James Turk: A spectacular year for gold and silver

In his new commentary today, GoldMoney founder, Free Gold Money Report editor, and GATA consultant James Turk celebrates the spectacular performance of gold and silver in 2009. 
Turk reports that gold rose in all major currencies except the Australian dollar, and silver beat even that. Turk’s commentary is headlined “Gold Shines for the Ninth Consecutive Year” and you can find it at GoldMoney’s Internet site HERE

 

FOFOA: Is the Dollar “Good as Tungsten”?

“It has been speculated by many people over the past decade that once we are in the heat of the fire the US Treasury’s gold will be employed in defense of the dollar.

Perhaps this was what some of the Giants were counting on. Before 1971 the dollar was considered to be “good as gold”.

Since then it was considered to be “hard currency” amongst a world full of soft currencies. Perhaps now it will be considered to be “Good as Tungsten“?

I wonder how this will affect the next move from the People’s Republic of China. Hmm….”

Read all about the dark art of tungsten alchemy at FOFOA’s blog HERE

 

Paul Mylchreest: Gold Market: Accident Waiting to Happen Or Crime Scene?..

Market analyst Paul Mylchreest, who wrote the 2006 report for Credit Agricole’s Cheuvreux brokerage house concluding that the gold market was being manipulated surreptitiously by central banks (http://www.gata.org/files/CheuvreuxGoldReport.pdf) and, the following year, a similar report for Redburn Partners, (http://www.gata.org/files/RedburnPartnersGoldReport_11-12-2007.pdf), has revisited the gold market in a study for his own analysis service, the Thunder Road Report.

Mylchreest examines the gold traded in the world’s biggest gold market, London, and concludes that either a tiny amount of real metal is supporting a spectacular volume of paper trades, “an accident waiting to happen,” or else that the world’s gold supply is spectacularly larger than officially acknowledged and the London gold market has been used in recent years to launder questionably obtained gold, perhaps the fabled “Yamashita’s gold” plundered from Asia by the Japanese military during World War II, in which case the London gold market is a “crime scene.”

Mylchreest’s report is fascinating and as conscientious as the obscurantism of the gold world allows. It’s titled “Gold Market: Accident Waiting to Happen Or Crime Scene? Don’t Shoot the Messenger,” and you can read it HERE

 

GATA: Fed admits hiding gold swap arrangements

Dear Friend of GATA and Gold:

The Federal Reserve System has disclosed to GATA that it has gold swap arrangements with foreign banks that it does not want the public to know about.

The disclosure contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

The Fed’s disclosure came this week in a letter to GATA’s Washington-area lawyer, William J Olson of Vienna, Virginia (http://www.lawandfreedom.com/), denying GATA’s administrative appeal of a freedom-of-information request to the Fed for information about gold swaps, transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks. (See the International Monetary Fund’s treatise on gold swaps here: http://www.imf.org/external/bopage/pdf/99-10.pdf.)

The letter, dated September 17 and written by Federal Reserve Board member Kevin M. Warsh (see http://www.federalreserve.gov/aboutthefed/bios/board/warsh.htm), formerly a member of the President’s Working Group on Financial Markets, detailed the Fed’s position that the gold swap records sought by GATA are exempt from disclosure under the U.S. Freedom of Information Act.

Warsh wrote in part: “In connection with your appeal, I have confirmed that the information withheld under Exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”

When, in 2001, GATA discovered a reference to gold swaps in the minutes of the January 31-February 1, 1995, meeting of the Federal Reserve’s Federal Open Market Committee and pressed the Fed, through two U.S. senators, for an explanation, Fed Chairman Alan Greenspan denied that the Fed was involved in gold swaps in any way. Greenspan also produced a memorandum written by the Fed official who had been quoted about gold swaps in the FOMC minutes, FOMC General Counsel J. Virgil Mattingly, in which Mattingly denied making any such comments. (See http://www.gata.org/node/1181.)

The Fed’s September 17 letter to GATA confirming that the Fed has gold swap arrangements can be found here:

http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf

While the letter is far from the first official admission of central bank scheming to suppress the price of gold (for documentation of some of these admissions, see http://www.gata.org/node/6242 and http://www.gata.org/node/7096), it comes at a sensitive time in the currency and gold markets. The U.S. dollar is showing unprecedented weakness, the gold price is showing unprecedented strength, Western European central banks appear to be withdrawing from gold sales and leasing, and the International Monetary Fund is being pressed to take the lead in the gold price suppression scheme by selling gold from its own supposed reserves in the guise of providing financial support for poor nations.

GATA will seek to bring a lawsuit in federal court to appeal the Fed’s denial of our freedom-of-information request. While this will require many thousands of dollars, the Fed’s admission that it aims to conceal documentation of its gold swap arrangements establishes that such a lawsuit would have a distinct target and not be just a fishing expedition.

In pursuit of such a lawsuit and its general objective of liberating the precious metals markets and making them fair and transparent, GATA again asks for your financial support and that of all gold and silver mining companies that are not at the mercy of market-manipulating governments and banks. GATA is recognized by the U.S. Internal Revenue Service as a non-profit educational and civil rights organization and contributions to it are federally tax-exempt in the United States. For information on donating to GATA, please visit here:

http://www.gata.org/node/16

You can also help GATA by bringing this dispatch to the attention of financial news organizations and urging them to investigate the Fed’s involvement in gold swaps particularly and the gold (and silver) price suppression schemes generally.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

 

Antal Fekete: More dress rehearsal for the last contango

by Antal E. Fekete

The Gold Standard Institute

Canberra, Australia

http://www.goldstandardinstitute.com/

Wednesday, August 26, 2009

I have received a deluge of mail from readers of my latest article on the gold basis and the threat of the coming permanent backwardation in gold. I truly appreciate the interest of my readers in learning my thoughts on the subject. I regret that it is not possible for me to answer these letters individually; I make an attempt here to answer one or two, where the questions are general enough so that my answers may benefit all readers.

. . .

Hello, Antal:

I have questions about your “Dress Rehearsal for the Last Contango.”

1) Will not gold at +$1,000 per ounce restore gold holdings registered at Comex warehouses? If not, why not?

2) When the gold basis goes negative, could it not subsequently go back to positive, assuming the price rises to over $1,000? If not, why not?

3) Why must gold backwardation, once established, become permanent?

I should like to hear your reply to these questions. I am really very interested in understanding fully the implications of the vanishing basis for gold, and I hope you can provide me with your answers to my questions.

With warm regards,

Victor

. . .

Dear Victor:

For a full discussion on the gold basis and the permanent backwardation in gold you must come to Canberra, Australia, where the Gold Standard Institute will have a seminar in November. This seminar is second devoted exactly to these topics. Last year’s seminar was a great success; this year’s will be an even greater one.

I am confident to say that Canberra is the only place in the world where you may get scientific information on gold contango, gold basis, gold warehousing, bimetallic arbitrage, and the prospects of permanent gold backwardation as well as answer to a host of tantalizing questions that arise from these.

We shall have an expert on hand from the Perth Mint. And as an absolute first, we shall have the manager of Masters Fund, a unique gold fund just coming on stream, to answer questions. I am proud to say that I have been associated with this fund from inception throughout the incubation period. The Masters Fund is offering exclusive features not available from any other fund, such as:

1) The guiding star of the fund is not the dollar price of gold, but the gold basis which is much less open to manipulation, and much more relevant to an accumulation plan.

2) The gold in the fund bears a return in gold, so profits are measured not in terms of the U.S. dollar but in terms of gold itself.

3) Any appreciation of the fund’s value in U.S. dollar terms is additional, but the maximization of dollar value is not a prime objective.

4) The gold in the fund is never put out on lease or on loan, nor can it be pledged as collateral, but stays on the premises at all times under the full control of the fund. It has never happened before that you could collect the return on capital unless you were willing to relinquish temporary control over it and thereby assume the risk of losing it. This could be important at a time when wholesale defaults on paper gold contracts may engulf the world.

5) The principle on which the fund operates is valid whether the monetary metals are in a bull market or a bear market.

6) The fund is especially recommended to those individuals who are in the habit of measuring the value of their assets and their own net worth in gold units rather than irredeemable paper units such as the US dollar.

7) The fund is structured in such a way as to take full advantage of the coming permanent gold backwardation, when all other gold funds will be grounded.

Of course false alarms can and do occur, and it is possible that gold goes into backwardation and then promptly comes out of it. It has happened before. But we are looking at a 35-year trend, embracing the entire history of gold futures trading. The trend has been that, as a percentage of the prevailing rate of interest, the basis has been falling from practically 100 percent to practically 0 percent.

You and I know the reason for this. It has to do with the vanishing of all newly mined gold into private hoards at an accelerating pace, the insatiable appetite in the world to snap up all available gold by well-heeled governments and individuals who no longer believe in the tooth fairy residing in the Federal Reserve.

You have to remember that the basis is widely used as a guide in the huge arbitrage operations between gold holdings and dollar balances and in the gold carry trade. To participate in this arbitrage you must have gold on deposit in Comex warehouses. But with the vanishing of the gold basis the profitability of this arbitrage as well as that of the gold carry trade has been drying up, which explains the dwindling of warehouse stocks.

Another consequence of the vanishing of the gold basis is that it makes the risks involved in the gold/paper arbitrage rather lopsided, as far greater risks are assigned to short positions on gold and long positions on the dollar than on long positions on gold and short positions on the dollar. The arbitrageurs are very much alive to this lack of symmetry and are increasingly unwilling to put their gold in harm’s way. They are fully aware that we are approaching an historic milestone, one that has never been passed before: the milestone marking the last contango.

As a consequence of this lopsidedness the gold futures markets can no longer coax gold out of hiding. In vain do futures markets promise risk-free profits for taking over the carry from the individual.

Here is the deal they offer you: Give us your cash gold in exchange for gold futures that we’ll let you have at a deep discount so that you can pocket risk-free profits. The offer is increasingly declined. There was a time when a drop in the basis would pull in gold from the moon, figuratively speaking. No more. Arbitrageurs no longer believe that gold futures are fully exchangeable for cash gold.

Gold backwardation is virtually inevitable, and when it comes, it will be irreversible. Why? Because it signifies a crisis of the first magnitude: the general disappearance of gold from trade for reasons of lack of confidence. No one will give up gold, because one is no longer confident that he can get it back on the same terms.

Vanishing confidence is like a runaway train The only thing that might turn this runaway train around is a steep rise in US interest rates. However, this is not in the cards. It would ruin what is left of the US economy. It would also cause the bond market to collapse, sending the dollar down the drain.

I do not see the collapse of the bond market happening any time soon. The US Treasury and the Federal Reserve can muddle through this crisis, and possibly beyond, by making bond speculation risk-free in order to maintain demand for Treasury paper.

Having said that, I don’t think the guys at the US Treasury and Federal Reserve understand the gold basis and the seriousness of the threat of permanent gold backwardation. They are just trying to hold the line at $1,000 for whatever psychological value it may have, for as long as they can. It’s the same old tug of war, they think.

It is not. Once the $1,000 level is breached, there may be some “profit taking,” to be sure. But because of the zero basis, those who take profits will look rather foolish. Last contango — last profit taking.

Be prepared for a great wave of defaults on paper gold obligations. Certainly, the lessees of central bank gold will default. Comex will close its gold pit for good, and outstanding contracts will be settled on a cash basis.

I will be surprised if any gold ETF shareholders will see a grain of gold coming their way out of the rubble left by the default. Comex gold certificate holders will be lucky if they can get a fraction of their gold back from the warehouses — after a lengthy wrangle. Too many claims have been issued on the same lump of gold.

Under these circumstances it is difficult to see how anyone could wish to deposit gold in a Comex warehouse to restart gold futures trading. The market for slaves disappeared after emancipation never to come back again. The gold futures markets will disappear, utterly (and deservedly) discredited. Like the slave markets, they will never come back.

—–

Antal E. Fekete is an economist and retired professor at Memorial University of Newfoundland. He is proprietor of the Internet site www.ProfessorFekete.com and can be reached at AEFekete@Hotmail.com.

* * *

 

Antal Fekete: Dress rehearsal for the last contango

By Antal E. Fekete

The Gold Standard Institute

Canberra, Australia

Monday, August 24, 2009

http://www.goldstandardinstitute.com/

I have written about “the last contango in Washington” before. The phrase covers the gold crisis that has been brewing under the surface in the world for 60 years due to the insane gold policies of the U.S. Treasury. As a result all newly mined gold, surpassing the quantity of all gold ever mined prior to 1947, has gone into private hoards, from which it will be next to impossible to coax out. The measure of this act of disappearance of gold is the vanishing of the basis, or the last contango.

In the technical jargon of the futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market — a contango market — due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.

But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the basis as a percentage of the rate of interest has been vanishing and now has dropped to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.

The support of the paper gold markets is at stake. Without cash gold backing it up, paper gold trading is not viable.

When the gold basis goes negative, that’s the end not only to contango but also to gold futures trading as we know it. Permanent backwardation in gold has never ever been experienced — unless we imagine that there is a gold futures market in Harare. Gold is not available at any price quoted in Zimbabwe dollars. In that sense the last contango has first occurred in Zimbabwe.

Whatever paper trading of gold is still going on in the United States, it is at best a dress rehearsal for the Last Contango in Washington, which will be followed by the regime of permanent backwardation.

The meaning of this is that physical gold cannot be purchased at any price quoted — this time, yes, in U.S. dollars.

The U.S. dollar rubbing shoulders with the Zimbabwe dollar?

Mainstream economists and financial journalists shrug: “So what? We are not watching the basis of frozen pork bellies trading either when we make monetary policy.” These gentlemen betray a lack of comprehension of the nature of the present financial and credit crisis. Whatever else it may be, this crisis, first and foremost, is a gold crisis with an incubation period measured in scores of years. It is about to reach its climax.

The world appears to be totally unprepared for it — witness the silence surrounding the gold nexus.

Even the so-called sound-money Internet sites misread the situation. They are talking about an imminent breakout of the dollar price of gold from its holding pattern below $1,000 per ounce. Such breakouts have occurred from time to time since 2001, when gold broke through the “resistance levels” of $300, $400, etc. The coming breakout is not distinguished by the fact that $1,000 is an even rounder figure than the previous round figures that have been surpassed. It is distinguished by the fact that we are confronting a world event the like of which has never happened.

It has never happened that gold was unobtainable at any price. It has never happened that all governments have defaulted on their debt obligations simultaneously.

Still, we have to explain the relevance of this to the credit crisis. It is no secret that the bonds, notes, bills, and other obligations of the U.S. government, or any other government, for that matter, are irredeemable. That is, they are redeemable in nothing but more of the same. For example, the bonds of the U.S. Treasury are redeemable in Federal Reserve credit, which is itself irredeemable and is “backed by” the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?

Come to think of it, the sight of this Ponzi scheme would shudder the Founding Fathers of our great Republic.

This is not an easy question to answer. But going through all the alternative explanations one by one, we come to the conclusion that the debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.

But if you break that final link, when gold is no longer for sale at any price quoted in U.S. dollars, then the rug will have been pulled from underneath this house of cards, and the international monetary system will collapse like the twin towers of the World Trade Center. And this is the situation that we are confronted with.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are “on the house.” This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt — or any debt, for that matter — will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.

In July I attended the Santa Colomba Conference 2009 at the Palazzo Mundell near Siena, Italy. There were 50 people in attendance by invitation of Robert Mundell of Columbia University, recipient of the Nobel Memorial Prize in economics 10 years ago. They were mostly officials of various treasuries and central banks, ambassadors, bankers, professors of monetary economics, authors of monographs, and editors of financial journals. Paul Volcker, a former U.S. Treasury official and chairman of the Federal Reserve Board, was present.

Prior to the conferernce I circulated several papers among the participants. I was trying to show that the cataclysmic nature of the present credit crisis could not be understood without trying to understand gold, the ultimate extinguisher of debt. We are all passengers on a runaway train on a down-sloping track, the brakes of which (gold) have been dismantled at the top of the hill. The train is picking up speed beyond any safe limit, and a crash appears inevitable.

Our gracious host and the chairman, Professor Mundell, made two references to gold during the two days of the conference, asserting that, apart from wartime, the gold standard has been the most crisis-free monetary system in history. (Of course, all monetary system have a habit of breaking down during wars.) Yet not one participant picked up the ball dropped by Mundell. They kept talking about “green shoots,” the recovery of the stock markets, and coming bailouts and stimulation packages. As to my papers stating that this crisis is a gold crisis, I got just one bit of feedback, in private. Apparently the rest of the participants have been turned off by the four-letter word “gold.” It was not worth their while to read the ramblings of this loner on the problem of “putting spent toothpaste back into the tube.”

One of my papers was an open letter addressed to Volcker. In it I asked whether there were contingency plans in the Treasury or Federal Reserve to meet the coming crisis of permanent gold backwardation.

Volcker declined to answer my question, in public or in private. I am inclined to think that there are no such contingency plans other than “muddling through,” as they have in all previous monetary crises. None of the policy-makers sees the uniqueness of the coming and predictable crisis, or the need to confront it with a comprehensive plan. There is an overwhelming unwillingness to admit that the international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971. Cracks have been papered over as they appeared after every subsequent crisis. Every opportunity to sit down and work out a permanent solution was passed up. This seems to have worked well enough in the past. Policy makers see no reason why it would not work in the future.

Yet the Last Contango in Washington will be different from all previous crises. It will be elemental, devastating, and apocalyptic. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will involve hordes of unemployed people roaming the streets, caring for no law and order, pillaging homes and institutions. It will destroy our freedoms. It may destroy our civilization unless we take protective action.

On the positive side, it will sweep away the complacency of the managers of the regime of irredeemable currency and fundamentally weaken the sway of Keynesian and Friedmanite economics as it has a stranglehold on the teaching of economic science.

The Last Contango in Washington will eclipse the Great Depression of the 1930s.

Be prepared.

—–

Antal E. Fekete is an economist and retired professor at Memorial University of Newfoundland. He can be reached at AEFekete@Hotmail.com. This essay first appeared in the Gold Standard Institute newsletter.

* * *

 

Chris Powell: Gold mining may not be profitable even near $1,000 per ounce

A friend, writes:

“I am confused regarding the average production cost of an ounce of gold. I have read a number of articles stating that the average production cost is at or near the current price, while other articles say the average production cost is about half the current price. Do you have any figures on the costs to produce gold exclusive of sales, marketing, administration, and so forth?“

There don’t seem to be any official figures on this. It is largely a matter of informed opinion. The opinion of the people GATA most respects is that, if resource replacement costs are counted, the current price of gold does not allow for much profit on the whole for the gold mining industry.

One thing is pretty sure: For years now gold mining production has been falling substantially even as the gold price has been rising substantially and gold demand has been increasing. The gap between production and demand has been covered by central bank dishoarding and by the diversion of gold demand into more and more mere paper promises of the metal — derivatives — a growing system of what might be called fractional reserve gold banking.

This suggests that the gold price has not yet reached the point where it is encouraging production; that, on average, if replacement costs are counted, gold mining remains uneconomic even as the price nears $1,000 per ounce; and that a much higher price will be needed to match supply with demand, the more so as central banks reduce their dishoarding.

CHRIS POWELL, Secretary/Treasurer

Gold Anti-Trust Action Committee Inc.

 

GATA: GFMS cooks books to make gold look bad

By Adrian Douglas

Wednesday, August 19, 2009

“Global consumption fell 8.6 percent to 719.5 metric tons from a year earlier, the London-based industry group said in a report today. That’s the lowest level since the first quarter of 2003. Jewelry demand declined 22 percent and electronics, the biggest industrial use for gold, slid 26 percent.”

This sounds pretty dire, doesn’t it? This means that global demand for gold fell67.7 tonnes.

But wait a minute! There is this little gem. …

“Central banks bought 14 tonnes of gold more than they sold, the first quarterly net purchases since at least 2000, according to the council, based on figures from London-based research company GFMS Ltd. The so-called official sector had net sales of 69 tonnes in the second quarter last year, the report said. Wozniak said GFMS wouldn’t identify any of the buyers. Central bank purchases aren’t counted in the 719.5 tonnes of total demand because they are considered a traditional source of supply, she said.”

You have got to be kidding me! Net buyers aren’t counted as demand because traditionally they are sellers!

That is just the most contrived reporting to come up with the negative gold news GFMS always wants to produce. This means that the change in demand from the central banks, going from selling a net 69 tonnes to buying 14 tonnes, is a positive difference of 83 tonnes. This means that global demand for goldincreased by 2 percent, instead of declining 8.6 percent.

Now why would an industry group that is supposedly meant to be a pro-gold advocate want to turn a 2 percent growth in demand to an 8.6 percent decline?

We can rule out an honest mistake because this is the ultimate in dishonesty: ignoring central bank demand. It is not the first time either. GATA has long criticized GFMS for its reporting of gold market statistics, particularly with respect to its ridiculously low gold loan numbers. GFMS failed to report the 450 tonnes of gold accumulated by China over the last five years, while GATA had sources that revealed not only the buying but the quantity as well.

But this is not the only nonsense in GFMS statistics. There also is this:

“Other such sources showed gains, including a 6 percent rise in mine production from the second quarter of 2008, and a 21 percent jump in recycled metal, the report said.”

A 6 percent increase in mine supply? Here is the news from the third-biggest gold producer in the world, South Africa:

http://www.dispatch.co.za/article.aspx?id=337268

“In June 2009 the country’s gold output fell 12.2 percent compared with the same month last year. South Africa is the world’s third-largest gold producer, behind China and the United States.”

China’s production did increase by 13 percent. However, although South Africa is the third-biggest producer at 220 tonnes, it is not far behind China, which produces 280 tonnes. So this means that gains in China’s gold production are roughly offset by declines in South Africa’s. So where did 6 percent total worldwide gold mine output growth come from?

Newmont Mining, the world’s biggest gold mining company, increased production by a meager 1.2 percent, while Anglogold Ashanti saw a 10 percentand reduced hedges by 1.4 million ounces in the quarter, which further reduced supply to the gold market.

A 6 percent growth in gold mine output is a fabrication.

The gold price has been suppressed by the gold cartel such that the price is at or below the cost of production. This is not an incentive to grow; it is the exact opposite.

GFMS has a hidden agenda and deliberately misreports gold market information. Could the firm’s motivation possibly be aligned with the gold cartel? It would be interesting to know who funds GFMS’ research.

* Adrian Douglas is publisher of the Market Force Analysis letter (http://www.MarketForceAnalysis.com) and a member of GATA’s Board of Directors.

 

QB Report: ‘Managed devaluation’ will multiply gold price

Paul Brodsky and Lee Quaintance, principals in QB Asset Management in New York, have published a fascinating report speculating that massive inflation in the United States will be required to restore solvency to the country’s banking system, that other countries will stop facilitating the export of U.S. dollar inflation, that the “shadow” gold price is really approaching $6,000, and that to achieve the necessary inflation central banks will arrange a “managed devaluation” of the dollar bringing gold closer to its “shadow” price.

The QB report thus echoes much of what the British economist Peter Millar of Valu-Trac Investment Research wrote in his own report in 2006. (See http://www.gata.org/node/4843.)

QB Asset Management has kindly allowed GATA to post its report, which is titled “Trade of the Century?” and can be found HERE

 

Latter days Alchemists

GATA board member Adrian Douglas discloses in the report below, titled “The Alchemists“, that the New York and Tokyo commodity exchanges have been permitting their gold futures contracts to be settled not in real metal but in shares of gold exchange-traded funds (ETFs). This essentially allows the gold shorts (and the exchanges themselves, which guarantee futures contracts) to transfer their obligations to third parties that may not have the metal they claim to have and that, in any case, are operated by the investment banks running major short positions in gold.

Thus it is likely that the paper claims to the world’s supply of gold are greater than even GATA has suspected — that the gold supply is even more oversubscribed and that “paper gold” is being created at an ever more frantic rate to suppress gold’s price.

The ability to offload futures contract gold obligations to the ETFs could become the principal mechanism of the gold price suppression scheme. GATA asks its supporters to call Douglas’ report to the attention of financial journalists, market regulators, and elected officials everywhere.

CHRIS POWELL, Secretary/Treasurer

Gold Anti-Trust Action Committee Inc.

***

The Alchemists

By Adrian Douglas
Saturday, July 11, 2009

In the Middle Ages alchemists toiled in vain to transmute lead into gold. One wonders why they used such an expensive starting material, such as lead, when modern alchemists in the gold world have succeeded in transmuting paper into gold. This article reveals the anatomy of a scam that has been perpetrated on investors and goes a long way to explain and tie together developments in the precious metals markets in recent years.

As many readers may know, I have recently been reporting on how delivery notices at the COMEX cannot be reconciled with movements of metals from and into the warehouse. Clearly these are not going to match on a daily basis, just as orders into a factory will not match shipments out on any given day, as there is a time lag. But when averaged over a month, the “flow” of metal inventory should be comparable to the delivery notices issued. This is just basic accounting. But I have observed that reconciliation is almost impossible with the COMEX data. The only explanation I could think of is that settlement of contracts must be bypassing the warehouse. But how could this be possible, as I thought all contracts had to be delivered via a COMEX registered warehouse?

The COMEX states:

- – - -

Delivery:

Gold delivered against the futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the Exchange. Delivery must be made from a depository licensed by the Exchange.”

This seems unequivocal until you find this exception:

Exchange of Futures for Physicals (EFP)

The buyer or seller may exchange a futures position for a physical position of equal quantity. EFPs may be used to either initiate or liquidate a futures position.

- – - -

The COMEX trading rulebook clarifies further:

- – - -

104.36 Exchange of Futures for, or in Connection with, Product (Physical)

(A) An exchange of futures for, or in connection with, product (EFP) consists of two discrete, but related, transactions; a cash transaction and a futures transaction. At the time such transaction is effected, the buyer and seller of the futures must be the seller and the buyer of a quantity of the physical product covered by this Section. The quantity of physical product must be approximately equivalent to the quantity covered by the futures contract.

- – - -

So what this means is that contracts can essentially be settled without going through the COMEX warehouse. Futures contracts and a physical commodity equivalent can be exchanged outside of the exchange and an EFP form can be filed to the clearing department at the COMEX. What’s more, the physical commodity doesn’t have to meet the specification of the COMEX Gold Contract of being a 100 troy ounce bar or three 1Kg bars of .995 fineness.

So what can be delivered as the physical gold commodity?

This is where it gets very interesting. On February 18, 2005, the NYMEX, parent of the COMEX, issued this announcement:

- – - -

http://www.cftc.gov/files/submissions/rules/selfcertifications/2005/rul0…

Exchange Rule 104.36, which governs exchange of futures for physicals (‘EFP’) transactions on the COMEX Division, refers to a ‘physical commodity’ as one of the required components of an EFP transaction but also indicates that the physical commodity need only be substantially the economic equivalent of the futures contract being exchanged.

The purpose of this Notice is to confirm that the Exchange would accept gold-backed exchange-traded funds (‘ETF’) shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied.

Thus, acceptable gold-backed and exchange-traded ETF funds include, but are not limited to, the iSharesCOMEX Gold Trust (ticker: IAU), which began trading on the American Stock Exchange on January 28, 2005.

The trust is an exchange-traded fund that provides a means of obtaining a level of participation in the gold market through the securities market. The trust shares are intended to constitute a means of making an investment similar to an investment in gold. Each trust share represents a fractional undivided beneficial interest in the trust’s net assets which consist primarily of gold held by a custodian on behalf of the trust. The shares of that trust are expected to reflect the price of gold less the trust’s expenses and liabilities.

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So the gold ETF with the symbol IAU started trading on January 28, 2005, and three short weeks later the shares of IAU became equivalent to real physical gold in the eyes of the COMEX for delivery against futures contracts in an EFP transaction! I

If that doesn’t blow your socks off, I don’t know what will.

Also note that the ETF mentioned is a COMEX product! How convenient!

Where are the regulators? This ETF is not equivalent to gold. Note the description: “Each trust share represents a fractional undivided beneficial interest in the trust’s net assets which consist primarily of gold.”

All that is being guaranteed is that each share is a fraction of the ETF assets. The net assets could be 1 oz of gold while the face value of the total shares sold could be 100 million ounces!

The notice does not restrict which gold ETFs are eligible, so clearly the infamous GLD is also eligible to be considered as good as physical gold in an EFP transaction.

Right from the inception of the gold ETFs GLD and SLV, the Gold Anti-Trust Action Committee has deduced from studies of the ETF prospectuses that these funds very likely do not hold gold and silver to fully back the issued shares because the prospectuses don’t categorically require it. (See footnotes 1 and 2.) In fact, the ETFs may have no gold or silver at all.

What seemed bizarre to GATA at the time was that the two mega-short anti-gold investment banks, JPMorgan and HSBC, would be involved in the launch and operation of precious metal investments that, on the face of it, would create huge investor demand for the very metals in which the banks hold massive and clearly manipulative concentrated short positions.

Now all becomes clear. The system is the ultimate alchemy. If ETF shares are NOT backed by gold but are accepted by the COMEX as equivalent to physical gold … presto! You have turned paper into gold — and paper is a lot cheaper than lead.

A futures market is supposed to provide price discovery for a commodity. In the gold market this notion has been hijacked because settlement can be made with a derivative instrument, such as an unbacked or partially backed ETF share. If that derivative instrument is not backed by gold on a 1:1 basis the scheme allows an artificial apparent increase in the supply of gold and so distorting price discovery toward lower prices.

Such a scam would be in grave danger of becoming exposed if anyone knew the true inventory condition of the vaults of the ETFs. That problem is easily solved by having HSBC be the custodian of GLD and JPMorgan be the custodian of SLV.

I have not found anywhere that COMEX accepts ETFs as an equivalent to physical silver for an EFP transaction, which probably explains why silver warehouse movements are much larger than those of gold, and perhaps may indicate that physical silver is the cartel’s Achilles heel.

We have all wondered how GLD could have amassed a stunning 1,100 tons of gold in less than five years without the gold price exploding. This represents buying 10 percent of all global gold output each year. What’s more, in the last nine months the ETF holdings almost doubled, adding approximately 500 tonnes or 23 percent of annual global production. And this when the signatories to the second Washington Agreement on Gold have reduced their gold sales to a trickle, from 500 tonnes per year. If the GLD shares are unbacked or only partially backed by gold, the alleged 1,100-tonnes gold holding would be easy to achieve with just the use of a printing press for the share certificates.

In looking at COMEX reports the EFP transactions are reported under “Other Volume.” This category is huge compared to delivery notices. For example, on July 8, 2009, the gold price fell by $20. Looking at the relevant COMEX report –

http://www.cmegroup.com/trading/energy-metals/files/cmxopint070809.pdf

– on Page 4 “Other Volume” is 9,540 contracts or 954,000 ounces, while the much more visible delivery notices were only 17 contracts or 1,700 ounces! Judging from many reports the “Other Volume” category is orders of magnitude larger than the delivery notices.

What I don’t know is how many of these trades are settled with the COMEX-approved gold equivalent ETFs or even if any are. I have sent an email to the COMEX to ask them. I won’t hold my breath for a reply. My guess is that a lot of EFPs are settled this way, which would account in part for the meteoric issue of GLD shares. But the COMEX should be transparent; it should be required to publish exactly what is being traded as “Other Volume.” In fact if the COMEX wants to be above suspicion it should insist in its rules that EFPs must be settled with gold that meets exactly the COMEX gold contract specification. The EFP then would facilitate delivery instead of facilitating a change in delivery obligations.

Why was it necessary to introduce a mechanism to exchange ETF shares in lieu of physical gold? Where there is smoke there is fire.

What I don’t know is how many of these trades are settled with the COMEX-approved gold equivalent ETFs. I have sent an email to the COMEX to ask them. I won’t hold my breath for a reply. My guess is that a lot of EFPs are settled this way, which would account in part for the meteoric issue of GLD shares.

Adding credence to this supposition is that GLD has gained wide acceptance with mutual funds, pension funds, and university endowment funds. Many sophisticated investors believe ETFs to be equivalent to investing in bullion. This makes this fiat paper bullion scam easy to perpetrate.

It would appear that the COMEX gold warehouse is merely a window dressing displaying an almost static 2.5 million ounces of dealer-owned gold inventory. But it would appear the vast majority of settlement occurs out of the average investor’s view AND, therefore, out of the view of the regulators.

This means that the COMEX is not what it seems. Delivery for an EFP only needs to be “substantially the economic equivalent” of the deliverable commodity! A default could occur at any time if this sorcery of swapping paper for paper suffered a serious setback.

The members of the Gold Cartel must be very proud of themselves for succeeding where the ancient alchemists failed. In fact, they are so proud they decided they didn’t need to limit the scam to the COMEX. They have implemented it on the Tokyo Commodity Exchange too.

On October 29, 2008, the TOCOM made the following announcement:

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Based on the Memorandum of Understanding signed in January this year, The Tokyo Commodity Exchange (TOCOM) and Tokyo Stock Exchange (TSE) have launched ‘Inter-market Cooperation Workshop’ in efforts to improve convenience for participants of both markets, and studied to reinforce cooperation between the commodity market and the stock market.

In light of the study at the workshop, TOCOM has added a ‘physically backed commodity ETF’ as a possible physical for EFP (Exchange of Futures for Physicals) transactions at the exchange, which allows seller and the buyer, who holds agreement for physical transactions, to conclude the contracts in the commodity futures market without continuous trading of physicals.

Therefore, the SPDR Gold Shares, physically backed commodity ETF listed on the TSE, which has a correlation with the gold spot price, can now be used as a physical for EFP transaction on TOCOM’s gold market.

Thanks to this new arrangement, it is expected that the link between TSE’s SPDR Gold Shares market and the TOCOM gold market will be strengthened and that the price reliability, as well as the liquidity of both markets, will be enhanced.

For inquiries about this news release, please contact:

Planning Department, The Tokyo Commodity Exchange

http://www.tocom.or.jp/news/2008/20081105-1.html

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Notice the comment that the “liquidity of both markets will be enhanced.” There can be little doubt about that! They can print as many ETF shares as they want and they can then settle as many EFPs as they want … and guess what happens to the price of gold with such an apparent increase in liquidity. Yes, it will be suppressed. As they said in the release, “the price reliability will be enhanced.”

Now that reminds me of Alan Greenspan, who said, “Central Banks stand ready to lease gold in increasing quantities should the price rise.” But why get the central banks to lease the real stuff when an ETF can print up an IOU that the unsuspecting investor will accept to be as good as gold?

Does this mean that the alchemists of the Gold Cartel have discovered the Elixir of Life for their gold suppression scheme so that it will go on forever?

No, absolutely not. Faith in anything paper is going out of fashion. California is shortly going to discover that people don’t like IOUs. Central banks outside of the G7 countries are buying gold, and I am sure they know about this alchemy. I doubt that the Chinese will accept GLD shares for settlement of futures contracts.

If you want an investment in bullion, then make sure you have an investment in bullion. In my opinion what I have presented here, and what other analysts have written, indicate that GLD and SLV are not investments in bullion. They are mere IOUs in bullion. Take physical delivery of gold and silver from the COMEX. They have only 2.5 million ounces of the real stuff in the gold inventory. That is a paltry $2.3 billion at today’s price.

The Gold Cartel is desperate to suppress gold and keep the dream of a “strong dollar” alive along with maintaining low interest rates by using a mechanism described by Professors Summers and Barsky in their research paper “Gibson’s Paradox and the Gold Standard.” The London Gold Pool used real gold to try to suppress the gold market, and it failed. The paper IOU is going to be even less successful. Imagine what will happen to the gold price when the holders of the paper IOUs go looking for physical gold instead. The Gold Cartel has built a dam on the river of physical gold demand, thinking that it is clever enough to defy the laws of supply and demand. Wait until the dam bursts to experience gold fever such has never been seen before.

Buy real gold and silver before the dam bursts!

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References

[1] “The Paper Game” by James Turk

http://www.financialsense.com/editorials/turk/2007/0305.html

[2] “Unanswered Questions about the Silver ETF” by James Turk

http://goldismoney.info/forums/showthread.php?t=125607

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Adrian Douglas is a market analyst and CEO of the Market Force Analysis newsletter (http://www.marketforceanalysis.com). He graduated in 1980 from Cambridge University, England, in natural sciences. For 20 years he worked in the oil and gas industry, where he held senior management positions in marketing and sales. He now runs his own consultancy and has been contracted by the largest companies in the oilfield services sector. His study of enterprise pricing and commercial markets led to his interest in the market pricing mechanisms of financial assets. As a result he developed a unique algorithm and methodology for analyzing financial futures markets and in particular for identifying appropriate entry and exit points. The technique has been named “market force analysis” and two patents have been filed on his techniques. He has a particular interest in the precious metals markets and serves on the Board of Directors of the Gold Anti-Trust Action Committee.

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Erste Bank gold report cites market manipulation

Erste Group Research, a division of Erste Group Bank AG in Vienna, Austria, has just published a 53-page special report on gold that includes a section on manipulation of the gold market. This section seems to have been heavily influenced by GATA’s work.

Under the headline “Is the Gold Price Subject to Manipulation?” found on Page 39 of the report (and Page 40 of the Adobe Acrobat reader), the Erste Group report says:

“The intraday movements have been showing an unusual pattern for many years now. In the early hours of Asian trading, the gold price tends to go up. Conversely, the afternoon fixing in London tends to trigger a downhill ride, which finds itself offset only partially in the New York session.

“The extreme concentration of futures positions seems particular as well: Currently three U.S. banks are positioned net short to the tune of 12.3 million ounces. This is equal to more than 15 percent of global production.

“In a speech in July 1998 Alan Greenspan addressed this context, saying that ‘central banks stand ready to lease gold in increasing quantities should the price rise.’

“The article ‘Gibsons’s Paradox and the Gold Standard’ by Lawrence Summers, currently chairman of the economic advisory board of President Obama, is another example. In this article Summers explains the connection between low key lending rates and the gold price.

“Paul Volcker, former chairman of the Federal Reserve (1979 to 1983) and currently a member of the economic advisory staff of President Barack Obama, pointed out, ‘Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.’

“And James Mofett, CEO of Freeport McMoRan, said, ‘The central banks are the OPEC of gold. They will control the price of gold by selling until they change their minds.’”

You can download the report in pdf format at the Erste Group Internet site HERE

 

Jon Herring: Gold is manipulated but buy it anyway

A contributor to Investors Daily Edge, Jon Herring, takes note of GATA’s work in his new essay:

“Gold Is Manipulated … And You Should Buy It Anyway”

The United States Bureau of Labor Statistics has an “inflation calculator” on their website. It allows you to enter an amount of money and a previous year and then tells you how much money you would need to have today to match the same buying power.

Just for kicks, I put the year 1980 in the calculator to see what would come out. If you had $25 then, you would need $64.54 today to purchase the same goods and services. If you had $5,000 then, you would need $12,907 to have the same buying power today.

So, what if you had $850 in 1980? How much would you need today to match the same buying power? The government tells us that number is $2,194. Perhaps you see where I am going with this.

The previous all-time high in gold was $850 an ounce, reached in 1980. So, by the government’s own calculation (which many have shown to be biased to the downside), you would need about 160% more dollars today to match the same buying power you had in 1980.

So how is it that gold – “the world’s greatest inflation hedge” – is roughly the same price today that it was in 1980, after 30 years of inflation? Keep in mind that gold only hit $850 for one day in 1980. The average price of gold that month was only $650. But the point is still valid.

The biggest reason is… manipulation.

It used to be that you didn’t speak about market manipulation in polite company. Everyone knows those conspiracies don’t exist. Who could do such a thing? We now know those sentiments are woefully naïve. There is now a deep and wide body of evidence that points to willful and ongoing, official and unofficial suppression of gold prices. Much of this evidence has been compiled and documented by the good folks at the Gold Anti-Trust Action Committee (www.gata.org).

Why would politicians, central bankers, commercial banks and Wall Street institutions have any interest in suppressing the price of gold? That’s easy. Gold is like a burglar alarm. It serves notice that politicians are spending more than they take in. And it emits a screeching siren when central bankers inflate the money supply. Wall Street and commercial banks hate gold because it represents competition for your investment dollars and savings… and because they can’t make any money on it.

A rapidly rising gold price signals to the masses that all is NOT right with our money and in the financial system. When the price of gold is going up, savers and investors begin to wonder why in the world they are holding dollars in the bank. There are some VERY powerful interests that would like to keep the price of gold in check.

So, how do they do it?

There are a number of ways the banking and political establishment have tried to keep a lid on gold. The first is simply the war of propaganda. Make gold savers out to be the lunatic fringe and denigrate gold itself. This is where the term “gold bug” came from. It was meant to be a disparaging term for people who believe in sound money and honest government. This is also where the talk of gold as a “barbarous relic” originated.

But that argument falls on its face immediately. If gold is such an ancient “relic” and so unnecessary and un-useful in today’s world of modern finance, then why do central banks still insist on holding gold in their vaults? And why do these same banks use gold among themselves to settle final accounts?

They do this because they don’t trust each other. They know that paper money is too easy to fabricate from nothing, while gold is rare and must be labored into existence. Despite what they say, central bankers know that gold is vitally important to the modern financial system and that there is no substitute for it.

Other than the war of words, the banking and political establishment put pressure on gold in other ways as well. One of these is central bank “leasing” of gold. I put leasing in quotes because usually when you lease something out, you expect to get it back (more on that in a moment). For years, central banks have been “leasing” the gold in their vaults to “bullion banks,” operated by institutions such as Goldman, Citi, Morgan, HSBC, etc.

And what a lucrative racket it has been. For years, the bullion banks received massive amounts of gold from official vaults at the “good buddy” interest rate of about 1% a year. They then sold this gold into the market and invested the proceeds. How much money could you have made in the ‘80s and ‘90s if you were able to borrow billions of dollars at 1% and reinvest those dollars at 5% risk-free… or even higher if you were willing to take on some risk? Let’s just say it was a pretty good deal, if you could get it.

Not only has this provided a welcome source of cheap capital for the insider banks, but a near constant supply of gold to the market meant that there were always big sellers to keep pressure on the price.

By no means is this the only way gold has been manipulated, but it is certainly one way. But for this to work in the bullion banks favor, the price of gold must fall or remain flat. Borrowing billions of dollars worth of gold at $300 an ounce and paying it back at $600 an ounce is a recipe for bankruptcy. So you can imagine the enormous incentive within the system to keep the price of gold from rising.

But they have not succeeded. These gold leasing operations were running full tilt in the early part of this decade when gold was in the $200s and $300s. Gold is now three times higher than it was then. And these banks are on the hook for billions of dollars worth of gold.

But remember, these are insiders. By now you know what that means. They have no intention to pay back the tons of gold they have borrowed. And the central banks have no intentions of calling these loans. To do so would require the bullion banks to buy gold at the market, paying prices several times higher than the price at which the gold was borrowed. This would instantly bankrupt these banks, though we know they would be insolvent anyway without taxpayer bailouts. Therefore, the central banks simply roll the “leases” over, again and again.

So, back to the subject of manipulation. Why would you invest in a market that is so clearly manipulated? First, because it is the right thing to do to favor honest money over fraudulent money. But the other reason is that the establishment’s power to manipulate public opinion of gold and influence the market itself is becoming weaker and weaker, and will soon fail altogether.

I was investing in gold and silver and precious metals equities when gold was $260 an ounce. The cries about manipulation of the market were as loud then as they are today. The manipulation was real. And yet, gold has risen 240% in that time. Gold stocks have soared even higher. Despite the best efforts of the establishment, gold has climbed steadily for eight straight years. And considering what is happening in the monetary realm, this trend shows no signs of abating.

However the manipulation due to central bank leasing operations will most certainly abate. These banks do not have an unlimited amount of gold to sell into the market. And their appetite for doing so is clearly waning. Central banks around the world are now adding gold to their coffers rather than divesting.

And despite propaganda efforts to the contrary, the public is gradually waking up to the fraudulent nature of the fiat-based monetary system and the shaky notion of holding unsound dollars in unsound banks.

In the realm of world finance, gold is a tiny market. It won’t take a huge shift in sentiment to stir up a massive increase in demand… demand that could not be met by the world’s miners and would have to result in a sharp increase in prices. Sentiment has already turned. But not nearly to the degree it will when the specter of inflation returns.
That day is coming. Got gold?

To Your Success,
Jon Herring

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