Gold is money but the industry doesn''t get it

By BILL MURPHY
Chairman, Gold Anti-Trust Action Committee Inc.
April 21, 2000

Recently I reiterated to supporters of the Gold Anti-
Trust Action Committee and members of
www.LeMetropoleCafe.com that GATA is building a case
to support our contention that the gold market is
manipulated by certain bullion dealers and the U.S.
Treasury Department's Exchange Stabilization Fund.

Information available in the public arena is bolstering
that case.

It is known to the bullion dealer world that Morgan
Guaranty Bank has reduced its New York bullion dealing
operation to a skeleton crew with all trading operations
now conducted out of London. Morgan Bank has been
known as the central banker's bank and the mother
bank of all the bullion banks, yet it has chosen to
reduce its New York bullion visibility. That is odd,
for to be a top-tier bullion bank one is supposed to
have a vibrant New York operation.

That being the case, it is even odder that Morgan's
gold derivative contract position reported to the U.S.
Comptroller and Currency rose from $18.363 billion on
July 1, 1999, to $38.086 billion on Jan. 1, 2000. That
figure is $16 billion greater than mega-derivative
player Chase Bank and is a huge number for a bank
that is scaling down its New York operations.

It is hard to know exactly the makeup of those
derivative contracts. But it does show that dramatic
gold activity was occurring at Morgan Bank during the
last half of last year -- a whopping 112 percent
increase.

J.P. Morgan (Morgan Guaranty) and Goldman Sachs are
leaders of the Counterparty Risk Management Group,
formed in early January 1999. Is part of their risk
management to make sure that the price of gold not be
allowed to advance in the short term?

GATA would love to know if Goldman Sach's derivative
book has grown as Morgan's has. That information has
been unavailable, but that should change after July 1.
Since 1990 derivative financial instruments for
institutions like Goldman Sachs that settled or could
settle contracts in the physical market were exempt
from reporting in their derivative exposure. That would
include wheat, oil, gold, etc.

GATA's investigators tell us that a new accounting rule
will change that at mid-year. Firms like Goldman Sachs
are going to have to report their gold derivative
positions at least once a year and have those positions
certified by auditors.

Barring more hanky-panky by Goldman, we will begin to
have some idea of the size of the firm's gold
operations and will use that information to continue to
build our case against quot;Hannibal Lecter.quot; quot;Nowhere to
Run and Nowhere to Hidequot; by Martha and the Vandellas
comes to mind on this one.

Demand for gold increased during the Morgan derivative
buildup period last year while producers were reducing
their gold hedges, maybe to a significant degree. Gold
supply had to hit the market in some form to hold down
the gold price, both before and after the 15 central
banks announced in the Washington Agreement that they
would curtail gold lending and limit gold sales to 400
tonnes a year. Where did all this mysterious gold come
from?

J.P. Morgan has a special relationship with U.S.
officialdom. GATA has focused on J.P. Morgan and
Goldman Sachs from the start. Many ramifications of
this may be revealed in time. This is just one more bit
of smoke.

Smoke also may be emanating from the most unlikely
sources -- the government itself. It is doubtful that
the manipulation crowd ever thought that their scheme
would be seriously challenged. After all, they control
the official gold statistic folks, and the press spits
out whatever pablum it receives from the gods of Wall
Street.

I think their arrogance precludes them from believing
that our motley crew is actually going to foil their
crooked money games. If they took us very seriously,
they would not let out the trade numbers that are
surfacing. They would have muffled some clerk to report
them differently.

Are they important? I think so. This is the deal.

From January through August 1999, official U.S. gold
exports of gold averaged around 220 tonnes per month.
In September they rose to 976 tonnes, in October 400
tonnes, in November 1008 tonnes, in December 783
tonnes, in January 727 tonnes, and February 921 tonnes.

Two to three hundred percent increases in U.S. gold
exports! Why the sudden need to pull gold from the
United States into the physical market?

The story becomes more intriguing. This gold is
reported as non-monetary gold. I spoke to almost no one
who understood that. It is GOLD COMING OUT OF THE NEW
YORK FEDERAL RESERVE BANK. It IS monetary gold, not
gold coming from mine production as one would think.

Greg Pickup did some sleuthing and found that most of
the gold ended up in Switzerland, with much lesser
amounts sent to Britain and Germany. The Swiss city of
Zurich houses the big gold refineries, so someone must
need physical gold for refining purposes but does not
want to buy it in the open market, which might drive up
the price. This leads much credence to Reg Howe's
recent essay on the Swiss gold sales.

It also gives us more evidence of the scurrilous nature
of the reporting of U.S. economic figures. Because this
gold is reported as non-monetary gold, it goes into the
trade figures and reduces the trade deficit by about $1
billion. Had this figure not been added to the recent
trade deficit figure, the real trade deficit number
would have been more than $30 billion. Little League
accounting chicanery is going on here, and it has been
picked up by the likes of the GATA camp. Has the
Clinton administration no shame?

This discovery of our government's shamelessly fudging
trade numbers also reveals what hypocrites the U.S.
government can be. In 1988 the United States chastised
Taiwan because it imported a large amount of gold from
the United States and wrote it up as an import that
reduced its tremendous trade surplus with the United
States. The United States complained bitterly at the
time that Taiwan was engaged in hocus-pocus.

What goes around comes around! Just more evidence as to
what lengths some officials will go to so that the U.S.
economic situation will look better than it is.

GATA has received many thoughtful suggestions for its
course of action. We hope that the gold producers will
wake up and start supporting us in a serious way so we
can accomplish more. In the meantime, we have charted a
near-term course of action that I am going to lay out
for you here.

Our first priority is to pursue a direction that
will cause the price of gold to go much higher
and reach a more natural supply/demand equilibrium.

Our target to effect such a result is the U.S.
Congress. The following letter is customized for each
senator and representative who may be able to respond
to our agenda. They include banking committee members
and all congressmen who have responded to requests of
GATA members and friends.

* * *

GATA'S DRAFT LETTER
TO MEMBERS OF CONGRESS

Sen. ------
United States Senate
Washington, D. C.

Dear Senator:

For several months many of your constituents have
expressed concern to us over irregularities in the gold
market. Recent developments have strengthened our
convictions about those irregularities and it is our
opinion that they may be part of one of the great
banking financial scandals in our country's history.

The Gold Anti-Trust Action Committee believes that the
gold market is being manipulated, that the gold price
is not allowed to rise, and that gold loans have risen
so much among bullion banks that they pose a systemic
risk to the U.S. financial system.

We also believe a small group of U.S officials is
aiding certain bullion banks in holding down the gold
price. We have identified the culprit as the U.S.
Treasury Department's Exchange Stabilization Fund. As
a result of an open letter published by GATA last
December in Roll Call, Federal Reserve Chairman Alan
Greenspan denied any involvement by the Fed in the gold
market. On behalf of the Treasury Department, so did
Treasury Department Inspector General Jeffrey Rush Jr.
and Acting Assistant Secretary Marti Thomas.

But Treasury Secretary Lawrence Summers has answered
whether the Exchange Stabilization Fund is involved in
the gold market. The ESF does show gold on deposit at
the New York Federal Reserve Bank, which was a surprise
to us.

GATA will be sending a delegation to Washington in May
to meet members of Congress, including House Speaker
Dennis Hastert and House Majority Leader Dick Armey. We
will request a congressional inquiry into the gold
market to determine whether the gold loans have become
a danger for U.S. banks and whether the ESF is trading
in the gold market.

Congress can obtain these answers very easily.

We have prepared a list of questions for for 20 of the
most prominent bullion banks. James Liesenring, vice
chairman of the Federal Accounting Standards Board, has
said there should be no reason not to answer these
questions.

World gold mine supply in 1999 was 2,559 tonnes. U.S.
Zurich/Kemper economist David Hale told reporters at
the Australian Gold Conference that quot;we've a leasing
market that's at least three or four times as large as
world mining output.quot; Since mine supply in 1999 was
2,559 tonnes, that would mean the gold loans have risen
to 7,700 to 10,400 tonnes.

GATA's work tells us that the gold loans are even
greater than 10,000 tonnes. If we are correct, they
cannot be paid back in a short time, as much of the
lent gold is on the fingers of Asians or around the
necks of Indians. It has been sold, not lent in a
classical sense.

It can be determined if the ESF is aiding the New York
bullion banks in holding down the gold price by asking
Secretary Summers, under oath, if the ESF is involved
in the gold market. The natural demand for gold is
running 1,500 tonnes greater right now than the supply
coming out of the mines. Too much gold is being
consumed at too cheap a price. If the price is being
held down unnaturally as we suspect, a gold price
explosion is coming, and it could rock financial
institutions.

Congress can defuse such a problem by promptly looking
into the matter.

At various times during our visit to Washington, the
GATA delegation will include me and:

* Frank Veneroso, an economic consultant who has been
an adviser to international agencies and governments.

* Reginald H. Howe, a Harvard-trained lawyer and former
mining executive who has written extensively on
possible involvement in the gold market by the ESF.

* Ethan Stroud, a prominent Dallas lawyer and former
lawyer for the U.S. Justice and Treasury departments.

* Chris Powell, GATA secretary/treasurer and managing
editor of the Journal Inquirer in Connecticut.

I met a year ago on this issue with U.S. Rep. Jim
Saxton, vice chairman of the Joint Economic Committee.
The committee's chief economist, Bob Kelleher, asked me
whether the price of gold was low because commodity
prices in general were low. Since then the price of oil
has doubled and the recent Producer Price Index and
Consumer Price Index numbers show U.S. inflation
accelerating on every level. So do the NABE economic
tabulations. Yet the gold price does not rise.

GATA is not the only one that senses that something is
not right.

The acclaimed Financial Times columnist, Barry Riley,
wrote on Feb. 12: quot;The gold manipulation might well
have started as a minor smoothing operation that got
out of control.quot;

From the February issue of the Economist: quot;Until
recently it has been easy to dismiss gold bugs as flat-
earthers, clinging to outdated ideas. Now, however, it
is harder to explain why the gold price remains so
low.quot;

I will contact your staff next week to determine if it
is possible for you to meet us. It need not be for
long, since we will bring extensive documentation that
can be reviewed by the appropriate parties.

Sincerely,

Bill Murphy, Chairman
Gold-Anti-Trust Action Committee

* * *

We hope to meet with as many receptive members of
Congress as possible.

It would be nice to think that this kind of effort
itself would be enough to do the trick. But, knowing we
are involved in a war of sorts, it is best to quot;hope for
the best and plan for the worst.quot;

So assuming we can raise a little money from the gold
producers, we will place another open letter in Roll
Call to reiterate our contentions to members of
Congress, with a special zinger to Banking Committee
members.

Why?

Efforts like GATA's can get squashed mysteriously in
Congress, especially when one is challenging Morgan
Bank and the U.S. Treasury Department in an election
year. By placing our findings in Roll Call for all of
Washington to see, Banking Committee members will be
put on notice that if they do not at least look into
the documentation GATA is presenting, they will have no
one else to blame if there is a banking problem when
the gold price explodes.

At the spring conference of the Committee for Monetary
Research and Education in New York last month,
Financial Accounting Standards Board Vice Chairman
Leisenring said the board yielded to pressure from
Silicon Valley not to count option compensation as part
of payroll compensation. The board was afraid that its
very existence was at stake! That says it all when it
comes to setting standards in America. The standard is
quot;the buck.quot; Some standard. Great preaching material for
kids.

Finally, GATA is going to send our congressional
presentation to gold producers and ask them, one more
time, to support us.

It is time for gold producers to get behind GATA. The
circumstantial evidence that certain bullion dealers
are holding down the gold price with the help of
certain government officials is substantial. We still
expect a John Dean to come walking in the door or that
quot;dressquot; to come our way in time. Every investigating
group dreams of coming up with the smoking gun. We
expect that but we do not need it.