In the April edition of The Casey Report, Doug Casey tackles
the matter of gold price manipulation. He does this in an excellent article
comparing gold’s bull market today with the one in the 1970s, which
both he and I remember well given that we are about the same age and both
were active participants in it.
Doug writes: “The great bull market broke out in earnest on
August 15, 1971, when Nixon reneged on the US promise to redeem foreign-owned
dollars for gold at $35 an ounce.” Gold then “gradually built
momentum until reaching a final peak in 1980 over $800. It was a wonderful
time to own gold.”
I wholeheartedly agree with his assessment. He then goes on to
complete his comparison of then and now before presenting his view on gold
price manipulation, about which he remains skeptical. He concludes by asking
some questions he would like answered in order to convince him that the gold
price is manipulated. Because Doug is a friend, I have prepared this response
to him to provide my perspective on this matter.
Reproduced below in italics are excerpts from Doug’s report,
which are followed by my response in normal typeface. I recommend reading
Doug’s whole report, and indeed, subscribing to his newsletter. It is always one of my favorite reads.
US government gold
holdings reached an all-time high in 1952, at 20,663 metric tonnes, or 665
million ounces…From there, official US holdings fell consistently, to
459 million ounces in 1962 and 276 million by the end of 1971. They have
stayed about there ever since.
Or
have they? In recent years, there’s been controversy about whether that
gold is really sitting in Ft. Knox, in that there hasn’t been an
independent audit for many decades. Congressman Ron Paul has been asking for
an audit for years and can’t get one. It’s an entirely reasonable
request; it’s simply correct and proper business to ascertain the
amount and quality of assets from time to time. There are some who allege the
gold isn’t there, perhaps because it’s been sold to suppress the
market – or to prop up the banks alleged to be doing so.
I
severely discount that possibility, simply because if it’s true, it
would be, by far, the biggest and most scandalous theft in history…
It would indeed be the biggest theft. But is it any more scandalous than
the lies surrounding the Gulf of Tonkin incident or the search for weapons of
mass destruction in Iraq? My point is that governments are not
truth-machines. It took 30+ years for the true Tonkin story to emerge.
Isn’t it therefore possible that the truth about the US gold reserve
has yet to emerge?
For many years now, a
meme has been floating around that the prices of gold and silver are being
manipulated, which is to say suppressed, by various powers of darkness. This
is not an unreasonable assertion. After all, the last thing the monetary
powers-that-be want is to see is the price of gold skyrocketing. That would
serve as an alarm bell, possibly panicking people all over the world, telling
them to get out of the dollar. It’s assumed, by those who believe in
the theory, that the US Treasury is behind the suppression scheme, in
complicity with a half-dozen or so large bullion banks that regularly trade
in the metals.
Not the US Treasury, but rather, the Secretary of the Treasury. Only
he and the President have authority to operate the Exchange Stabilization
Fund (ESF), which is an important point. The Secretary of the Treasury can do
basically whatever he wants using the ESF as his vehicle, or as an article in
Slate puts it: “What's the
Exchange Stabilization Fund? A pile of cash that can be used for whatever.”
An article by
the New York Federal Reserve confirms this point of essentially unlimited
authority. Noting that the ESF was created by the Gold Reserve Act of 1934,
which itself dealt with the book ‘profits’ arising from
FDR’s gold confiscation and subsequent 69.3% devaluation of the dollar,
it states: “The Act authorized the Secretary of the Treasury, to deal
in gold, foreign exchange, securities, and instruments of credit, under the
exclusive control of the Secretary of the Treasury subject to the approval of
the President.” The key word here of course is “exclusive”,
which means outside the control of Congress or anyone else.
I recommend reading “Time to
Abolish the International Monetary Fund and the Treasury's Exchange
Stabilization Fund” by Anna Schwartz, Christopher Whalen, and Walker
Todd, which was published by the Committee for Monetary Research and
Education, Inc. in 1998.
Also, it is also generally believed that there are only four bullion
banks involved. Two are American, with one each from Germany and the UK,
which together represent the three countries involved. These banks act as an
agent for their respective governments, executing trades on their behalf. By
knowing government plans, these banks can profit from them, in a scam
normally called “front-running”, which Wikipedia defines as “the illegal
practice” of a broker executing orders “for its own account while
taking advantage of advance knowledge of pending orders from its
customers.” In short, participation in this scheme can be very
profitable for the bullion banks, even if illegal because in this case, the
government and the bullion banks have the shared interest to keep their
intervention secret.
The assertion is
bolstered by the fact that governments in general, and the US in particular,
are always intervening in all kinds of markets. They try to control the price
of wheat and corn with various USDA programs. They manifestly manipulate the
price of credit (interest rates), now keeping it as low as possible to stave
off financial collapse. And they may well be active, through the so-called
Plunge Protection Team, in propping up the stock market. They were largely
responsible for the boom in property, through numerous programs and
parastatals like Fannie Mae and Freddie Mac. Why, therefore, shouldn’t
they also be involved in the monetary metals? Central banks regularly
intervene in (i.e., manipulate) each others’ currencies. So it’s
not unreasonable to imagine they’d try to manipulate gold as well.
Well, yes. That’s exactly the point isn’t it? The
lifeblood of the State is money. It is money, not votes or popular consent
that gives the State power, particularly in our present fiat currency system.
To put it bluntly, the State needs bullets to stay in power. It cannot create
bullets out of thin air. So it has formed an unholy alliance with the banks,
to which the State grants monopolistic power to create money out of thin air
that the State then borrows to buy bullets. Government actions today –
like the 2008 bank bailout that was granted despite popular opinion
overwhelmingly against it – are aimed at preserving this relationship.
Intervention in the gold market is just one part of it.
In fact, the US and other
governments did try to suppress the gold price from 1961 to 1968 through what
was known as the London Gold Pool. The US alone persisted in trying to do so
until Nixon devalued the dollar and closed the gold window in 1971.
But
if it was ever doable, that was the time. Although nobody knows exactly how
much gold there is above ground, a reasonable guess might be six billion
ounces. There was a possibility of controlling the price, in the days of the
London Gold Pool, when there were only three billion ounces in existence and
when all the gold in the world was worth only $105 billion ($35 x 3 billion =
$105 billion).
I think there is less gold in the world today than you suspect,
probably 5 billion ounces. Regardless, the weight of gold in central bank
hands, both in relative and absolute terms, is an important point. It is a
point that was well-learned in the 1960s price suppression, which you acknowledge existed, when the US government dishoarded
over 300 million ounces in a futile attempt to keep the gold price at $35 per
ounce. The point is that there is only so much physical gold in existence. It
is therefore a valuable resource, to be used in interventions only sparingly,
if at all. In contrast, propaganda is cheap and unlimited.
This observation explains why Gordon Brown announced in advance his
intention to sell Britain’s gold reserves. Clearly, the propaganda
impact was important, and much less costly than allowing physical metal to
leave its vault, although over time the gold did go. The importance of
propaganda also explains why there were repeated calls earlier this decade
for the IMF to sell its gold, ostensibly to help the poor. Propaganda is
often wrapped in a noble cause.
Today, however, the value
of the world’s gold is around $10 trillion ($1,650 x 6 billion = $10
trillion), nearly 100 times as much. And governments own about a billion
ounces, only 16% of it, whereas the last time they tried to control the price
they owned about 1.1 billion ounces, which was about 35% of the world supply.
And the governments, their central banks and almost all large commercial
banks are bankrupt; they have vastly less financial power than they did in
the days of the London Gold Pool. Why would they try to do something
that’s so obviously a losing game?
Yes, governments have vastly less power today, but they have much
greater control of the corporate media. And you are right, it is a losing
game for the government, but what is their alternative? Go back to sound
money, as required by the Constitution, with the result that the federal
government shrinks in size to become the quaint institution it was in the
19th century that did little except operate the Post Office? Ron Paul would
like that to happen, as would his army of supporters. But in my view it is
not going to happen until the losing game now being played is finally over.
When that is going to happen, no one knows, but governments will pull out all
the stops to continue playing this losing game to keep the present system
going.
Thus, those in charge who know what is happening have one objective.
They do not want the ship-of-state to sink on their watch. So they will do
whatever they need to keep the ship afloat and preserve their power base
– like passing in recent years the various laws that are an affront to
the Bill of Rights.
The reality is that the ship-of-state hit an iceberg long ago. More
and more people are starting to realize the gravity of the situation.
I’m not at all
disinclined to believe tales of manipulation of markets by the state; I
expect it, and as a speculator I relish it. But I like to see evidence for
everything. And extraordinary claims demand extraordinary evidence.
I’ve read the stuff these guys have written for years and have seen
nothing but strident assertions and accusations. I’m completely willing
to believe central bankers are capable of any kind of nefarious foolishness,
but I’d like to see proof. I’m constantly reading assertions of how
“the boys” come along at “precisely” 1pm or 2pm or
perhaps “precisely” 11:37am or 12:16pm and, on a purely
not-for-profit basis, decide to “smack down” the market for gold
or silver or both. Meanwhile the market has been hitting new highs for a
dozen years.
Yes, it is a bull market, and no one – not even the biggest
government the world has ever seen can stop a bull market. But stopping the
bull market is not their aim. It is to keep the fiat currency game going. It
is a game where the dollar will continue to be debased, and the price of gold
will continue to rise – but in a controlled way until the game ends
with a soaring gold price.
Gold has risen 11 years
in a row, so it is clearly winning the war. The dollar is staging what I have
been calling a “managed retreat”. In other words, because of
government intervention the gold price is only allowed to rise so much each
year to more or less reflect the amount of dollar debasement in that year.
Thus the gold price is prevented from reaching – at least so far anyway
– its fair value. That means that even though the gold price has risen
nearly 7-fold since 1999, it remains undervalued.
As you might imagine, I
know most of the believers in the precious metals manipulation theories
personally and am only a phone call or email away from those I don’t
know. And I’m curious. So I ask questions of these folks, who are
generally intelligent, well informed and sophisticated. But I don’t get
answers that I find make sense. There have been readily identifiable reasons
for other government manipulations in the past. It’s obvious why a
government wants low interest rates. It’s obvious why they want high real
estate and stock markets. But why – in today’s world –
would they really want to spend billions keeping gold (or especially silver)
down?
Billions matter to you, me and to most folks. But do you really
believe that billions or even trillions matter to the people in power? They
are spending other people’s money. Remember the Grace Commission? Its report in 1984 “claimed that if its
recommendations were followed, $424 billion could be saved in three years,
rising to $1.9 trillion per year by the year 2000. Congress ignored the
commission's report”. Billions mean nothing when the present
system’s existence is at stake.
You’d think they
might have tried to control the price of uranium when it ran to $140 a few
years ago. Or perhaps the price of sugar when it ran to 28 cents last year;
everybody uses sugar.
There is no need to manipulate these markets. First of all, none of
these commodities are money, and therefore not a threat to the lifeblood of
the State. Second, there is no need to manipulate them because the government
just massages the CPI to understate the true rate of inflation. So there is
no need to waste limited resources intervening in these other commodity
markets.
Despite the fact that
gold can act as an alarm bell, few Americans – or anyone, for that
matter – among the hoi polloi care or even know the stuff exists except
as an academic matter. Suppressing the gold price is not only vastly harder
but much less important than it was during the last market.
I think most people intuitively understand that something is wrong
when the gold price rises, particularly if it rises rapidly. Look at what
happened in the 1970s. Those who understood gold,
got in early. As the gold price rose, more people started to investigate what
was happening and jumped on board. Then by the end of that decade, and the
top of that bull market, everybody was watching the gold price and jumped on
the bandwagon. The same thing is happening this time around, but because of
market intervention that has prevented any rapid rises in the gold price, it
is still the early stage of this bull market. It is not just a coincidence
that a jump in the gold price stops at 1% from the previous day’s
close. It is a statistical anomaly found only in gold, not other commodities
or other markets.
There is another important point to make about how people view gold.
What may be true in the US or the West more generally is not necessarily true
in Asia, where there exists a much wider recognition that gold is money.
Here are some questions
I’d like answered:
Q:
Why do these banks ( JPMorgan, etc.) even give a damn, in the first place,
what the price of the metals might be?
The
only reason that makes any sense is that they are acting as proxies for the
US Treasury; the Treasury doesn’t go into the markets itself. But does
it direct a commercial bank to act for it to buy or sell gold? It might. But
there’s zero proof of any sort it’s doing that.
There is proof. Let’s start with Congressional testimony by Alan Greenspan in 1998, who said: “Central banks stand ready to lease gold in increasing
quantities should the price rise.”
I want to explain this quote, but I do not use the term
“leasing”, which became the popular politically correct term in
the 1980’s with the growth of gold lending to mining companies. Because
gold was supposedly demonetized by President Nixon in 1971, to achieve proper
political correctness it had to be ‘leased’ instead of
‘loaned”.
When gold is loaned, at maturity of the promissory note the borrower
returns the weight of gold with interest paid in gold. Thus, the lender is
indifferent to the price of gold. He lends gold and gets gold principle
returned with interest paid in gold at maturity. So when Mr. Greenspan says
central banks are lending “in increasing quantities” if the price
rises, there can be no aim by central banks other than to cap the gold price.
This objective is achieved because the borrower sells the gold he borrows
from a central bank, thereby adding supply over and above new mine
production, which depresses the price. The borrower then uses the newly
acquired dollar proceeds to purchase dollar assets, earning a spread.
This practice goes back to the early 1990s when Citibank and most of
the other big US banks were insolvent, at the tail-end of the S&L crisis.
Having just bailed out the S&L’s, a bailout of the big banks by the
federal government was deemed to be politically impossible. So Greenspan
engineered a steep yield curve. Banks borrowed from every cheap source they
could in order to buy US government paper yielding 5%-6% and other even
higher yielding dollar assets. Banks could borrow gold at 0.5%, thus making a
huge spread, which helped earnings and replenished their depleted capital
base, enabling them to work through their insolvency.
This back-door bailout strategy works only if gold prices are stable
or decline, which was the case in the first half of the 1990s. If the gold
price rises greater than the amount of the spread, the banks will take a
loss. When gold broke above $400 in early 1996, a price that hadn’t
been seen in years, the banks realized they had a problem. But each
individual bank pursuing this strategy did not realize the extent of the
collective problem. The banks in the aggregate had borrowed a weight of gold
so large, they could not cover their positions without driving the gold price
much higher, forcing them to take losses on their gold liabilities. The banks
appealed to the Fed, which turned to the ESF. So the ESF stepped in to begin
what has now become a multi-year effort to keep a lid on the gold price.
For evidence that the ESF is active in the gold market, I recommend
reading two of my articles: “The Smoking Gun” and “Smoking Gun Follow-Up”. I also recommend a third article, “What Is
Happening to America's Gold?”, which explains how the Federal Reserve stopped reporting the
ESF’s gold activity after my discovery of the smoking-gun.
I also recommend reading “The Federal
Reserve's Blueprint for Market Intervention”. This document provides primary, original source supporting evidence
making the case for intervention in the gold market.
And if you really want to read the whole treasure trove of material
assembled over the years by the Gold Anti-Trust Action Committee (www.GATA.org), I suggest beginning with this presentation that Chris Powell, Secretary & Treasurer of GATA, gave at the Vancouver Resource
Investment Conference this past January. For more in-depth reading and
research, GATA has compiled an extensive database.
To conclude, the banks’ interest and that of the US government
conflated. Neither wanted to see a higher gold price, albeit for different
reasons. The banks did not want to take losses on their gold liabilities,
while the government did not want a higher gold price signaling dollar
debasement. So the US government joined forces with the biggest of the
bullion banks to intervene in the gold market, forming what is loosely called
the “gold cartel”, to cap the gold price. When viewed from a
broader perspective that recognizes the importance of money to the State,
intervention in the gold market is an essential step to keep the present
system afloat.
It might be worth asking here, what is this system and who runs it? It
is what President Eisenhower warned of in his Farewell Address to the nation?
Here is what he said: “In the councils of government, we must guard against the
acquisition of unwarranted influence, whether sought or unsought, by the
military-industrial complex. The potential for the disastrous rise of
misplaced power exists and will persist.”
Or has that force Ike identified been supplanted by a new
“military-financial complex”? I don’t have the answer to
these questions, but I agree with the polls that say most Americans believe
their country is heading in the wrong direction.
These banks have no dog
in the fight; they couldn’t care less what the metals prices are and
have no reason to try manipulating the market.
The banks care about three things. First, they borrowed gold to fund
assets and do not want to take a loss on a rising gold price. Second, their
protector and monopoly grantor (the US government) cares about a rising gold
price, so the banks need to care. Third, the banks can make a lot of profit
by knowing in advance what the government will do with its interventions in
various markets.
Q: Why has there been
zero word from their traders about how stupid their bosses are for fighting a
gigantic 10-year bull market? These guys all know each other, and they gossip
with the same delight as teenage girls.
It’s
hard to keep a long-term illegal collusion a secret. Two parties might
possibly be able to keep a secret. But six or eight commercial banks acting
in broad daylight? It’s said that three individuals can keep a secret,
but only if two of them are dead. But for a half-dozen trading operations to
do so? Wall Street is the world’s greatest rumor mill. But
there’s never been a rumor (outside of those created in conspiracy
circles, who offer no sources) that the bullion banks are acting, in concert
or individually, as agents of Timmy Geithner.
Take the case of whistleblower
Andrew Maguire, who was aware of one bank’s plan to manipulate
the silver market. In a telephone call with a CFTC official, he explained how
the silver price was about to move because of manipulation. The price moved
exactly as he forecast. Andrew Maguire was subsequently the victim of a
hit-and-run accident that threatened his life, an event that has probably
discouraged other whistleblowers. In any case, many of the 20-something
traders that banks employ don’t have a clue about the big picture. They
just do what they are told, and enjoy the profits paid to them in their
year-end bonus.
Q: If, as alleged, these
banks have been short gold from the bottom of the gold bear market at $255 in
2001 and the silver bear market at $4.25, also in 2001, how can they possibly
absorb tens or hundreds of billions of losses? Did they expect to take the
metals to a fraction of their 1971 lows?
Trading
desks make mistakes. But they don’t stay short in one of
history’s great bull markets – it’s not the way traders
earn bonuses. How stupid are the supposed “not for profit”
sellers of gold supposed to be?
The banks are being backstopped by the government. They always have
been, and always will be. That is why the banks always get bailed out.
As noted above, the interests of the banks and the US government
conflated. Neither one wants to see a higher gold price. So the government
intervention is designed to accomplish two objectives.
First, the government aims to cap the gold price to let the banks
trade out of their predicament over time. The objective is to avoid any
losses. So as the banks unwind their gold position, they use the
government’s unlimited capacity to create paper-gold to move the market
to their advantage. I wrote about this phenomenon in “Picking the
Market's Pocket Again” and also in “Picking the
Market's Pocket, Part Two”.
Second, by keeping the gold price under control, the US government
makes the dollar look worthy of being the world’s reserve currency when
we all know that it is not. On a related point, a capped gold price also has
the added advantage of containing inflationary expectations, an objective
often stated by Federal Reserve officials.
Q: Exactly where and how
do they supposedly get the capital to cover these losses? Haven’t they
ever heard the old saw, “He who sells what isn’t his’n must
give it back or go to prison”? No bank can tie up billions in capital
fighting the market for a decade.
The banks don’t tie up capital because they operate in the
paper-gold and paper-silver markets, creating various financial derivatives
that are not regulated and carried off their balance sheet. They are
contingent liabilities and do not require bank capital.
Q: Exactly who originated
this idea of trying to suppress prices using the futures markets? Here a well-known writer on this subject
suggested the following to me, via an email, when I asked: “The big
commercials, starting some 25 years ago, discovered they could dominate the
market and force technical traders in and out of the market when they wished
at great profits to the commercials. But they miscalculated and stayed in too
long, and now they are trapped.”…But one thing is for certain:
nobody (certainly not commercials) allows himself to get in so deep
he’s trapped for 12 years in one of history’s greatest bull
markets.
I agree that the writer you quote misses the point. The banks are
trapped only to the extent that they owe physical gold that was borrowed to
fund dollar assets, as explained above. But the gold market intervention
gives them time to unwind these positions and control losses that would
otherwise occur if gold prices were not capped.
One aspect of the quote though is correct. In my two articles I mention
above, “Picking the
Market's Pocket Again” and “Picking the
Market's Pocket, Part Two”, the banks trade around
the technical traders and trend followers, both big and small. They do this
to make profits to offset the losses accrued on their gold liabilities as the
gold price rises. But in the end if the banks fail to repay or hedge the
physical gold they borrowed from central banks, the central banks will let
the banks off-the-hook and take the loss, rather than forcing the banks to
take it. Governments (meaning taxpayers) and anyone holding the currency that
is depreciating because of these policies favorable to banks will take any
losses incurred – not the banks.
Q: Why fight the market,
and get trapped, in just gold and silver? Why aren’t they trying to
suppress copper, platinum and palladium as well? For that matter, every
commodity?
These other markets don’t matter, as I explain above. Only gold
and silver are money. Only gold and silver have an interest rate and always
therefore trade in contango (except in extremis, meaning when the currency in
which their price is being quoted is near collapse). Gold and silver have
unique attributes not shared with any other commodities.
Q: Why would the US
Treasury (if it’s behind a gold suppression scheme) make things easier
for the Chinese, the Russians, the Indians and numerous other developing
countries by suppressing the gold price? They simply take advantage of the
lower price to buy more.
Was the US government acting in the country’s best interests
back in the 1960s when it allowed over 300 million ounces of gold to be
withdrawn from Fort Knox and exchanged for $35 per ounce? Do you really think
that the people intervening in the gold market care about acting in the
country’s best interests? They care about keeping the system going.
If anyone could answer
these questions, I’d appreciate it. I advise readers to buy gold
– even at current levels – but I’d like to see them do it
for the right reasons. And it seems to me the arguments about gold
manipulation are more redolent of religious belief than economic reasoning.
I wouldn’t say that there is any religious belief involved, but
I have replied to a lot of Doug’s questions with questions of my own.
So I haven’t really “answered” all of his issues, which
highlights an important point.
The investigation into the inner workings of the gold market that are out of public view and decided behind closed doors in central banks is an
ongoing effort. It has been that way for years, and fortunately, the Gold
Anti-Trust Action Committee has been there relentlessly compiling the
mounting evidence that something is amiss, that gold trading is influenced by
government intervention aimed at keeping the price from rising to its fair
value. Or to put it another way, by allowing the gold price to climb higher
year after year in what I have dubbed a “managed retreat”,
governments hope that people will not notice what is happening to the ongoing
debasement of the US dollar, which Doug and I can both remember was once
“as good as gold”.
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