The first few pages of Dimitri Speck’s book The Gold Cartel already prove to the discerning reader that the author actually understands gold. One might say that this should be expected of someone writing about gold, but quite often this can actually not be taken for granted. A great many analysts and market observers still treat gold analytically as though it were akin to an industrial commodity. However, although gold has been officially ‘demonetised’ and no longer serves as a general medium of exchange, it has retained all its other monetary characteristics. Its main function today is to serve as an investment asset with very specific and unique features (we would even state that every sensibly diversified portfolio needs an allocation to gold). Speck familiarises the reader with gold’s unique attributes and its modern-day role in a manner that leaves no doubt that he knows whereof he speaks.

Gold market intervention: statistical studies and the historical background
When Frank Veneroso published a study on gold lending in 1998, many people probably heard the term ‘gold carry trade’ for the first time. However, it became a staple of deliberations about the gold market in subsequent years. It was increasingly obvious that a superficially legitimate (if ultimately slightly dubious) business activity, namely the hedging of future gold output by mining companies, had been turned into a major and potentially explosive financial engineering scheme. There was one big problem, though, the critics of the practice encountered: as the carry trade involved gold held by central banks, it was largely shrouded in secrecy. No-one could tell for sure how big it had become, and what the long-term consequences of its eventual unwinding might therefore be. Veneroso’s work, while path-breaking, was marred by its lack of precision, which was partly a result of the difficulty of obtaining good data. By necessity, he was forced to rely to a great extent on estimates. Central bank accounting for gold was (and in most cases remains) rather peculiar: gold receivables and gold still held in their vaults is treated as a single line item in their balance sheets, making it impossible for outsiders to ascertain how much of their gold is really on loan. When approached about this, they routinely claim the need to protect trade secrets on behalf of their business partners, which rightly strikes many people as a rather flimsy excuse.

Not surprisingly, this fanned speculation about the amounts involved as well as the motives of the central banks. After all, it was no secret that central banks once upon a time intervened in the gold market quite openly. Were they still doing so clandestinely, employing a different modus operandi? The difference in estimates regarding the size of the carry trade published by ‘establishment-friendly’ organisations and independent researchers varied enormously – and obviously it would matter which of those estimates were closer to the truth.

Enter Dimitri Speck, who has delivered what is to date probably the best such estimate ever produced by an independent analyst of the gold market. Mr Speck is a commodity market expert who not only has first-hand experience with the markets, but actually knows how to perform solid statistical analysis (the quality of the statistical analysis of earlier studies is often problematic, not only in the context of the carry trade). A striking example was his estimate of the amount of gold lent out by Germany’s Bundesbank over time, calculated from the extremely meagre tidbits of information that could be gleaned from the BuBa’s balance sheet. Today we actually know how close his estimate came, because the BuBa has finally confessed to all the details (after having ceased to lend out gold and having come under considerable public pressure in Germany for its secrecy). This shows the soundness of his approach.

A considerable part of The Gold Cartel presents the results of painstaking statistical analysis of the gold market. Luckily it never gets so technical as to bore the reader – the analysis reads rather like a detective story at times. It focuses specifically on the question of whether anomalies in the gold market can be detected which point to possible interventions, and if so, whether the beginning of these anomalous activities can actually be dated. Another focus is gold’s behaviour during financial crises, as well as the already mentioned carry trade and the determination of its overall size.

It should be pointed out at this juncture that while Mr. Speck is certainly sympathetic to the idea that covert interventions in the gold market have taken place, there is a refreshing difference in his approach to the subject compared to that often encountered elsewhere, which makes the book an enjoyable and informative readeven for people who are sceptical about this thesis. There is only very little speculation about what might have happened; instead the focus is on what is actually known, respectively on what can be known. Speck thus lays out a logically consistent and coherent history of the gold market and gold market interventions. It may be conceded that some of Speck’s conclusions are open to debate, but this is in the nature of things: as a thymological discipline, history always leaves room for interpretation. When we consider, e.g., the words and deeds of Alan Greenspan, understanding is required, as no-one can read his mind. What cannot be refuted are the facts and data of history, which form the basis of the statistical study. As an aside, while central banks increasingly strive to provide greater transparency nowadays, Speck thoroughly disabuses the reader of the naïve notion that they ‘would never do such a thing as intervene clandestinely’ by presenting hard evidence of past transgressions (which in at least one case even included the intentional falsification of data).

The statistical analysis in The Gold Cartel is buttressed and supplemented by a gripping account of the history of the modern monetary system, beginning with the step-by-step disintegration of the Bretton Woods system in the late 1960s (which resulted in Nixon’s gold default in 1971) and encompassing everything that has happened since then, including of course the creation of the euro. All of these events are brought into context with the happenings in the gold market. We know for a fact that governments and central banks intervened in the gold market during the 1960s and 1970s, since it was done openly. Only after Paul Volcker got a grip on the inflation problem of the 1970s and thereby paved the way for the gradual acceptance of a global monetary system using a pure fiat dollar as its reserve currency did ‘official’ interventions in the gold market cease.

Based on the dating of the beginning of later interventions which the statistical analysis reveals, Speck proceeds to highlight relevant passages from the minutes of FOMC meetings that took place around this time. From these we learn that although gold had been thoroughly ‘demonetised’ from an official standpoint, it still was very much on the mind of many important FOMC members in the early 1990s, including then chairman Greenspan. This is perhaps not too surprising, considering that the enormous rise in the gold price during the monetary upheavals of the 1970s, which was still a relatively recent event at the time, and certainly something the FOMC’s members were still acutely aware of. As Speck points out, the conversations at these meetings clearly show that there was major concern at the time over gold’s role as a competitor to the US dollar and as an indicator of inflation expectations.

Once gold lending by central banks had grown well beyond the hedging needs of mining firms, the interests of private parties involved in the gold carry trade and those of central banks increasingly converged: both had henceforth a strong motive to keep the gold price from rising. Speck demonstrates convincingly that once the carry trade began to exceed a certain size, private profit motives undoubtedly began to play a bigger and bigger role. In order to keep being able to play the game and avoid losses, bullion banks started putting pressure on central banks to continue to sell and lend out ever increasing amounts of gold. Speck looks closely at the events surrounding this phase in the late 1990s, when a great many politicians whose credentials as gold experts or experts on monetary policy must be judged to be rather dubious, attempted to influence the climate and official attitudes toward gold. Unwilling central banks such as, e.g., the Swiss National Bank were put under enormous political pressure to agree to gold sales. Today many of the relevant events of the late 1990s are largely forgotten, and Speck does us agreat service by rescuing them from the memory hole.

One big exception remains of course the infamous sale of a large portion of the UK’s gold reserve by then chancellor of the exchequer Gordon Brown. This event has certainly remained in the public consciousness, mainly because Brown proved himself to be one of the worst market timers of all time. However, as Speck points out, there is far more to it than that, considering all the circumstances surrounding the sale. As far as circumstantial evidence of an unofficial scheme to put pressure on the gold price goes, Brown’s actions surely have to count among the most conspicuous and suspicious of the time.

Speck also provides the reader with a very well reasoned argument regarding the changes in the gold market after 1999 and how the carry trade’s fate can be put into context with the bull market that started in the year 2000. Especially interesting are his comments on the Washington agreement in this context, in which major Western central banks decided to limit their gold sales and freeze their gold lending. The agreement provided strong evidence of the desire on the part of European central banks to put an end to the shenanigans in the market, albeit in a manner that ensured that the carry trade would get ‘off the hook’ in a fairly painless manner. Once again, a number of details surrounding the announcement are provided that few modern day readers are likely to remember or may not even be aware of at all, but which greatly enhance one’s understanding of these events.

A giant debt bubble
The statistical and historical analysis of the gold market and the monetary system comprise only the first two-thirds of the book. This is followed by a theoretical part that deals in great detail and in a highly original manner the problems the abandonment of gold as an anchor of the monetary system has ultimately brought about. The methodological and conceptual approach to the topic will not be entirely unfamiliar to readers who know the Austrian School of Economics, even though Speck employs at times a slightly different terminology. The most notable effect of demonetising gold has been and continues to be the recurrence of numerous sizeable booms and busts. These are a result of the unfettered credit expansion the unanchored monetary system has made possible. In a monetary system based on gold, the emergence of such credit expansions could certainly not be completely averted, but as Speck puts it, gold clearly would serve as a ‘brake’.

He provides a detailed description of how credit-financed bubbles begin and are then continuing to grow, driven by their inherent dynamics. The most important feature of such bubbles is that speculation for some time appears to be ‘paying for itself’, as artificial accounting profits emerge. ‘Wealth’ is seemingly created ex nihilo, and profits are booked even though no-one has actually produced anything tangible. This explains the enduring popularity of credit-driven bubbles, as it is simply human nature to embrace the ‘something for nothing’ mirage that is their major characteristic. Given that financial bubbles have real economic effects, and given that their recurrence cannot be averted, the focus of the authorities soon shifted to the question of how the effects of their bursting could be mitigated – a momentous decision, as Speck shows.

The mitigation policy consists of government intervention by the very same means that lead to the emergence of bubbles in the first place, i.e., a further expansion in debt and credit claims. This almost always works in the short term, and so the long-term consequences are routinely ignored. As Speck avers, it is precisely the fact that a series of busts following smaller-scale credit expansions have been mitigated by such interventions, that a kind of ‘mega debt bubble’ has evolved over time. After all, the credit claims accumulated in the past were never extinguished, but merely added to. Private and public sector indebtedness both have thus continued to expand, effectively egging each other on. An ever greater pile of credit claims thus towers over a real economy the growth of which is paling by comparison.

Speck also points out that the vast expansion in public sector liabilities is marred by the fact that it is deeply undemocratic, as the population is lulled into believing it is getting ‘something for nothing’. As a result, there are no proper deliberations over the wisdom of public spending. Ultimately, no-one is taking responsibility and the political class naturally glosses over this fact, as it pursues its own narrow interests. Indeed, as official remarks preceding the abandonment of gold in 1971 show, it was precisely the ability to run deficits in quasi-perpetuity that attracted governments to the new monetary system. The ability to increase spending without having to increase taxation is deemed a highly desirable method of achieving short-term political goals.

Establishment economists have done us a great disservice by ignoring and/or whitewashing the long-term implications of the ever growing level of financial claims. There is an ultimately misguided focus by central bankers and economists alike on the chimera of ‘price stability’, while the growth in debt remains unheeded. Speck rightly suspects that the 1987 stock market crash was a decisive turning point. It is barely remembered today that Alan Greenspan once started out as a very conservative central banker who seemed to have grave reservations about increasing speculation in financial markets and the vast growth in public debt that were both evident when his chairmanship began. The jolt of the stock market crash appeared to alter his attitude. He began to err on the side of easier monetary policy thereafter and his focus increasingly turned toward price stability, while the growth in credit claims and debt were ignored. ‘Mitigation of busts’ had become the official mantra, and this remains the case to this day.

Speck also discusses the question of the long-term consequences of this spiral of ever growing debt. One question that cannot be answered with apodictic certainty is whether deflationary or inflationary forces will eventually get the upper hand. As Speck points out, ‘credit’, after all, describes not only debt, but also involves the issuance of credit claims that are precisely offsetting the debt. High indebtedness thus creates a deflationary undertow, but the possibility that existing claims could ‘leak out’ into the economy and so create a spiral of inflation is always lurking in the background. Money substitutes and claims which the fractionally reserved banking system creates by extending credit have increasingly been confined to the financial sphere. As long as that is the case, pressures on the prices of goods and services will tend to remain subdued, but obviously the tinder for a flaring up of inflation exists. Speck demonstrates this by applying the analysis of stocks and flows that is applicable to the gold market to the wider sphere of financial claims. As he points out, the classical denouement of a credit-financed bubble used to be a major deflation, egged on by debt defaults and the associated destruction of deposit liabilities held by banks falling into insolvency. There can, however, be no guarantee that this outcome will be repeated in modern times. Today, the authorities can and do intervene to avert deflationary reductions in outstanding financial claims. Their countermeasures could eventually result in the exact opposite outcome (i.e., a major inflation). However, other possibilities are just as thinkable (such as, e.g., a prolonged period of stagnation, as has happened in Japan, or what is euphemistically known as ‘currency reform’).

Summary and conclusion
Anyone with an interest in the gold market cannot afford to miss this book. In fact, anyone with an interest in financial markets or the economy will undoubtedly benefit from reading it. It provides a solid statistical analysis of every aspect of the gold market, a thoroughly researched account of the history of the modern monetary system and a highly original perspective of the growing bubble in debt and credit claims we have experienced in the modern system of credit-based money. The crises of the 1990s and the early 21st century with their increasing amplitude have shown that we are inexorably moving toward some sort of climactic event. The world still creates a lot of real wealth of course, and the modern age is the most prosperous ever. And yet, our growing prosperity rests on what seems an increasingly rickety monetary foundation.

Dimitri Speck’s book furthers our understanding of this foundation and will thus help readers to prepare for an uncertain future that is bound to be far too ‘interesting’ in the Chinese curse sense.