Gold has recently corrected down below $900 per ounce. We are hearing more and more people saying that the economy is recovering, and that the "safety trade" into gold and cash should give way to the new "safety trade" back into the stock markets. I disagree very strongly with that sort of propaganda, but it is pervasive in the media. I also happen to think that much of gold's recent weakness has been artificially arranged through market manipulation. Therefore, I think that the time is right for an updated look at whether or not the gold market is manipulated, by whom, and why.
Manipulating markets is a crime. Whenever one is investigating a crime, it is necessary to identify the perpetrator or perpetrators. However, very few crimes make much sense unless one can also find a motive for the crime. When reporter Bob Woodward was investigating the Watergate scandal, his secret informant, "Deep Throat," told him that if he wanted to solve the case, "Just follow the money." That injunction is certainly true when one is trying to determine the identities and motives of those who might be manipulating the gold market.
As a starting point, let us look at the nature of money. In an earlier issue of this newsletter, I wrote about the fact that gold has always been a form of money. Indeed, throughout history, whenever the markets have been left to their own devices, gold, silver, and (to a lesser extent) copper, have been the substances chosen to serve as money. In order to know why, one must look at the characteristics required of money. Once we have identified the reasons why gold is money, we can begin to look for those who might be suspects in our investigation.
The characteristics required of money are: durability, divisibility, convenience, consistency, and intrinsic value. What do these things mean? The best form of money will be something which, unlike wheat or corn, does not decay. It must not rust like iron. Money must also be divisible into uniform smaller units. One cannot do this with a rare painting or a diamond. Money must be consistent and uniform. Wheat, real estate, diamonds, and rare art are not uniform. Indeed, they can vary quite significantly in quality. Finally, money must have intrinsic value and uses.
When one considers all of the characteristics needed in money, it becomes clear that only something like a metal can fulfill ALL of the functions needed. Metals are divisible, consistent, and most have intrinsic value. However, not all metals will suffice. Lead is too heavy, so it is not convenient. Iron rusts, so its durability is in question. After centuries of trial and error, human beings selected gold and, to a lesser extent, silver and copper, as the primary forms of money. No government ever had to pass a law mandating that gold or silver be used as legal tender. Gold and silver were selected because they fulfilled ALL of the requirements of money.
Who would hate gold? Why? The answers to these questions are very simple, yet seemingly difficult for most modern "educated" people to comprehend. Gold is a form of money. Gold is a form of money which cannot be created by using a printing press, nor can it be digitally created. Gold can only be obtained by mining, a costly and arduous process. This is why, for at least two thousand years, governments have been locked in mortal combat with gold. They hate it because it stands in the way of government's inevitable quest for total control over its citizens. When gold serves as the basis for a nation's currency, then it is impossible for a government to create infinite social programs or to engage in the confiscation of the wealth of some of its citizens for the supposed benefit of others. It is also impossible to engage in open-ended wars. Inflation is not a problem in a nation which utilizes the gold standard.
Until the advent of "Helicopter Ben" Bernanke as Fed Chairman, perhaps the greatest fiat currency inflationist in world history was Alan Greenspan. His response to every financial crisis was to "print more money" by lowering interest rates and thus expanding the money supply. He did it in response to the 1987 stock market crash. He did it and caused the dotcom bubble of the late 1990s, and he did it after 9/11, thus igniting the now-deflated real estate bubble of this decade. Therefore, it is supremely ironic that this same inflationist wrote the following words back in 1966, a time when he was considered to be in Ayn Rand's inner circle:
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.....The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
Alan Greenspan, "Gold and Economic Freedom" (1966).
Another person who fully understands why governments hate gold is Larry Summers, now best-known as Barack Obama's chief economic advisor. Here is an excerpt of an article which I wrote in the October, 2008, issue of this newsletter. It summarizes Mr. Summers' role as one of the architects of the gold suppression scheme which began during the 1990s and continues to this day:
" In 1988, two young economists wrote a paper entitled, "Gibson's Paradox and the Gold Standard." One of the economists was Lawrence Summers, better known as the man who succeeded Robert Rubin as Secretary of the Treasury during the Clinton administration. The paper is a very "dry," academically-oriented one. However, the main idea proposed in it is this: Higher real interest rates mean lower gold prices, and vice versa.
Here is what Mr. Summers and his co-author, Robert Barsky concluded: "The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term real interest rates are indeed associated with movements in the relative price of gold in the opposite direction and that this effect is a dominant feature of gold price fluctuations." In summary, gold prices and REAL INTEREST RATES move in opposite directions in a free market.
As a practical matter, what does this mean? It's simple, yet complicated. As I have stated many times, gold is money, no matter what Keynesian economists might say. Gold is the proverbial canary in the coal mine. It tells us when something is rotten in the world of fiat currency. In a free market, if gold prices are rising, it tells us that REAL INTEREST RATES are too low. However, if interest rates rise, bond prices will fall. There will be less of an incentive for stock market investment because real interest rates will be yielding better returns for investors.
Clearly, the perfect world for a central banker would be one in which the stock market is flourishing. However, the BIGGEST market is the bond market, so it is the most important market for the central bankers. Keep interest rates low, and all your owners (JP Morgan Chase, Goldman Sachs, and the other banks) can make BILLIONS! The real estate market will go ballistic. Indeed, you have the best scenario, except for one thing: In a free (i.e.,UNMANIPULATED) market, the gold price moves inversely to real interest rates. If you keep interest rates artificially low, gold will go up in price. When gold goes up in price, the dollar is worth LESS relative to gold. The dollar is thus revealed as a shabby, counterfeit piece of Crane Company stationery with ink on it.
Long-time gold market expert Reginald Howe has proven beyond ANY DOUBT that, in 1995, real long-term interest rates and gold prices "began a period of sharp and increasing divergence..." When Mr. Howe wrote those words in 2001, real interest rates had declined from 4% to about 2%. Under Gibson's Paradox, and according to Summers and Barsky, when real interest rates declined, the price of gold (in dollars) should have gone up. Instead, Reg Howe pointed out that the gold price had fallen from about $400 per ounce to around $270 per ounce. When he wrote his article, Howe calculated that, had the markets been left to operate freely, then gold should have been priced at about $500 per ounce. However, the opposite had happened. Instead of rising in price as real interest rates fell, gold had also fallen. Why?
Do you remember the "Strong Dollar Policy," as enunciated by President Clinton's Treasury Secretary, Robert Rubin (and his successor, Mr. Summers)? It turns out that this was nothing more than a scheme by which to have the best of all possible worlds: Stock market? UP! Interest rates? DOWN! Bond prices? UP! Dollar? UP! Gold? DOWN!"
Isn't it nice to know that one of the authors of "Gibson's Paradox and the Gold Standard" is now the nation's top "economic advisor?"
I believe that we have identified government as a prime suspect for being involved in the crime of rigging the gold market. Government certainly has the strongest motive! Our job is now to see whether or not one can build a case which will hold up under cross-examination. I do not normally talk very much about myself in this newsletter. However, since we are investigating a crime, I think that readers might find my methodology a bit more credible if they were aware that I have been actively practicing law for 31 years. Early in my career, I spent 12 years as a prosecuting attorney. During that time, I tried more than 100 criminal jury trials, including 26 murder trials. I was also involved in actually investigating and solving many crimes. I know a little bit about evidence.
Is there any evidence that the U.S. government has tried to rig the gold market? What about other governments and non-governmental entities? The Gold Anti-Trust Action Committee (GATA) has assembled a huge body of evidence as to the identities and motives of those involved in the rigging of the gold markets. Many of the things I am going to write about in this article are the direct result of more than ten years of investigating by members of GATA, including its founders, Bill Murphy and Chris Powell. I have never met them, but I consider them to be patriots and fighters for individual freedom.
Back to the evidence: On January 31, 1995, the FOMC met. At that meeting, the Fed's general counsel, J. Virgil Mattingly, was tape recorded stating that the Treasury Department's Exchange Stabilization Fund "...operations are authorized. I don't think there is a legal problem in terms of the authority. The statute is very broadly worded...it has covered things like the gold swaps..."
What is a gold swap? For this, we look to the definition published by the Organization for Economic Cooperation and Development (OECD): "Gold swaps are forms of repurchase agreements commonly undertaken between central banks or between a central bank and other types of financial institutions. They occur when gold is exchanged for foreign exchange, at a specified price with a commitment to repurchase the gold at a fixed price on a specified future date so that the original party remains exposed to the gold market. Its features are, therefore, very similar to those of a repo." I have italicized some very key words in the definition. Please keep them in mind.
On July 24, 1998, Alan Greenspan testified before the House Committee on Banking and Financial Services. In pertinent part, he testified as follows: "...private counterparties [cannot] restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise." Please think about the words you have just read. Mr. Greenspan ADMITTED that central banks will lease gold into the market if the price of gold rises! That is a confession!
In 2003, the Reserve Bank of Australia stated in its annual report that "Foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market. In investing these assets, priority is therefore given to liquidity and security, in order to ensure that the assets are always available for their intended policy purposes." If that isn't a confession, what is it?!
In June, 2005, William R. White, of the Bank For International Settlements (known as the "central bank of all central banks") gave a speech. In that speech he stated that central banks collaborate "...to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." That sounds like a confession as well!
Within the past year, more evidence has emerged. A researcher named Elaine Supkis discovered a "Confidential" memorandum in the papers of William McChesney Martin, the Fed Chairman from 1951 to 1970. The memorandum was written in 1961, apparently by a Fed staffer who was very familiar with the operations of the Fed and the Treasury Department. In 1961, the U.S. dollar was still backed by gold, at least with regard to other countries. While it was not permitted at that time for U.S. citizens to own gold bullion, other nations could exchange their paper dollars for gold bullion.
At the time the memorandum was written, the United States had begun to inflate its money supply, thus triggering an exodus of gold from its reserves. Under the gold standard, when a nation irresponsibly inflates its currency, its gold reserves tend to drop as other parties choose to exchange their ever-less-valuable currency holdings for something of enduring value (i.e., gold). Although the memorandum is not easy reading, it basically asserted the proposition that the Fed and the Treasury Department should secretly intervene into the currency markets: "...[F]oreign exchange dealings by the United States monetary authorities, when judiciously applied, can serve to reduce capital flows, to dampen speculation, to minimize potential reserve effects, and hence, to minimize the impact on the United States gold stock."
The memo also proposed the following: "It is of fundamental importance that foreign exchange transactions generally be subject to public analysis only with some delay. It is, therefore, necessary that published statements and data be appropriately devised." The memo also recommended that the Fed "...avoid or delay publications of the details of our foreign exchange operations." Translation? You stupid people won't know what we have done until long after we have done it. Even then, if we deign to reveal the fact that we have actively intervened into the markets to manipulate currencies, we are only going to release carefully crafted statements filled with "weasel words" which you won't understand.
There is a lot more to the memorandum than I have mentioned here. The memorandum even mentions gold sales. It implies that the Fed should conceal its operations, even from Congressional oversight. The main significance of the memorandum is this: as long ago as 1961, when the United States had begun its journey away from the gold standard toward irredeemable fiat currency, our monetary central planners were already advocating secret interventions into the currency markets. GOLD IS MONEY. Because it is honest money and governments cannot inflate it, it competes with all other currencies. This fact, above all, explains why central banks and governments would want to secretly intervene into the markets to attack the gold price. Do you honestly think that they would tell you what they were going to do in advance?
Central banks have a number of strategies which they can employ in trying to depress the gold price. The first, and most obvious, is for them to engage in direct gold sales. The most outrageous instance of this occurred when then Chancellor of the Exchequer Gordon Brown ordered the Bank of England to sell about 400 tonnes of Britain's gold reserves in 1999. This was done at a time when the price of gold was already at a generational low. The sale was announced in advance and this resulted in the price of gold going down by about ten percent. Gold was selling for under $300 per ounce at that time. It now sells for just under $900 per ounce. Looks as if Mr. Brown really did Great Britain a favor! His economic brilliance has been rewarded. He's now the Prime Minister!
Other governments like Switzerland have also sold significant amounts of gold into the market in order to manage the gold price. In 1999, a total of 15 central banks reached an agreement known as the Washington Agreement in order to coordinate gold sales. They agreed to enter into a "concerted programme" of gold sales, not to exceed about 400 tonnes per year. Gold sales under the Washington Agreement have continued throughout this decade. The agreement is set to expire later this year. Recent remarks made by a member of the governing council of the European Central Bank suggest that the agreement will be renewed.
Another method of trying to manipulate the gold price is by old-fashioned " jawboning." Recently, the International Monetary Fund has again made rumblings about wanting to sell 400 tonnes of its gold reserves in order to raise money to "help" under-developed countries. Long-time gold market observers are very familiar with this behavior. It seems to be an annual occurrence. It is laughable to think that selling a bunch of gold into the market would actually help underdeveloped countries. Many underdeveloped countries in Africa and South America depend upon gold mining as a means of raising money, as well as a means of providing employment. Dumping IMF gold would depress the gold price and have a harmful effect on the gold mining industry, especially in the so-called under developed countries.
In the past, the proposed IMF gold sales have never taken place, partly because the United States Congress (which has effective veto power over IMF gold sales) has never consented to the proposed sales. The main effect of public announcements about possible IMF gold sales is usually a temporary drop in the spot gold price. Like the snow, it soon melts away. As a practical matter, even if the IMF sold all of its gold, the ultimate effect would be negligible. It is likely that none of the gold would actually be sold on the open market. Instead, the gold would most probably be sold to other central banks, some of which (like those in China and India) currently wish to INCREASE their gold reserves, rather than to sell it into the market.
Gold price suppression is also done indirectly through leasing. If central banks are willing to lease gold "in increasing quantities" if the gold price rises too high for their liking, how would this be done? Here is a very simple explanation of how the gold price management scheme has worked: First, a government or central bank lends some of its gold reserves (you know, the property of its citizens?) to what is known as a bullion bank. JP Morgan Chase is an example of a bullion bank. The excuse given for leasing is that this is a way for the central bank to earn some interest on what would otherwise be an unproductive asset. However, the gold lease interest rates are usually less than 0.5%. Talk about an absurdly low interest rate for being able to borrow a nation's treasure!
After the bullion bank borrows the gold from the central bank or government, things get even stranger. The bullion banks SELL the gold into the market and pocket the cash. That's right! They are permitted to SELL property which they have "leased" from the central bank/government! Would you be allowed to sell an apartment which you had rented? Bullion banks have been allowed to do the equivalent of this. Why does this matter? Think about the law of supply and demand. If there is a lot of something for sale, then the price normally goes down. If central banks lease gold to bullion banks, and if bullion banks then sell it into the market, then this sends an artificial signal to the market that gold is in plentiful supply. This would explain why the price of gold could go down, even when worldwide mine production is in serious decline.
What happens after the bullion bank sells the leased gold? The bullion bank takes the proceeds from the sale and invests it into something which will have a higher rate of return than the cost of leasing the gold. That would be pretty easy to do if one were paying less than 0.5% interest to rent the gold. It is even easier when, as recently happened, gold lease rates actually went into NEGATIVE territory for a brief time in March, 2009. Imagine being able to "lease" gold where it cost next to nothing, or even where the government actually paid the borrower to borrow the gold! It would mean huge, virtually risk free profits for the billion banks. Central banks and governments would get what they wanted because the bullion bank sales would put a lot of gold into the market, thus seeming to create an oversupply of gold. The gold price would go down, and fiat currencies would appear to be strong.
The only thing that could throw a monkey wrench into the scheme would be if the price of gold were to go up. In theory, when one leases something, one ultimately has to give it back. A bullion bank would at some point have to go out into the market and cover its position by purchasing gold to be returned to the central bank or government from whom the gold had been leased. However, if the gold had been leased when gold cost $300 per ounce, and if the gold price had gone up to $900 per ounce, the bullion bank would be facing huge losses. This is basically what has happened. There is reason to believe that some bullion banks might be so far "underwater" with their gold leases that they will be allowed to "pay back" the central banks and governments with fiat currency rather than having to go out and buy gold to cover their positions.
Let us return to building our case. In 2002, Barrick Gold, JP Morgan Chase, and other companies, were sued for alleged manipulation of the gold markets. (Civil Action No. 02-3721, U.S. D. C., Eastern District of Louisiana). The lawsuit alleged that the bullion banks and certain gold mining companies (including Barrick) colluded to actively manipulate the price of gold. The suit alleged that the bullion banks leased the gold from central banks, and that the mining companies in turn borrowed the gold from the bullion banks. The bullion banks and the mining companies would then dump millions of ounces of tangible central bank gold into the spot market, thus depressing the price of gold.
One might wonder why a mining company would want to borrow gold, the very substance which it mines. The answer to this goes back to the period of the 1980s and 1990s, when the precious metals were mired in a secular bear market. Some gold mining companies engaged in "hedging" programs where they raised much-needed cash by borrowing gold and selling it. The idea was that the gold could be repaid to the bullion banks from future production. The danger was that the mining company was exposed to the gold market. If the price of gold were to go up, then a mining company could wind up having to pay back gold loans with gold which could otherwise have been sold for much more money on the spot market. This is what happened to Barrick and others, and it is a reason why gold "hedging" has fallen out of favor with most mining companies.
What did Barrick do when it was sued for having allegedly colluded with bullion banks and central banks to manipulate the gold price? It admitted that it was involved in hedging. Indeed, it admitted that its activities accounted for about 20% of all gold mining hedging activities at that time. However, it filed a motion asking that the suit against it be dismissed because Federal Rule of Civil Procedure 19 (b) states that if a necessary person cannot be made a party to a lawsuit, the court may determine that the action "should be dismissed, the absent person being thus regarded as indispensable."
And who were the "indispensable" persons who could not be made parties to the lawsuit against Barrick? The Federal Reserve Bank, as well as other central banks. And why? As "agents" of their governments, they enjoyed Sovereign Immunity, and they could not be sued! Barrick contended that, as a party to the borrowing of central bank gold, it was, in effect, an agent of the governments involved and should also enjoy the protection of Sovereign Immunity! Barrick ultimately settled its lawsuit out of court, and the exact terms are not available to the public.
In the law of evidence and pleading, an admission is an acknowledgment that an allegation is true. Where a party states in a pleading that an allegation is true, this is known as an admission in judicio. Barrick Gold's Motion To Dismiss was a pleading filed in Federal Court. In that pleading, Barrick Gold made an admission in judicio that it had been involved in borrowing central bank gold from bullion banks which had leased it. We have another confession.
Recent events have provided additional evidence that central banks and their bullion bank co-conspirators continue to use gold leasing and selling as a tool by which the gold price can be managed where this might be "thought useful," to use the words of William White of the BIS. I have written extensively in this newsletter about the fact that certain large bullion banks have continued to sell gold short, thus depressing the price. The biggest perpetrators are most probably JP Morgan Chase and HSBC. However, there is also evidence that the Deutsche Bank may also be a "player."
In late March, 2009, the gold price had been steadily rising. A number of big gold dealers on the COMEX had large short positions. To make matters worse, during the past few months, more and more people had actually been taking delivery of gold contracts purchased through the COMEX. When a buyer takes delivery, the seller must deliver. If the gold price has risen since the seller went short, then the short seller will suffer a loss. At the end of March, it appears that Deutsche Bank was short a significant quantity of gold which had to be delivered by March 31.
Interestingly, on March 31, the European Central Bank (ECB) announced that it had sold 35.5 tonnes, or about 1,141,351 ounces of gold. On that same day, the Deutsche Bank miraculously delivered a total of 850,000 ounces of gold to COMEX gold buyers. This amounted to 8,500 contracts' worth of gold. The ECB did not reveal the buyer of its gold, nor did the Deutsche Bank reveal where it had gotten enough gold to make its gold delivery. However, it is certainly an interesting "coincidence" that the Deutsche Bank was able to find a way to deliver about 26 tonnes of gold on the same day that the ECB announced that it had sold a huge amount of gold. It is also interesting that the gold price has dropped since the ECB sale.
The ECB/Deutsche Bank episode is what is called circumstantial evidence. A lay person might think that circumstantial evidence is of little worth. I strongly disagree. Back when I was a prosecutor, I got several murderers convicted based upon circumstantial evidence alone. Those cases were VERY STRONG CASES! In the case of gold market manipulation, we have much more: confessions, an admission in judicio, and circumstantial evidence. We can also see that central banks have motives for wanting to see the gold price supressed (propping up irredeemable fiat currencies and consolidating government power). We have also identified a motive for the bullion banks to want to see the gold price suppressed (virtually risk-free profits from borrowing gold and dumping it into the markets).
Where does all of this leave us? How long can the gold suppression scheme continue? No one knows. The most that anyone can say is that it will continue until it can't anymore. Part of the problem is that the United States' gold reserves have not been subjected to an independent audit in more than 50 years. In addition, the Federal Reserve Bank and other central banks have been deceptive as to how much gold bullion they actually have in their possession. Through the work of gold market experts Frank Veneroso, Reginald Howe, and James Turk, there is circumstantial evidence that central banks around the world may actually have only half the gold (or less) that they claim to have. If that is true, then, at some point, the jig will be up. The banks will either run out of gold or refuse to sell what they have left. As mentioned in last month's issue, some central banks are already net buyers, rather than sellers.
The evidence proves that manipulating the price of gold (and of other currencies) is an official policy which is employed by central banks. It is not a conspiracy theory. IT IS AN OFFICIAL POLICY. However, it is important to remember where we were in 2001, and how far we have come. In my opinion, the Dow Theory is one of the best methods of analyzing the movements of the stock markets. Under the Dow Theory, there are three trends: the primary trend, the secondary trend, and the daily fluctuations. Although the Dow Theory specifically applies to stock market analysis, I have come to believe that some aspects of Dow Theory can be applied to other markets. That includes the gold market.
Here is what the Dow Theory says about market manipulation: Manipulation is possible on a very short- term basis. This means that the daily fluctuations and the secondary trends can be manipulated to varying degrees. Based upon the way that gold always seems to go down when the New York market opens, a reasonable person could suspect that powerful financial players intervene on an almost daily basis to influence the gold price. Nonetheless, the primary trend can never be manipulated. In short, the primary trend is more powerful than any short-term attempts to manipulate it.
During 2001, the cumulative average of the gold price was $271.04 per ounce. Since that time, gold has traded for more than $1,000 per ounce. It currently stands at almost $900.00 per ounce as I write these words. Gold has finished higher every year this decade. The gold suppression scheme has been in full force throughout this decade. At best, central banks and their bullion bank accomplices have been able to delay gold's rise. They have been unable to stop it. The primary trend for gold remains up.
While it can be discouraging to see the gold price fluctuate, it would be a big mistake to abandon one's gold positions during a primary bull market. We are in a primary, secular bull market for gold. I expect it to continue for some time to come. If and when we finally see the Dow/Gold ratio approach 1:1, it will be time to think about moving some of our money from gold to other asset classes. For now, the manipulation may continue, but so will the primary trend. Keep the faith!