by Matthew Hart
Let’s look at that. If the swaps had been a purely benign activity, why did it take so long to get an explanation from the BIS? When bullion goes tiptoeing through Europe to a secretive Swiss bank controlled by foreign treasury officials, it’s fair to ask if there’s an explanation other than business as usual. There is.
After the 2008 banking crisis, the prospect of mass bank failures prompted European regulations. The regulators set new capital requirements for commercial banks. Many of these banks were holding too many bonds of countries whose credit ratings had gone bad. To see if the commercial banks were complying with the new standards, the European Central Bank planned to conduct audits called “stress tests.” A reasonable suspicion about the gold-for-dollars swaps, then, was that it was a subterfuge for packing cash into the European banking system to improve the balance sheets of private banks in advance of the stress tests. The commercial banks were so shaky that their own central bankers had become reluctant to deposit money with them, placing their extra funds in BIS instead, hence all the extra cash. The swap gave the international treasury establishment a way to avoid the crisis that would certainly have followed stress test failures. The only dupes would be the public . . . and the people who actually owned the gold. The swapped gold did not belong to the commercial banks. The banks had borrowed it, mostly from their own customers. If their customers had asked for it, the gold would not have been there.
THE COMMERCIAL BANKS HAD OBTAINED the gold from two sources. Some of it they’d borrowed from central banks. The other source, their own customers’ gold, would have come from “unallocated” accounts. The gold in an unallocated account, unlike that in an allocated one, is not held separately for the owner. The bank can trade it until you ask for it back.
In the swap with BIS, the commercial banks were getting cash for other people’s gold, and using the cash to look healthier than they were. This maneuvering was not illegal, but perhaps more creative than we like a bank to be. The bank had used the gold the way it used cash deposits. They “owed” the gold to the owner in the same way that all deposits are obligations. But if a bank was in such straits that the BIS seized the pledged gold, you wouldn’t like the bullion owner’s chances of recovering his metal. And his title might be tangled anyway.
The depositor himself might already have borrowed against the gold while keeping ownership. In such a case the gold is said to be “hypothecated”—ownership not transferred, but the asset hypothetically controlled by someone else with the right to seize it: the bank. If the bank then borrowed against this hypothecated gold by swapping it for dollars, the gold would be said to have been “rehypothecated.” The gold that was swapped for cash went off to Basel with a tail of obligations flapping out behind.
Since part of gold’s allure as an investment is its supposed safe-haven function, it’s fair to wonder what would happen if suddenly those who owned paper claims wanted the actual metal in their hands. In any climate of doubt about the amount of physical gold backing up paper gold, investors will think about ETFs. Do the funds have the gold they are supposed to have? If they have allocated gold, then presumably it is stacked up in its own dedicated corner of the vault. As long as the hoard has not been compromised by some of the new tungsten-alloy fakes making their way into the market, the investor is covered.1
A more realistic worry for the investor is what would happen to gold ETFs in the case of a panic. Say a free fall in the stock market prompts margin calls, and some investors decide to sell gold to cover their positions. Let’s imagine that a lot of investors bailing out of gold own small pieces of the same ETF. Taken together, the small pieces are a big piece. When the investors try to redeem their stakes, there’s not enough gold on hand. The ETF evaporates in a puff of insolvency. The failure sparks redemption calls on other ETFs, ones that actually do have physical gold to back up all shares. These sturdier ETFs start selling gold to meet redemptions. A cascade of bullion splashes into the market. The gold price tanks, and so do gold mine stocks. Galvanized by this collapse, the run on equities turns into a rout.
Even if you find this scenario farfetched, it’s still what gold is supposed to save you from. Part of gold’s investment raison d’être is just such a possibility: for peace of mind, buy gold. But gold is never peaceful. It’s a fever spread by doubt. Doubt and suspicion are its pathogens. Besides jewelry and a few industrial uses, there are no other reasons to own it. If you’re not suffering from the fever, you are betting that others will. Gold is inseparable from speculation about disaster, misfeasance, or manipulation. Even when the price is high, owners suffer from the fever, because what if the price goes down?
AT THE MORNING FIX IN London on September 5, 2011, gold hit $1,896.50 an ounce. Propelled by a ten-year bull run, the rising price had an air of inevitability about it. The hurdle of $2,000 was suddenly right there—a cinch! For a year, analysts had been predicting gold would clear the bar. Like everyone who followed gold, I wondered how long it could continue, and how the price could be justified. By luck, I had another appointment with Peter Munk. His office had contacted me to say that he was passing through London. He wanted to talk about price, and we were to meet just as gold was pushing up against $2,000.
A gale was chewing its way through southern England as I got a taxi and went down to Mayfair. In Park Lane the wind was blowing out umbrellas and thrashing people’s coats against their legs. As we passed the Dorchester Hotel, a geranium with a clod of earth still clutched in its roots sailed into the traffic and exploded on a car. In the Four Seasons lobby, women were stealing glances at each other’s hair and shaking water from their shoes. Promptly at 5:15 Munk popped from the elevator. He scowled at the crowded lobby, seized my arm, and said, “We’d better go upstairs.”
He wore a dark blazer and charcoal pants and a soft-collared, light blue shirt. The white enamel pin of the Order of Canada glowed on his lapel. Munk had just been to the Venice Biennale with his wife. In Venice they had stayed on his 140-foot yacht, Golden Eagle. It takes a crew of nine to sail it. “You think that’s big?” said Munk. “That’s nothing! They made me moor at the farthest point of the basin to make way for people with much, much bigger boats. They look like cruise ships. You have no idea how big they are!”
I did have an idea, because I had been reading up on them in articles about Munk’s latest venture, a marina for super-yachts at Tivat, the former Yugoslavian naval base in Montenegro. Munk used the profusion of these gigantic pleasure tubs to illustrate his theme—that there were more rich people in the world today than there had ever been, and they had assets to protect.
“Today I talk to people, and I have been around for a long time and I am associated with gold, and they confide in me. And everybody I speak to is now buying gold. They are not gold bugs, Matthew, and you know that Peter Munk is not a gold bug either.” He stood up from his seat and looked out the window at the rain with a fierce expression. Gold bugs are by definition fanatics—believers in gold as the only real money. I knew that Munk subscribed to no such theory, although I guess he had no problem selling gold to those who did. His point, though, was that a new supply of gold buyers had appeared on the rising tide of recently created wealth.
“These people I talk to,” he resumed, “they buy because they want protection to keep a portion of their assets and they think gold will do that. They think the [financial] system is not going to change unless there’s a catastrophe, a French Revolution, a war, or a devaluation of such proportion that the United States government defaults. These people who have been accumulating gold are not going to be selling.”
Yet they were. A Zurich-based executive of Stonehage, a firm that provides wealth management advice, had been telling Reuters only days before that some rich clients had already taken what they’d made in gold’s decade-long bull run and put it into what they saw as the next smart thing, high-end art. This shift accounted for substantial gold amounts, because some of the clients had had as much as 15 percent of their assets
in bullion. The money that had gotten into gold ahead of the pack was also getting out ahead of it, and just in the nick of time. The day after I spoke to Munk the gold price sank. In three weeks it dropped $300.
Among those battered in the fall was John Paulson, the American hedge fund sorcerer. Paulson made staggering sums on gold. In 2010 he personally made $4.9 billion on his gold investments. The New York Times calculated that this paycheck came to twice the total player salaries of Major League Baseball. He lives in a 28,500-square-foot limestone mansion on Manhattan’s Upper East Side. Most of Paulson’s own gold money was invested in a special gold-share product that his firm sold. The shares did not represent gold bullion, but were linked to gold-based assets such as gold mining stocks.
Paulson was the man with the Midas touch, until he wasn’t. His fortunes started to turn with the collapse of an $834 million investment in Sino-Forest Corporation, a Toronto-listed Chinese timber company with property in Yunnan province. He had been accumulating stock since 2008. By 2011 he owned a majority stake. In June that year a firm of short sellers called Muddy Waters accused Sino-Forest of being a classic “pump and dump,” an operation in which the owners of a stock use false information to inflate its value—the pump—and later sell when the share price is high—the dump. Muddy Waters claimed Sino-Forest had overstated timber reserves by $900 million, and had run what amounted to a twenty-year fraud. The stock collapsed. Paulson took a loss of half a billion dollars. One of his largest funds lost 47 percent of its value. That was around the time that the gold price got on the elevator and pressed the down button. Paulson’s gold fund lost 16 percent in a single month.
One report said Paulson was so angered by the steady leakage of news about his losses that he tightened his reporting policies to make it harder for the media to get information. The only public documents recording his gold actions were the quarterly 13F filings mandated by the SEC. The 13Fs showed Paulson dumping gold. He sold a third of his company’s position in the Spider for $1.4 billion. According to an unnamed source cited by Reuters, Paulson’s move from the Spider was not an abandonment of gold, but a switch to forms of ownership that did not have to be reported in public filings, such as swaps, forwards, and physical gold. He was moving his gold from sight.
A STORE OF GOLD IS a hiding place. The Oxford dictionary defines “hoard” that way, as something “hidden away or laid by.” But laid by against what? Gold is a doubtful sanctuary. As the price was tanking that September, a financial reporter attributed the fall to investor preference for stocks, because the stock market was rising in response to a rare moment of good news about the Greek debt crisis. Three weeks later the debt crisis returned to its usual state of hopelessness, and equities fell. So did gold. This time the reporter said that the falling market had dragged the metal down. Market up: bad for gold; market down: bad for gold.
Why is gold worth anything at all? Those who buy it perform a rite so old it’s scarcely possible to separate it from who we are. It’s the archaeologist’s dilemma: we are inside the object we are trying to understand. In The Golden Constant, a classic study that tracked gold’s purchasing power through time, the economist Roy Jastram confessed to a “nagging feeling that something deeper than conscious thought, not an instinct but perhaps a race-memory,” was behind our attachment to gold.
Among the uses for gold listed on its website, Barrick includes such devices as medical thermometers capable of detecting the tiniest changes in a patient’s temperature. And it’s true that gold makes a good thermometer, but not because it measures what is happening to the human body. It’s good because it measures what is happening to the human race.
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1. The technology of faking gold is getting better, most of it apparently based on the near-identical densities of gold and tungsten. The counterfeiter drills out plugs of gold from a bullion bar, replaces the gold with an alloy of tungsten, and covers the replacement plug with a thin layer of gold. The Financial Times reported a Chinese scam that involved “a complex alloy with similar properties to gold.” The fake contained about 51 percent bullion, and seven other metals: osmium, iridium, ruthenium, copper, nickel, iron, and rhodium. A skilled metallurgist had made it. One of Hong Kong’s biggest jewelers, the Luk Fook Group, was fooled by such fake gold.
11
THE GOLD IN THE BAMBOO FOREST
Empires rose and fell in the desert—secretive, enigmatic, fabulously rich.
IN KING SOLOMON’S MINES, THE Victorian potboiler whose adventurers find treasure in the heart of Africa, a book captured the spirit of an age. It was a publishing sensation. Its author, H. Rider Haggard, became a millionaire. The reading public, captivated by such recent discoveries as Egypt’s Valley of the Kings, snapped up the novel so fast that the publishers had trouble keeping it in print. When Alan Quatermain, the swashbuckling hero, heads up an ancient road to the royal city of Loo, the reader found the exploit believable. Not long before, explorers had discovered the ruins of Great Zimbabwe, a stone city whose oldest buildings dated from the eleventh century. Haggard’s book created a new literary genre, inspiring such bestsellers as Edgar Rice Burroughs’s The Land That Time Forgot and Arthur Conan Doyle’s The Lost World. The success of these books revealed a whole country’s hunger for adventure.
Today the gold rush is that adventure. It catapults us out of the quotidian into an enticing dream-world of riches and romance. Africa brims with gold. We emerged from Africa. Maybe the idea of gold came with us.
I thought of this one night on the balcony of a hotel in Dakar, when I couldn’t sleep. In the morning I was leaving on a journey across Senegal to a distant goldfield. I would cross the territory of vanished empires as fantastic as any that Haggard had imagined. The gold rush has awakened them. The forests teem with people whose gold mining skills originated in prehistory. The gold empires of Africa had captivated Europeans centuries before Haggard wrote his book. Portuguese ships had gone scraping past Dakar in the 1400s as they probed the coast of Africa for the gold kingdoms. They had not found them.
I gave up on sleep and phoned for coffee. There was no moon. The electricity had failed in the night. The ocean lay a hundred feet away, invisible, wrinkling softly on the beach. The desert deposited a layer of grit on the balcony, grainy underfoot. We left Dakar at 5:00 A.M.
A succession of empires rose and fell in West Africa from about the seventh century, when a ruler called Dingha Cissé established the Wagadu Empire. It was a secretive and enigmatic power, fabulously rich, in the Mauritanian and Mali deserts. The Soninké people domesticated camels and established trade routes to North Africa. They traded salt, slaves, and gold. The location of the mines was a state secret. The monarch could field an army of 200,000, including 40,000 archers and a strong cavalry. A merchant who visited the ruler’s court in the eleventh century gave this account:
He sits in audience or to hear grievances against officials in a domed pavilion around which stand ten horses covered with gold-embroidered materials. Behind the king stand ten pages holding shields and swords decorated with gold, and on his right are the sons of the kings of his country wearing splendid garments and their hair plaited with gold. The governor of the city sits on the ground before the king and around him are ministers seated likewise. At the door of the pavilion are dogs of excellent pedigree that hardly ever leave the place where the king is, guarding him. Around their necks they wear collars of gold and silver studded with a number of balls of the same metals.
In the myths of the Soninké, every year a seven-headed snake called Bida replenished the gold in the mines. In exchange for the annual sacrifice of a maiden, Bida caused a rain of gold. This arrangement ended when a young man decided to keep the maiden for himself, and cut off Bida’s heads. The gold rain stopped. The mines ran out. The Soninké lost their empire.
Over the centuries one empire melted into another through decline and conquest. News of these kingdoms reached Europe, and the Portuguese went looking for them. They establi
shed a trading port, but failed to find the gold source. In 1698 the Dutch traveler William Bosman described what the adventurers believed about the people who lived inland. “They are possessed of vast treasures of Gold besides what their own Mines supply them with, by plunder or their own commerce.”
The Ashanti state was the last of the African gold empires. In its founding story, a golden stool descended from heaven into the lap of the paramount chief Osei Tutu I. The federation started by this leader in the seventeenth century eventually extended into the Sahara, absorbing parts of the old Wagadu Empire. The Ashanti king, called the Asantehene, ruled a population of about 3 million. Extravagant reports about him circulated. A Danish doctor wrote that “this mighty king has a piece of gold, as a charm, more than four men can carry; and innumerable slaves are constantly at work for him in the mountains, each of whom must collect or produce two ounces of gold per diem.” The Ashanti state had a treasury filled with gold that was cast into standardized weights. They traded gold at outposts on the Atlantic, a trade that gave the country its European name—Gold Coast. Inevitably, the traders wanted to see for themselves where all the gold was coming from. On April 22, 1817, the British consul Sir Thomas Bowdich marched inland to find the Ashanti capital.
They set off in good order. A breeze came off the sea. They entered the green shade of the jungle on a pathway paved with pulverized quartz. Then the jungle sucked the breeze away, then the sunlight. The men advanced into a steamy, twilit furnace of vegetation. The quartz path ended. Then there was no path at all. They struggled forward into mangrove swamps. Their nostrils filled with the stench of rotting vegetation. Sweat poured into their eyes and soaked their clothes. Bowdich wrote:
The ground of our resting place was very damp, and swarmed with reptiles and insects; we had great difficulty in keeping up our fires, which we were the more anxious to do after a visit from a panther. An animal which, the natives say, resembles a small pig, and inhabits the trees, continued a shrill screeching through the night; and occasionally a wild hog bounced by, snorting through the forest, as if closely pursued.
