December 20, 1999. Chinese Gold: Earning a Good Spread

According to a story from China Daily (, the People's Bank of China is selling gold bars weighing 50, 100, 200 and 500 grams to the public, and "they are receiving a warm welcome." The sales were initiated on December 10, priced at 104 yuan per gram. Based on an exchange rate of .1137 yuan per dollar (today's rate from the currency converter at South China Morning Post,, the price is about US$368/oz. (31.103 grams = 1 troy ounce). Not a bad spread for the People's Bank if it covers on the world market.

The story adds that individuals in China are now permitted for the first time since 1949 to buy gold bars "...for savings and investment, as long as they can afford them." It adds: "And the metal is still the top choice for most individuals to maintain and enhance their wealth." Among nations, China is the fifth largest gold producer with annual gold production reported to be about 150 metric tons. A short but interesting discussion of Chinese gold can be found at The Gold Companion ( under China.

December 17, 1999. Bet Your Life: Barrick vs. Gold Bugs (Revised)

The hedge book debate has produced another strange twist: Barrick Gold disparaging its natural shareholders, the gold bugs. Arthur Hailey, well-known author and former Barrick shareholder, is trying to instigate a shareholder revolt against Barrick's gold hedging program. Vince Borg, Barrick's point man for investor relations, accuses Hailey and other gold bugs of being irrational extremists blinded by conspiracy theories about the gold market. See P. Kaihla, "Gold bugged," Canadian Business, Nov. 26, 1999 (www.canadian

Barrick, a major gold producer, expects to produce over 3.5 million ounces of gold in 1999 at a total cash cost of $137/oz. and total cost including depreciation of $240/oz. It has 51.5 million ounces of proven and probable reserves and an "A" credit rating. As currently set forth at its website (, Barrick's hedge book includes 14 million ounces (435 metric tons) sold forward under spot deferred contracts as well as written call options for another 4 million ounces.

Barrick's spot deferred program is predicated on the assumption that "gold has never consistently risen in price and stayed there." This assumption is demonstrably false.

Twice in this century the gold price moved quickly to a new, permanently higher level as a result of disruptions in the international monetary system. In 1933-34, gold moved in about nine months from $20.67/oz. to $35/oz., which became the official price for the next 37 years. Within two years from the closing of the gold window in 1971, gold moved over $100/oz., never again to fall significantly below this level although it would rise much higher. More generally, the history of all paper currencies is one of long term depreciation against gold until the paper eventually expires worthless.

Barrick asserts that it would not be subject to any margin calls on its hedge book unless gold rises to over $600/oz. This figure represents slightly more than a doubling of the gold price from current levels, or a rate of appreciation between that of 1933-34 (about 70%) and 1971-73 (over 150%). Spot deferred contracts at $385/oz., the price Barrick claims to have locked in through 2001, will not look so smart if gold moves to $600 quickly and stays there. What is more, $600/oz. is not far from the price that some claim is even now about the equilibrium price for gold in a truly free physical market.

Fundamentally, Barrick's spot deferred contracts are a bet on continued stability of the dollar and the exiting international monetary order. There is no mystery to the falling out between Barrick and the gold bugs. Fulfillment of the gold bugs' sweetest dreams represents Barrick's worst nightmare.

Note: An earlier version of this commentary suggested that Barrick might be combining its spot deferred contracts with gold loans. On several rereadings of Barrick's description of its hedging program, I have decided that this is probably not the case. Rather, it seems more likely that Barrick is merely trying to describe the full mechanics, including the role of the bullion bank, by which a forward contract yields a contango.

Since this subject engenders considerable confusion (as well as being one on which I receive numerous e-mails and questions), I will try to clarify it with an example. Assume spot gold at $300/oz., one year gold lease rates at 2%, and one year dollar interest rates at 6%. The one year forward rate -- the "contango" -- will be about 4%. Thus gold for delivery one year forward will be about $312/oz. A producer can lock in this price by entering into a simple or spot deferred forward contract and earn the contango. (The relationship between lease rates, interest rates and forward rates is discussed in more detail in a prior commentary.)

Similarly, on the same assumptions and for the same reasons, a futures contract on the Comex one year out will be about $312. Thus a producer could in theory also sell a futures contract and obtain the same result. However, as a practical matter, forward contracts on the over-the-counter market are more flexible than standardized futures contracts and thus are generally preferred by producers. For example, there are no spot deferred contracts on the futures markets.

It is often said, more or less correctly, that a forward contract involves a spot sale. The basic mechanics are as follows. When the gold producer enters into a forward contract to deliver gold, it normally does so with a bullion bank. The bullion bank typically borrows the amount of gold that it has agreed to buy forward from a central bank, sells that gold at spot (i.e., $300/oz. in my example), and invests the proceeds in notes of equal maturity with the forward contract. It pays a lease rate to the central bank and charges a higher lease rate to the producer on its forward contract, thus earning the spread on the lease rates.

At the same time, the proceeds from the gold sale are invested to earn the dollar interest rate. Again, the bullion bank may earn a small spread, but the essence of the transaction is that the producer can earn most of the difference between the dollar interest rate and the lease rate. In my example, when the time for delivery arrives, the producer delivers the gold against payment of $300/oz. plus the contango, and the bullion bank delivers the gold to the central bank in payment of its loan. Most importantly, at no time in this transaction was the bullion bank ever exposed to fluctuations in the gold price. By selling at spot at the same time that it was buying for future delivery, the bullion bank hedged itself against any fluctuations in the gold price. The principal amount of the transaction was simply a stated number of ounces of gold.

Forward and spot deferred contracts can contain various bells and whistles, including provisions allocating the risk of fluctuations in lease rates, forward rates or interest rates. Accordingly, these contracts not only can get quite complicated but also are hard to evaluate without complete details. Generally, however, by creating a spot sale and a future purchase, they tend to depress spot prices. But it is not correct to suggest, as some do, that forward contracts differ significantly in this respect from traded futures contracts. These are typically hedged in substantially the same way, at least to the extent that a particular futures merchant may be net short.

Like forward and futures contracts in currencies, forward and futures contracts in gold are governed by relative interest rates. To the extent that predictions about the future enter in, they do so only through interest rates. But unlike paper currencies, where there are really no practical constraints on supply, the supply of gold -- although very large -- is not unlimited. And unlike most commodity futures, where delivery of more than a small proportion of total open interest is not really possible, there is no theoretical or practical bar to all the longs in gold futures demanding delivery. As permanent, natural money, gold is unique. Those who trade in forward and futures contracts on gold without understanding its true character do so at considerable peril, particularly at times of international monetary distress.

December 7, 1999. P A N I C !

Western central banks are in panic mode. No other interpretation can be put on the announcement yesterday of further Dutch gold sales of 300 metric tons. European central bankers should have spent last weekend preparing to announce gold purchases and a Euro truly independent of the dollar. Instead, they used the time to cobble together another bailout for the Fed, the Bank of England and the mostly Anglo-American bullion banks sinking, or so it would appear, into ever deeper trouble.

The Dutch announcement basically uses up all the slack left in the Washington Agreement, which provided for central bank gold sales of 2000 tons over the next five years, including 1300 tons by the Swiss and the 365 tons then remaining in the planned British disposals of 415 tons, leaving only 335 tons of possible additional sales. That gap has now been almost entirely filled by the Dutch.

The gold banking crisis that unfolded rapidly in the wake the Washington Agreement on September 26, 1999, has resulted in some rather unusual gold disposals. First, Kuwait announced publicly that it was making its entire official reserves of 79 tons available for lease through the BOE. Not long afterwards, it was revealed that Jordan had sold 10 tons from its official reserves of 26 tons. This depletion of long held official gold reserves by two Middle Eastern nations easily subjected to Anglo-American pressure pretty much speaks for itself, particularly when followed by disclosure of additional U.S. military spending for Kuwait. What is more, a rumor -- quickly denied -- of a possible reduction or halt in British gold sales caused an immediate almost $10 spike in the gold price.

The Dutch announcement itself is notable in three respects: (1) the sales will be arranged through the BIS, no public auctions for the Dutch; (2) nevertheless, the sales were publicly announced in advance, not a smart way to get the best price especially on the first year's planned sales of 100 tons; and (3) the Dutch emphasized that even after the sale "the Netherlands will remain a significant gold holding country with a gold stock of more than 700 tons."

In fact, the Dutch gold sales may be no more than an advance on the proposed Swiss sales. The Swiss have been slow to complete all necessary preparations for their sales, which were probably intended, inter alia, to provide the European safety valve on the gold market. Certainly the Netherlands could repurchase whatever gold it sells now from Switzerland later, and it may well have already received some assurances on this point. For that matter, maybe most of the 100 tons that the Dutch plan to sell in the first year is necessary to repay Kuwait's loan to the BOE, a loan that reportedly has been the subject of much criticism in Kuwait.

The World Gold Council's press release on the Dutch sale is yet another example of that organization's unfortunate tendency to serve as apologist for the central banks instead of advocate for the gold industry. Admitting that "the timing of the announcement...may have caused a ripple in the market," the WGC then accepts uncritically a reported private assertion by the Dutch central bank that the decision to sell was made in July, but delayed to participate in the Washington Agreement. Why, then, wasn't the proposed Dutch sale included in the agreement? Why didn't the Dutch sell on the price rally after announcement of the agreement? Was there any connection between the timing of the Dutch announcement and the continuing problems of the bullion banks, the Kuwaiti gold loan, and the Jordanian sale? Apparently these are all questions that the WGC neglected to ask in its private discussions with the Dutch central bank. Speaking only for myself, and it pains me to say it, Ms. Haruko Fukuda, the new chief excecutive of the WGC, is rapidly losing both her halo and her credibility.

Central bankers are generally a clubby and prudent sort, not given to unnecessary risk taking. Given the uncertainties of the Y2K changeover, Anglo-American and European central bankers may have arrived at an informal truce or agreement designed to push resolution of the gold banking crisis into the new year. In this connection, it would not be surprising to see Anglo-American intervention in support of the Euro should it threaten to break below parity. Indeed, if the European central bankers did not obtain a commitment of this sort as a condition of the Dutch gold sale, they should all be fired. Yesterday's surge in the Euro may not be solely attributable to the good German factory report.

But make no mistake: the day of reckoning is rapidly drawing near for both the Euro and the bullion banks. The EMU and the ECB cannot provide further gold to the market without not just destroying their own credibility, but also undermining the whole notion of the Euro as a truly independent currency and alternative to the dollar. As for the bullion banks and their protectors at the Fed and the BOE, they must know that they cannot count on others to bail them out forever. Ultimately there can be no lender of last resort in a gold banking crisis.

Citizens of the Euro Area should be asking themselves tonight whether their central bankers have merely gone the last mile to help the British and the Americans with their gold banking crisis, or whether the ECB and its allied central banks and finance ministers are about to, as a former British prime minister once put it, "go wobbly."

December 3, 1999. A Time for Courage: Buy Gold

As a general rule, this site does not offer direct investment advice. So do not be misled by the headline; it is directed at the ECB and the Bank of Japan. There will never be a perfect time for either the EMU or Japan to assert complete monetary independence from the dollar. Recently, with the Euro surprisingly weak against the dollar and the yen surprisingly strong, the ECB quite properly eschews intervention in the dollar/Euro market and the Bank of Japan continues an ineffective policy of sporadic dollar purchases followed by domestic yen sterilization.

Today, in an article entitled "Time to Tame Exchange Rates," The Wall Street Journal, Dec. 3, 1999, p. A14, David Malpass, chief international economist for Bear Stearns, argues that Europe (and by implication Japan) should evaluate its currency in absolute terms, not in reference to the dollar. He writes:

Europe may want to create a benchmark other than the dollar for evaluating the euro. Otherwise, it will trap itself into viewing the world through American asset valuations. This would cause mistakes in monetary policy and would reduce the attractiveness of investment in the eurozone. My preference would be for the European Central Bank to evaluate the euro using the price of gold or another indicator of the euro's absolute value.

Mr. Malpass does not address the mechanics of implementing his advice. He does suggest that given the strength of the yen against the dollar, gold and commodity prices, Japan "should shift from its failed government spending policy to monetary stimulus, expanding central bank assets until deflation stops." The ECB, he suggests, should "announce in advance that when the price of the benchmark rises (meaning the value of the euro is falling), the quantity of euros will fall, and vice versa." He also makes some telling criticisms of American exchange rate policy. Overall, it is an excellent article, which I strongly recommend taking the time to read and study carefully.

But let's suppose, as appears to be the case, that the ECB is relatively content with monetary conditions within the EMU, and considers as well that gold is relatively cheap in Euros and even cheaper in dollars. The problem, as Mr. Malpass suggests, is not so much a weak Euro as a strong dollar. Under these conditions it makes no sense at all either to sell gold to mop up Euros or to buy gold with Euros. The problem is not a shortage of gold relative to Euros or vice versa. The problem is a shortage of dollars relative to both. The answer is to sell dollars, of which the ECB has an abundance, for gold, of which it can never have too much and with which it can someday, if conditions warrant, purchase excess Euros.

The point is that Mr. Malpass did not go quite far enough. If the ECB uses gold as the benchmark for the Euro, it logically must also use gold as the benchmark for its foreign exchange holdings. Indeed, it should hold very modest amounts of foreign exchange except in so far as it may deem certain foreign currencies a good value against gold.

Of course, if the ECB declares gold as its principal benchmark of value -- not only for the Euro but also for all other currencies that EMU current account surpluses may bring it -- it will also be declaring complete monetary independence from the dollar. But if it doesn't, the Euro will continue to play second fiddle to the dollar. Worse, the ECB at some point could find itself forced to buy Euros with dollars despite reasonably tight monetary conditions within the EMU.

If the Bank of Japan were willing to effect currency maneuvers through the gold market, it would have several options. It could sell dollars for gold, tending to weaken the dollar by adding to supply. Better yet, it could buy gold with yen, which it might feel less need to sterilize immediately, particularly if it also made gold the benchmark for the yen. Finally, should Japanese actions in this regard assist Europe to adopt gold as its benchmark, this too could help weaken the yen. For to the extent that the ECB has excess yen reserves, it would likely use them ahead of dollars to buy gold since it is even cheaper in yen than dollars.

The real question, then, in both Euroland and Japan is whether either is now prepared to assert true monetary independence from the United States by declaring for gold, or whether, despite all the brave talk, both will continue to measure their money at the end of the day against the dollar.

December 1, 1999. Fed Options: The Plot Thickens

My commentary of September 20, 1999, suggested the possibility that the Bank of England's gold sales were triggered by a plea from Washington aimed at rescuing the Fed from potential big losses on the writing of gold call options. Nothing that has happened since is inconsistent with this suggestion, and what new evidence there is supports it.

But to go back, an initial question -- on which I accepted the opinion of others -- was whether the Fed has statutory authority to write (sell) call options on gold. In my opinion, it clearly does. What is now codified as 12 U.S.C. s. 354 provides in relevant part:

Every Federal reserve bank shall have power to deal in gold coin and bullion at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security....

This provision, included in the original Federal Reserve Act (Dec. 23, 1913, c. 6, s. 14(a), 38 Stat. 264), has remained unchanged and in force ever since. While it does not specifically mention writing call options, the broad grant of authority "to deal" in gold and to make or receive gold loans can readily be construed to include writing or purchasing options.

This authority, it should be noted, addresses only what the Fed can do for its own account. It has nothing whatever to do with buying, selling or otherwise dealing with the official gold reserves of the United States, which are under the control of the Secretary of the Treasury acting with the approval of the President. 31 U.S.C. ss. 5116-5118. Whether the Fed's authority to deal in gold for its own account may in some respects be limited by other statutes is a question that I will leave to others, but under s. 6a(d) the Commodity Futures Trading Act, any transactions for its account are expressly exempt from trading or position limits.

Testifying in July 1998 before the House Banking Committee looking into the regulation of over-the-counter derivatives, Fed Chairman Alan Greenspan distinguished financial derivatives from agricultural derivatives, saying that it would be impossible to corner a market in financial futures where the underlying asset (e.g., a paper currency) is of unlimited supply. The same point, he continued, also applied to certain commodity derivatives where the supply was also very large, such as oil.

Greenspan further volunteered: "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise." In other words, the Fed Chairman opposed any action by Congress aimed at greater regulation of over-the-counter derivatives, specifically including gold derivatives. One reason -- left unstated -- for this opposition may well have been concern that any new legislation might interfere with the Fed's own activities in the derivatives markets, particularly in the gold area.

Why might the Fed have engaged in writing call options on gold? Their immediate purpose and effect would be to facilitate gold leasing by enabling the bullion banks to hedge more easily short positions resulting from the sale of leased gold. Indeed, as the so-called gold carry trade grew, demand for this sort of hedging by bullion banks likely strengthened since here, unlike in mining finance, their customers were not themselves producers of gold. More generally, by thus exercising control over the amount of leasing and resulting short sales, the Fed could have achieved considerable influence over the gold price. Indeed, perhaps it was just this kind of activity that led a former Fed governor to claim on CNN's Moneyline in October 1998: "The Fed has precise control over the price of gold and therefore over commodities such as crude oil. No inflation, therefore no need to raise rates." Emphasis supplied.

A recent analysis by Ted Butler faults the CFTC for not taking action against certain bullion bankers over the option strategies foisted on certain mining companies. The basic strategy to which he refers is the sale by mining companies of long dated call options to finance the purchase of relatively short dated put options, i.e., the strategy that crippled Ashanti and Cambior. In all that has been written or disclosed about this strategy in recent weeks, two facts stand out. First, the risks were not fully or widely understood. Second, the strategy experienced a surge in use right after announcement of the BOE's gold sales program. No doubt, as many have suggested, this sudden spurt of options hedging reflected the gloom that descended over the gold market in the wake of the BOE's announcement. But to the extent that the bullion banks actively pushed the strategy onto their mining customers, it may also have represented an effort by them to replace Fed call options that were in process of drying up.

Efforts at market manipulation almost always come to a bad end because ultimately market fundamentals will assert themselves. Central bankers tend to have a better appreciation of this fact than politicians, which is almost certainly why the BOE's gold sales program was ordered by the British government over the objection of bank officials. If the BOE's gold sales were originally intended to rescue the Fed from a losing options position as gold threatened to move over $300/oz. last May, it has probably largely achieved that narrow goal by now. But the cost has been enormous, not only in British gold but also in undermining continued central bank control of the gold price.

Neither the BOE nor its political masters foresaw that their attack on gold would trigger the Washington Agreement, announced September 26, 1999, which overnight caused an almost complete reversal in negative attitudes toward gold created by several years of highly publicized central bank sales and huge increases in their gold leasing activities. The resulting spikes in the gold price and in already high lease rates effectively killed the gold carry trade and forced far more prudent use of hedging by mining companies. While the troubles of certain mining companies caught wrong-footed have been widely noted, the damage to the bullion banks themselves, not to mention certain hedge funds, has yet to be fully disclosed. The BOE's reputation for prudent oversight of the international gold market, long based in London, is badly tarnished. Kuwait's release of its entire official gold reserves for loan through the BOE has only underscored the parlous condition into which that market has fallen.

The BOE itself now appears locked into a gold sales program that amounts to a fire sale of British gold, so much so that two of the world's largest mining companies have successfully used the last two auctions to cover some of their own forward sales. Whether wholly unsubstantiated or floated as a trial balloon, the mere rumor -- quickly denied -- that the BOE might cancel future planned gold sales caused an almost immediate $10/oz. spike in the gold price a couple of weeks ago. Charges fly that the BOE's sales are part of a government plot to join the EMU. If so, it's a pretty dumb plot.

By not joining the first round of the EMU, Britain regained possession of 173 metric tons of gold previously deposited with the EMI (predecessor to the EMU) and increased its total gold reserves to 715 tons, which its gold sales program when completed will reduce to around 300 tons. Should Britain join the EMU, it will probably have to allocate about 140 tons to the ECB, leaving national gold reserves of around 160 tons. Britain would thus be the only major EMU member without substantial gold reserves, and thus the only one not to benefit from any future upward revaluation of gold.

Beyond these direct consequences, some believe that the Fed responded to the October gold banking crisis and presumed problems of the bullion banks by adding liquidity to the banking system, thus providing much of the fuel for the November stock market rally. In this connection, it is worth noting that the bullion banks with apparently the greatest exposure to Ashanti's problems are among those most often associated with suspected Fed activities in the gold market. So too, the question of whether and to what extent short gold positions may have played a role in last year's LTCM affair remains shrouded in mystery. What does appear, however, is that the Fed is very reluctant to allow the U.S. stock market to progress from a correction into a true bear market, adding credence to the growing belief that the stock market, however overvalued, is too big and too important to be allowed to fail.

There is a certain irony in the fact that since Alan Greenspan assured Congress in July 1998 that over-the-counter financial and gold derivatives required no further regulation, these very same derivatives have twice presented the Fed with an opportunity to allow a stock market correction to turn into a bear market for which it could escape much of the blame. In each case the Fed may properly have been concerned that the decline might cascade into a disorderly rout. But by intervening to head off these stock market declines, the Fed may also have undercut the credibility of its own interest rate weapon. Searching for a way to freeze the bubble or at least to let the air out slowly, and unwilling to let market forces have their way, the Fed has steered the whole American economy into uncharted waters.

The Fed was founded to stabilize the gold value of the dollar on the theory that central banking could achieve this goal better than free banking. Having utterly botched that mission, it has accepted a new one: guardian of the American economy's paper wealth.

The Fed has never had, nor will it ever have, "precise control" over the gold price. The question now is whether its control over the stock market will prove equally illusory. No doubt, should its traditional monetary tools or suspected derivatives activities appear inadequate to the task, the Fed will unveil some new weapon. But if the BOE ever announces a plan to achieve greater diversification of its dollar assets by investing proceeds from its gold sales in U.S. blue chip stocks, beware. For if one rule of investing is: "Don't fight the Fed;" another is: "Bet against the BOE." Just ask George Soros.

November 22, 1999. Euro Grand Strategy: Defense, Welfare and the Swiss Connection

Is the Euro part of some larger strategic plan to restore Europe's great power status? If so, it's a safe bet that the full plan is known only to a handful, several key officials and perhaps a Rothschild. And it's an even safer bet that these folks aren't talking, unless maybe to protect the true dimensions of the plan with a bodyguard of lies. But speculative as its existence may be, the strategy outlined here relates the Euro to Europe's two other greatest challenges.

To be a major power in the coming century, Europe must do more than make a success of its new currency. It must also: (1) create a modern military and defense force capable of effective action in major matters independent of American desires or support; and (2) reform public welfare programs that already impose a too heavy financial burden, and that include unfunded pension obligations which will become insupportable with the aging of the general population in the years ahead. See Peter G. Peterson, "Graying Dawn: The Global Aging Crisis," Foreign Affairs, Jan./Feb. 1999, pp. 42, 48-49.

The Euro offers an opportunity to mobilize the EMU's two greatest but heretofore largely unused monetary assets: combined foreign exchange reserves of approximately US$220 billion and 12,500 metric tons of gold, of which about $40 billion and 750 tons reside with the ECB itself. The rest, although subject to some direction by the ECB, remains with the central banks of the Euro Area countries. What is more, particularly given that the EA is running annual trade surpluses exceeding $100 billion, the foreign exchange and gold holdings of the ECB alone appear more than adequate for any likely EA needs. Indeed, the ECB's biggest problem appears to be what to do with an ever increasing and unneeded supply of dollars.

Switzerland remains outside the EMU but its economy is closely integrated with that of the EA. Accordingly, the Swiss economy is best served by a reasonably stable Swiss franc versus the Euro. The Washington Agreement permits the central banks adhering to it to sell 2000 tons of gold over the next 5 years, including the previously proposed British sales of another 365 tons and Swiss sales of 1300 tons. Sales of most of the Swiss gold to the ECB for dollars with which the Swiss could then buy Euros would: (1) rid the ECB of some unwanted dollars; (2) tie the Swiss franc more closely to the Euro by increasing Swiss Euro reserves; (3) strengthen the Euro; and (4) support the gold price, not an inconsequential benefit to nations collectively holding the world's largest official gold reserves.

This procedure, of course, would not address the problem of the nearly $200 billion excess dollars sitting at the central banks of EA countries. But these dollars, as well as any further dollar surpluses, could be deployed to help build a modern European defense force. What is more, many of them could be spent for this purpose directly in the U.S., a definite political plus. American defense contractors would benefit, and some pressure on the American defense budget would be relieved. Indeed, the whole idea of a Europe ready to shoulder more responsibility for its own defense, including substantial expenditures for upgrading its military hardware and capabilities, is one that would be difficult for the U.S. credibly to oppose. And it is an idea already moving forward in Europe. See Richard Medley, "Europe's Next Big Idea," Foreign Affairs, Sept./Oct. 1999, p. 18.

Over time, these steps would almost certainly lead to increased use of gold as an international reserve asset. As Asian and other central banks with relatively low gold reserves recognize this trend, their demand for gold could provide an outlet for a significant chunk of official European reserves at much higher gold prices than currently prevail. Indeed, the effective functioning of any new international monetary order elevating gold to a central role will virtually require a more equitable distribution of the world's monetary gold reserves among central banks. From the European perspective, gold sales at higher prices to other central banks are far preferable to market sales at bargain prices. What is more, with a high enough gold price, these sales could ease considerably the huge burden of rising public pension payments with graying of the population.

Little in the events of the last couple of years is inconsistent with this grand vision of Europe's future. Indeed, much that seemed surprising when it happened fits quite well into the picture, such as the planned Swiss gold sales and the Washington Agreement restricting official gold sales and gold leasing. Only the terminally naive could have believed that Europe would forever acquiesce in the trashing of its huge gold reserves.

After almost a century of internecine squabbles, a new Europe -- led by the EA countries with France and Germany at each other's side rather than at each other's throat -- seems poised to reassert its historic role as a major player in the great game of politics among nations. For America, this development means some painful adjustments; for the British, it will bring some painful choices. The continuing Anglo-American efforts to denigrate gold, including the third tranche of the Bank of England's gold sales next Monday, are signs that neither country has yet faced up to the reality of the Euro and the new Europe.