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Another scandal for the gold shorts

Section: Daily Dispatches

10:50a EDT Monday, September 6, 1999

Dear Friend of GATA and Gold:

There are indications of a new scandal involving
manipulation of the price of gold -- and this one is
being investigated by both financial and law-
enforcement authorities, according to the latest
quot;Midasquot; commentary by GATA Chairman Bill Murphy at It follows here.

If this comes to you as an attached file and, like me,
you don't like downloading those, you can read it at
the GATA Internet site at eGroups at:

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Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *

September 4, 1999


It is fascinating to me that much of what we have
covered at the Cafe over the past year is starting to
synchronize and boil over. So I thought I would put
some labor into this Labor Day weekend and examine what
is happening on the scandal front, as well as update
you on the peculiar nature of it all.

Much of the hubbub about the manipulation of the gold
market began early last fall. Then Long-Term Capital
Management was supposedly taken off the hook on a 300-
tonne quot;borrowed goldquot; short position by the financial
entities that bailed them out. Since I had heard as
early as May 1997 that LTCM might have this amount of
gold exposure, it was no surprise to me to hear so many
rumors floating around of this nature, and I did not
hesitate to publicly question the propriety of it all.

Our protests caught the attention of Long-Term Capital
Management and its attorney, James G. Rickards, who
sent us a letter, along with an affidavit from fund
principal Eric Rosenfeld. Rickards stated that Long-
Term Capital Management denied any involvement in the
manipulation of the gold market, and Rosenfeld said to
the Cafe, quot;None of LTCM, LTCP, nor their affiliates,
has ever entered into any transaction involving the
purchase or sale of gold, including without limitation,
spot, forwards, options, futures, loans, borrowings,
repurchases, coin or bullion, long or short, physical
or derivative, or in any other form whatsoever.quot;

I responded to Rickards in a letter saying that the
Cafe never accused LTCM of manipulating the gold
market, nor did I ever say that that LTCM quot;tradedquot;
gold. I strongly suggested that LTCM had quot;borrowedquot; 300
tonnes of gold and had gold exposure in a credit sense
with the bullion banks, and I asked him for a response.

Rickards never did respond to me, and the other day it
was announced that he has resigned from LTCM to join
another firm.

Then there is information we received from a very
sophisticated source that a blind trust for Hillary
Clinton quot;shortedquot; gold instruments just prior to the
Bank of England's announcement of its plan to sell
gold. Interestingly, it was reported yesterday that the
down payment for the Clintons' new home in Westchester
County, N.Y., came from her blind trust.

It was strongly suggested to me from a source that we
try to find out if Hillary Clinton has a blind trust at
Goldman Sachs. The Gold Anti-Trust Action Committee and
the Cafe now have allies looking into this matter. We
are trying to find out who is handling her blind trust
or any other accounts she might have and, once these
are identified, attempt to elicit a response about the
gold-shorting speculation.

Why would this be the H-bomb as far as we are
concerned? Simply put, I have set forth much commentary
linking the Clinton administration, the New York Fed,
Goldman Sachs, Long-Term Capital Management, the
British treasury, the Bank of England, and Prime
Minister Tony Blair. A revelation of this nature would
solidify the link. For example:

* Former Treasury Secretary Robert Rubin is a former
Goldman Sachs CEO.

* Former N.Y. Fed Governor Ed Corrigan is a senior
partner at Goldman Sachs.

* London-based senior partner Gavyn Davies is Goldman
Sach's international economist and has close ties to
Prime Minister Tony Blair. Davies' wife, Susan Nye, is
officer manager for the chancellor of the exchequer.

* Dr. Sushil Wadhwani, former director of equity
strategy at Goldman Sachs International (1991-95), sits
on the Bank of England's Monetary Policy Committee. The
committee's duties include determining the bank's
objectives and strategy.

* Jon Corzine, former Goldman Sachs CEO, has close ties
to John Meriwether, chairman of Long-Term Capital

* Former Fed Vice Chairman David Mullins was a partner
in Long-Term Capital Management, which, of course, was
bailed out in part by Goldman Sachs.

Exhibit 2 and further background information on the
significance of the Hillary Clinton gold shorting story
comes from this commentary about the Bank of England's
gold sale from the document I sent to Sen. Phil Gramm,
chairman of the Senate Banking Committee:

quot;Yet, the night before the BOE announcement (May 6,
1999), I feared duplicity and this is what I wrote in
my Midas du Metropole commentary entitled, `XAU surges
46 percent':

quot;We know `the squad' are all lining up, one more time,
to try to stifle a decent gold move to the upside.
Deutsche Bank, Chase, Swiss Bank, and Goldman Sachs
were all there selling gold during today's session and,
when they had to, even throwing the kitchen sink at the
bulls' attack. Deutsche Bank has been especially
aggressive and noticeable in its selling the past few
days. We got word late this afternoon that its bullion
desk is calling clients saying that the gold market is
stopping at $290. I don't think Midas followers will be
surprised when we tell you that big sellers late in the
day today and taking on all bids were `squad' honchos
Goldman Sachs and Deutsche Bank. The Battle for
Navarone is an important stand for them, for if $290 is
taken out to the upside, their longstanding bearish
position could begin to look a bit shaky.quot;

The next morning I awoke to the Bank of England
announcement. Since then the price of gold has
collapsed more than $36 -- or almost 15 percent -- and
the sale has ignited a furor all over the world,
fostering talk of conspiracies, etc. Before I get into
the ramifications of the sale, I thought the following
utterances by some of England's most notable officials
might raise an eyebrow or two:

Wire service commentary July 14, 1999 (my comments in
parentheses): quot;Asked in Parliament if it was right to
sell off part of Britain's reserves, Prime Minister
Tony Blair replied, `The gold price has been falling
for two years, so in fact if it carried on falling and
we didn't sell we would lose money.'quot;

Blair then declined to say if he would meet with the
South African gold industry delegation, but said the
gold sale was justified, stating, quot;We did this on
technical advice from the Bank of England.quot; (Haruko
Fakuda, CEO of the World Gold Council, was told that
the decision was a political one and made by the
British Treasury, not the bank.)

Blair went on to say, quot;It is only the Conservative
Party's utter obsession with the euro in some bizarre
way. Given that Argentina and Switzerland are also
selling gold, what it has to do with the euro I do not
know. It is only that which is making them raise this
issue. It was done, as I say, on technical advice. It
was carried through perfectly sensibly and we actually
got the best deal for the country.quot;

How wrong can you get? The best deal the Bank of
England could have made would have been $30 to $40 more
per ounce by carrying out the sale as all the other
major countries have done for 20 years.

But the story now gets confounding. On Sunday, July 11,
the chancellor of the exchequer, Gordon Brown, said in
the London Times, quot;The proposal to sell the reserves
was put to ministers by officials and, say treasury
insiders, agreed to it with little discussion.quot;

According to the London Times article, the chancellor
is said to have been surprised and mortified by the
reaction from Thabo Mbeki, the South African president,
who said the Bank of England's gold sales would have a
quot;potentially disastrous effectquot; on South Africa.

OK, so what gives here? Blair said it was a Bank of
England decision. The Bank of England says it was a
Treasury decision. The Treasury says it was only a
Treasury decision of sorts and agreed to with little

Good grief. A decision that may have disastrous effects
on South Africa, a democracy the West is committed to,
was made with little discussion and no one will take
responsibility for it. Yet it is such an important
decision that Tony Blair will not reconsider it, even
though it appears he does not know who made the
decision in the first place.

Meanwhile, the mortified (but confused) chancellor of
the exchequer, Gordon Brown, just prior to the trip to
England by the African delegation, was all over the
wire services talking about the righteousness of his
decision on gold, while continuing to extol the virtues
of the proposed gold sales by the International
Monetary Fund. The headline on the Reuters dispatch
read: quot;U.K.'s Brown Sees Wide Support for IMF Gold

But a Bloomberg audio report reveals that when the Bank
of England's Eddie George was asked whether the bank's
gold sale was 1) his decision, 2) whether he was
involved in it, or 3) whether he was consulted, his
response was that he was consulted, which is a
euphemism for being told. When asked who made the asset
allocation decisions on the quot;bank reserves,quot; George
answered, quot;the governmentquot; -- that is, the politicians.

So what do we have here? The British now say their
decision to sell gold was planned for some time and
made the announcement, coincidentally, as the price of
gold was about to take off. They became the first
central bank in more than 20 years to make an
announcement of a gold sale in advance. They knew this
announcement would devastate the market from a
psychological perspective and send gold prices crashing
-- and, of course, it did. The price went straight down
more than $36 per ounce. This assured Britain the worst
price possible and cost the country hundreds of
millions of pounds. Now no one in the British
government will own up to making this mysterious
decision, which is devastating poor African countries,
among others.

Meanwhile, as my May 6 commentary indicated, somehow
the bullion dealers knew what was coming and told their
clients as much.

It does not take an Einstein to comprehend the
significance of determining if there is a financial
account of any kind someplace that shorted gold for
Hillary Clinton just prior to the Bank of England's
gold sale announcement. With the help of others, I am
trying to track down where her accounts are located,
and then we will start asking questions. It will be
interesting first to find out if Hillary Clinton has an
account at Goldman Sachs.

Now for the quot;scandale du jour.quot; It revolves around GATA
protagonist Martin Armstrong and his firm, Princeton
Economics International. The latest from two wire

quot;New York, Sept 2 (Bloomberg) -- Republic New York
Corp. said it suspended the head of its securities unit
after an investigation of a client's affiliate in
Japan. HSBC Holdings PLC said the probe may delay its
acquisition of Republic.

quot;The bank is under investigation by U.S. law
enforcement and regulatory authorities for inflating
the net asset value of an investment fund, the Wall
Street Journal reported. Republic said it is working
with U.S. and Japanese regulators on the probe.....

quot;Republic isn't the subject of its investigation, the
FSA said. The Japanese authorities are looking at
Crestvale International Ltd., an institutional
brokerage based in Hong Kong, with offices in London,
Tokyo, and New York, a person familiar with the matter
said. Princeton Economics International, a money
manager based in Princeton, N.J., owns Crestvale.quot;

quot;New York, Sept 3 (Reuters) -- quot;Analysts and a Republic
shareholder told Reuters they thought the Republic unit
and the Princeton affiliates may have participated in
so-called 'tobashi' deals, in which Japanese
institutions hide losses through complex derivative
transactions. The probe is limited to Republic's
dealings with the Princeton affiliates and does not
extend to other client relationships, these sources

quot;Analyst Gerard Cassidy of Tucker Anthony said, 'It
appears one of two things happened: Princeton told
Republic this is what (the investments) are worth and
Republic took it at face value, or Princeton, in
conjunction with Republic Securities, determined the
value, which was artificially inflated.quot;

The Reuters story goes on to say, quot;The firm (Republic)
also hired Lee Hennessee, an adviser who helped clients
pick hedge funds, or unregulated investment funds for
wealthy investors that trade a variety of securities,
usually using borrowed money.quot;

This begins to raise all sorts of issues on what we
have reported to you and one that we have not yet. We
understand that certain other bullion dealers have been
lending gold to Republic. That is very strange.

Republic is a bullion dealer. Why is it borrowing gold
from other bullion dealers? We have already reported to
you that one bullion dealer told us that he has turned
down at least one hedge fund that wanted to borrow gold
from his bank. (We are trying to find out if was
Armstrong.) All this is going on with the one-month
gold lease rate (borrowing rate) now skyrocketing to
4.2 percent, up from a normal 1 percent.

It is well known that Republic has done much of
Armstrong's silver and gold business on the Comex.
Sources told me Friday that Armstrong has not been seen
on the Comex lately and they had heard that his funds
were not doing very well. In addition we have reported
that sources tell us that four hedge funds (Soros,
Tiger, Moore Capital, and Martin Armstrong) are short
from 30 million to 50 million ounces of gold. The
number filtered back to us on Armstrong is that he is
short anywhere from 8 to 20 million ounces.

But how can this be? Armstrong has had correspondence
with the secretary of the Gold Anti-Trust Action
Committee, Chris Powell, denying he was short gold. I
am presenting excerpts from Armstrong's commentary. The
first two are to GATA in May 1999 and the next one was
sent to Armstrong's subscribers in June. The
investigation into his firm, Crestvale, began in May.
Note how his tone changes towards GATA from May to
June. The last piece is long, but well worth the read.

* * *

May 14, 1999

Dear Chris:

I understand your frustration that gold has been
perhaps the worst investment for the past 20 years. But
to argue that it is being manipulated due to large
short positions is not justified.

There is no interest in gold at this time and the
central banks are all sellers. After they sell their
gold, then we will see a bull market. Once those
supplies are gone, no one will be able to lean on that
supply and your bull market will begin.

I hate to tell you, but gold will drop to under $200
before it turns. I find it extremely one-sided how a
Buffet and company of tagalongs is not a manipulation
because they buy, while selling is a manipulation. The
very guys you argue are manipulating gold down were big
sellers of gold and buyers of silver during the Buffet
rally. GS or not, the economy simply does not support
your position. And I do not want to hear how I am short
or some nonsense to try to discredit my views, because
it is not true. PEI owns a 51 percent stake in a public
gold mine in Australia. That is my long-term view; it
does not change my short-term view.

You cannot make a case for gold manipulation when
central banks are willing sellers. They have
demonetized gold and that is a simple fact of life. If
you want a free market, then don't stand in the way of
this bear market. Let the central bankers sell
everything they have and then there will be no overhead
supply to worry about. You cannot argue manipulation
and take the position that these guys are not allowed
to sell what they have.

The banks know what is coming and if they sell ahead of
the central banks, so be it -- that's a free market.

Princeton Economics

* * *

Saturday, May 15, 1999

Dear Chris:

Your view of Long-Term Capital Management is slightly
distorted. The bailout was in fact for the financial
markets. The shareholders of LTCM were wiped out. The
banks were given the assets in return for an orderly
liquidation. The investors in LTCM did not receive a

The IMF has its own agenda. The Republicans have
demanded access to the International Monetary Fund's
decision process and the IMF refuses. It has emerged as
its own authority. When the gold standard collapsed,
the IMF simply reinvented itself. I speak to many
people on Capitol Hill and they are not in bed with the
IMF. The debate behind closed doors has been how to
make the IMF at least accountable to someone. Its
policies imposed upon Third World nations are a
throwback to a fixed exchange rates system. They are
the ones who insisted upon fixed exchanges rates and
that they must hold at all costs -- a great policy, as
demonstrated by Korea and others.

I work in this field quite extensively. There is no
conspiracy. The problem is that the IMF and the Bank of
International Settlements along with the World Bank all
have their own agendas and they have been at odds with
the G7 nations on many issues. No government is in
charge of these guys and only now are some beginning to
understand that profound fact.

When the gold standard collapsed, nobody was there to
turn out the lights. If this were a true conspiracy,
then perhaps it would be better organized. As it is,
these institutions are like the Keystone Cops. They
know not what they do!

Gold will one day return to a bull market. Perhaps in
2000 or at the latest in 2002. The lack of a paper
currency (Euro) is still driving international capital
toward the dollar. This trend could last for a few more
years. The European politicians are trying to create a
currency that is not based upon economics at all. Hence
the swan dive since Jan. 1. I'd rather hold a dollar
than a euro right now.

By the way, William Jennings Bryan stood for inflation
-- not sound money. The great financial panics of the
last decade of the 19th century were largely caused by
the silver Democrats who took 72 cents worth of silver
and called it a dollar. People then began to hoard
gold, according to Gresham's Law. The U.S. Treasury
needed to be bailed out by J.P. Morgan, who lent it
$100 million in gold in order to make payments.
Otherwise, the United States would have been declared
bankrupt internationally -- and there was no IMF back

Money is a difficult thing to define. It is, in its
purest form, whatever the majority believes it to be.
The Babylonians began with gold because it was abundant
in their region. The Greeks began with silver for the
same reason. The Romans had only bronze, as was the
case in Japan and China. The Japanese did not issue
gold coins until the 19th century in order to
facilitate trade with the West, just as Russian today
are adopting dollars on the street.

The Egyptians used both precious metals, by weight, and
wheat; they never minted coins. Only after the birth of
Imperial Rome, starting with Augustus, do we find gold
as a regular part of the monetary system in the west --
some 2,000 years ago. After the fall of Rome, gold
disappeared and the monetary system became the silver
penny of Europe. Gold began to reappear as money after
600 years during the reign of Henry III.

Those who like to claim that gold has been money for
6,000 years leave out that it too has not always
survived as money in the past. Perhaps one day gold
will re-emerge as the black market form of money if
government succeeds in moving to a pure electronic form
of cash. But given the history of gold, it could be in
our children's lifetime.

All the best. I leave for Euroland for two weeks

Princeton Economics

* * *

Gold: Manipulation or Exaggeration?

By Martin A. Armstrong
Copyright 1999 / Princeton Economics International
June 10, 1999

A two-man army calling itself GATA has begun to
besiege the media attempting to gain a lot of press on
the platform that gold is being quot;manipulatedquot; by a
cartel of investment banks. They constantly point to
what they call the huge quot;carry tradequot; in gold were
there is far more gold sold than exists. The tenets of
the commodity markets, be it cash or futures, is that
every position is offset by an equal and opposite
position. There cannot be more outstanding short
positions than long positions, yet the total number of
positions combined can far exceed the actual supply.
However, the same thing can happen in Samp;P 500 futures
or even U.S. 30-year bond futures. That is the nature
of the free markets. Those who own a commodity have the
right to sell it, lend it or hedge it to someone else
who is willing to take the other side, for whatever
reason, be it hedging a future use or betting on the
next bull market.

Above all, this single misconception has been man's
greatest downfall. For during almost every great
financial panic in history, government has launched
intrusive investigations seeking to uncover that
horrible short position that has manipulated the entire
marketplace through its sheer ability to overpower it
with size. Every investigation to date has begun with
that misguided belief that a short position can be
larger than a long position, failing to understand in
the process that all positions must balance.

In the wake of the Panic of 1907, short selling was
declared a criminal act despite the fact that they
never found that horrible person who overpowered the
marketplace. Fortunately, the U.S. Supreme Court struck
down that law against short selling and the free market
went on. The true cause of the decline was only finally
revealed as a cash-flow problem, which in turn gave
birth to the Federal Reserve six years later.

An investigation was launched following the Crash of
1929, from which the Securities and Exchange Commission
was born. People from all over the country were
questioned by Congress and accused, without evidence,
of somehow being short behind the scenes. The mere
accusation made against people ruined their reputations
and provided the basis that launched a thousand
lawsuits. When the evidence was finally collected, all
the famous names were found to have been long not
short. From Rockefeller on down, they all lost
staggering amounts of money. The multimillion-dollar
short position never surfaced once again.

The same was true following the Crash of 1987. Those
who should have been short as a hedge against their
stock portfolios were, in fact, found to have been
significantly under hedged. No massive short position
ever surfaced from the 1987 investigation and they
imposed circuit breakers that needed to be revised in

The quot;carry tradequot; in gold that has been the subject of
much discussion is seriously misunderstood. There are
those who would like to point to this position as the
cause for the decline in gold. They are dead wrong. The
quot;carry tradequot; in the OTC gold market has been around
for years. The Arabs have used gold as a means to earn
interest without calling it interest. Islam forbids the
lending of money for interest known as the sin of
usury. The Arabs have used the carry trade in gold
since the early 1980s. They buy spot and sell forward
and collect the quot;carryquot; or premium on a back month.
This premium is a reflection of the cost to quot;carryquot; a
gold position. If you buy the current spot and sell the
forward, you earn that net difference without being
exposed to the price fluctuation of gold itself. In
reality, the investment banks can book billions of
dollars of such transactions that have NO impact or
relevance to the gold market. Technically, the Arabs
are not receiving interest but instead they are buying
gold today and selling it for a few dollars more 3
months out. These profits are allowed under Islam,
whereas normal interest earnings are forbidden.

The Japanese are also involved in the quot;carry tradequot; in
gold. Public futures funds in Japan are still regulated
under the commodity acts even if they trade Nikkei or
Samp;P500 futures. Since the definition of ALL futures
funds remains that of a quot;commodityquot; fund according to
Japanese regulation, there is a strict investment
guideline. ALL futures funds must be invested 50
percent at all times in commodities. Hence, the
Japanese futures funds are also using the gold quot;carry
tradequot; in order to meet the crazy requirement that the
fund must be invested 50 percent in commodities at all

Again, gold is purchased on the spot and sold forward
without risk. Again, this becomes a paper transaction
where a bank will certify that there is a trade on
their books thus allowing the fund to meet its
requirements for being invested 50 percent in
commodities at all times. The balance of the fund then
CANNOT be invested in commodities and off they go into
the financial futures world trading Nikkei, JGBs, Samp;P
500 and the like.

Of course, the last type of this quot;carry tradequot; involves
the mining companies. Here, gold is sold forward in
order for a company to plan its operating expenses. A
budget can be established only if there is some assured
return for their production. Others may borrow gold on
an interest rate differential. In this case, a gold
loan comes with a lower interest rate. The gold is sold
on the spot and the loan is repaid from future
production. It is a cheap means of acquiring financing.
Interest on gold loans tends to be lower because it is
a dead asset on the books of its owners since there is
no income and often there are storage and insurance
costs. Consumers of such loans are typically mining
companies or manufacturers. The granters of gold loans
are holders, including central banks. Holding gold
without lending can be very costly, but by lending the
gold, a holder retains ownership since the borrower is
committed to repay the loan in gold plus interest
thereby reducing the holding costs.

Gold is no more being manipulated today in some grand
conspiracy than it was going into the 1980 high. We
disagree that the Hunts were market manipulators in
silver back in 1980. Perhaps one could have argued that
the Hunts manipulated silver IF it was the only
commodity to have risen during the entire period.

However, the CPI was hitting 17 percent annually and
people were hoarding toilet paper. All commodities were
in a strong bull market -- not ONLY silver.

Likewise, we find it extremely difficult to also accept
that just because of the quot;carry tradequot; in gold that it
is being manipulated lower when all other commodities
are also in a bear market. To further argue that if
these massive short positions were forced out of the
marketplace gold prices would rise makes no sense. If
you chase the Japanese and the Arabs out of gold,
nothing will change. These types of transactions do NOT
impact prices, but they do have an impact by making
gold appear to be extremely liquid. If you outlaw gold
loans you destroy the free market and most likely cause
massive liquidations on the part of those who have such
hoards but need some kind of income.

Those who jump up on the soapboxes and cry foul about
sales of gold by the International Monetary Fund, Bank
of England and the rest of the central banks seem to
miss the point. The governments of the world DO NOT
share their belief that only gold is money and that a
return to the gold standard is inevitable. Such a step
back in time would require the complete abandonment of
virtually every social program introduced since World
War II -- a highly UNLIKELY political decision. The
governments of the world have a self interest in not
returning to the gold standard.

In 1985, we argued that governments must return to some
fixed exchange rate mechanism or that volatility would
escalate into 2003 disrupting the world economy as a
whole. The White House responded by stating that any
return to the fixed exchange rate system would mean
that quot;domestic policy objectives would be held hostage
to international policy objectives.quot; This was a fancy
way of stating that such a system meant a return to a
balanced budget and, in turn, that meant that
politicians could NOT offer wonderful social programs
if they had to actually fund them long-term.

We do NOT disagree that the floating exchange rate
system has allowed national debts to explode and that
at some point in the future there must be
reconciliation with reality. However, such a collapse
in society is not likely to come before the 2012 time
period when the obligations of governments will be
unbearable. In effect, the formation of the European
Monetary Union this year is a step toward preparing for
these serious default problems in the future. In
France, there are plenty of guarantees by the
government for your pension but there is no money set
aside to support those guarantees. The French
population has no 401K or private system that they can
count on. This situation could spark the next French
revolution when the population faces the fact that
their pensions have only been political promises.

The same is true in many regions of Europe. By banding
together, Europe hopes to capture the capital that
moves between the cracks and thus increase their
revenues in an effort to reduce all future liabilities.
A Federal Europe will be far better equipped to deal
with the problems together rather than on a divided
basis. By allowing the euro to collapse, they are in
effect devaluing their future obligations, which is one
way of getting out of the mess. You meet your
obligations but you pay with a currency that is worth
far less than it was at the point the promise was made.
Then they manipulate CPI in an effort to reduce any
increase in liabilities by purporting that there is no

There is a serious question that needs to be asked
based upon the events economically since World War II.
The gold standard gave way because governments
continued to increase their debts but never readjusted
the price of gold in proportion to the increase in
money supply. Instead of admitting that their
borrowings had created inflation, they chose to close
the gold window and end the gold standard. The rally in
gold during the 1970s was a natural response for any
and all commodities that had been artificially
restrained. Thus, if one wants to discuss
manipulations, the gold standard was the biggest
manipulation of all by keeping the value of gold fixed
while the supply of money increased. Gold was NOT
money; it was merely a store of wealth in which money
was expressed. This is why the gold standard collapsed.

The global economy is indeed showing signs of distress.
The IMF loan portfolio looks like a charity case with
assets that will never be repaid. Any normal bank would
be declared insolvent and closed with a portfolio of
this nature. The IMF has long past its expiration date.
The original intent behind the IMF was to be a lender
to nations who temporarily were unable to meet their
obligations under the gold standard. Hence, the IMF
became the largest holder of gold in order for it to
provide gold loans. Since there is a political agenda
that is intent upon never returning to a gold standard
due to its impact upon the social goals of the left
wing, it makes perfect sense that central banks and the
IMF should in fact liquidate their gold assets. While
this may be a major bearish factor short-term, it is
also most likely going to provide a true free market in
gold long-term.

Gold will also be capped as long as the bulk of its
supply remains in the vaults of the central banks. The
idea that they are trying to manipulate gold lower is
not well-founded. Australia sold its reserves when they
caught wind of the true agenda of liquidation. From the
Australian perspective, they sold about $100 higher
than the current price, saving considerable national
reserves. For these reasons, we do not see a conspiracy
to push gold lower just as an international policy that
has not been publicly expressed. We do not see this as
a manipulation, but as a change in monetary system
policy that is promoting the liquidation of gold assets
and its quot;officialquot; demonetization.

We have been blamed and criticized intensely for our
view on gold. We warned six months before the
marketplace became aware that the central banks were
going to be net sellers and we received hate mail
claiming that we were making up the entire issue. We
warned about the silver squeeze and that there was no
true shortage, but that the metal was instead headed to
London where inventories are not disclosed.

We were attacked again claiming that we were making up
the entire affair, and companies like CPM claimed that
industrial consumption was the cause of the drain in
silver inventories. When the Bank of England suddenly
got involved, then Warren Buffett admitted that he
bought the silver and that it was in London where
several other parties were engaged in front-running
Buffett's order out of sight from the Commodities
Futures Trading Commission. We did warn that some of
the bullion dealers were selling gold aggressively and
buying silver to help push it up to the $7 level,
depressing gold in the process. Our sources on this
entire matter have always been reliable and they have
proven to be correct.

There is most likely the typical summer rally from a
June low that may yet develop. The public funds are all
quite aggressively short and a rally is starting to
appear overdue where a retest of $275-280 may be
likely. Nevertheless, the prospects for lower prices
into next year remain quite strong, where a drop to
just under $200 performs a retest of the 1974 high.

The bullion trade has tried to use Y2K as a reason to
rush out and buy gold. The central banks have been the
sellers into that retail consumer demand as well. Even
the British are now running advertisements offering new
gold coins struck for the millennium. Some of the
bankers have expressed a fear that the hype over Y2K
that has been used by some bullion dealers could prove
to be quite damaging to retail demand next year. The
concern remains that a sharp drop in demand could
unfold when the public sees that the banks have not
collapsed and that life goes on.

There is also a growing fear that perhaps net sales by
the public may also emerge causing prices to decline
even further. Those banks that are selling gold to the
public do NOT want to see a price collapse. They
naturally want to sell gold coins at the highest
possible price, as was the case with Australia.

We can entertain conspiracy theories and blame or
threaten everyone who has ever uttered a bearish word
about the precious metals, but this will not change a
thing. It is going to be a very difficult period ahead
for many involved in the precious metals and most other
commodities as well.

Nonetheless, the only hope will be new lows in 2000 and
a return to inflation perhaps due in part to Y2K. Any
disruption to supply will cause a shortage of goods and
that is price inflationary, as was the case during the
late 1970s. If there is no serious problem and the
stockpiling of goods and raw commodities by
manufacturers going into year-end results in excess
inventories, then there will be a risk of a further
deflationary trend into 2002- 2003. Such an outcome
would prompt further deflation and postpone any bull
market in commodities until the 2003-2007 time period.
These are major economic issues that will take time and
patience to resolve.

Short-term price manipulation by dealers who run after
the stops of fund managers are a commonplace event in
the OTC cash markets of gold and foreign exchange.
Nonetheless, this does not rise to the level of a grand
conspiracy of monumental proportions intent upon
forcing a particular long-term directional trend. If
the central banks sell everything, they will have
nothing left to prevent a bull market from unfolding.
It will take time before we can see the new light of
day and a shift in the economic prospects worldwide.

* * *

It is my turn to respond to Martin Armstrong:

September 5, 1999

Dear Martin:

If you are so on top of the Japanese markets and their
way of doing things, how come the Japanese are
investigating one of your firms to such a degree that
U.S. law enforcement authorities have been brought in
to investigate you too? That is highly unusual.

You said months ago that quot;allquot; commodities were in bear
markets and that gold should be too. But now oil is
trading at $22 per barrel, the CRB has cracked 200 to
the upside, and the base metals in London are flying.
You are known to be one of the world's big silver
bears, yet silver has not broken towards $2.78 as you
predicted. How come, and how short are you still?

You stated there was quot;no interestquot; in gold. But gold
demand in the second quarter was 4 percent higher than
any other quarter in history; it will be even greater
in the third quarter. Demand for gold in India and Asia
is booming, while demand for gold coins is soaring in
North America and elsewhere. The premiums on gold coins
are rising as they go out the door as fast as they are

No interest in gold? Then why is the one-month lease
rate 4.2 percent when the historical norm is about 1
percent? Gold lease rates have now remained at
abnormally high levels for longer than most can

Why was the August Comex gold contract almost squeezed?
Did you know that demand is now running about 160 to
180 tonnes per month greater than supply? That's just
PER MONTH. Perhaps you are caught short about this
fundamental piece of information?

Oh no, I forgot. You told GATA you were not short gold.
Something strikes me here. quot;Borrowing goldquot; for the
past few years has been one of the great windfalls of
all time and you are one of the big gold bears. Hedge
funds and many financial institutions (as stated above)
often borrow money to make investments. For some reason
your firm is being accused of overstated assets, etc.
Yet both you and Long Term Capital Management have told
GATA that you are not short gold. Very strange.

Somehow it does not make sense that one of the most
leveraged financial institutions known to mankind
(LTCM) and one of the most bearish institutions
regarding gold (PEI) both publicly denied that they are
quot;short gold.quot;

That does not fly with me.

I suggest you both protest too much, especially to a
quot;two-man armyquot; like us. (For the record, we are a
three-man army with many hundreds of great supporters.)
Something does not sit right here at all.

Yes, you are brilliant, but you have made your share of
bummer market calls too. As I recall, you have been one
of the great bears on the Japanese yen. Your prediction
for the yen, if my memory serves me correctly, was
about 278. Does that have anything to do with your
troubles with Crestvale? The way I see it, if your
short-term gold call is as on target as your yen call,
we gold bulls are in great shape.

You have offered your thoughts. I offer mine; maybe an
eye-opener would be good for you.

The gold supply/demand deficit is much greater than the
bullion dealers have told you. The gold loans are
double what the bullion dealers have told you. We think
that they exceed 10,000 tonnes right now. You say the
gold market is not being manipulated. I say the only
reason gold has not doubled in price is because the
market has been manipulated.

The manipulation of the gold market is one of the great
financial scandals in U.S. history. It sounds like you
have a few problems of your own to deal with right now.
Don't get caught up in this one too.

Gold Anti-Trust Action Committee
Le Patron,