace. What is most alarming about the Bush administration's aggressive new Middle East policy is the growing danger that whatever the short-run outcome, the long-term consequence may be a lengthy and bloody holy war -- jihad -- pitting almost the entire Muslim world against the United States, Britain, Israel, and any who stand too obviously with them, including certain friendly but repressive governments in the Middle East. See, e.g., Patrick J. Buchanan, "Whose War?" The American Conservative (March 24, 2003); Gary North, "The Mother of all Tar Babies," Remnant Review (February 21, 2003).

On September 16, 2001, President Bush alighted from his helicopter and remarked that his administration would "rid the world of evildoers," adding: "This crusade, this war on terror, is going to take a while." In other circumstances, this statement might have passed as merely an unfortunate faux pas. But coming from an evangelical Christian (see Howard Fineman, "Bush & God," Newsweek (March 10, 2003), pp. 22-30) and in light of subsequent events, it can and has been taken as tantamount to a declaration of war on Islam.

At least on the subject of money, Christians should find common ground with Islam and the gold dinar. The history of paper money demonstrates that it constitutes always and everywhere a violation of the Seventh Commandment (Exodus XX:15): "Thou shalt not steal." As the apostle warned (James V:3): "Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days." Though he spoke just a few years before the fall of Jerusalem, his words could as easily apply to the United States since President Nixon closed the gold window in 1971. See commentary by Bob Landis, The Once and Future Money.

Because honest money makes war prohibitively expensive, monetary inflation is the standard tool of military finance. That the U.S. trade deficit has reached roughly the same order of magnitude as its defense budget is not wholly coincidental. As long as the United States enjoys the "exorbitant privilege" of meeting its international obligations with its own paper, other nations cannot begin to match its military power because they cannot match its defense expenditures. Under these conditions, as the old Soviet Union discovered, an arms race with the United States is a certain route to national bankruptcy.

Whatever roadmap the president may have in mind to resolve the Israeli-Palestinian conflict, restoring gold to the center of the international monetary system is the surest way to promote general peace. By changing the composition of their international reserves to give a greater a role to gold, the other nations of the world could whittle away at the dollar seigniorage available to fund the U.S. defense budget while at the same time pushing the United States back into compliance with the monetary principles of the Constitution.

Unless his writ truly runs from God, President Bush is playing with fire in the Middle East. Should he burn his political fingers or even his whole political career there, he would be in good company. Misadventures in this volatile region have humbled some famous British and American statesmen, among them David Lloyd George, Winston Churchill, Anthony Eden and Jimmy Carter. See, e.g., David Fromkin, A Peace to End All Peace (Henry Holt, 1989), esp. pp. 556-557; Mark Tran, "Jimmy Carter," Guardian Unlimited (October 11, 2002).

What President Bush has no right to burn is the Constitution, which he has sworn to support and defend. The Constitution was written for a republic, not an empire. The framers did not create a "more perfect Union" so that it could better plunder foreign lands, either by military force or monetary fraud. Nor did they prohibit the federal government from establishing an official religion at home in contemplation that it might take sides in religious wars abroad.

An enduring Pax Americana cannot be built on military power and unlimited paper money. It can be built -- if at all -- only by fulfilling America's purpose and making it worthy of emulation. In his farewell speech from the White House, Ronald Reagan recalled the standard against which he measured his service to the nation:

The past few days when I've been at that window upstairs, I've thought a bit of the "shining city upon a hill." The phrase comes from John Winthrop, who wrote it to describe the America he imagined. What he imagined was important because he was an early Pilgrim, an early freedom man. He journeyed here on what today we'd call a little wooden boat; and like the other Pilgrims, he was looking for a home that would be free.

In proclaiming the covenant of the early Puritans with God, John Winthrop, the first elected governor of the Bay Colony north of the Pilgrims at Plymouth, sounded both a caution and a vision (Richard D. Brown et al., Massachusetts: A Concise History (Univ. of Mass. Press, 2000), p. 22):

... that men shall say of succeeding plantacions: the lord make it like that of New England; for wee must Consider that wee shall be as a Citty upon a Hill, the eies of all people are uppon us; so that if wee shall deale falsely with our god in this worke ... we shall be made a story and a byword through the world, wee shall open the mouthes of enemies to speake evill of the wayes of god ... we shall shame the faces of many of god's worthy servants, and cause theire prayers to be turned into Curses upon us till wee be consumed out of the good land.


Commentary for Patriots' Day and Easter, 2003