Portion of article by bullionvault. Oct 1. 2007.

-----------

“We believe that the policy resolution to the credit crunch will take the form of of a massive, extended ‘Reflationary Rescue’ in a new cycle of global credit creation and competitive currency devaluations. This could take gold to $1,000 an ounce, or higher.”

More than that, the flood of central-bank gold sales earlier in 2007 was “clearly timed to cap the Gold Price,” they go on. But little good it did the central bankers’ aim of capping gold if so. The price just moved above a 27-year high vs. the Dollar, and it’s tracking new 16-month highs for European investors each day.

Why suppress gold? If gold goes higher, or so the thinking runs, then the world’s confidence in the confidence-trick of paper money backed by government promises alone might just collapse. That was the threat in the late 1970s. Given last month’s run on Northern Rock in the United Kingdom…and now the collapse of NetBank in the US…that might come to be seen as a possible threat again today.

Allegations that the world’s major central banks actively work together to suppress the price of gold were only given credence in 2004 when Paul Volcker – chairman of the US Federal Reserve at gold’s all-time top – said in his memoirs that “letting gold go to $850 per ounce was a mistake” during the last great bull market in gold bullion.

At one of the policy meetings led by Volcker in late 1979, his Federal Reserve committee noted the threat of “speculative activity” in the Gold Market. It was spilling over into other commodity prices. One official at the US Treasury called the gold rush “a symptom of growing concern about world-wide inflation.”

“We had to deal with inflation,” as Volcker said in a PBS interview of Sept. 2000. “There was a kind of great speculative pressure.

“It was the years when everybody wanted to buy collectibles from New York. The market was booming, and other markets of real things were booming – because people had got the feeling that things were inflating and there was no way you could stop it.”

But besides waving a gun at anxious gold owners, there seemed only one other route to stopping speculators profiting from – or rather, defending themselves against – the demise of the Dollar.

Fix it up with higher interest rates. The Volcker Fed took US interest rates to 19%…and put the real cost of Dollars above 9% after adjusting for inflation. The Gold Price sank almost in half inside 12 months.

Because just like Wayne Angell says, the price of gold really is determined by central bankers. They hold it very easily…simply by causing the opportunity cost in terms of interest rates and US Treasury bills to make it unprofitable to own gold.

To do that, however, they have to raise interest rates dramatically above inflation. If you don’t trust the Bernanke Fed to do that – not least after they cut 0.5% off the returns paid to Dollar savings in mid-Sept. – then you want to consider Buying Gold today.

Adrian Ash