London Gold Pool

The London Gold Pool was the pooling of gold reserves worth of several hundred million U.S. dollars by a group of eight central banks in the United States and seven European countries (Germany, the United Kingdom, France, Italy, Belgium, Netherlands and Switzerland). The cartel's aim was to defend a gold price of $35 per ounce by intervention in the London gold market. The pool became an active buyer of gold when the London price fell below $35.08 an ounce and a seller at $35.20. The central banks tried to regulate the price of gold because they wanted to assure the convertibility of the greenback into gold, which was the very basis of the Bretton Woods Agreement. For the Bretton Woods system to remain effective, the free market price of gold would have to be maintained near the $35 official foreign exchange price, since when it was higher, it was tempting for other countries to buy gold at the official price and sell it in the London gold market, which exacerbated the drain on the U.S. gold reserves.

History of the London Gold Pool

Some people believe that the London Gold Pool is a proof that the gold market is manipulated. However, the history of the cartel shows that it is extremely difficult to systematically manipulate the price of gold. Although the London Gold Pool was initially controlling the price of gold, market prices often diverged from $35 and the whole cartel collapsed after just a few years, bearing huge costs to suppress the price of gold before. Thus, even a group of the world’s eight most powerful central banks could not overcome market forces and merely stabilize the price of gold (but today, with a much larger and more liquid market the price of gold is believed by some investors to be systematically lowered). As one can see in the chart below, when the London Gold Pool ended and the gold window was opened, the price of gold rose.

Chart 1: The price of gold (in $) between April 1, 1968 and April 1, 1969 (London PM Fix).

Moreover, the London Gold Pool operated under the Bretton Woods system and gold was still used (at least partially) as money. Central banks tried to control the price of gold because they had to assure the convertibility of the greenback into gold. But today, the U.S. dollar is no longer convertible into gold, so there is no need to control the gold price.

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