When does a c0nspiracy theory become a covert reality? John Ward goes in search of an explanation for short-term precious metal volatility....and discovers disturbing evidence about double-dealing in Gold

 

Stumbling into a minefield

As the Dow and FTSE began their long plunge downwards on September 2nd 2008, as the editor of a self-styled advice and satire website (and nervous investor) I completed, along with millions of others, an orderly withdrawal from the Stock Market that had begun the previous March. With the bulk of funds now in gilts and currencies, my super-Bear gut turned fairly immediately to precious metals in general, and gold in particular.

I was surprised to see not a rising sector, but one which (after initially shooting upwards earlier in the year) was jumping up and down on (literally) an hour by hour basis. Everything I'd learned in A-Level economics told me this was not so much abnormal in a Bear market as impossible. At $785 an ounce, the spot price of gold looked like the bargain of the century.

The first surprise came when I rang several retail bullion dealers, all of whom said they couldn't sell me much because "people are screaming for the stuff". As well as looking upside down, the world now seemed back to front. But the next day - when for no apparent the spot price fell off a cliff to the tune of $39 in less than an hour - it became apparent that either I had warped into an opposing Universe, or something very odd was going on.

Using streamed live and historical online data over that next doom-laden fortnight, the first and most obvious correlations were twofold: first, the drop in gold's price - and it ranged from $15-20 at any one time - usually occurred in the ninety minutes before NYSE trading began. We need to bear in mind here that on 9/11, the total gold price variation was a mere six bucks. The second (and seemingly obviously connected) parallel event was that the drop always occurred following a steep dive in stocks the previous day - and always produced a Dow rally during for at least the three hours following.

During the month of October 2008, with every share price in the worldgoing south, the spot price of gold fell by twice the biggest previous amount in history....which was in August 2008.

Why?

To anyone of sound mind, this was not neo-liberalist economics at work: it was intervention on a major and concerted scale. As the amount of gold in the world is not as huge as some people think, it doesn't take that much selling to make a difference on one occasion: but by this time I'd identified at least twenty-three trading days when what I began to call 'the morning dump' occurred. Somebody or bodies wanted very badly to cap the price of gold - and the most obvious culprit was the country with (allegedly) most of it - the USA.

At this stage I was little more than an annoyed investor looking for a safe haven, as well as a journalist looking for at best a business magazine or section piece - speculating about what might be going on and perhaps pointing out how underpriced precious metals are. As my focus was mainstream investment, I began to look at a possible Federal Reserve strategy to make the gold haven appear too dodgy - and thus keep bearish investors safely in Wall Street stocks.

An early port of call in mid October was to the website onlygold.com. OK, these are guys with an agenda - but the content reflected my own experience:

'...why would gold prices plummet some $200 in four weeks time when the fundamental case for gold seems, if anything, stronger than ever?....The US Mint filled orders for some 140,000 1- ounce gold Eagles, and that number was produced with no real production glitches. But as they say, that was then, and this is now. During this recent surge in gold bullion demand, the Mint sold 80,000 such coins in August 2008 alone - more than half of what they sold all last year. Yet that is still not enough, and the Mint is having to allocate (‘ration’) coins to its distributors for as long as demand exceeds current production capacity.'

To be honest, the range of trusted experts I interviewed at this point - retail dealers, commodities traders, bankers, brokers and assorted wealth managers - were on the whole sceptical. They too had noticed the pattern, but been convinced in most cases by central bank contacts that they were not in any way involved in market manipulation. As we shall see, blanket denials by the CBs were to become a pattern of this investigation - right up to and including the IMF.

However, a vocal minority were convinced about market tampering. In late October, the founder of a top wealth management company based in the UK told me "The game is no longer about growth, it is about protection and survival. In such circumstances, all rules go out of the window, and those who share the common language of senior, central banking close ranks. Anyone who thinks there has been no manipulation of precious metal prices is doing a Nelson: choosing to ignore the obvious by applying a telescope to the blind eye."

Another senior source in merchant banking asserted, "This is not the market deciding, it is governments controlling as best they can. My own view is that the whole thing is an exercise in expensive futility. But to suggest that there's been no dampening of gold demand is ridiculous".

What I was being somewhat dumb about at this stage was interrogating precisely what the main point of the expensive exercise might be.

The Buck stops here

My conclusion after six weeks on this project is that what we're seeing is chiefly about defence of the Dollar. And along the way, it's become harder to deny that the process has been going on for a long time - perhaps nearly sixty years.

In order to try and separate conspiracy theory from covert operation (because both exist) the best way to do it without slipping into the paranoid tendency is to cast serious doubt about central bank reassurances based entirely on verifiablefacts: written official documents and figures, audited valuations and accountancy work done by heavyweights - not conjecture offered by those with an interest in talking up the metal. This is the air of grave doubt I will now attempt to create: not a verdict, but - if you will - a case strong en0ugh for prosecutors in normal life to proceed with charges.

Many things in life are complex, but a few things are straightforward. One is that strong gold prices are bad for the dollar: as the world's most trusted and traded currency, the only thing likely to shift folks out of the Big Buck and into precious metals is very serious fear about the economic outlook. With the US even today enjoying around 19% of world trade - and historically the biggest exporter of physical stuff - it is still by far the most likely to suffer during a bad recession. The biggest exporter by value today is Germany, and in unit terms China: but the greater part of the world's notional wealth and real infrastructure lies in America.

The value of the dollar in 2008 has become a life-and-death issue for the remaining superpower. Not only is it one of the keys to defending market share in the financial services business, confidence in the US currency reflects confidence in the nation's future - its ability both to borrow, and run deficit government spending without making trading partners nervous. While the two Bush terms have seen the dollar allowed to slide (and thus disguise long-term falling export competitiveness) such a policy begins to look sick when property values slip, powerful multinational US banks go belly up, other economies' exports challenge the country, and new trading platforms threaten the NYSE's position.

There comes a point at which the leadership position for US geopolitical and commercial hegemony cannot credibly be sustained with a dollar heading even further south once a credit crunch has been diagnosed. I can reassure you that in the current climate, it would cost a lot of money in international phone calls to find a single commentator who'd disagree with that analysis.

In short, the Federal Reserve has a strong motive for capping the gold price. More acutely aware than most of the clear link earlier in 2008 between gold rise and dollar fall, the US Treasury and Government would have to treat this as (literally) a National Defence issue.

Tumbling the Numbers

When one tosses out terms like National Defence, it's important to counter charges of hyperbole. Even including the Pentagon, Fort Knox is the most security-classified object in the USA. Only two Presidents - FDR and Truman - have ever been inside the place. Entry is by direct Presidential order only for non-employees. There are no exceptions to this rule. No audit of the contents has been published since 1953. No reason for this has ever been even offered, let alone verified. The best anyone in the public domain can tell you is that in 1941, there were 650 million Troy ounces of gold in Fort Knox, and today (allegedly) there are 147.3 million. The shiny stuff is sitting there in the form of 368,000 gold bars weighing 400 Troys each. Everyone accepts the 1941-1998 variance, but nobody will advance any reason as to where the rest went. Ask the US Treasury, and they'll say the contents in there today are not its concern - that's down to the Fort. Ask the Fort and they'll suggest you ask the Federal Reserve. Ask the auditors KPMG and they'll (quite rightly) say 'client confidentiality'.

Hank Paulson has probably gone as far as anyone will by confirming that US Gold reserves and Fort Knox contents are two mutually exclusive things. This is rather like confirming that there is sea water between the US and Japan, but questions beyond this level of banality are given a clear rebuff: 'I decline to comment on the decline in Fort Knox contents'. As for using its supposed contents to interfere in world markets, the US Government line is severe and unbending: we do not ever do it under any circumstances.

Given this curious mix of secrecy and sanctimony, accusation is inevitable. Two senior members of the US gold-capping conspiracy elite - Ed Durrell and Tom Valentine - suggest that in reality there are only around 1000 of the claimed 8500 tonnes of gold in Fort Knox. The rest, they say, has been spent propping up the dollar at various times during the last half-century. While there is some support for this view in the figures - at old book values, the volumes quoted against current values are out by a negative factor of ten - mistakes do get made with that many noughts, and the ounces, tonnes, dollars, and pounds are to say the least confusing at times. But under my hyper-strict judgement criteria, this has to remain conjecture rather than convincing doubt.

A history of dissembling

The serious doubts start with the stunning figures that even central bankers are quite happy to confirm, but not to explain properly. In the late 1960s, for example, 64% of the world's gold was in central banks. Under the 1934 US Gold Reserves Act (and later, associated Bretton Woods Agreement) a new and regulated reality was created by President Roosevelt to produce a gentleman's agreement that Gold would be properly audited - and not used to competitive advantage. This transparency continued until 1953, and then abruptly ceased.

Yet for the last ten years at least (and the figure could be lower today) banking and government agencies have accepted the fact that the nearly two-thirds locked-up figure of 1968 is now a mere 10%. The disparity is put down to 'consumer purchases of gold items'. If so, it would be the first time in history that governments around the world had freely allowed their citizens to buy such a powerful national weapon for the purpose of adorning themselves. Like the 1941 Fort Knox gold figures when set against the current levels, it is difficult - close on impossible - to explain without some consideration of the use to which the missing stuff was put beyond fashioning wedding rings.

In the intervening seventy-five years - although Nixon repudiated Gold's currency-fixing role in 1971, making gold truly market-sensitive for the first time - the gentleman's agreement has officially remained in place about 'avoiding any and all sales likely to destabilise the reserves of others'. But - and this is a matter of statute record - the 1934 Act created a hazy thing called the Exchange Stabilisation Fund. At the time its sole official purpose was the benign use of gold by the US to help currencies in trouble.

A year before Nixon's repudiation, the USA approved a change in the ESF law. It allowed the Secretary of the Treasury, with the approval of the President, to use money in the ESF to 'deal in gold, foreign exchange, and other instruments of credit and securities.' This time there were no qualifications about planetary good.

During Bill Clinton's administrations - again, on the public record - the U.S. Government used the fund to provide $20 billion in currency swaps and loan guarantees to Mexico immediately following the economic crisis there. This was extremely controversial at the time, because Clinton had tried and failed to pass the Mexican Stabilisation Act through Congress. In truth, it was a glaring attempt to use sixty-year-old emergency legislation to circumvent the elected legislature.

What follows is not a smear, but merely hstorical behavioural evidence employed to cast further doubt: these last two men above are the chief executives who told us the President wasn't a crook, the White House was a whitewash-free zone, and I did not have sexual intercourse with that woman.

I think you have to agree - albeit only tentatively - that if you were a DA, by this time you'd be seeing a good case forming in your lawyer's mind. So perhaps it's time to ask who the people are with serious - even litigious - doubts about the Fed's protestations of innocence in the use of gold to manipulate markets.

The guys from GATA

The Gold Anti-Trust Action Committee (GATA) was organised in January 1999 'to advocate and undertake litigation against illegal collusion to control the price and supply of gold and related financial securities'. The committee emanated from essays by Bill Murphy, a financial commentator, and Chris Powell, a newspaper editor in Connecticut, who is still published at Murphy's Internet site. In the period since then, GATA has brought several class-action suits against various US government agencies and their associated bankers on the basis of evidenced attempts to artificially influence market movements using gold.

The main charges against GATA are that they hype the confusion about who owns how much gold and where into collusion; and that they twist various courtroom and official statements to suggest complicity and/or accidental admissions of guilt - when in fact the transcripts don't always support this. (It is a primary feature of obsessive conspiracy theorists that they tend to leap on and/or paraphrase statements made by adversaries for their own ends.)

Here I am inclined to return to motive. We need to compare the amount at stake for the US in this matter versus the potentially blinkering effect of an obsession held by two men who are (while criticised by those who represent the financial status quo) widely admired and honoured. Murphy's career in particular is a brilliantly eclectic one that suggests an almost Renaissance inability to focus rather than obsession. Powell is the managing editor of a Connecticut newspaper that is avowedly anti-Establishment. For example, his leader of November 11th on the subject of Obama's financial appointments reads as follows:

'The next treasury secretary will need the confidence of the country more than the confidence of Wall Street. Since the Treasury Department will continue to dispense billions in patronage in the name of economic stabilization, the new secretary should have the fewest possible associations with the financial industry, so that the department's usual grotesque conflicts of interests may be ended. The new secretary will need to get the financial industry under public control, not maintain the industry's control of the government. Obama's campaign finances drew heavily on the financial industry, which sought to insure itself against the very change he was preaching. That is the change the country most needs.'

It would be hard to find many Obama supporters disagreeing with that view. It's also hard to see (or at least, I haven't found it) what seamy or lunatic motive the GATA founders might have for pursuing the Gold authorities in the way they do. It is, however, rather more easy to see what those in charge might be up to.

Existing Secretary Paulson told both houses of Congress in mid October 2008 that only his $700 billion bailout plan lay between the world financial system's continued existence and an unthinkable (but largely unspecified) Armageddon. This week (11.11.08) he has quietly let slip out the reality that, while his package 'stabilised the markets', he doesn't actually need most of it after all. So it kind of worked but wasn't, as such, necessary. Hmm: this isn't the sort of stuff to reassure all those blue-collar workers who bombarded their Congressmen with phone calls and emails insisting on resistance to the Paulson Plan.

This is not to draw simplistic white hat/black hat conclusions. It seems to me that GATA is at times overenthusiastic, perhaps even bombastic - but run by respected people with little or nothing to gain from their populist campaign against what they do genuinely see as gold price manipulation. More to the point, as a long-time empiricist, it also seems to me that twenty-three suspicious gold plunges in two months - all in the period immediately preceding trading sessions where confidence in US stocks and currency would be put to the test, and perhaps to the sword - puts the onus of explanation rather more on the Fed than on GATA.

Such would still, however, be firm rather than rock-solid grounds for bringing a gold manipulation case. So it's time to take a look at how the IMF fits into the picture.

The IMF and discrepancies in the world gold tonnage data

In answer to a Canadian suggestion in 2001 that the IMF was counting gold that was no longer in bank vaults (on account of being 'swapped' as loans) as extant 'reserves', the IMF replied as follows:

'This is not correct: the IMF in fact recommends that swapped gold be excluded from reserve assets.'

The question was loaded, for the Canadian GATA fan had already seen this footnote on the Internet site of the central bank of the Philippines:

"Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign currency liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with non-central banks shall be treated as collateralized loans. Thus, gold under the swap arrangement remains to be part of reserves and a liability is deemed incurred corresponding to the proceeds of the swap."

Nothing surprises me any longer in the field of global banking, but counting gold that isn't there as gold that is there does seem a tad eccentric. And saying you recommend one thing when central banks (including others in Europe far bigger than that of the Philippines) say you recommend the opposite also begs a further degree of clarification. In fact three separate auditors employed by GATA - using three different methodologies - have all concluded pretty much the same thing: that of the 32,000 tonnes of gold alleged to be in central bank vaults, just under half aren't there really. Otherwise (they say) the figures knocking about on retail sales, melting down and mining simply don't add up. GATA - naturally - claims the gold is being used to manipulate. I merely point out that - in the specific case of Fort Knox value figures - I couldn't get the claimed volume to anywhere near work either.

What GATA claim as their 'smoking gun' is quite complex. It has to do with the gold derivatives on the books of the Bank for International Settlements in Switzerland, and the tabloid headline is that while, according to claimed swaps, the transactions should've been going down, they have in fact been going up. Here again, the discrepancies are hard to explain without reaching the conclusion of at least a degree of central bank mendacity - and perhaps even IMF naivety.

IMF reports on currency and gold reserves are kept religiously up to date and freely available to anyone. The problem, of course, is that there is no binding agreement (or procedure for that matter) on the verification of data they're given by national agencies. The USA, for example, laughably gives its gold reserves as roughly 12% of those held by Italy. As we've seen, the US Treasury distinguishes nowadays between what it calls 'reserve' gold and 'deep storage' (ie, Fort Knox) gold. While deep storage is one of those neat-sounding phrases capable of evoking gasps of reverence, it also tends to beg the question 'why?' We have a deep-storage cow leg in our freezer, but one day soon we intend to use it.

When one asks the IMF about this, they are prompt rather than helpful. My first enquiry wondered about the suggestion that Italy - a nation stumbling from one bizarre government combination to another - seems to have more gold-clout than the US. This was the response:

'Central Banks that issue reserve currency, such as in the United States, tend to hold less international reserves in order to avoid quasi-fiscal costs for holding large amounts of foreign exchange assets. For a  very selected group of countries, it is less costly to raise  foreign currency liquidity swapping their own currency if need be, thus contributing to maintain  relative small amounts of international reserves vis-a-vis predetermined drains in foreign exchange.'

In truth, one can find hundreds of websites (many of them pukka commentators on gold versus the markets in recent years) casually accepting that government interventionism in gold prices is rife, and probably always has been in the modern era. Anti-manipulation writers are being specious when they use the blanket term 'conspiracy theory' as a smear - as in, 'well, you know about conspiracy theories and grassy knolls -it's all bunkum'. Indeed, most of it is. The difference here is that there is no paranoid worldwide global conspiracy being debated: merely a variety of seemingly quite sane people pointing out how governments defend currencies, stock markets and economies with gold whenever they can....if the alternative is national ruin, or even losing an election. It is, after all, sort of a Page One thing to do - not counting all those inconvenient international agreements and all.

 

Last month, respected US precious metals commentator Franklin Sanders wrote as follows:

‘I believe the US government, and every other government and central bank, is intervening in the silver and gold markets to cap prices. Now don't even bother to wave your snide "conspiracy" remarks my way, because under the Gold Reserves Act the NGM have a slush fund called the Exchange Stabilization Fund - created for the explicit purpose of manipulating the gold price and currency exchange rates. Second, what would you hold in preference to silver and gold? US Dollars? Stocks? Euros? Yen? The only thing I would want to own is productive assets, a farm, a business, a manufactory - something capable of producing a stream of revenue. So I come back in a circle to gold and silver. I'll just have to keep on buying it, whether the silver price drops to $8 and the gold price to $720.’

A good example of an objective site is inflationdata.com, and out of all the ones I visited during this trawl it struck me as making some very telling points about what people have always used gold for - that is to say, as a wealth guarantee during what the Chinese call 'interesting times'. Not specifically as an inflation hedge alone, but rather for use after the four dark-cloaked men on horses come riding over the horizon. Empires come and go, but gold remains. One senses that this is what may well be happening in global commerce at the moment - and so these extracts from the inflationdata site are apposite:

'Back in 1980 the real reason gold prices were rising was the international crisis arising from the Soviet invasion of Afghanistan and the Islamic Revolution in Iran. The world was in turmoil and inflation was out of control so everyone was scared. When people are scared a paper IOU is not enough....Three thousand year old traditions of hoarding stores of wealth that are physical, portable and easily devisable  are hard to break....The key is that during times of crisis and fear Gold rises and individual governments can't stop it. During more peaceful times governments are able to maintain control and keep a lid on the price of Gold. This causes Gold to move up in a sort of "stair step" fashion.'

Once again in 2008, people are scared. Following myriad conversations with skilled professionals, and after poring over a great many rows, columns, graphs and tables, my best guess is that were investors allowed free access to an unmanipulated gold sector, the per ounce spot price now would be nearer $1600 than $740 (13.11.08). And there is every chance that with more bad news during 2009, the price could easily go beyond $2500. The history, the logic, the economics, the common sense, the strong Federal Reserve motive (and a quite a lot of the tonnage/value/sales discrepancies) all point to the very strong likelihood that gold prices are being massaged with a view to currency defence - specifically in relation to the dollar.

I can't comment on how long this might last before market pressures finally break the dam, because the data in relation to gold supplies obfuscates matters at every turn (perhaps deliberately) and there are far too many unknowns in the equation. What one can say with near-certainty is that - short-term volatility aside - gold is undervalued in this climate, and in the end it remains the ultimate safe haven. Whatever downside there is to investing in it, right now it would seem to be minimal.

Conclusions

It is not the task of media observers, experts and the folks at GATA to prove manipulation. Rather, it is down to central banks in general and the US Federal Reserve to explain their secretive behavious and provide convincing answers to the following awkward questions:

* Why does Fort Knox today only have - at best - about 20% of the gold it stored there in 1941?

* Why has there been no published audit or independently witnessed inspection of this gold since 1953?

* How have five sixths of the central bank gold deposits gone into retailer/consumer onwnership since 1968?

* Why are the Federal Reserve, the Treasury, the US Mint and the IMF unable to cordinate a comprehensible picture of who is responsible for what, and what is counted as what, in relation to gold storage, reserves and use?

* Why - in a time of unprecendented financial fear and global bank collapses - has the gold price not just faltered but gone down during the worst periods of stock market decline?

* Why are so many of the gold price plunges timed before the start of NYSE trading and after particularly steep stock declines?

* Why should the one universally accepted law of economics - that of supply and demand - suddenly cease to apply in a precious metal spot market, when retail sales of the product are booming, mining output is falling, and confidence in paper money is at its lowest since 1932?

 

 

 

ry/treasurer, has been in the newspaper business in Connecticut since graduating from high school in 1967. He has been managing editor of the Journal Inquirer in Manchester, Conn., since 1974 and was editorial page editor as well for many years. His column on Connecticut government and politics is published in the Journal Inquirer and a dozen other newspapers in the state and Rhode Island. He is legislative chairman of the Connecticut Council on Freedom of Information and a director of the Connecticut Associated Press Managing Editors Association, of which he was president in 1999 and from 1983 to 1985. Chris Powell, the Gold Anti-Trust Action Committee's secretary/treasurer, has been in the newspaper business in Connecticut since graduating from high school in 1967. He has been managing editor of the Journal Inquirer in Manchester, Conn., since 1974 and was editorial page editor as well for many years. His column on Connecticut government and politics is published in the Journal Inquirer and a dozen other newspapers in the state and Rhode Island. He is legislative chairman of the Connecticut Council on Freedom of Information and a director of the Connecticut Associated Press Managing Editors Association, of which he was president in 1999 and from 1983 to 1985.