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Chris Powell: Piercing the mystery of the gold market
Remarks by Chris Powell
Secretary/Treasurer, Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
Hilton New Orleans Riverside Hotel
Wednesday, October 27, 2010
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.
... Dispatch continues below ...
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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 now.
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 leases.
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 have?
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.
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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 journalists:
-- There's the omission by official gold reserve reports of leased and swapped gold.
-- 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.
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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.
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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 Germany.
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 dollars.
Free-trading 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 exist.
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.
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