Ctd... Modern Monetary Theory is that we should create money to promote actual economic growth and rising living standards, not simply create money in a way that makes money for the financial sector and the billionaires.

All of this political argument lies behind the restructuring of monetary policy that we're going to be seeing in the next few years, triggered by this gold meltdown.

BEN NORTON: Very well said, Michael. There's so much we could respond to, but I want to go back a little bit to talking about the gold market.

Something that you were emphasizing is how different the gold market is from other markets. You were talking about how, you know, the actual economy works very differently from what is taught in textbooks.

You emphasized that the gold market in particular is different from other commodity markets. So can you talk more about that?

MICHAEL HUDSON: So, the important key to understanding just how all of this was accomplished is to see how complex the world's financial commodity exchanges where gold prices are set are, and what's their relationship to actual commodity dealers, which is where individuals go to buy gold.

Central banks can buy gold from each other. Investment funds, hedge funds, individuals, jewelry makers, etc. buy gold from bullion dealers.

Well, there's a general impression that when people, or central banks, or mutual funds, buy gold, they place bids in a market, something like the Commodity Exchange, COMEX.

But that's not really where people buy and sell gold.

In a commodity exchange, this is really a gambling venue. You bet on whether the price of a stock or a bond, or gold, or a commodity — copper, or wheat, or any other commodity — is going to go up and down.

So a commodity exchange is [where you go to] bet on where prices are going to go.

These dealers who are buying and selling options for grain prices — and where is the stock market, or the S&P 500 going to go — they're not actually going to buy wheat, or gold, or the stocks; they're putting a bet on which way prices are going to go.

That bet is supposed to reflect what’s happening in the real world. There’s supposed to be some physical, tangible basis for all of this.

So I want to take a minute to explain. [The asset manager] Vanguard has a site that talks about puts and calls, and selling short, and options, and that has a vocabulary all its own.

I'm going to quote what Vanguard says:

When you buy a call option, you're buying the right to purchase a specific security at a locked-in price (the "strike price") sometime in the future [at a given date].

If the price of that security rises, you can make a profit by buying it at the agreed price and reselling it on the open market [in the exchange] at the higher market price.

When you buy a put option, you're buying the right to sell someone a specific security at a locked-in strike price sometime in the future.

So suppose, the price of gold is at $1,250. You can say, “Well, I'm going to sell it to you at only $1,200”. Well, if the price falls, you can actually make a profit by buying it on the open market at the lower price, and then exercising your put option at the higher price. That sounds complicated.

BEN NORTON: Just to simplify for people — you had a good description — the very simple explanation is, if you buy a call, it's because you think the price will go up; if you buy a put, it's because you think the price will go down. So, call up, put down.

As you said, these are essentially financial bets. This is options trading.

MICHAEL HUDSON: Well, the question is, during the 2010s, why, when everybody was saying, “This trend can't go on; the price of gold has got to go up”, why would somebody come in and keep selling gold at a lower price forward, saying, “In three months, we're going to sell you gold at $50 an ounce less, or $25 an ounce less”. Who was doing this?

I don't know any private investor that would have come and done that, because they said, “Well, we think the price is going to go up, instead of going down; that's the long-term trend of gold”.

Well, the explanation is this selling of gold forward was done by central banks, mainly by the US Federal Reserve and Treasury, acting on behalf of the Treasury, or the Bank of England.

When you buy a put or a call, you have to pay money for the options. And there used to be, you would look in the newspapers, and here's how much it cost to buy an option for treasury bonds, a price for stocks, or for gold.

When you sell the right to buy gold at, let's say the same price, or a dollar or two less, then people will pay you for that option to buy it at the same price in three months, or six months. That's a source of revenue.

So the US Treasury, and the Bank of England, were actually making money selling gold short. And when you keep promising, you have so much money, and you’re such a large participant in the market, you're sort of like George Soros when he broke the Bank of England. You can make the market by being so large.

When you come in and you keep selling gold short, way beyond the demand, you're overwhelming the market, and that holds the price down.

Even though more and more people may be buying gold, the United States and England are making money by essentially engaging in this market manipulation as a source of revenue.

That is one of the factors that was holding down [the price of gold].

Well, central banks also have, in fact, been selling gold short for many decades now. And they've been making money by it.

As I said, to buy this option, to buy gold at a fairly low price when you think, “Well, certainly the market is going to go up for gold; the price must be going up for gold, because everybody is buying it. I'm going to buy this option”.

And it just didn't work. A lot of people, pessimists, tried to do this, and they were overwhelmed by the central banks’ selling.

Most options are not exercised, because central banks keep selling forward again, and again, and again. That is what held down the price of gold for many decades. It kept the price from rising, because future buyers can always buy the other end of a short sale, at a lower price.

The supply and demand wasn't just in the private market; it wasn't just among central banks; it was a manipulated market.

So it seems that this gold drain, to satisfy the recent thousand dollar an ounce price rise that we've seen, has seriously depleted gold reserves. The Treasury has actually had to sell them.

This is another aspect of the market. That’s the gold dealers.

Suppose there were not a commodity exchange, to set the prices for contracts.

Well, the demand for physical gold has been running ahead of its supply. So, central banks have been leasing the gold to gold dealers.

In other words, the central banks have felt, you could call it hubris. They said, “Well, we're always going to be able to keep the price of gold down”. So gold dealers are buying gold, and selling it to their customers, who expect prices to go up.

So the gold dealers will say, “Lease us a ton of gold, at this price. We will pay you to lease it so that we can send it to customers”.

If the price doesn't go up, you know, at a certain point, the customers will say, “OK, I didn't make the profits in gold that I made in the stock market, or in the bond market”.

Remember, after the Obama bank crisis in 2008-2009, the whole quantitative easing came in, and interest rates were so low that it spurred an enormous stock market boom, and the biggest bond market boom in history.

Why would people want to buy gold after 2009, when gold prices are going up gradually, but stock prices and bond prices were going up so much more?

So the rival to gold was this artificial boom created by quantitative easing and, low interest rates. So that's part of the equation.

Central banks were happy to lease the gold to gold dealers. They made money from this leasing, just like you'd lease a car. You would give them the gold; they would have to give it back at a specified date.

You say, “OK, we’ll lend you this gold for a year, and at the end of the year, you'll have to give it back, but you can hold it, and do what you want at that time”.

Well, the gold dealers would then turn around and sell to the private investors — maybe to central banks, too — the gold that they'd leased. At the end of the year, they would say, “We'll take out another lease, and we'll lease now for two tons”; then later, you know, for three tons.

So the central banks would keep leasing out the gold, ton after ton, to the gold dealers.

Well, that meant that the US would send gold, physically, from Fort Knox to the gold dealers — largely in London, which was sort of the gold trading center.

Just like the gold market after World War Two, when the United States held down the price of gold in the market. That was in the London gold exchange, that they were holding it all in.

So, the US and England kept leasing gold, making money that way from the dealers, and selling gold short, and making money off the purchase of the commissions. And that became a good source of financing.

If you do the accounting, Fort Knox would have a claim for payment on the gold dealers for leasing this gold. And, that was a way for Fort Knox and the Treasury to make money.

But their aim wasn't simply to make money; it was to keep down the price of gold, so that gold would not reemerge as a rival to the US dollar.

That's what drove, this whole system. And that was the motivation for the United States. It was political.

BEN NORTON: Michael, by the way, just, for people who don't know, Fort Knox is the Department of the Treasury's gold holdings. It's the physical location.

It's officially called the US Bullion Depository. It's where the Treasury has its physical gold reserves.

MICHAEL HUDSON: Yes, but most people think of that as Fort Knox. If you saw the movie Goldfinger, you know where it is.

BEN NORTON: By the way, for younger viewers, when you say Goldfinger, you're referring to a classic James Bond movie from the 1960s.

MICHAEL HUDSON: It's a very good movie, too. You can watch it again, and it’s always fresh. Sean Connery was still the James Bond back then.

So the question is, how do we know how much US gold has been actually sent to foreign dealers? There are no statistics on this.

There are not even any statistics for how much gold is actually in Fort Knox.

The United States reports its gold supply, but the gold supply treats all the gold that has been leased to foreign dealers as part of the gold supply, because it is our gold supply. But we're not holding it. We've leased it out!

It’s just like, if you're an auto company, like Hertz or Avis, and you lease the car, the car is your car; it's not the renter's car. Well, the gold is still yours; it doesn't belong to the gold dealers who have leased it from you.

So, Roberts, a friend of mine who was the former assistant secretary of the Treasury for monetary affairs under Ronald Reagan, back in 1981 and 1982, wrote me recently to say, I'll quote, “Before we learned to suppress the gold price with naked shorts” — that is selling gold short when you don't have it — “we leased the gold to bullion dealers who sold the gold”.

The state of this leasing seems to have accelerated steadily. There are no statistics. And, “Representative Ron Paul, years ago, could never get a gold audit of Ft. Knox. He wasn’t even be allowed inside to see if there was any gold there”

Ron Paul, who's a libertarian, the [former] leader of the libertarian group in Congress, “made a fuss, but was told that this was a matter of national security”.

So imagine, even a congressman cannot find out how much gold physically is there. Why would it be a matter of national security, if there is no problem?

Why isn't the US glad to say, “Here's how much gold we have. You know, we're perfectly solvent. We have it all. No problem”.

They're not letting any statistics out at all.

So the Treasury has worked in two ways, as I've said, to keep the price down: leasing gold, for many years; and then manipulating it in price, to keep it low via the gold exchange standard.

The question is, the gold dealers, what have they done with this gold that they've leased?

Well, when I was studying the history of money and banking, 60 years ago, the principle of fractional-reserve banking was the first thing that the professors talked about and explained.

That means that, if you go to a bank, and you have a deposit there, the bank doesn't just hold all your money. It realizes that not all of the bank depositors are going to want all their money at the same time, unless there's a run on the bank.

So the banks take your money, and they have to keep, let's say, one-seventh of the money they keep liquid, you know, for just the turnover, for normal demand by people who actually want to write checks on their accounts and spend the money.

But basically, they make their money by lending out most of the money you put into banks, and mortgages, or to stock dealers and bond dealers, they lend it out, and only keep some of their money on reserve.

Banks have specific reserve requirements, and now it’s capital backing requirements that they have. They're regulated, for how much money they have to keep liquid, on hand.

But back in the 16th and 17th centuries, before there was modern banking, gold dealers played the role.

If you were a well-to-do person, the money that you had was gold and silver coinage. You didn't really have paper currency coming in until the 17th century, and especially after the Bank of England was created in 1694. People used, their transactions were in coinage and gold.

So if you were wealthy enough, and you had extra coinage, you would keep it with a bullion dealer, because you didn't want to keep it at home, because you could be robbed, or there could be a fire, and the gold would all melt. And the gold dealers would charge you for safekeeping your gold.

But they realized that, as more and more people sold gold, they didn't have to keep all this gold in their own vaults.

They could take this coinage and they could buy bonds that were yielding a good amount of money, or they could buy real estate. They could buy whatever they wanted. They only had to keep some of this gold in their hands as reserves.

Needless to say, when there was a financial crisis, or when there was a war, you had these depositors come and say, “OK, we want our gold. There's instability. We want to keep the gold at home now”.

And the gold dealers would have said, “Well, we've bought bonds with them. We have lent out the money to traders, to make money on import and export trade. The money is safely invested, but we don't have the physical gold to pay you”.

There would be a crisis, and gold dealers would go under, if they really didn't have enough money to pay their depositors, just as banks would go under when there was a run on the bank.

So some gold dealers over lent, and some prudent dealers experienced risks, because there was always some crisis that comes up at some point, for reasons that usually can't be anticipated.

That's why you have regulated reserves. But, back in the time of gold dealers, there wasn't any regulatory agency to make sure that they didn't just lend out all the money, and make money by not only collecting money from the depositors for holding their gold safe, but making money for lending out the gold, and investments, which came to a crisis at the end.

Well, this kind of behavior, leveraging your reserves in order to make money, poses an obvious problem. I guess you can think of what it is.

How long has Fort Knox, and the Bank of England, and perhaps other banks, been leasing their gold? And how near are they to running out of it? What if there's no gold left in their vaults at all?

Imagine Goldfinger trying to rob Fort Knox, as they did in the movie, and discovering that it turns out that its vaults are empty, and there's nothing to steal!

Are gold dealers in a similar position to Fort Knox, having gold claims for payment for gold that is leased from the United States, but they’re not able to give it back?

The United States, will say, “We want our gold back now”. And the dealers have said, “Well, in the past, when you said you wanted it back, we just paid you a little bit more to lease it, and a little bit more to lease it. How much do we have to pay you this time to lease it?”

Well, the United States can't say, “We want all our gold back, because people are questioning whether America really has control of this gold stock”.

You know, it's like an Avis car getting into an auto wreck, and, all of a sudden, Avis is writing on its balance sheet, “Well, we have so many cars, and it turns out that some of them are broken down, or some of them are crashed, or some of them are missing”.

This is the kind of situation we have now. And Avis has auditors; and gold dealers and mutual funds have auditors; and probably the Treasury has auditors, but it's all secret. So nobody can see it.

So everybody is operating in the dark right now. They would like to operate in the light by saying, “Look, what is the real situation? Who has the gold? Who owes the gold? What's the supply and demand?”

If you factor in all of this leasing, all of these short sales, you know, what's the actual physical demand for gold? Where is all this gold that has been leased out or sold forward coming from? Where is it going?

Well, we may be near to see the whole charade being exposed. That point is going to come when enough investors actually want to take physical delivery.

It could be Indian jewelers. India used to be called the “sink of gold”, because, while most of the West and China operated on the silver standard; India always focused on gold. So it has been a major private sector purchaser of gold.

A lot of gold of held in gold dealers, or Singapore is a place, a country that provides safekeeping for people who want to hold gold there. So you'll have a claim on a Singapore bank or dealer, or on a Swiss bank that holds gold.

And you assume that it really has the gold, and isn't operating just on a fractional-reserve basis.

So, last week, a former [US] military officer Douglas Macgregor was interviewed by Judge Napolitano, and he cited Alex Kreiner telling him that there are suspicions that the Bank of England may not have the gold that they're supposed to have.

The US Treasury has suggested they’ll send treasuries through London to provide the British banks with a backup, so that they can say, “OK, we won't give you the gold, but we'll give you the money for the gold. Isn't that the same thing?” Well, of course it's not the same thing.

He thinks that US investors are among the recipients of the gold that has been leased out.

Suppose the United States Treasury and Bank of England have leased gold to gold dealers. The gold dealers are supposed to be holding the gold.

It becomes a pyramid scheme, basically. And this can't be solved simply by paying money for the price that you had, because people want the gold. That's why the price has been going up so much.

The leasing would have kept working if the United States and its British satellite had enough gold to keep selling it short and leasing it out.

But if more and more buyers buy the right to get gold on COMEX futures, then the Treasury can simply pay them the price gain that they bet on. The problem can be solved simply by printing more money, which the [Fed] can create ad infinitum.

But once you lease gold, that poses a more concrete and immediate problem. At some point, people are going to want to take physical possession of the gold. That's what's occurring. It's a run on the gold market — not a run on the bank, but a run on the gold market.

Most individual investors haven't wanted to hold gold until right now, but now they're getting antsy.

So what's going to happen? And how is all of this sort of pyramid scheme going to end?

Well, the preferred solution for the United States and the British government would be to simply pay their way out of the present quandary.

But investors who bought receipts for holding gold want to have some security that the gold is really there. And for the first time, they're not really trusting the dollar or the pound sterling anymore.

That's why, for so many thousands of years, people have wanted to hold gold bullion, because it's tangible, and you know how much you have.

One solution would be for central banks to try and replace tangible monetary investments by just saying, “Well, we're going demonetize gold. We don't need gold anymore. We demonetized it in 1971. We kept it on the books. But now we don't need gold. We’re an electronic, artificial intelligence system now. So we're going to just adopt a blockchain accounting system, and forget gold; it doesn't count anymore. Poof! We're going to pay you the money that you paid to get your gold, and isn't money as good as gold? Isn't the paper credit that we're creating on our computers, the computer electronic credit, isn't that as good as gold?”

That's the ideal for a fictitious financial universe based on claims and liabilities that have lost all connection to physical reality. That's one kind of future that would solve the problem.

Otherwise, how can the US and Britain cover up the problem and avoid liability?

The old rhyme said there's a problem selling a commodity short when you actually don't have the commodity: “He who sells what isn't his'n, must buy it back or go to prison”.

That's what people always warned short sellers. Be very careful if you sell the right for somebody to demand this commodity from you, you know, when the period is up, and you say, “Well, I'm sorry, we just speculated that the price would go down, but we really don't have the gold, or the wheat, or the copper, to sell you”. Then that's fraud, and you're sent to prison.

So, what's going to happen if a whole government does it?

Well, remember what President Nixon said: “When the president does it, it's not a crime”.

Today, they’ll say, “Well, it’s not a crime that we can’t give you the gold that you thought you bought. We’ve given you the money for the gold; we’ve made you whole. Isn't that enough?” Because we've changed the whole nature of the system.

So, they need a new Goldfinger to blame for the empty vaults at Fort Knox. But how are they going to find this? Well, Goldfinger really couldn't have done all of what he did so simply in the movie.

But maybe somebody can just atom bomb Fort Knox, and then you'll blame whoever is America's enemy of the week. They can say, “Oh, Hamas blew up Fort Knox with the atom bomb that Iran gave them. We're going to attack Iran. And it's really too bad that they've done this, but there's no more gold. So that's a national emergency. You're just going to have electronic dollars now”. Maybe there will be something science fiction, like that.

Well, the West wants to demonetize gold so that the problem — poof! — goes away by collective agreement.

The problem is going to be to convince the Europeans and others to take it on the chin and say, “OK, we're going to demonetize all of our gold. You know, we’ll hold it, but we'll agree, in the future, that the United States can continue to wage the new cold war, and spend dollars into the economy, and we're not going to buy more gold, unless we pay $4000, $5000, $6000 an ounce for it. But, we're going to continue to let the US dollar be the basis of our own monetary and financial system”.

Well, is Europe really going to do that? Certainly, China, Russia, most of Asia, and the Global South are not going to do that.

That's what makes this gold price so political. This idea of where did the gold go is the key to how the world's monetary system [works], and it controls where world geopolitics is going to be going for the next few years.

BEN NORTON: Very well said, Michael. I think you raised all of the important points that you had wanted to raise. Was there anything else?

MICHAEL HUDSON: Well, I know that it sort of seems boring to people to go through the mechanics of the COMEX exchange, and the bullion dealers — these technicalities and how the system works doesn't seem very exciting, but it turns out the Devil is in the details.

Once you understand how the system works, you see where the vulnerabilities lie, and where the instability lies — or, as we like to say, internal contradictions.