Piercing the Mystery of the Gold Market

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The precious
metals markets have tremendous potential for investors. But they
are also wrapped up in great mystery – deliberately so.

Gold is the
worst understood financial market. Most official data about gold
is actually disinformation.

Years ago GATA
disclosed that the International Monetary Fund, the leading compiler
of official gold reserve data, allowed its member nations to count
gold they had leased, gold that had left their vaults, as if it
was still in their vaults. The effect of this accounting fraud was
to deceive the gold market into thinking that central banks had
much more gold left to bomb the market with than they really did.

But that’s
only the start of the false data.

In April 2009
China caused a bit of a sensation by announcing that its gold reserves
had increased by 76 percent, from 600 tonnes to 1,054 tonnes. For
the previous six years China had been reporting to the IMF only
600 tonnes. Had China acquired those 454 new tonnes only in the
last year? Very unlikely. Experts now believe that China acquired
those 454 new tonnes over at least several years, largely by purchasing
the production of China’s own fast-growing gold mining industry.
So for as many as six years the official gold reserve data about
China was way off.

This June the
World Gold Council reported that Saudi Arabia’s gold reserves had
increased by 126 percent, from 143 to 323 tonnes, just since 2008.
That the world’s oil-exporting superpower had made such a new commitment
to gold in its foreign exchange reserves also caused a brief sensation.

But a few weeks
later the governor of the Saudi Arabia Monetary Authority, Muhammad
al Jasser, insisted to news reporters in Kuwait that Saudi Arabia
had not purchased the gold cited in the June reports but
rather had that extra gold all along in what he called "other
accounts" – that is, in accounts not reported officially,
just as the true status of China’s gold accounts was not reported
officially for six years, if the true status is being reported even

Some analysts
think that China and Saudi Arabia have accumulated far more gold
than they’re reporting and are accumulating still more gold surreptitiously
– China to hedge its dollar foreign exchange surplus, Saudi
Arabia to hedge both its dollar surplus and the depletion of its
oil reserves – but that China and Saudi Arabia can’t acknowledge
this accumulation lest they spook the currency markets and devalue
their dollar surpluses before those surpluses are fully hedged.

In August 2009
GATA consultant Rob Kirby of Kirby Analytics in Toronto obtained
from Germany’s central bank, the Bundesbank, a written admission
that much of Germany’s national gold is held outside the country
at "trading centers" at which the Bundesbank may "conduct
its gold activities." Without explicitly confirming that the
Federal Reserve Bank of New York was one of those "trading
centers," the Bundesbank noted to Kirby that the New York Fed
holds gold for 60 nations and international organizations.

But exactly
how much German gold is where and for what purpose, particularly
trading purposes? How much German gold been leased or otherwise
encumbered? The Bundesbank wouldn’t say.

In September
2009, in the course of seeking access to gold records from the Federal
Reserve and then suing the Fed in U.S. District Court for the District
of Columbia, GATA obtained a sensational written admission from
the Fed, signed by Fed Board of Governors member Kevin M. Warsh,
a former member of the President’s Working Group on Financial Markets
– the so-called "Plunge Protection Team." Warsh wrote
that the Fed has secret gold swap arrangements with foreign banks
and that these arrangements must be kept secret.

So has gold
from the U.S. reserve been swapped? Does the United States really
have 8,200 tonnes of gold in its reserve, as it long has claimed
to have?

Fed Governor
Warsh didn’t quite say that U.S. gold had been swapped, only that
the Fed has gold swap arrangements. But the U.S. gold reserve hasn’t
been audited in more than half a century, and the last audit wasn’t
really complete. So in the next session of Congress U.S. Rep. Ron
Paul hopes to introduce legislation requiring an audit of the gold
reserve, including specifically any encumbrances like swaps and

Then there
are the major gold and silver exchange-traded funds, which were
established in the last few years supposedly to help ordinary investors
invest conveniently in gold and silver. How much metal do the ETFs

While the major
gold and silver ETFs frequently report their metal holdings, studies
by GoldMoney founder James Turk and GATA board member Catherine
Austin Fitts and her lawyer, Carolyn Betts, suggest that this data
is unreliable too. For the major ETFs won’t disclose exactly where
their metal is, and indeed their prospectuses say it’s OK for the
ETFs not even to know where their metal is kept among custodians
and sub-custodians. And the custodians for the major gold and silver
ETFs are, perhaps not so coincidentally, also the two major international
banks that report having the biggest short positions in gold and
silver, short positions that give these banks and metal custodians
a powerful interest in suppressing the price of the assets
they supposedly are holding for investors who want those assets
to rise in value.

How much gold
do the major gold and silver ETFs really have in their vaults? How
much of it is encumbered in some way? ETF investors themselves will
never be permitted to know.

The biggest
so-called "physical" gold market in the world is the one
run by the London Bullion Market Association. The LBMA publishes
statistics on how much gold and silver are traded by its members.
But these statistics show spectacular volumes, more metal than could
possibly exist. Of course much of this metal could be sold and resold
back and forth many times every day. But an expert in that market,
Jeffrey Christian of the CPM Group, acknowledged at the March 25
hearing of the U.S. Commodity Futures Trading Commission, as he
had acknowledged in an explanatory report published in 2000, that
the London bullion market is actually a fractional-reserve gold-banking
system built on the presumption that most gold buyers will never
take delivery of their metal but rather leave it on deposit with
the LBMA members from whom they bought it.

GATA board
member Adrian Douglas has studied the LBMA statistics and Christian’s
work and estimates that the great majority of gold sold by LBMA
members doesn’t exist – that most gold sales by LBMA members
are highly leveraged. How leveraged? How much gold is due
from LBMA members that doesn’t really exist? The LBMA doesn’t report
that. Like the Fed’s gold swap arrangements, the world mustn’t be
permitted to know. The consequences might be catastrophic for the
banking interests that run the world.

For then the
world might understand why even at its recent price above $1,300
per ounce gold has not come close to keeping up with the inflation,
the currency debasement, of the last few decades, why gold has not
fulfilled its function of hedging against inflation. That is, gold’s
enemies figured out how to increase its supply by vast amounts without
going through the trouble of digging it out of the ground. They
invented "paper gold" – gold that doesn’t exist but
that many buyers accepted, never suspecting that major financial
institutions might deceive or defraud them.

The misunderstanding
of the gold market continues with the awful journalism about it.

The falsity
of the data about the gold market practically screams at financial

  • There’s
    the omission by official gold reserve reports of leased and swapped
  • There are
    the sudden huge changes in official gold reserve totals.
  • There are
    the deception and conflicts of interest built into ETF prospectuses.

The valid documentation
about the gold market also practically screams at financial journalists:

  • There are
    the huge and disproportionate gold, silver, and interest rate
    derivative positions built up at just two or three international
    banks, positions that never could be undertaken without the express
    or implicit underwriting of the U.S. government.
  • And there
    are the dozens of official records, records collected and publicized
    by GATA over the years, demonstrating the plans and desire of
    the U.S. government to suppress and control the price of gold.

But financial
journalists just don’t ask about these things. After all, who are
the major advertisers in the financial news media? The market manipulators
and governments themselves.

Here are a
couple of examples of this grotesque failure of journalism just
from this year.

In June the
Bank for International Settlements, the central bank of the central
banks, disclosed, via a footnote in its annual report, that it had
undertaken a gold swap of unprecedented size, 346 tonnes. But the
BIS provided no explanation. A newsletter writer was the first to
come upon the information; only then did it leach into the major
financial news media. What was going on here?

The reporters
for the major financial news media didn’t bother going to the source,
didn’t bother asking the BIS itself. It was simply assumed that
central banks never give serious answers about what they do. Instead
the reporters called various gold market analysts for what they
hoped would be informed speculation.

A few days
after GATA ridiculed the Reuters news agency for not demanding answers
from the source, the BIS, Reuters did try putting some questions
to the bank, and on July 16 Reuters reported: "The BIS said
the gold in question was used for ‘pure swap operations with commercial
banks’ but declined to respond to further questions from Reuters
on the transaction."

For a year
I have been urging financial journalists to call the Federal Reserve
to ask for an explanation of the secret gold swap arrangements admitted
by Fed Governor Warsh. As far as I know, no news organization has
put such questions to the Fed officially. But, a bit intrigued,
a reporter for another major news agency, having failed to get her
editor’s authorization to pursue a story about gold, called the
Fed on her own and did ask about the gold swap arrangements. She
told me that a Fed spokesman had told her: "Oh, we never talk
about those things."

GATA has
been gaining publicity over the last year, if with great difficulty.
A few months ago the Financial Times did a big story about
gold that was half about GATA’s complaints about gold price manipulation
by central banks and their associated bullion banks. But the FT
reporter failed to put any of our complaints and questions to any
central bank or government official.

How can you
report complaints of central bank gold price manipulation without
questioning central banks themselves? Again, it’s just taken for
granted that central banks operate in secret and there’s no point
in questioning them.

Maybe this
journalistic negligence will change a little because of the remarkable
event yesterday in Washington.

A member of
the U.S. Commodity Futures Trading Commission, Bart Chilton, to
whom GATA Chairman Bill Murphy, in a meeting at CFTC headquarters
in Washington in December 2008, delivered evidence of the manipulation
of the gold and silver markets, made a statement that had a noticeable
effect on those markets. At a CFTC hearing yesterday Chilton issued
a formal statement urging his commission to answer to the public
for the commission’s seemingly interminable investigation of the
silver market.

Chilton added:
"I believe that there have been repeated attempts to influence
prices in the silver markets. There have been fraudulent efforts
to persuade and deviously control that price. Based on what I have
been told by members of the public and reviewed in publicly available
documents, I believe violations to the Commodity Exchange Act have
taken place in silver markets and that any such violation of the
law in this regard should be prosecuted."

Within hours
Chilton’s statement had become international news. Of course that
doesn’t mean that financial news organizations will press the precious
metals market manipulation story vigorously now. But the story just
became a lot harder to ignore. Indeed, just a few hours ago a lawsuit
complaining of silver price manipulation by J.P. Morgan Chase &
Co. and HSBC was filed in U.S. District Court for the Southern District
of New York.

Why is
gold such a mystery? Why is it, along with silver, kept such
a mystery?

It’s because
the two precious metals are not only money but, from the point of
view of free individuals, the best sort of money, less susceptible
to what governments see as the most desirable quality of money –
the susceptibility to control by government and particularly its
susceptibility to devaluation. You can print or otherwise issue
gold and silver derivatives to infinity, but not the metals themselves.

Gold particularly
is kept such a mystery because it is the key to unlocking the currency
markets, which long have been the most efficient mechanisms of imperialism.

Many of you
have heard about the looting of Europe that was undertaken by the
Nazi German occupation during World War II. But most of that looting
did not take place at the point of a gun. No, it took place through
the currency markets.

This looting
through the currency markets was spelled out by the November 1943
issue of a military intelligence letter published by the U.S. War
Department, a letter called Tactical and Technical Trends. Of course
the Nazi occupation seized whatever central bank gold reserves had
not been sent out of the occupied countries in time. But then the
Nazi occupation either issued special occupation currency that could
not be used in Germany itself or, in countries that had fairly sophisticated
banking systems, took over the domestic central bank and enforced
an exchange rate much more favorable to the reichsmark. Or else
the Nazi occupation simply printed for itself and spent huge new
amounts of the regular currency of the occupied country. This control
of the currency markets drafted every resident of the occupied countries
into the service of the occupation and achieved a one-way flow of
production – a flow out of the occupied countries and into

For a few years
Nazi Germany had one hell of a trade deficit. But being in the position
to print the currencies for occupied Europe, Nazi Germany never
had to cover that deficit.

Since the United
States now issues the reserve currency for the world, the dollar,
the United States now more or less occupies most countries economically,
even those countries that have their own currencies, since even
those countries hold most of their foreign exchange reserves in

and widely accessible gold always has been and always will be a
threat to the rigging of the currency markets, always will be the
escape from overbearing government generally and from any overbearing
government in particular. That is why so many U.S. government records
compiled by GATA over the years candidly discuss or advocate or
describe controlling and suppressing the gold market. A declassified
cable from the U.S. Embassy in Paris to the State Department in
Washington, written in March 1968, even talks about the necessity
for U.S. monetary officials to remain what the cable calls "the
masters of gold." This is also why U.S. government agencies
like the Federal Reserve are trying desperately to prevent other
such documents from being disclosed.

That is, gold
is the secret knowledge of the financial universe and its true value
relative to currencies is vastly greater than its nominal price
today, since much of the gold that investors think they own doesn’t

GATA’s work
is to bust this secret open. Russia, China, and other Asian countries
have figured out that the dollar reserve system is the mechanism
of their economic enslavement and have started to prepare their
liberation by accumulating gold in a big way before gold is formally
reinstated as the world reserve currency or as a big part of that
new reserve currency. Now you’re in on the secret too. This wonderful
conference will give you many good ideas for preparing yourselves
profitably. But just make sure that whenever you buy precious metal,
you’re getting metal, not paper. Otherwise you’ll just be
sabotaging yourself.

This is
the text of a speech given at the Gold Anti-Trust Action Committee
Inc. New Orleans Investment Conference on October 27, 2010. Reprinted
with permission.

30, 2010

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