Gold Market Manipulation Update
Slide 1: Introduction
The premise of my organization, the Gold Anti-Trust Action Committee, is what the assistant undersecretary of state for economic and business affairs, Thomas O. Enders, told Secretary of State Henry Kissinger in a meeting at the State Department on April 25, 1974 – a meeting whose discussion was transcribed and now is posted at the internet site of the State Department's historian.
Slide 2: State Department historian
That is, the gold price is a primary determinant of all currency values and whoever controls the gold price can control not just all currency values but, implicitly, control the value of all capital, labor, goods, and services in the world. Back in 1974 the countries that were about to form the European Union had amassed, collectively, more gold than the United States had.
So it became U.S. policy to push gold out of the world financial system in order to protect the dollar's role as the world reserve currency. Western gold price suppression policy, extensively documented at GATA's internet site, arose from this realization and objective.
This is not "conspiracy theory," though the policy usually was concocted and implemented in secret – that is, by a conspiracy, which is only how government often operates. No, this is history. As the saying goes, "you can look it up," though the people in power would prefer that you didn't.
So gold is the secret knowledge of the financial universe. That is why nothing financial can be analyzed without regard to gold and to what governments and central banks are doing in regard to gold.
This year has produced many major changes in the gold and silver markets that indicate increasing demand for real metal and tightness in supply. Some of us think these changes foreshadow the implosion of the longstanding fractional-reserve, derivatives-based gold and silver banking system – a system that has diverted most demand for the monetary metals away from the metals themselves and into derivatives.
While the supply of real metal is finite, the supply of derivatives is infinite, and credible estimates are that there are dozens of derivative claims to every ounce of actual gold and silver. That is, most of the gold and silver the world thinks it owns doesn't exist. There is a huge and uncoverable short position in the monetary metals. Physical demand threatens to destroy this short position. Therein lies the opportunity in investing in the monetary metals and the companies that mine them.
The risk is that, as author and geo-political analyst Jim Rickards said on CNBC in September 2009: "When you own gold you're fighting every central bank in the world."
So in the context of this background let's review the major changes in the gold and silver markets this year.
Slide 3: NYMEX / COMEX headquarters
The gold and silver futures markets of the New York Commodities Exchange, the Comex, have been transformed from almost entirely paper or derivatives markets into largely physical markets with huge offtakes of metal. Meanwhile the London gold and silver markets are having trouble delivering metal. GATA's friend the London metals trader Andrew Maguire says it is impossible to get timely delivery of gold and silver in London and that as a result "spot" prices there are misleading, not capable of bringing forth metal in anything less than weeks.
Slide 4: CME Group gold bars list
A few weeks ago the Comex quietly implemented a vast expansion of the eligible mints of gold bars acceptable for gold futures contract delivery. Some of the mints on the Comex's expanded list are no longer operating. This implies shortage of supply.
Volatility in the gold and silver futures markets has increased dramatically, but the frequent smashdowns in these markets are losing effect. In recent years they could knock prices down for weeks or even months at a time. Now prices usually bounce back in two or three days. The biggest smashdown of all came last week but prices are on their way back up again. Someone seems to be using the smashes in the futures markets to obtain real metal.
Slide 5: Scotiabank fines
Scotiabank recently paid fines of $127 million to settle gold and silver futures market rigging charges by the U.S. government. Scotiabank also is closing its gold and silver division, the oldest continuously operated bullion bank in the world.
Slide 6: Fines against JPMorganChase
JPMorganChase recently paid fines of $920 million for rigging the gold, silver, and Treasury futures markets. Both JPMorganChase and Scotiabank have entered deferred prosecution agreements with the government, indicating that the banks are expected to cooperate with the government in additional prosecutions.
Slide 7: Deutschebank trader convictions
A few weeks ago two former traders for Deutsche Bank were convicted for manipulating the gold and silver futures markets.
The futures market rigging done by Scotiabank, JPMorganChase, and the Deutsche Bank traders, called "spoofing" – the strategic placing and withdrawal of buy and sell orders calculated to mislead other traders – is not the rigging GATA long has complained about. The market rigging GATA long has complained about is done through largely surreptitious intervention by governments and central banks.
But the spoofing convictions are important because they show how easy it has been for big traders to rig the futures markets. It went on for years without discovery by the U.S. Commodity Futures Trading Commission, even when the commission purported to be looking for it. If futures market rigging is that easy for big traders, imagine how much easier it is for governments and central banks.
Slide 8: CME Group's Central Bank Incentive Program
Indeed, CME Group, operator of the New York Commodities Exchange, has a special discount program for governments and central banks surreptitiously trading all major futures contracts in the United States.
Anyone trading commodities in the United States is probably trading against any number of governments and central banks, whose pockets are far deeper than those of ordinary traders.
Slide 9: GLD metal held at Bank of England
GATA's friend the gold researcher Ronan Manly of Bullion Star in Singapore reported a few weeks ago that the exchange-traded fund GLD appears to be storing increasing amounts of its gold at the Bank of England, even though the fund's prospectus requires the fund's metal to be immediately transferred to the vaults of the fund's own custodian, HSBC. This prolonged storage at the Bank of England suggests that GLD is increasingly using borrowed central bank gold to balance its accounts.
Slide 10: BIS statement of account
In recent months intervention in the gold market by the Bank for International Settlements, monitored by GATA's consultant Robert Lambourne, has reached its highest level in the last two years and possibly the highest level in the bank's history. The BIS functions as an agent or broker for its member central banks in purchasing, lending, and swapping gold among its members and commercial banks so the metal may be applied to gold markets that are under stress. In doing so the BIS provides camouflage for the interventions of its member central banks so they do not have to transact as directly with bullion banks and run more risk of being exposed publicly.
Slide 11: BIS PowerPoint presentation
Indeed, GATA has obtained and posted at our internet site BIS documents showing that the bank considers its major purpose to be to help its member central banks control the gold price and the value of other currencies. The BIS refuses to explain the purposes and objectives of its trading in gold, nor for whom this trading is done.
A few years ago GATA put that question to the BIS. Its press office quickly replied that the bank never answers such questions. Fortunately for the bank, mainstream financial news organizations and market analysts never ask it, since asking might be bad for business.
Slide 12: University of Sussex report
In May this year a study by researchers at the University of Sussex Business School in Britain concluded that the gold futures market is indeed heavily manipulated, seemingly contrary to regulations, but regulators are overlooking it.
Slide 13: U.S. Rep. Mooney's letter to CFTC
In the last year the U.S. Commodity Futures Trading Commission repeatedly has refused to answer a crucial question put to it by GATA and U.S. Rep. Alex X. Mooney, Republican of West Virginia. This is the question: Is futures market manipulation undertaken by a broker or agent for the U.S. government, or by someone acting with the approval of the U.S. government, subject to the commission's jurisdiction, or is such manipulation legal under the Gold Reserve Act of 1934 or other federal laws?
Since the CFTC refuses to answer that question even for a member of Congress, you may fairly assume that the commission considers futures market rigging by the U.S. government to be perfectly legal. That certainly would help explain the commission's strange reluctance to act against gold and silver futures market rigging over the years.
Slide 14: U.S. Treasury Department's ESF page
Discovering this U.S. government policy was GATA's first great success. It came in 2001 in U.S. District Court in Boston when our consultant and litigator, Reginald Howe, extracted from an assistant U.S. attorney a claim that the Gold Reserve Act of 1934, which establishes the Exchange Stabilization Fund in the Treasury Department, does indeed empower the U.S. government to rig the gold market exactly as Howe's lawsuit complained. If you will visit the Exchange Stabilization Fund's page at the Treasury Department's internet site, you may see that the Treasury Department indeed seems to construe the Gold Reserve Act to authorize it to manipulate not just the gold market but any market anywhere.
When GATA got started in 1999 nearly all respectable market observers insisted that the gold market was not being manipulated by governments or anyone else. Today most respectable market observers acknowledge that most markets ARE being manipulated by governments, but they don't want to talk about gold. This is a bit of an improvement, since at least it seems that few observers today are willing to DENY that the gold market is being manipulated by governments.
In the last few weeks there have been many reports that after a decade of increasing their gold reserves, central banks have become net sellers of the monetary metal, if only in a small way.
Slide 15: Secret IMF staff report
But these reports were based on mere estimates offered by the World Gold Council, which long has been determined not to look too deeply into what central banks do with gold. For example, the World Gold Council has never taken note of the March 1999 secret staff report of the International Monetary Fund, which acknowledged that central banks refuse to distinguish the gold in their vaults from the gold they have swapped or leased with other central banks or bullion banks.
That is, the reports of central banks often overcount their gold.
Candor in gold reserve reporting, the secret IMF staff report said, cannot be allowed because it would reveal and compromise the surreptitious interventions by central banks in the gold and currency markets. The secret IMF staff report remains a warning to all market observers that central bank gold data cannot be trusted.
While the World Gold Council was claiming last month that central banks are now net sellers of gold, London metals trader Andrew Maguire was reporting that China has begun bypassing the London gold market and is acquiring unrefined gold directly from mines in Africa and South America and doing the refining itself.
Of course it is a matter of record that China is not always candid about its acquisition of gold. Not long ago China went five years without updating its gold reserve reports, and then reported five years' worth of acquisitions in a lump sum.
If Maguire is correct about China's acquisition of unrefined gold directly from mines, central banks are likely still net buyers of gold, not net sellers.
Because there is no serious journalism about gold, what the world is told about the gold market is almost always only what central banks want the world to be told.
It would not be difficult for financial journalists and gold market analysts to confirm or discredit Maguire's assertion about China's acquisition of unrefined gold. Journalists and market analysts could inquire with central bankers, gold traders, gold mining companies, and customs agencies. While few such sources might go on the record, some might comment confidentially. But even publicizing the question would be too subversive for most journalists and market analysts.
Of course monetary metals investors most want to know when gold and silver will break free of this manipulation at last – break free of the longstanding Western government policy of driving the monetary metals out of the world financial system, the policy that is extensively documented at GATA's internet site.
We at GATA tend to expect that there will be another international currency revaluation in the near future. Something like that likely will be announced on a Sunday night before the Asian markets open. Of course governments are not going to share such plans with us in advance. But the day of deliverance for the monetary metals and their investors could be hastened if mainstream financial news organizations and market analysts reclaimed their integrity and began committing some journalism about central banking and gold.
All they have to do is what they never have done – put a few critical questions to central banks and regulatory agencies and report the refusals to answer.
Of course monetary metals mining companies could help by pressing those questions too. But most mining companies are too scared – too scared even to stand up for their investors. Mining is the most capital-intensive business in the world, and most mining companies cannot operate without support from the largest banks, which typically are intimate agents of governments, and few governments want gold and silver remonetizing themselves and competing with government currencies.
Mining is also the business most directly vulnerable to government regulation – for mining permits, environmental standards, and royalty payments. It is a rare mining company that is willing to embarrass its government with critical questions.
Central banking's power to create and dispense infinite money is of course a spectacular power. But this power can't succeed on its own. To succeed this power usually requires secrecy and deception. For if investors are NOT deceived, the power of central banking's infinite money vaporizes. People won't buy gold and silver derivatives if they realize that those products are designed to cheat them.
That's why central banking's most crucial power right now is its power to intimidate financial news organizations, market analysts, and mining companies out of their duty. That's why GATA struggles to gain a forum. It is also why GATA is especially grateful to this conference for granting us this forum and grateful to you for attending.