Tracks in the Trading:
When Did the Gold Price Manipulation Begin?

Part I. Dating and Statistical Evidence

In the first Part-I, we produced statistical proof of the gold price suppression witnessed in the USA for the last seven years. More importantly, we identified two specific dates. In the second part of the essay, they will help us to understand this gold price manipulation. The basis of our analysis was the price movements of gold during a New York session against price movements of the remaining day. The graph in Figure 1 shows the resultant figures. The graph is smoothed with the help of a 125-day moving average. The gold price suppression results in an anomaly, as represented by the values that are below zero in Figure 1.

Figure 1 shows the exact day on which the New York gold price suppression began: August 5, 1993. The anomaly was more pronounced on a second day, September 29, 1999.

First of all, what happened on these days? On August 5, 1993, the price of gold fell sharply, an event that does not occur very often. A few days later, newspapers wrote special articles about the price drop. Traders at Comex were surprised that the price of gold fell by about $15 within a few minutes and speculated about possible reasons for several days. Events on the second day, September 29, 1999, are also interesting. Only a few days before, viz. on Sunday, September 26, 1999, the European central banks had made a statement to the effect that only a certain amount of gold would be sold.

The next question is: What happened to the gold price at this time? To find out, let us take a look at Figure 2. Figure 2 shows the smoothed graph from Figure 1, gold price movements during a New York session as compared with the movements of the remaining day, together with an additional graph of the gold price itself.

The anomaly began after the price of gold had risen sharply in the summer of 1993. This supports the theory of deliberate gold price suppression, because there appears to be some kind of temporal link between the rise and the anomaly.

The second day, on which the anomaly was even more pronounced, was a few days after the statement issued by the European central banks. This statement caused the price jump that we can see in Figure 2. Again, this supports the theory of deliberate gold price suppression, because there is one again a link between the jump and the anomaly. The theory is furthermore supported by the fact that the statement mainly concerns Europe, whereas the anomaly concerns New York.

Figure 2 shows that the anomaly both grew and increased in intensity after price rises. It also shows that the price of gold fell immediately afterwards in both cases.

An inverse anomaly can be seen as far back as 1991; this may have been caused by central bank selling or lending via Europe.

Before moving on further, a few explanations concerning the gold-lending process will be necessary.

During the 1990s, many central banks worldwide sold or lent gold. The process of lending gold is a special one. Gold alone is stockpiled in quantities amounting to the output of several years, the reason being the former use of gold for the gold standard. Lending gives a central bank the opportunity to earn a return on its investment in gold.

The central bank lends its gold to a private bank, which sells it on the cash market. The private bank lends the proceeds to a mining corporation against a contract. This contract ensures that the private bank will get the gold back directly from the mining corporation in the future, which it will subsequently return to the central bank. The private bank pays the central bank what is known as a gold lease rate, which differs from rates on fiduciary money. The gold lease rate is (normally) merely tantamount to compensation for the risk of failure and is therefore usually much lower than the rate on fiduciary money; the latter is additionally compensation for foregoing a return which the creditor would otherwise earn. The lending can be renewed - theoretically infinitely.

There is also a variation on the above lending process. Here, the private bank does not pass the proceeds on to a mining corporation against a contract but invests the money itself, e.g. in bonds, to earn profits. This 'gold carry trade' involves higher risks and is very short-sighted.

The process of lending gold has advantages and disadvantages. The advantages are the return for the central bank, the reduced economic and environmental costs of gold production, and the opportunity for mining corporations to hedge their costs by 'forward-selling', as described above. The disadvantages are the risk of not getting the gold back, the pressure on the mining industry, and the effects on supply and demand. The last point is of importance.

Any lending leads to a reduction in gold production and growth in gold consumption. This is only the case if the lending is additional lending (not prolongation) and if there is no further change in storage. The first 100 t, let's say, that enters the market via central bank lending is additional supply. This leads to a fall in the gold price, a decrease in production of about 50 tonnes and an increase in consumption of, say, 50 tonnes. So the lending process leads to a gap between production and consumption.

In the following period (`year') the central bank could continue with the lending process by carrying-over the amount already lent and lending an additional 100 tonnes. These 100 tonnes are additionally lent gold, because the gold of the previous year is already in the market. In this case the gap would stay the same, so there would be no additional effect on the price. But now 200 tonnes have been lent. If the same thing happens the next year, 300 tonnes will have been lent. And so on. It is clear that the process of lending additional gold will have to come to an end in the long run. However, due to the large stocks kept by central banks, this does not necessarily have to happen soon.

To stop this process, the central bank could continue to prolong already lent gold but cease lending additional gold. This would lead to a rise in the gold price, as the existing gap of 100 tonnes must be closed, by an increase in production of 50 tonnes or so and a decrease in consumption of 50 tonnes. This is simply the reverse of the events that took place at the start of the lending process in the first year.

If the annual volume of additional gold lending is significant, e.g. 1000 tonnes, the central bank would be unwise to stop the process of lending additional gold too suddenly, as this might cause price shocks and the market should be given a chance to close the gap between production and consumption in a moderate fashion. The central bank might, for example, lend an additional 800 tonnes, then 600 tonnes, then 400 tonnes, then 200 tonnes, then nothing at all. In this case, the market could close the gap of 200 t per year relatively easily. Note, we are merely talking about ceasing the lending of additional gold, not of regaining gold that has been lent.

So much for the special features of the gold-lending process and back to the interpretation:

The public is not fully aware of events on the gold market during the last seven years. The following scenario can be derived with the help of the above-mentioned two dates.

A lending process was going on in the early 1990s. Several central banks were also selling gold. So there was a gap of the kind described above. In summer 1993, there was a sudden rise in the gold price. This may have been caused by insufficient additional gold lending or selling. There was also an European Monetary System (EMS) crisis at this time and fears of inflation. The rise in the gold price was then halted, possibly due to the intervention of an organization best described as the 'Stabilization Fund' (http://www.nara.gov/fedreg/codific/eos/e12631.html) or a similar institution connected with the FED and with the Treasury and having large amounts of gold at its disposal. Theoretically, any central bank in the world can induce an anomaly to take place in the USA. But which central bank remains as a possible candidate after the European central bank statement in September 1999?

What might have been the motivation for the Stabilization Fund to act on August 5, 1993? The reason must be seen in connection with the previous rise in the gold price and the situation in the summer of 1993. The reaction on the part of the Stabilization Fund prevented a price shock. Because the central banks had caused the rise in the gold price indirectly by their previous lending and selling system, it can be considered to have been the task of the Stabilization Fund to intervene. The sudden rise must have led to a loss in the books of short sellers', mostly private banks and mining corporations. Such losses were limited by the intervention.

An additional reason for the Stabilization Fund's action was probably the goal of stabilizing the markets after the EMS crisis. A possible gold bull market would not have helped to stabilize the currency markets. One should also bear in mind that there were rumors that George Soros was buying gold. He had played a role in the EMS crisis and created a climate that called for action on the part of the Stabilization Fund. To sum up, we can now comprehend the Stabilization Fund's initial motivation.

But why was the pressure on the gold price not stopped after several months? Why did the central bank system not start phasing out the process of additional lending in a moderate fashion as described earlier? Moreover, why was the pressure maintained and the additional lending continued, and even expanded?

The anomaly depicted in Figure 1 clearly shows that the pressure on the gold price continued. An additional indication of a continuation of this pressure is the falling gold price as well as certain statistics regarding production and consumption quantities. Physical gold is required, if pressure is to be exerted on the gold price for a lengthy period of time. The pressure must therefore be connected with additional lending (or selling) of physical gold.

The reasons for the continuation of the pressure are not connected with an individual event. During the past seven years, there has been no EMS currency crisis, no inflation fears, no known large-scale gold speculation.

Apparently a number of market participants were aware of the action of the Stabilization Fund to stop the rising gold price, which they interpreted as a guaranty that the gold price would not rise in the future. This may have caused them to establish or increase a short position in gold, as it is easily earned money. The short positions then increased, which, in turn, forced the central banks to continue with the process of new lending to prevent bank losses, even at lower price levels. This process developed a momentum of its own.

The explanation is, however, not yet complete. Let us recall that the pressure on the gold price is taking place in the USA, and let us put ourselves in the central banker's or finance minister's position. Within the central banking system, US Treasury securities are the most important reserve funds. US Treasury securities therefore benefit most of all, if gold is no serious competitor for Treasury bills and bonds. Gold is still a central bank reserve currency. If a falling gold price leads central bankers to come to the conclusion that gold is a bad investment, they will invest in other assets, generally government securities, and especially US Treasuries. These special interests of the US Treasury are probably the reason why the European central banks' made their announcement in September 1999 without the FED. But the decision was not only determined by self-interest on the part of the USA. The American central bankers may have felt called upon to promote government securities in general as a reserve currency. We should, however, not overlook the fact that other central banks are free to decide whether they prefer the US dollar as a reserve currency or not. It is an open secret that European and Asian central banks are striving to grab a bigger piece of the 'reserve currency cake'.

These are the two main reasons why the pressure on the gold price is being maintained. The above process aimed at preventing losses or earning profits is the best explanation for the fall in the gold price. The Treasury's special interest in selling its paper is the main explanation for the duration.

But other thoughts may also have influenced the central bankers' decisions. They may possibly have rejected investments in gold as being economically unnecessary and competitors for government bonds. They may also have wanted to continue the process of lending in a manner that is considered uniform. Some people assume that the pressure on the gold price was supposed to create the impression of a relatively strong dollar and of low inflation. This can only be secondary. It does not fit in with the non-inflationary environment of the 1990s and does not explain why the gold price fell. We have no reason to believe that there is a conspiracy, as some people assume. But because the details of the manipulation are not known to the public this gives rise to speculations.

Every explanation must deal with the difference between the initial cause of the pressure and the motive for continuing it. It must look at the situation at each point in time when a decision was taken, e.g. in August 1993. It must be in line with other circumstances, especially those relating to the market situation, e.g. the falling gold price. It must distinguish between the various central banks. And it must distinguish between the task of the Stabilization Fund and the interests of private banks and other market participants.

Until September 1999, Stabilization Fund procedure was supported by the European central banks, mostly by selling gold. But as the figures show, most of the pressure took place in the USA, from August 1993 onwards. In September 1999, the European central banks decided to limit their selling and lending of gold. This led to a price jump. The action of the European central banks was a step in the direction of closing the gap between production and consumption through a higher gold price. But the gold price fell again. As the Figures show, the anomaly increased significantly as of September 1999: The pressure on the gold price continued. But now the suppressive action was taking place to a stronger extent than before in the USA, as the European central banks had reduced their selling and lending by that time. The declaration of the European central banks could have put a slow end to the process of new lending, but this did not happen.

So much for the possible reasons for the anomaly.

The scenario described above is possible, but hypothetical. There may be other reasons for the anomaly, even reasons that do not assume a deliberate government influence on the price. An alternative scenario might be that the international central banks started to sell through New York because of the rise in the gold price in summer 1993, which selling took place in a particularly rapid fashion on August 5, 1993. After the rise in September 1999, these central banks increased their selling. But such an alternative scenario is rather unlikely. We cannot identify these central banks. Moreover, simple selling or lending does not fit in with the overall picture.

Let us sum up. There has been a local anomaly since August 5, 1993. Since then, the price of gold has fallen on average during the New York session as compared with the remaining day. This anomaly increased around September 29, 1999, shortly after the European central banks' announcement that they would limit gold sales. It is very likely that central banks are lending gold in considerable amounts in addition to their more publicized selling. This lending process seems to be connected with the anomaly during the New York session. Pressure on the price of gold is localized in the USA. It is probably intended by the FED and by the Treasury. The initial motivation was connected with the rise in the gold price in summer 1993. Once it started, the process of influencing the gold price developed a momentum of its own. This has two principal reasons, one of which is related to the banking system, the other to the central banking system.

Dimitri Speck

(c) 2001 Dimitri Speck
Dimitri.Speck@gmx.net
March 8, 2001