October 2007


Here’s a word of caution from the man who knows gold like the palm his hand:

 

Dear CIGAs,

For your information, gold above $782 by 3% means $882 – $889 and then on to $1050.

It does not matter if it is next week or next month. It is coming as the price of gold makes its way to $1650.

I have no doubt that $1650 will come. My concern is not that it will not happen, but that I am much too conservative in my long-term price objective since 2000.

Last week’s story is becoming too common to ignore. Keep in mind that all this damage has occurred because of a small part of the gigantic mountain of over the counter derivative paper, which if official figures are correct is only 5% of the total. What do you think the financial landscape would look like if 1/3 of the OTC derivative mountain were to melt? It will.

If major international investment banks can be torn apart how can we have faith in the small local institutions that hold most of your ready cash? How about all those retirement plans that prevent you from securing ownership without the need to pay a penalty tax?

When I said “This is IT,” it is not something that I take lightly. Never in 49 years in finance have I seen a set of circumstances so challenging to the man in the street.

If there is a severe financial challenge to the man in the street, there is possible decimation on the top. Decimation may well be too conservative a statement because that means one out of ten. Right now it looks like 80% of major names have problems from their principle position in the issuance of over the counter derivatives. It should not be a shock because the financial capacity to perform on these instruments depends on the balance sheet of the loser in the transaction. Add to that no clearinghouse financial structure and performance is not improbable but impossible in a crunch.

What I am getting at is a simple question. Are you prepared?

You would be amazed how little space $1,000,000 in gold coins takes up. $100,000 looks like a small loaf of bread. Now you can see the actual transformation from the US dollar to gold as a currency of choice. It has happened.

When gold is purchased as money there is no reason why you should play it as a speculative item trying to buy it cheaply as it may well leave you in the lurch.

It becomes more important now to take delivery of whatever investments you have in shares as paper certificates. Whenever a broker tells you it cannot be done it is either self-serving or rank stupidity. Once you do have them in your position DO NOT lose them.

The basic goal now is to eliminate intermediaries between your assets and yourself. What do you stand to lose by taking this action, a few percentage points interest, and a tax advantage? You gain the advantage of possession in the financial world that is separating people from billions, probably trillions of dollars. It cannot be contained among the Blue Blood International Investment firms. This is coming our way and you cannot simply weave and duck to avoid it. You need to be your own bank, your own broker and your own central bank.

If the once most respected international investment firms are teetering, if not already broke, how can you sit by without taking precautions? You have nothing to lose and your fortune to protect.

If there is no need for the actions I am suggesting then simply put it back. No bank will refuse your money if you wish to deposit it. No broker will turn you away if you want to convert your paper certificate back to a transfer agent’s computer entry.

Prof. Xenophon Zolotas (March 26, 1904 – June 11, 2004) was an eminent Greek economist who had also served as an interim non-party Prime Minister of Greece. The speeches that follow were given to a foreign audience, at the closing session of the International Bank for Reconstruction and Development, on September 26, 1957 and on October 2, 1959. Prof. Zolotas held the positions of the Governor of the bank of Greece and the Governor of the Funds for Greece, at that time.

1957 speech

I always wished to address this Assembly in Greek, but I realized that it would have been indeed Greek to all present in this room. I found out, however, that I could make my address in Greek which would still be English to everybody. With your permission, Mr. Chairman, I shall do it now, using with the exception of articles and prepositions only Greek words

Kyrie,

I eulogize the archons of the Panethnic Numismatic Thesaurus and the Ecumenical Trapeza for the orthodoxy of their axioms, methods and policies, although there is an episode of cacophony of the Trapeza with Hellas.

With enthusiasm we dialogue and synagonize at the synods of our didymous Organizations in which polymorphous economic ideas and dogmas are analyzed and synthesized.

Our critical problems such as the numismatic plethora generate some agony and melancholy. This phenomenon is characteristic of our epoch. But, to my thesis, we have the dynamism to program therapeutic practices as a prophylaxis from chaos and catastrophe.

In parallel, a panethnic unhypocritical economic synergy and harmonization in a democratic climate is basic.

I apologize for my eccentric monologue. I emphasize my eucharistia to you Kyrie, to the eugenic and generous American Ethnos and to the organizers and protagonists of this Amphictyony and the gastronomic symposia.

Xenophon Zolotas

1959 speech

Kyrie,

It is Zeus’ anathema on our epoch for the dynamism of our economies and the heresy of our economic methods and policies that we should agonise between the Scylla of numismatic plethora and the Charybdis of economic anaemia.

It is not my idiosyncrasy to be ironic or sarcastic but my diagnosis would be that politicians are rather cryptoplethorists. Although they emphatically stigmatize numismatic plethora, energize it through their tactics and practices.

Our policies have to be based more on economic and less on political criteria.

Our gnomon has to be a metron between political, strategic and philanthropic scopes. Political magic has always been antieconomic.

In an epoch characterised by monopolies, oligopolies, menopsonies, monopolistic antagonism and polymorphous inelasticities, our policies have to be more orthological. But this should not be metamorphosed into plethorophobia which is endemic among academic economists.

Numismatic symmetry should not antagonize economic acme.

A greater harmonization between the practices of the economic and numismatic archons is basic.

Parallel to this, we have to synchronize and harmonize more and more our economic and numismatic policies panethnically.

These scopes are more practical now, when the prognostics of the political and economic barometer are halcyonic.

The history of our didymous organisations in this sphere has been didactic and their gnostic practices will always be a tonic to the polyonymous and idiomorphous ethnical economics. The genesis of the programmed organisations will dynamize these policies. I sympathise, therefore, with the aposties and the hierarchy of our organisations in their zeal to programme orthodox economic and numismatic policies, although I have some logomachy with them.

I apologize for having tyrannized you with my hellenic phraseology.

In my epilogue, I emphasize my eulogy to the philoxenous autochthons of this cosmopolitan metropolis and my encomium to you, Kyrie, and the stenographers.

Xenophon Zolotas

 

Χρυσός: το bull market συνεχίζεται αλώβητο

Η εβδομάδα που πέρασε σφραγίστηκε από ακόμα ένα νέο ρεκόρ. Η τιμή του Χρυσού έκλεισε στα $783.50/ουγγιά, ήτοι στα ανώτερα επίπεδα των τελευταίων 28 ετών. Κρίνοντας από το μακροχρόνιο διάγραμμα της τιμής για την εν λόγω περίοδο, βλέπουμε ότι το bull market που ξεκίνησε δειλά-δειλά στα μέσα του 2002, είναι για τα καλά στρογγυλοκαθισμένο από τεχνική άποψη. Αλλά και τα θεμελιώδη μεγέθη της παγκόσμιας οικονομίας που έδωσαν το εναρκτήριο λάκτισμα στο bull market αυτό, συνεχίζουν σήμερα να ισχύουν περισσότερο ενισχυμένα από ποτέ (δείτε προηγούμενα ποστ)

Με τέτοια θεμελιώδη σε συνδυασμό με την ακλόνητη τεχνική εικόνα, όλα δείχνουν ότι το ρεκόρ όλων των εποχών στην τιμή του μετάλλου (δλδ. τα $850/ουγγιά) είναι απλώς θέμα χρόνου να διασπαστεί. Άν εξαιρέσει κανείς την περίπτωση μιας ογκώδους και καλά ενορχηστρωμένης παρέμβασης στη τιμή του Χρυσού από τους “γνωστούς κύκλους” -όπως η GATA ακούραστα δεν σταματά να καταγγέλνει- η διάσπαση αυτή θα έλθει ίσως συντομότερα και απ’ότι αναμένετο.

Στα θεμελιώδη, πέραν από τα αστρονομικά μεγέθη λιμνάζουσας ρευστότητας παγκοσμίως, ανήκει και η ενίσχυση της γενικής αντίληψης ότι το US$ έχει ακόμα δρόμο στην κατηφορική του πορεία. Όσο τούτο γίνεται συνείδηση, τόσο ενισχύεται η φυγή και απεμπλοκή από το US$ προς σταθερότερες αξίες -όπως αυτή εμφανώς πλέον καταδεικνύεται και πάλι από τη πορεία της τιμής του χρυσού- των όσων κατέχουν δολλαριακή ρευστότητα (π.χ. Κίνα, Ρωσσία, Αραβικά Εμιράτα κλπ)

Κατά την ανοδική πορεία του χρυσού θα πρέπει βέβαια να αναμένονται κατά καιρούς “ισχυρές αναταράξεις” καθώς κάθε άνοδος θα συμπιέζει προσωρινά τη ζήτηση που προέρχεται από το μεγάλο -προς το παρόν- “πελάτη” δλδ του εποχιακού κλάδου της χρυσοχοϊας. Όσο όμως περισσότερο η ζήτηση του μετάλλου θα περνά σε ισχυρά επενδυτικά χέρια -safeheaven investing- τόσο η ένταση και η διάρκεια των όποιων διορθώσεων θα μειώνεται.

Βραχυπρόθεσμα τελικά πού βρισκόμαστε;
Η διάσπαση του επιπέδου των $800 είναι πολύ πιθανό να πραγματοποιηθεί μέσα στο 2007 καθώς όλοι οι οδοδείκτες συγκλίνουν προς τα κεί. Τού χρόνου ποιός ξέρει; Ίσως -τολμώ να πώ- να δούμε και τα $1000/ουγγιά!

By Kenneth J.Gerbino

 

The big news globally is that the U.S. Federal Reserve and the Bank of England both threw in the towel on monetary policy to deal with market panics in the last two months. We believe these problems are only the tip of the iceberg of a massive credit and investment bubble that is threatening to unwind. Their only answer is more money and soon more inflation.

In the U.S., the Fed lowered important benchmark interest rates well beyond what was expected and instigated very lenient bank repayment policies for borrowed capital from the Fed. This was not to help the man in the street or to “avoid a recession”. Since unemployment is so low the Fed rate move was obviously made to bail out Wall Street and the major banking institutions. This resulted in the dollar hitting new lows and gold moving higher. These trends are likely to continue.

History tells us the truth about the Fed. In the twenty years before the Fed was created, there were 1,724 bank suspensions, in the twenty years afterwards there were 15,502. By subsidizing and protecting the banks they encourage speculation, overleveraging and excessive credit creation which leads to major banking problems that are then solved at the expense of the general population.

In England the central bank announced that all depositors of Northern Rock, Britain’s 5th largest mortgage bank would have their deposits guaranteed by the government. This was in response to a bank run which had ensued with world press coverage showing thousands of people lining up to withdraw their savings at various branches.In the future this will become a disastrous precedent encouraging more speculation by institutions and investors. Northern Rock had a $6 billion equity base and had leveraged its balance sheet to $226 billion. I suspect they are not alone and this may not be the last of the bail outs.

These actions are only the beginning of a new round of paper money injections that will surely bring on above average inflation. An excellent study by economist John Williams shows the real inflation rate in the U.S. since 1991 was annually 4% higher than government figures. Financial writer Howie Katz reports adjusting the CPI from 1983 to reflect housing costs as opposed to rents shows U.S. consumer prices have tripled not doubled as reported by the Bureau of Labor statistics. Gold averaged around $400 in 1983, it is reasonable to triple this price for a future target just based on a simple real CPI formula.

The Dollar

With the dollar at new 40 year lows, it will force Europe and other countries to devalue their currencies. If you are an international business working on 2-3% margins or less and you can now buy your U.S. goods 8% cheaper because of a weak dollar, it is an incentive to do so. This means other countries that depend on exports will not get that business and their governments will respond with competitive devaluations. Devaluations in the current floating currency environment (where exchange rates change daily in response to supply and demand as well as government intervention) can be accomplished by 1) manipulating interest rates lower (which then leads to more money creation by the banking institutions) or 2) just printing money. The central banks and the banking establishment in these countries along with the politicians also have a beautiful excuse to print their way out of the fiscal mess they are in because they cannot meet the obligations to their citizens. This is and always will be bullish for precious metals. This is one reason why precious metal ownership by way of reserves in the ground of mining companies is prudent. Precious metals could be one of the only monetary assets still standing when this excessive global credit and monetary cycle is over.

China and Japan – The Big Currency Misconception

Because of competitive devaluations, already mentioned above, the death of the dollar may not be as fast as some people think. Also one of the big misconceptions that I keep reading about is that China and Japan will soon dump their holdings of dollar denominated Treasuries because they are losing value with the dollar going down. Not true.

Follow this very carefully.

  1. A million dollars of clothing is exported from China to the U.S.
  2. A million dollars is sent to China.
  3. The Chinese factory owners send the million dollars to the central bank and ask for the equivalent in renminbi so they can pay their workers and suppliers.
  4. No problem so far.
  5. But what does the Chinese central bank do?
  6. They actually create (print) $1 million worth of renminbi and send this off to the factories and keep the original $1 million and buy U.S.Treasuries with it.
  7. The central bank does not have to exchange the dollars for renminbi’s, they can create an additional $1 million worth of renminbi’s.
  8. Since China now has $1 million in local currency they earned for the clothing does the central bank even care if the value of extra $1 million in Treasuries they own goes down by 20% or more.
  9. The answer is no.

China sent $1 million of clothing to the U.S. and now they have $1 million of local currency and $1 million of U.S Treasuries. Easy money.

China now has more money in circulation (M1) than the United States. $1.9 trillion vs. $1.4 trillion. The reason is that they have been double dipping.

In the above example the $1 million they have in Treasuries is all gravy and this is what the Chinese have done the last 10 years and that is why their money supply has mushroomed. When the time comes they will most likely take the trillions they have in U.S. Treasuries and come back to the U.S. and buy buildings and factories (like the Japanese did in the late 80’s) Spending dollars for dollar denominated assets in the U.S. will have zero effect on the exchange rate. So the argument that these Treasuries are a huge overhang on the U.S. dollar because the Chinese don’t want to lose value is not true. They are so far ahead already it doesn’t matter. Of course the local citizens will now have to put up with plenty of inflation that is coming to China from all the new money floating around the country.

Gold Demand

High oil prices are flowing huge amounts of money to countries in the mid east that have been historically pro gold and the higher oil goes the more gold will be absorbed by these governments, their financial institutions and investors.

It has been estimated that all the gold in the world ever mined equals 5.3 billion ounces. This has a value of $3.7 trillion. Much of this gold is in woman’s jewelry cases and on men’s wrists or resides in peoples teeth. Global liquid financial assets are in the hundreds of trillions of dollars and global derivatives are over $450 trillion. Therefore the ratio of gold available for investment is a tiny fraction of the other investment alternatives. When further financial problems arise gold will have to rise when too much money chases too few ounces.

The U.S. Economy – Where’s the Beef?

The U.S economy has been skating on thin ice. Subtracting out the money that people have spent from refinancing their homes, the U.S. economy (GDP) has averaged only one half per cent growth annually for the last six years. This means we are living in an economy that has been fueled by consumers borrowing home equity money and this has now come to an abrupt end. This, coupled with the underlying problems in our banking system, means the only way out is a loose monetary policy. The overleveraged banking system cannot handle a recession. This unfortunate scenario coupled with more trade and budget deficits will have a positive effect on the gold price and will also contribute to future inflation.

Since 2002 crude materials in the U.S. are up exactly 100%. This is more anecdotal evidence, that the inflation rates in the U.S. will rise substantially in the coming years.

Money Creation Versus Gold

Our survey of the seven largest countries in the world and Europe show that they created $775 billion in new money in the last year. The supply of gold available for investment, outside of jewelry and industrial demand which would include bars, coins and bullion funds was approximately $13 billion. This is a ratio of 60 to 1 and does not include the money creation by the other 175 countries in the world. The point is that there really is not much annual gold supply around for investment purposes or financial insurance or a money substitute. Sooner or later the price will dramatically reflect this imbalance. India has increased it’s money supply 15.3% in the last year. This is probably why in the first eight months of 2006, gold imports increased by 86%. India could be on track to consume over 35% of 2007 global mine supply all by itself.

Because mining companies have gold in the ground, their valuations over the next decade are logically bound to increase substantially. These companies provide an outstanding opportunity to own gold in the ground via stock ownership.

Volatility and The Gold Stocks

The recent volatility of the precious metals and the mining shares unfortunately is part of the equation of this investment sector. We attempt to balance these fluctuations in our hedge fund but it is a difficult task and requires focus and discipline. You should expect volatility with your personal portfolios in the future and realize that volatility in this sector is normal. But, in my opinion, this type of volatility is a small price to pay for the long term trend that is clearly in your favor and the excellent growth and value attributes of a well diversified and hedged portfolio.

The mining sector should continue to be one of the top performing investment sectors in the coming 3-5 year period. The past actions of the Fed and other central banks mean they will surely do everything they can to avoid a credit and debt implosion that according to many experts could be in the trillions of dollars of potential defaults and bankruptcies. If this estimate is true then bailing out the institutions that are in danger will require the greatest expansion of paper money in history. The winner will be gold and other natural resources because the more money that is created the higher the prices of basic commodities and monetary substitutes (gold and silver) will go. Gold mining shares are the beneficiaries of the economic excesses of others.

It is important to be careful of exploration stocks and allocate only a small amount to this sector. The large mining stocks are now being bought by huge non gold savvy hedge funds and will create lots of volatility as we go forward. A stampede by these players either way can be profound. The developmental mining companies with solid resources in the ground and a 1-2 year horizon to production will be targets for buy outs by mid-tier and major mining companies.

Good luck – you are going to need it especially if gold goes to $1,200 and then back down to $700 and then to $2,000, which is very possible in the coming decade. So always keep a core portfolio as insurance (and long term appreciation) and a trading portfolio that rolls with the punches. Do not go on margin and do not spend much time or money on the exploration stocks as more than likely every share you buy is usually from an insider who is selling. Also if there ever is a major economic upheaval gold and silver mining companies with known and verified resources in the ground will go up dramatically but exploration companies with nothing but a geologist and promoter’s dreams will go no where because they have nothing in the ground. Remember that – they have nothing – so be careful.

For more information on the economy, stock market and gold please visit our website at: www.kengerbino.com

Ken Gerbino
26 October 2007

***

click for magnification
It looks like gold will be testing the $800/oz. mark before the year is out.
Mine stocks are still a little shy (perhaps they still can’t believe their eyes!) and the metal is leading the paper for the time being.
Once the up trend has embeded a definite track on the collective awareness, then it’s “fasten seatbelts” time…

By CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
The U.S. Treasury Department’s acknowledgement of loans and swaps of gold from the U.S. gold reserve, disclosed last week by James Turk of the Freemarket Gold & Money Report, appears to have been prompted by the International Monetary Fund’s adoption in May of stricter rules for financial transparency for member nations.

The revisions to the IMF’s fiscal transparency manual were adopted on May 8, seemingly without any announcement except for this brief preface on the IMF’s Internet site:

http://www.imf.org/external/np/fad/trans/index.htm

GATA long had complained that IMF rules allowed member nations to count leased and swapped gold as gold still in the vaults of their treasuries and central banks. But the IMF agreed to consider tightening the rules when the issue was pressed by Neal R. Ryan, then vice president and director of economic research for New Orleans coin and bullion dealer Blanchard & Co.

The revised manual, posted at the IMF’s Internet site here — http://www.imf.org/external/np/pp/2007/eng/101907m.pdf — appears to require more specific accounting for gold reserves, declaring on Pages 74 and 75:

“Financial assets consist of financial claims that entitle the government to receive one or more payments from a debtor, as well as monetary gold and
special drawing rights. Financial assets to be reported include cash and cash equivalents; other monetary assets, such as gold and investments; and loans and advances.

“Additional breakdowns should be provided within each category of financial asset. For example, investments might be broken down into direct marketable securities, equity investment in private companies, portfolio investment in private companies, and investment in international institutions. Loans and advances receivable might be broken down by sector (e.g., agricultural loans, student loans, and housing loans), and within sector by major loan programs.

“Foreign exchange reserves held by the central bank should not be reported as part of the central government statement of financial assets for fiscal policy purposes. They are generally held to provide import cover and for possible exchange market intervention, although it is acknowledged that in some countries foreign exchange reserves have been run down as a matter of central government policy for other purposes, including debt repayment, even when held by an independent central bank.

“Foreign exchange reserves should, however, be reported as part of other transparency requirements (i.e., in the context of monetary or statistical standards), generally by the central bank.

Any special characteristics of financial assets, such as being secured against a debt or other specific liability, or any restrictions on the use of an asset or the income deriving from it, should be noted as memorandum items. [Emphasis added.] Any financial assets excluded from reporting should also be noted.”

The acknowledgement of the need to distinguish between gold in the vault and leased (“deposited”) and swapped gold began to appear in the Treasury Department’s weekly U.S. International Reserve Position report a few days after the IMF adopted the revisions to its fiscal transparency manual, on May 14. The 13th line of the Treasury report, recording gold reserves, contained this new language parenthetically: “including gold deposits and, if appropriate, gold swapped.”

The Treasury’s May 14 report can be found here:

http://www.treas.gov/press/releases/20075141738291821.htm

But the Treasury Department’s new reporting form fails to comply with the new IMF rules, since it still does not distinguish unencumbered gold from encumbered gold, gold on deposit and gold swapped, even as there would be no need for the new language in the reporting form if the Treasury had not already placed gold on deposit somewhere or had not swapped gold.

So a lot remains to be done before central banks come clean about their gold reserves. GATA aims to press the Treasury Department about this in a formal and legally demanding way in coming days.

Remarks by Chris Powell
Secretary/Treasurer, Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
Sunday, October 21, 2007

Ever since the Gold Anti-Trust Action Committee was founded in 1999 to expose manipulation of the gold market, we have been called “conspiracy nuts.” We don’t mind the “nuts” part, but we’re actually public record nuts. For the scheme to suppress the price of gold is increasingly a matter of ordinary public record.

It was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: “Central banks stand ready to lease gold in increasing quantities should the price rise.” That is, Greenspan himself contradicted the usual central bank explanation for leasing gold — supposedly to earn a little interest on a dead asset — and admitted that gold leasing was all about suppressing the price. His admission is still posted at the Fed’s Internet site.

The Washington Agreement on Gold, made by the European central banks in 1999, was another admission — no, a proclamation that central banks were working together to control the gold price. The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that rubbish, it was still collusive intervention in the gold market.

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. On that date Barrick filed a motion to dismiss Blanchard & Co.’s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase. The Blanchard suit charged that Barrick was doing exactly what Barrick’s motion went on to admit. But Barrick’s motion said that in borrowing gold from central banks and selling it, the company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick’s confession to the gold price suppression scheme is posted on the Internet HERE.

The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. “Foreign currency reserve assets and gold,” the RBA’s report said, “are held primarily to support intervention in the foreign exchange market.” The RBA’s report is still posted on the Internet at the central bank’s own site.

Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005. There are five main purposes of central bank cooperation, White announced, and one of them is “the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”

White’s speech is posted at GATA’s Internet site HERE.

Last week the editor of the Freemarket Gold & Money Report and the founder of GoldMoney, James Turk, a longtime consultant to GATA and a speaker at this conference, revealed some U.S. Treasury Department reports showing that since May this year the U.S. gold reserve has been or is being mobilized for leasing to suppress the gold price. Those records are available on GATA’s Internet site.

In complaining about the manipulation of the gold market, GATA has not been called “conspiracy nuts” by everyone. We have gained a good deal of institutional support over the years.

First came Sprott Asset Management in Toronto, whose chief investment strategist, John Embry, has spoken at this conference. In 2004 Sprott issued a comprehensive report supporting GATA. The report was titled “Not Free, Not Fair — the Long-Term Manipulation of the Gold Price,” and it remains available at the Sprott Internet site.

Then last year the Cheuvreux brokerage house of Credit Agricole, the major French bank, issued its own report confirming GATA’s findings of manipulation in the gold market. The Cheuvreux report was titled “Remonetization of Gold: Start Hoarding,” and you can find it at the GATA Internet site.

And last month Citigroup — yes, Citigroup, a pillar of the American financial establishment — joined the conspiracy nuts. On September 21 Citigroup published a report titled “Gold: Riding the Reflationary Rescue,” written by its analysts John H. Hill and Graham Wark, declaring: “Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price.”

You can find the Citigroup report at the GATA Internet site.

So a bigger question today is not whether central banks and their agents manipulate the gold market — even Citigroup sees it now — but why this should ever have been a mystery or a controversy.

For the manipulation of the gold market by central banks is only the most basic economic history. That’s what the gold standard was about — governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies that were backed by gold. Though the gold standard was abandoned amid the Great Depression, that was not the end of government efforts to control the gold price. The United States and Great Britain attempted to hold the price at $35 per ounce throughout the 1960s in a public arrangement of dishoarding that came to be known as the London Gold Pool. The London Gold Pool was overwhelmed by demand and was shut down abruptly in April 1968. Since then there has been sporadic selling of gold by central banks and, increasingly, leasing of gold by central banks, even as the gold price has continued to rise.

That the London Gold Pool was a scheme to manipulate the gold price is not denied even as the more recent selling and leasing by central banks may be disputed.

But it is all much bigger than that. Gold is only part of it.

For market intervention is why central banking was invented. Intervening in markets is what central banks do. They have no other purpose.

Central banks admit intervening daily, even hourly, in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels.

Central banks admit doing the same in the government bond markets.

Now there is even evidence that the Federal Reserve and Treasury Department have been intervening frequently in the U.S. stock markets since the crash of 1987. You don’t have to settle for rumors about the “Plunge Protection Team,” also known as the President’s Working Group on Financial Markets. Again you can just look at the public record.

The Federal Reserve injects money into the stock and bond markets every day, on the public record, through what are called repurchase agreements the Fed has with the major New York financial houses. The financial houses become the Fed’s agents in directing that money into the markets. This week the money deployed into the stock and bond markets by the Fed through the repo pool stood at about $160 billion — which is plenty for pushing all sorts of markets around or propping them up. Indeed, market manipulation is the only purpose of the repo pool.

As even Citigroup acknowledges now, the price of gold has been manipulated through the strategic dishoarding of gold by central banks and their sale of gold futures and options.

So the biggest question of all may be why central banks manipulate the gold price and what this means for investors.

Gold has been manipulated by central banks because it is a currency that competes with their currencies, a currency whose price helps set the price of government currencies and helps determine interest rates.

More than that, gold is the ticket out of the central bank system, the escape from coercive central bank and government power. As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply.

In recent months central bankers often have complained about what they call “imbalances” in the international financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers are ironic, since these imbalances have been caused by the central bankers themselves, their constant interventions in the currency, bond, and commodity markets to prevent those markets from coming into balance lest certain political interests be disturbed.

Yes, when markets balance themselves they often do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for almost 150 years before that the country went through a catastrophic deflation every decade or so. Central banking was enacted to prevent those catastrophic deflations. The problem with central banking has been only the old problem of power — it corrupts. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest. These interventions, effectively subsidies to one economic interest or another, increasingly are needed to prevent the previous imbalances from imploding. And so we have come to an era of daily market interventions by central banks, so much so that the main purpose of central banking now is to prevent markets from breaking out.

Central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret — because, in choosing winners and losers in the economy, administering the ultimate patronage, modern central banking cannot stand scrutiny. Yet the secrecy of central banking now is taken for granted even in nominally democratic countries. What a hundred years ago in the United States was called the Money Power is so ascendant today that it boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: “The last duty of a central banker is to tell the public the truth.”

The truth as GATA sees it is this:

First, gold is the secret knowledge of the financial universe, but it is coming to be an open secret. Indeed, GATA announces here today that it has retained a prominent Washington-area law firm, William J. Olson PC of McLean, Virginia, to work with our consultant, the monetary historian Edwin Vieira, to demand from the U.S. government, under the federal Freedom of Information Act, a full accounting of U.S. gold reserves. That demand will be filed in a few days.

Second, while you will hear at this conference much technical analysis of the markets, all of it will be compromised if it fails to account for government intervention.

And third, that intervention is failing because of overuse, exposure, exhaustion of Western central bank gold reserves, and the resentment of the developing world, which is starting to figure out how it has been exploited by the dollar system. The Western central banks are attempting a controlled retreat with gold. But GATA believes that they may have to retreat farther than anyone dreams — that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between gold suppply and the explosion of the world money supply of the last few decades, there may not be enough zeroes to put behind the gold price.

One more thing: You’re all invited to GATA’s fund-raising reception, cocktail party, and buffet during this conference. It will be held from 7 to 10 p.m. Tuesday at Latrobe’s on Royal, 403 Royal St., here in New Orleans. Admission will be $50, you’ll get to meet GATA’s officers and directors, and for a few hours it will be one place in the world financial system with absolutely no liquidity problem.

* * *

Next Page »