South China Morning Post Features RBC Report, GATA's Work.

Missive Adds Weight to Gold Conspiracy Theory

South China Morning Post, June 25, 2002

The gold bugs got a boost at the weekend. An investment letter by John Embry, a money manager with the Royal Bank of Canada, appeared to back the central argument of conspiracy theorists who for more than three years have been crowing about the co-ordinated attempt to keep the yellow metal low.

According to the theory, the United States Federal Reserve, the Bank of England, a consortium of Wall Street banks headed by JP Morgan and Goldman Sachs, and others ganged together in the mid-1990s to keep the price of gold at less than US$290 an ounce.

In Mr. Embry's letter -- later called an "internal" piece and played down by his bank -- the manager reportedly asserted that manipulation of the gold price began in 1995 and that "those with a vested interest in containing the price of gold -- central banks, bullion banks, heavily hedged gold companies -- will not die easily, but the tide is moving strongly against them."

The price manipulation theorists -- who include the Gold Anti-Trust Action Committee (GATA) -- took Mr. Embry's words as a huge vote of confidence for their take on the depressed gold market of the 1990s.

The gold bugs hold that the price has been manipulated by the massive short positions built up by banks over the years -- positions aided by an extremely generous lease rate of about 1 percent by the central banks. Gold producers too have played a part, taking out billions of dollars of derivative contracts to hedge against the falling prices, the bugs maintain.

The banks have purportedly been borrowing the gold, selling it on the market, and ploughing the sales proceeds into better-performing assets. That has left them with tens of billions of dollars in short positions in gold; a serious enough increase in prices and the global financial system starts looking wobbly.

Hence, the theorists say, the bailout of hedge fund Long-Term Capital Management in 1998 was, in part, an attempt to keep the price of the yellow metal depressed. GATA accused the hedge fund of being short 300 tonnes of gold, but a letter from the fund's lawyers saw GATA back down.

The gold bugs also contend that the U.S. authorities have been keeping gold prices depressed to bolster the price of the U.S. dollar and maintain the trade deficit, allowing the U.S. to maintain its position as investment destination par excellence and paying for the late 1990s boom.

Dismissed by many as a few cans short of a six-pack, the gold bug theorists have nevertheless kept their foes busy over the past few years. They have published report after report exposing the banks' and producers' positions as well as studies of central bank gold hoards. They prompted the introduction of a bill in the U.S. Congress forbidding the Federal Reserve and Treasury from intervening in the gold markets and took the Bank for International Settlements and Alan Greenspan, among others, to court for manipulation. The case was thrown out of court last year.

The mainstream line is that gold slumped because of a widespread perception at the end of 1990s that, with the inflation demons tamed, it was a relic of a former world. Not that any recent events -- including oversupply in the past decade, the sudden rise in gold prices on renewed Japanese buying, and growing investor risk aversion -- have shaken the gold bugs' conviction.

"This is one of the most important reports ever written on the gold market. They understand the dynamics being played out," GATA Chairman Bill Murphy said.