In 1961, The US and Europe pooled their Gold resources in London to prevent the market price for gold from exceeding the mandated rate of $US 35 per ounce. This project to suppress gold was known as the "London Gold Pool".
The TIME article below was written in March 1968, as the "London Gold Pool" collapsed under a speculative gold stampede.
(emphasis mine) [my comment]
Friday, Mar. 22, 1968
Quietly and secretly, technicians at Fort Knox, Ky., loaded an estimated $450 million worth of gold ingots [about 410 tons of gold] onto a heavily armed convoy. The convoy proceeded to a nearby U.S. Air Force base, where the gold was loaded aboard a transport plane and flown to Britain.
There, it was sent to the Bank of England, to be transported by Swissair and British European Airways flights to the coffers of Swiss banks. The influx of gold became so bulging, in fact, that one Swiss bank had to reinforce the walls of its vault to contain it. It was all part of the largest gold rush in history, a frenetic, speculative stampede that last week threatened the Western world with its greatest financial crisis since the Depression.
Socks & Mattresses. Telephone and telex lines to London, the world's largest gold market, were swamped as buyers throughout Europe demanded gold, gold and more gold. More than 200 tons, or $220 million worth, changed hands on the London gold market in one day to establish a new single-day trading record. Where gold could be bought directly, mob scenes erupted and the price soared. Ten times the usual number of buyers jammed the gold pit in the cellar of the Paris Bourse, and fist fights broke out as the price on one day rose to $44.36 an ounce v. the official price of $35. In Hong Kong, frantic trading drove the price up to $40.71, and around the world investors and banks bought gold certificates and gold stocks. Many refused to accept the U.S. dollar in payment.
In dozens of nations, from Austria and Italy to Sweden and Ireland, ordinary citizens rushed out to buy gold coins to stuff socks and mattresses, cleaning out numismatic stocks virtually overnight. In London, a $20 U.S. gold piece sold for $56, a Ł 1 British sovereign for $10.20. In Geneva, the Swiss lined up at tellers' windows to convert their savings to gold bars. There was even a run in Hong Kong on gold jewelry. All told, between $1 billion [910 tons] and $2.5 billion [2270 tons] in gold may have changed hands within ten days in London—as much as 10% of the total gold in the seven-nation Gold Pool, whose bullion reserves are the cushion for the $35 international price of gold. No estimate was possible of all the other trading in gold around the world, except that it was colossal.
Lost World? The rush was on because speculators—some avaricious, some panicky, some merely prudent—had become convinced that the U.S. and its partners could not much longer maintain the $35 price. With a balance of payments deficit of $3.6 billion last year and a war in Viet Nam that is costing some $30 billion annually, the U.S. has seen its gold reserves shrink by 50% from a postwar peak of $24.6 billion. Now, believed the speculators, the U.S. was nearing the end of its gold tether [This is beginning to happen again]. If the U.S. could no longer sell gold to all takers at $35 an ounce and the price were allowed to rise to meet the demand, the speculators stood to make a handsome profit, just as they had in the devaluation of the pound sterling last November. Having tasted blood then, many scented another kill —and, in their wild bu ying, ripped and clawed at the remaining gold stocks in the Gold Pool [for more on the London Gold Pool, see my entry on Gold Wars].
Who were the speculators? The identity of most was veiled in the secrecy of Swiss bankers' files, but they were situated throughout the world. Perhaps as much as 40% of Swiss bank purchases were destined for safekeeping in the coffers of Middle Eastern sheiks and oil potentates. Latin American businessmen, affluent overseas Chinese, Asian generals—all claimed a piece of the action. The central banks of many smaller nations with precarious national reserve margins, including some Communist Eastern European countries, had undoubtedly joined in to protect themselves. More in sorrow than in greed, European corporations moved into the buying to hedge their foreign-currency holdings. So did some wealthy Americans with numbered Swiss accounts, although it is illegal for U.S. citizens to own gold bullion.
[When 2009's gold rush and dollar panic truly begins, everyone, even US allies (Middle Eastern sheiks, European corporations, US citizens), will flee the dollar into physical gold.]
For the men who understood the situation best, the spectacle was appalling. "The world is lost," said London Economist John Vaizey. "A rise in the price of gold is inevitable now. It's like a grand opera of which the overture is over, and we're in the first act of a world depression." A usually unemotional Swiss banker warned that "in participating in gold speculation, capitalists are doing their best to destroy the capitalist system. If they win the battle in London, the probability is that the whole present international monetary system will come crashing down." French Economist Jacques Rueff, who has long predicted a crisis and argued for a rise in the price of gold, saw his worst jeremiads vindicated. "Whether one wants a gold price increase or not," said Rueff, "it will soon be achieved."
Two-Tier Price. Finally, the pressure grew so great that the U.S. refused to continue to feed gold to satisfy speculators' greed. In a telephoned message to British Chancellor of the Exchequer Roy Jenkins, the U.S. asked Britain to close the London gold market and shut off the flow from the Gold Pool. Prime Minister Harold Wilson hurried to Buckingham Palace for a midnight meeting with Queen Elizabeth, who declared a bank holiday in foreign-exchange trading. That shut off the Gold Pool's dealing, and money markets from Singapore to Lusaka followed suit. The Paris market alone stayed open.
The U.S. then invited representatives of the Gold Pool nations to Washington for a weekend conference. There was little doubt that the speculators had succeeded in wrecking at least part of the world's monetary system, and that the U.S. and the other members of the Gold Pool would no longer sell gold to all takers at $35 an ounce. What would likely be decided in Washington was a "two-tier" pricing system for gold, by which the speculators would have to conduct their transactions in a free market (see BUSINESS). Without the U.S.'s willingness to buy back speculative hoards, their price just might prove in the end to be lower than many of the hoarders think. [By the end of 1974, Gold had soared from $35 to $195 an ounce.]
My reaction: This is what a speculative gold rush and dollar panic looks like. The points to note about what happened in March 1968 are:
1) The world experienced the largest gold rush in history and the greatest financial crisis since the Depression.
2) Several hundred tons of gold were secretly flown to London from Fort Knox and sold in an effort to keep the price of gold fixed at $35 per ounce:
3) More than 200 tons changed hands on the London gold market establishing a new single-day trading record.
4) Telephone and telex lines to London were swamped as "buyers throughout Europe demanded gold, gold and more gold."
5) Wherever gold was sold, mob scenes erupted and the price soared.
6) Fist fights broke out as ten times the usual number of buyers jammed the gold pit in the cellar of the Paris Bourse
7) Traders around the world refused to accept the US dollar in payment.
8) In dozens of nations, from Austria and Italy to Sweden and Ireland, ordinary citizens rushed out to buy gold coins to stuff socks and mattresses, cleaning out numismatic stocks virtually overnight.
9) In Geneva, the Swiss lined up at tellers' windows to convert their savings to gold bars.
10) Hong Kong experienced a run on gold jewelry.
11) Between 910 tons and 2270 tons of gold may have changed hands within ten days in London
12) Trading in gold around the world was "colossal"
13) The gold rush was caused by the belief that the US was nearing the end of its gold tether.
14) The investors speculating on gold's rise included:
A) Middle Eastern sheiks and oil potentates
B) Latin American businessmen
C) Affluent overseas Chinese
D) Asian generals
E) The central banks of many smaller nations with precarious national reserve margins
F) European corporations
G) wealthy Americans with numbered Swiss accounts (Although it is illegal for U.S. citizens to own gold bullion)
15) The men who understood the situation best were appalled:
"The world is lost"
"A rise in the price of gold is inevitable now. It's like a grand opera of which the overture is over, and we're in the first act of a world depression."
"In participating in gold speculation, capitalists are doing their best to destroy the capitalist system. If they win the battle in London, the probability is that the whole present international monetary system will come crashing down."
"Whether one wants a gold price increase or not, it will soon be achieved."
16) The pressure grew so great that the US asked Britain to close the London gold market and shut off the flow from the Gold Pool. The US and the other members of the Gold Pool would no longer sell gold to all takers at $35 an ounce.
17) US's fiscal irresponsibility had succeeded in wrecking at least part of the world's monetary system.
Conclusion: We will see something like 1968's gold rush soon, except it will probably be much worse. The trigger for 2010's gold rush will be the collapse of paper gold (ie: gold futures, GLD, unallocated gold, etc). This time around, the dollar won't just lose some of its value: it will lose nearly all it.