London Gold Pool: A Brief History of Global Gold Price Regulation

The London Gold Pool was a short-lived but significant experiment in global gold price regulation. It was established in 1961 and lasted until its collapse in 1968.

The Pool was created by the United States, the United Kingdom, and other major gold-holding countries to stabilize the price of gold and maintain its value. They agreed to sell gold at a fixed price of $35 per ounce.

The Pool's goal was to prevent a gold rush and maintain confidence in the US dollar, which was the global reserve currency at the time. The Pool's members agreed to sell gold to the market if the price rose above $35 per ounce, and to buy gold if it fell below that price.

The Pool's collapse led to a sharp increase in the price of gold, from $35 to $42 per ounce in just a few months. This was a significant blow to the credibility of the US dollar and the global financial system.

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The London Gold Pool was established in November 1961, marking an unprecedented coordinated effort among eight Western central banks to stabilize the gold price at $35 per ounce.

The idea for a coordinated gold intervention emerged from meetings at the Bank for International Settlements (BIS), which led to the creation of the London Gold Pool.

By November 1961, eight central banks agreed to create the London Gold Pool, a mechanism for jointly managing gold sales and purchases in the London market.

The United States provided the largest share of gold reserves to the pool, contributing 50% ($135 million worth of gold).

The total fund began at $270 million in gold and expanded to $2.57 billion by 1968, demonstrating the significant growth of the pool over time.

The Bank of England was assigned the role of administrator, managing interventions on behalf of the participating central banks.

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The London Gold Pool's function was to maintain price stability by buying and selling gold in the London market.

Initially, the operations were conducted in secrecy, but in 1962, the scheme was leaked to the media, revealing that central banks were actively intervening in the gold market.

The pool operated by selling gold into the market to prevent speculative price increases when demand surged. Losses and gains were shared proportionally among the participating central banks.

To maintain the gold price at $35 per ounce, the London Gold Pool sold gold reserves into the market. This strategy relied on preventing investors from fleeing to gold as a haven.

The pool's strategy ultimately failed, and it collapsed in 1968 after France withdrew from the pool, refusing to deplete its reserves to prop up the system.

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The Gold Pool played a crucial role in maintaining the gold price at $35 per ounce during the Cuban Missile Crisis in 1962.

To prevent gold prices from rising due to speculative pressures, the Gold Pool released large amounts of gold into the market. This move effectively discouraged further speculation and kept the price anchored at $35 per ounce.

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The Bank of England was responsible for executing trades on behalf of the pool members, ensuring that gold supply and demand remained balanced. This secretive operation aimed to reinforce confidence in the Bretton Woods system.

By preventing speculative attacks on the US dollar, the Gold Pool helped maintain the stability of the financial system.

The London Gold Pool was a complex system that involved buying and selling gold to maintain a fixed price.

Central banks shared the financial burden of interventions based on their original contributions, with the US bearing the largest share of losses.

The US contributed 50% of the Pool's gold, making it the largest stakeholder.

France withdrew from the arrangement in 1967 due to unsustainable losses.

The UK sold a large volume of gold during the London Gold Pool, 1180 tonnes in seven years, which is more than its annual quota.

This suggests the UK contributed more to the Gold Pool than it should have or was selling gold independently.

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The London Gold Pool faced mounting challenges by the mid-1960s, with France, under President Charles de Gaulle, being particularly skeptical of US monetary policy.

France began redeeming its dollar reserves for gold, exacerbating the strain on US reserves, and in 1967, France officially withdrew from the Gold Pool, further weakening its effectiveness.

Economic pressures added to the instability, with the United States facing growing fiscal deficits, inflation, and geopolitical risks, including the Vietnam War.

Speculation that the US might devalue the dollar intensified, driving demand for gold higher, and the Gold Pool's reserves continued to dwindle, making it increasingly difficult to defend the $35 per ounce price.

By 1965, the pool was increasingly unable to balance the outflow of gold reserves with buybacks, and excessive inflation of the US money supply led to the US no longer being able to redeem foreign-held dollars into gold.

The 1967 devaluation of the British currency, followed by another run on gold and an attack on the pound sterling, was one of the final triggers for the collapse of the pooling arrangements.

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By early 1968, the strain had reached a breaking point, with gold purchases spiking to $400 million in a single day, overwhelming the Pool's ability to intervene.

The US and UK temporarily shut down the London gold market for two weeks to prevent a complete depletion of reserves.

The collapse of the London Gold Pool was a major event, with the international financial system moving toward a crisis more dangerous than any since 1931.

The events of the weekend led the Congress of the United States to repeal the requirement for a gold reserve to back the US currency as of Monday, March 18, 1968.

The London gold market stayed closed for two weeks, while markets in other countries continued trading with increasing gold prices.

These events brought the London Gold Pool to an end, and the collapse marked a significant shift in the global monetary system.

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The price of gold was a crucial aspect of the London Gold Pool. The price of one troy ounce of gold was pegged to US$35.

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This agreement was part of the Bretton Woods system, where the US dollar was recognized as the world's reserve currency. The price of gold was fixed, but adjustments were allowed when necessary.

In 1960, a surge in price led to a surge in panic buying of gold, pushing the price over US$40 per oz. This resulted in agreements between the US Federal Reserve and the Bank of England to stabilize the price.

Eight nations agreed to regulate the price of gold and defend the $35/oz price through targeted selling and buying of gold on the world markets.

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The London Gold Pool was a cartel of eight powerful central banks that tried to control the price of gold, but it ultimately collapsed due to the difficulty of manipulating market forces.

The cartel was formed under the Bretton Woods system, where gold was still used as a form of money, and central banks had to assure the convertibility of the US dollar into gold.

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The London Gold Pool operated from 1961 to 1968, and during that time, the price of gold was artificially kept at $35.

Despite the cartel's efforts, market prices often diverged from the artificially set price, and the cartel ultimately bore huge costs to suppress the price of gold.

The London Gold Pool collapsed in 1968, and the gold window was opened, allowing the price of gold to rise to its true market value.

The price of gold rose significantly after the London Gold Pool collapsed, as seen in the chart below.

The experience of the London Gold Pool shows that even a group of powerful central banks cannot overcome market forces and control the price of gold.

The gold market has become much larger and more liquid since the London Gold Pool collapsed, which some investors believe makes it easier to manipulate the price of gold today.