Last December the European Central Bank announced its new long-term refinancing operation (LTRO) that would, supposedly, prevent Southern European governments from defaulting on their debt. LTRO will constitute back-door quantitative easing, as big banks borrow from the ECB at negligible interest rates, buy the bonds of insolvent governments that the ECB is prohibited from buying, collect a handsome spread, and keep coming back to repeat the maneuver while the euro-zone figures out how to monetize those bonds permanently.
The gold carry trade of the 1980s and ’90s, apparently invented by Robert Rubin while he was at Goldman Sachs, before he became U.S. treasury secretary, was the same sort of mechanism to support government bonds and enrich financial institutions — borrow gold from central banks at negligible rates, sell it, use the proceeds to buy government bonds, and collect a big spread risk-free as long as central banks kept dishoarding enough gold to prevent the price from rising and as long as they were ready to write off borrowed gold in cash settlement of leases.
That the gold carry trade devastated gold – and commodity – producing developing countries was no deterrent; indeed, this devastation, the suppression of commodity prices, was another objective.
An enlightening essay on the topic is headlined “How Gold, Silver, and Platinum Will Respond to ECB’s Money Printing” and it’s posted at Seeking Alpha here: