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What Will Happen If COMEX Defaults?

A group of eight central banks in the US and Europe, the London Gold Pool controlled the price of gold for six years until the Pool collapsed leading into a more than decade long bull run. Gold reached nearly $1,000 per ounce, silver nearly $50. The central banks had pegged the price too low causing runs on gold, the British pound and US dollar. France boisterously left the pool and repatriated gold reserves, like many nations today are wont to do. In March 1968, the London Gold Pool collapsed amidst chaos in the market.

A two-tier system of official exchange and transactions was implemented after the London Gold Pool controls failed in order to suppress the gold price. The gold window closed altogether in 1971 during the Nixon Shock. Gold rose in price to $850. Western nations had to sit out the bull run as eastern markets remained open in the days following the Pool’s collapse.

In 1960, gold buying sent the price to more than $40 per oz. The US Federal Reserve and Bank of England allocated for the sale of BoE gold supplies in order to keep the price down. Banks worked feverishly to maintain the $35/oz gold price despite the free market dictating appreciation. The banks began “targeted selling and buying of gold” in order to achieve the price controls. They ultimately failed.

Poor economic conditions amid Vietnam War protests created instability in the US and thus the London Gold Pool. Inflation became an issue for the US. It would not exchange foreign-held dollars into gold and France left the Pool in June 1967. The nation moved large amounts of gold across the Atlantic from New York to Paris.  In 1967, Britain devalued its currency causing panic and a gold run.

By spring 1968, according to the Federal Reserve, “the international financial system was moving toward a crisis more dangerous than any since 1931.”

The British government devalued the pound on November 18, 1967 by 14.3%. The US adopted measures to slow down the gold run. London sold 100 tons of gold at market price on March 8th, a major increase in a typical sale for the bank. The pool released a statement:  “the London Gold Pool re-affirm their determination to support the pool at a fixed price of $35 per oz”.

On March 14, 1968 the US government and the British government agreed to close the London gold markets the following day. The British government declared March 15 a bank holiday.

The London gold market remained closed for two weeks. Around the world, gold trading continued amid rising prices. Switzerland founded the Zürich Gold Pool, helping to establish Zürich as a gold trading center of the world. The Federal Reserve funds rate had increased from 2% on October 25, 1967 to 5.13% on the day the Pool collapsed. The fed fund rate appreciated to 10.5% during the summer of 1969.

 

The two-tiered system stipulated $35 gold. Gold pool members did not trade gold with regular people. The US government suspended gold sales to governments trading in private market.

Although the gold pool members refused to trade gold with private persons, and the United States pledged to suspend gold sales to governments that traded in the private markets inflation ravaged the US. West Germany abandoned the Bretton Woods System in May 1971. The dollar declined. Switzerland purchased $50 million worth of gold in August. France purchased $191 million in gold. By then, US gold reserves had reached their thinnest levels in nearly fifty years.

President Richard Nixon unilaterally ended dollar convertibility to gold in what’s called “The Nixon Shock.” This effectively ended Bretton Woods. The Federal Reserve wanted the US, BoE, West Germany, France, Switzerland, Italy, Belgium, Luxembourg and the Netherlands to begin selling gold so that gold would not appreciate.

According to Fed chairman William McChesney-Martin, the US would protect the $35 gold price  “down to the last ingot”. The London Gold Pool airlifted emergency shipments of gold from the US to London due to high demand. Demand for gold was overwhelming. The Fed failed.

So what can we expect from a Comex default?

Market manipulation and price controls do not work. Free markets manage supply-and-demand better than central planners. When central planners scheme to control the price of goods, services, etc. it is only a matter of time before their cartel begins to fade. They generally try harder to manipulate the market, but always the free market dictates.

The London Gold Pool collapse and the COMEX default could come amid a similar situation: the world reserve currency is at risk. However no amount of government authority, command-and-control economics (Communism) can drown out the reason of the free market over the long-haul.

The end of the London Gold Pool cost the member banks (and so therefore the countries) billions of dollars. The same would happen with a COMEX default. The gold price appreciated 2300% between 1968 and the 1980 peak. This time around, the silver price would skyrocket in a similar manner.

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