August 2008

Rob Kirby of Kirby Analytics in Toronto, a GATA consultant, tonight posted at Jim Puplava‘s Financial Sense Internet site an examination of the latest commitment of traders reports from the New York Commodities Exchange. Kirby’s conclusion matches what silver market analyst Ted Butler reported last week in silver: an eleven-fold increase in the concentrated short position in gold, the short position held by three or fewer banks.

Such a short position, Kirby notes, can be only the work of a central bank, “because no public entity — bank or otherwise — has the balance sheet maneuverability in an impaired credit environment to conduct such business.”

Yes, even coin and bullion dealer Kitco, employer of the gold market analyst who most steadfastly refuses to acknowledge the likelihood of gold market manipulation, isn’t short that much gold.

You can find Kirby’s commentary, headlined “Wake-up Call,” at Financial Sense HERE

A new summary of GATA’s work and the organization’s outlook toward the world financial system, written by its secretary/treasurer C. Powell, has been posted in the “Essays” section of GATA’s Internet site. It may be of some interest to people who have come upon the gold price manipulation issue only recently.
A new summary of GATA’s work

By Chris Powell
Gold Anti-Trust Action Committee Inc.
Sunday, August 24, 2008

While the gold price long has been at least “managed” by Western central banks — as with the gold standard itself, and then the London Gold Pool of the 1960s — the current arrangement, largely surreptitious, may have originated with an academic paper co-written in 1988 by Lawrence Summers, then a professor at Harvard, later deputy to Treasury Secretary Robert Rubin and then his successor. The paper was titled “Gibson’s Paradox and the Gold Standard” and was published in the Journal of Political Economy. You can find it here:

It’s very dense but GATA consultant Reginald H. Howe, a lawyer and gold mining company investor in Massachusetts, the first litigator against the gold price suppression scheme and a Harvard grad himself, put it in context in 2001 with his essay “Gibson’s Paradox Revisited: Professor Summers Analyzes Gold Prices,” which you can find in the “Essays” section on the home page at Howe’s Internet site here:

Essentially, the scheme as implied by Summers’ paper is to keep interest rates down and government bond prices up by rigging the gold market, gold and interest rates ordinarily being inversely correlated.

I’ve long had a hunch that the scheme became U.S. government policy because of President Clinton’s resentment upon being told, soon after taking office, that the foremost objective of his administration should be to placate the bond market. There is a famous quotation about this in Bob Woodward’s book about the Clinton administration’s early days, “The Agenda.” The full book isn’t available on the Internet but the quotation appears in several reviews of the book that have been posted. Clinton says:

“We’re Eisenhower Republicans here. We stand for lower deficits, free trade, and the bond market. Isn’t that great? … We help the bond market and we hurt the people who voted us in.”

Here’s a link to one such review:

My hunch is that not long after Clinton expressed this resentment of the bond market, Rubin told Clinton how the bond market could be deceived by rigging the gold market, and Clinton gave his approval.

While this scenario is admittedly speculation, the gold-carry trade, on which the gold price suppression scheme was based — the lending of Western central bank gold reserves to investment houses at an only nominal interest rate, the investment houses’ sale of those reserves, and their use of the proceeds to purchase government bonds for a risk-free income of 5 percent or so — is a matter of public record. Even if it wasn’t the intent, this had the effect of suppressing the gold price, supporting government bond prices, and lowering interest rates.

Further, a gold mining company executive, a longtime GATA supporter, who worked with Rubin at Goldman Sachs prior to Rubin’s appointment as treasury secretary, witnessed Rubin’s involvement in the gold carry trade at Goldman.

While the people who formed GATA sensed as early as 1998 that something was wrong technically in the gold market, it took us a couple of years to figure out that the culprits were not the visible players in the futures markets — the New York investment banking houses — but rather the Western central banks, and that the investment houses were just their agents, their cover. A British economist, Peter Warburton, may have been the first to put it together comprehensively, with his 2001 essay, “The Debasement of World Currency: It Is Inflation, But Not as We Know It,” which you can find here:

Warburton argued that the Western central banks meant to deprive the world of any standard by which their enormously inflationary policies could be quantified.

While the gold price suppression scheme is seldom raised in polite company and even less often acknowledged in the mainstream financial press, enough public documentation of it has been discovered to allow me to make a stump speech out of it. Here is the stump speech’s most recent version, as presented at GATA’s conference in Washington in April:

The speech contains Internet links to most of the documentation it cites.

An indication that maybe GATA is not just another conspiracy group came out of the blue in June 2004, when Oleg Mozhaiskov, the deputy chairman of the Bank of Russia, that country’s central bank, gave a speech to the London Bullion Market Association’s Bullion Market Forum in Moscow. Up to that point GATA had not knowingly had contact with anyone in Russia, and yet the only words in Mozhaiskov’s speech that were in English were “Gold Anti-Trust Action Committee.”

We heard something about the Mozhaiskov speech soon afterward but the LBMA refused to provide us a copy of its English translation. So I got in touch with Mozhaiskov by fax in Moscow and he agreed to provide a translation through an intermediary, Moscow Narodny Bank in London. (I told Mozhaiskov that I’d be glad just to get the Russian text, since at that time my newspaper employed a reporter who was fluent in Russia and had studied at length there, but Mozhaiskov was insistent on controlling the translation.) It took a couple of months but Mozhaiskov came through.

His remarks about GATA were less than a complete endorsement of our work but his meaning seemed plain enough: that the gold market was not free-trading and that it was subject to surreptitious influences.

Of course there was no need for Mozhaiskov to mention GATA if he didn’t want to call attention to our work. And of course he thereby signified that the Russian central bank had been watching GATA for a long time, quite without our knowledge. You can find Mozhaiskov’s speech here:

A year later, in August 2005, Andrey Bykov, an economics adviser to the Russian president, Vladimir Putin, attended GATA’s international conference in Dawson City, Yukon Territory, at which the gold carry trade was a primary subject. We can’t prove it but we suspect that it was at this point that the Russians understood that most of their central bank’s gold had been deposited in London and leased out as part of the gold price suppression scheme, which served to suppress commodity prices generally and cheat commodity countries like Russia:

In any case immediately after GATA’s conference in Dawson City, President Putin announced that the Bank of Russia would be adding to its gold reserves and buying gold on all markets, and gold’s ascent quickened dramatically. We doubt that this was a coincidence.

Frank Veneroso, whose credentials in international finance are as good as anyone’s, gave his analysis of the gold carry trade at a conference in Lima, Peru, in 2002. You can find Veneroso’s presentation here:

And Antal Fekete, an economist dedicated to the gold standard, wrote a year ago what struck me as an excellent essay on the underlying purpose of derivatives, which are heavily involved in the gold price suppression scheme as well as the interest rate suppression scheme: to siphon away from real goods the vast increase in the world money supply. To a great extent Fekete’s thoughts seem to echo Warburton’s:

I would summarize all this with the title of my stump speech: “There are no markets anymore, just interventions.” Because government interventions in markets are now so pervasive, I don’t think we have much of an idea of how anything would be fairly priced. The only thing I think we know is that Western central bank gold reserves, the crucial mechanism for market rigging, will be exhausted, likely within our lifetimes, at which point we may begin to discover market prices again — as if commodity prices recently haven’t been shocking enough.


Submitted by cpowell on 10:46AM ET Friday, August 22, 2008. Section: Daily Dispatches
2:45p ET Friday, August 22, 2008

Dear Friend of GATA and Gold:

Just as James Turk of GoldMoney and the Freemarket Gold & Money Report discovered in government documents the “smoking gun” of the gold price suppression scheme, silver market analyst Ted Butler has just discovered in government documents the “smoking gun” of the silver price suppression scheme, as well as another “smoking gun” for gold.

In commentary published today, Butler examines data from the U.S. Commodity Futures Trading Commission and reports:

“As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever.

“Between July 14 and August 15, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38 percent.

“For gold, three U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and three U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an 11-fold increase and coinciding with a gold price decline of more than $150 per ounce.

“As was the case with silver, this is the largest short position ever by U.S. banks in the data listed on the CFTC’s [Internet] site. This was put on as one massive position just before the market collapsed in price.”

GATA urges U.S. citizens to forward Butler’s report to their members of Congress and ask for an investigation of the CFTC’s refusal to enforce commodity trading law in the gold and silver markets.

You can find Butler’s commentary, headlined “The Smoking Gun” at GoldSeek’s companion site, SilverSeek, HERE

Richard J. Greene of Thunder Capital Management strikes some brutal but well-deserved blows against all the bad guys in his new essay, “Amateur Hour in the Precious Metals Markets”. Greene writes:

You do not get a $200 move down in gold and $7 move down in silver in a month, because they were supposedly in a bubble, and then after everyone and his mother is selling you find it almost impossible to find any actual gold or silver to buy at major dealers across the country.

Hundred-ounce bars on eBay are changing hands at $17 per ounce, more than $4 above the spot price. That is a heck of a lot closer to the market price than $12.68 spot, which is what the screen says right now but where you can not buy a single ounce of physical silver. After this display anyone who uses the paper markets to invest in gold and silver is just a dummy and deserves what he will eventually get — nothing.

How speculators can continually line up leveraged positions against bullion banks with unlimited cash backing which in turn repeatedly smack down the markets is a mystery…

You can find Greene’s essay at GoldSeek HERE

Below is the recent market commentary by Monty Guild and Tony Danaher of Guild Investment Management Inc.

Posted On: Wednesday, August 20, 2008
Author: Monty Guild & Tony Danaher



As you know, we are fundamental analysts, not technicians. We take an investment view on stocks and commodities, not a trading view. That being said, we believe that much of the panic and the savage price decline in food related investments and in precious metals is behind us. We are adding to our positions in these two areas.

We do not know if the correction caused by technical momentum traders is over. What we do know is that the emerging world is very strong economically, and these countries are large and growing consumers of high protein foods. Thus, a recession in Europe, Japan and the U.S. will not deter them from upgrading their diets. This will require the production of more grains and an increase in demand for fertilizers and other food production inputs. We own fertilizer stocks and we have recently been adding to our positions.

The world banking system is broken and badly needs to be re capitalized. How will they get new capital from investors? We doubt that the banks will be able to get many investors to buy into their optimism and buy their stock. In our opinion, the only long term solution is that governments print more money to re-capitalize and re-liquefy the banking system. The season for increased gold demand is upon us as India starts to buy more for the wedding season. Gold coins are in short supply at many coin dealers in the U.S. Stagflation, inflation, and deflation threaten the world in different parts of the globe. All of these events are bullish for gold and we are adding to our gold positions.

As we said earlier we are not technicians, or momentum players (the two groups that seem to have had control of commodity prices during the last few weeks). We are fundamentalists, and the fundamentals argue that food and precious metals are getting into attractive buy areas.

We do not know if this is the ultimate bottom in precious metals. We do know that we want to own gold during periods when the world banking system is flirting with collapse and the only solution is governmental takeovers and subsequent large money printing exercises, by governments in Europe, Japan and the U.S.

There has been no fundamental decrease in the value of gold as a hedge against both inflation and strong deflation. Clearly, many commentators believe that one or the other may be the long-term outcome. We believe it is still too early to call…but that inflation has the upper hand at this time. Historically, gold has fared well in both inflationary and strong deflationary periods. We will write more on this later.

Thanks for listening.

What follows is an excerpt from Casey Research‘s Managing Director, David Galland weekly missive: “The Room“. This week it is -fittingly- titled “The Building Storm: Gold, the Dollar and Inflation”

“... So have we reached the moment when gold bugs must start questioning their deepest assumptions. Have they bought too deeply into the “dollar-collapse/M3 monetary bubble” tale, ignoring all the other moving parts in the complex global system? Nobody wants to be left holding the bag all the way down to the bottom of the slide, long after the hedge funds have sold out.

Well, my own view is that gold bugs should start looking very closely at something else: the implosion of Europe. (Japan is in recession too.)

Germany’s economy shrank by 1 percent in Q2. Italy shrank by 0.3 percent. Spain is sliding into a crisis that looks all too like the early stages of Argentina’s debacle in 2001. The head of the Spanish banking federation today pleaded with the European Central Bank for rescue measures to end the credit crisis.

The slow-burn damage of the over-valued euro is becoming apparent in every corner of the eurozone. The ECB misjudged the severity of the downturn, as executive board member Lorenzo Bini-Smaghi admitted today in the Italian press. By raising interest rates into the teeth of the storm last month, Frankfurt has made it that much more likely that parts of Europe’s credit system will seize up as defaults snowball next year.

As readers know, I do not believe the eurozone is a fully workable currency union over the long run. There was a momentary “convergence” when the currencies were fixed in perpetuity, mostly in 1995. They have diverged ever since. The rift between North and South was not enough to fracture the system in the first post-EMU downturn, the dotcom bust. We have moved a long way since then. The Club Med bloc is now massively dependent on capital inflows from North Europe to plug their current account gaps: Spain (10 percent), Portugal (10 percent), Greece (14 percent). UBS warned that these flows are no longer forthcoming.

The central banks of Asia, the Mideast, and Russia have been parking a chunk of their $6 trillion reserves in European bonds on the assumption that the euro can serve as a twin pillar of the global monetary system alongside the dollar. But the euro is nothing like the dollar. It has no European government, tax, or social security system to back it up. Each member country is sovereign, each fiercely proud, answering to its own ancient rhythms.

It lacks the mechanism of “fiscal transfers” to switch money to depressed regions. The Babel of languages keeps workers pinned down in their own country. The escape valve of labour mobility is half-blocked. We are about to find out whether EMU really has the levels of political solidarity of a nation, the kind that holds America’s currency union together through storms.

My guess is that political protest will mark the next phase of this drama. Almost half a million people have lost their jobs in Spain alone over the last year. At some point the feeling of national impotence in the face of monetary rule from Frankfurt will erupt into popular fury. The ECB will swallow its pride and opt for a weak euro policy, or face its own destruction.

What we are about to see is a race to the bottom by the world’s major currencies as each tries to devalue against others in a beggar-thy-neighbour policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright slump.

When that happens — if it is not already happening — it will become clear that both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.

The Fed has already invoked Article 13 (3) — the “unusual and exigent circumstances” clause last used in the Great Depression — to rescue Bear Stearns. The US Treasury has since had to shore up Fannie and Freddie, the world’s two biggest financial institutions.

Europe’s turn will come next. We will discover that Europe cannot conduct such rescues. There is no lender of last resort in the system. The ECB is prohibited by the Maastricht Treaty from carrying out direct bail-outs. There is no EU treasury. So the answer will be drift and paralysis.

When EU Single Market Commissioner Charlie McCreevy was asked at a dinner what Brussels would have done if the eurozone faced a crisis like Bear Stearns, he rolled his eyes and thanked the heavens that no such crisis had yet happened.

It will.

Gold bugs, you ain’t seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.

GoldMoney founder James Turk, editor of the Freemarket Gold & Money Report and consultant to GATA, comments on the retail market’s shortage of gold and silver in his new essay, “A Fabrication Bottleneck or Something More?” Turk writes that GoldMoney had a record week for purchases last week but has not yet seen a shortage of the large LBMA-standard bars in which it typically does business.
But Turk speculates that central bank gold vaults could be cleaned out if gold does not return to $900 soon. You can find Turk’s essay in the “Founder’s Commentary” section of the GoldMoney home page HERE

Next Page »