After all, the gold carry trade consisted of a covert scam engineered by Western central banks (CB) and bullion banks, acting in collusion, to short sell gold into the market. The central banks were motivated to participate in the scam as a means of permanently demonetizing gold and relegating it to the status of mere commodity. The bullion banks saw the gold carry trade as an opportunity to receive de facto "free money" from the CB's, since, at one time, CB gold loans averaging 1% per annum could be invested in safe treasuries yielding no less than 5% per annum.
Although defenders of the bullion banks would object to my description of the gold carry trade as a scam, there is absolutely no doubt that it was a government- endorsed crime in which spec players in the gold market were hoodwinked and robbed of their monies.
Firstly, the gold carry trade was devised by the major players of the Western Establishment (government politicos and bullion bank officials) in secret. As such, the gold carry trade consisted of a conspiratorial, collusive effort at the highest levels of government and finance without proper disclosure of its illegal mechanics to those spec players who bet unwittingly in favor of rising gold prices. I say "illegal" because any collusive scheme perpetrated secretly by major players within an economic sector and designed to rig prices can best be described as a cartel (and cartels are illegal in the United States).
Furthermore, such collusion constitutes moral hazard since the major players within the gold carry trade understood that gold prices were rigged and an artificial ceiling imposed upon gold prices, one that was maintained through regular ongoing sales and leases of central bank gold. Given this knowledge, the bullion banks could short tremendous quantities of gold with impunity knowing that the potential downside (a sudden escalating gold price) would not be allowed by senior CB officials directing the gold carry trade's operations. Unfortunately, for those counterparties who bet in favor of rising gold prices, they simply had no idea of the degree by which the gold market had been subverted through such moral hazard.
Since the gold carry trade operated to benefit a limited number of special, privileged Establishment players much to the detriment of multi-thousands of gold investors, gold miners, gold mining executives, gold dealers, etc., then it represented a form of cronyism that is the hallmark of any corrupted market.
In my mind, a cartel characterized by moral hazard, price rigging, and cronyism at the highest levels of the Establishment seemed undefeatable. The small spec victims of this cartel could not appeal to the Establishment for remedy because, after all, the Establishment was a notable part of the problem. So, from my perspective several years ago, I could only envision the cartel's collapse on the basis of a rebellion by a member against its collusive partners. To that effect, I noted that financial history proves there is no sustainable "conspiracy amongst thieves." At a certain point, I hypothesized that one of the bullion banks would effect full coverage of its gold short position, then turn the tables against its collusive partners and initiate the conditions for a spectacular rise in the gold price. Thereafter, the rebellious cartel member would be able to swoop in and pick up the dead remains of the former cartel allies for pennies on the dollar, thereby enhancing and strengthening its power in the financial circles of Wall Street.
Today, I see that, although my hypothesis may yet be proven valid, the chain of events leading to its realization are different than what I imagined. That is because the outbreak of civil war on Wall Street today is not occurring within the bullion bank ranks but rather it begins as a notable schism between the insurance industry and JP Morgan.
The first shot was fired the other day in a courtroom by JP Morgan, whereby that bullion bank giant sued several major insurance companies for payment of $1 billion to cover its losses in dealings with the now infamous corporate fraudster, Enron. Since the insurance companies have been reliable Establishment allies in the past with respect to most bullion bank concerns, it is an understatement to note that this break in the alliance will likely lead to a deterioration of the cohesion amongst ALL Wall Street's Establishment players.
What is most remarkable (if not appalling) about the outbreak of hostilities is this: bullion bank JP Morgan is trying to defend the merits of circular loans by which monetary transactions for Enron's oil & gas were entirely specious since the commodities never actually changed hands.
Now if a group of individuals were to set up various bank accounts today at JP Morgan subsidiary, Chase Manhattan, then proceed to run transactions on a circular basis through those various accounts, there is little doubt that Chase Manhattan would describe such an arrangement as an illegal form of cheque kiting....and there is also little doubt that JP Morgan would prosecute the perpetrators of such circular cheque kiting arrangements to the fullest extent of the law.
Yet for some reason, JP Morgan seems to think the same laws that apply to such felonies in the banking sector do not apply to itself where phony transactions in commodities are concerned.
In the end analysis, I believe JP Morgan is hammering yet another nail in the coffin of the bullion banks because, if there is one thing a bank needs more than anything else today, that is a firm, unshakeable belief by the public and institutions in the good faith of the safe-keepers of our cash.
However, instead, JP Morgan is playing word games in court and attempting to justify the micro-manipulations of the greatest fraud (Enron) in US financial history. No doubt, the insurance industry is taking a closer look at ALL its contracts with the bullion banks, in recognition that "these guys can't be trusted anymore."
The exacerbation of the crisis of good faith in America can only favor gold. At a certain point, the spillover effect of this good faith crisis will contaminate the US dollar, which is no more than a good faith monetary instrument today, without the backing of any intrinsic value assets.
The insurance industry vs. the bullion banks....
Now who would have thought the rise of the gold phoenix would begin this way...and who can predict where it will lead?
7 December 2002