70% of Portugal's Gold is Missing!
The enormous bubble that is resulting in the "Hooverization of Bush" was created in no small way by the Clinton Strong dollar policy. With the dollar getting stronger and stronger even as the U.S. expanded the money supply at a rate of speed never before seen in the annals of reserve currency history, people really did begin to believe in a new paradigm. They were willing to throw out the old laws of economics and why not? Classical economic law states that when the supply of something increases, its price should decline. Yet with every financial crisis during the 1990's, the dollar strengthened despite the fact that its supply was surging.
We now know how Mr. Clinton was seemingly able to defy that law of economics, not only over a short time frame (which could easily occur naturally) but over many, many years of very rapid money supply growth. The GATA folks have revealed information that shows the U.S. Treasury secretaries during the Clinton year were well aware that the only way they could keep the dollar strong as the world's reserve currency while at the same time bailing out the world with printing press money was if they capped the gold price. This was especially important as they began to pump up the system with Mexico, Russia, Asia, Long Term Capital and provide ample liquidity in case of a Y2-k disaster.
We know the policy makers accomplished this rigging of the gold market via the Exchange Stabilization Fund, cooperation of the Fed and cooperation of various foreign central banks. The way these institutions drove down the price of gold was three fold: 1) Outright sales. 2) Leasing gold at very low interest rates to gold bullion dealers like Goldman Sachs, Chase Manhattan, Citibank, J.P. Morgan and Deutsche Bank so that they could engage in a very profitable "gold carry trade," and 3) by swapping gold among various central banks thus freeing the sale of gold by one or another party of the swaps. As James Turk revealed, there is strong reason to believe for example that the U.S. transferred ownership of physical gold at West point to the Germans, thus allowing the Germans to sell gold which they held on their shores but for which title had been passed to the U.S.
The dishording of major amounts of gold was revealed by the work of Frank Veneroso which in fact provided the intellectual foundation upon which Bill Murphy built GATA. Mr. Veneroso who is not a gold bug by any stretch of the imagination, but rather more of a Keynesian thinker, demonstrated how the shortage of supply to meet demand was far greater than Goldfields and the World Gold Council and the CPM group for example were suggesting.
The response of these old line establishment gold analysts were to scoff at and make fun of GATA. Both Goldfields and the World Gold Council have repeatedly refused to debate the GATA team in a public forum. Goldfields arrogantly dismissed Bill Murphy's invitation by suggesting that since GATA was a new organization and since Goldfields had been around for so many years, GATA should shut up. When they had the large number of years of experience as they (Goldfields had) then they might be worthy of a debate. But until then, forget about it.
And so to those of us who have believed in the GATA thesis all along, the revelation last week that the Portuguese are hugely short of gold, came as a vindication. The following was excerpted from www.lemetropolecafe.com last week which is being published with GATA's permission.
"Longer term, the most important news of the day comes from Mitsui. Their Sydney commentary, speaking of yesterday's announcement by the Portuguese of a 15 tonne sale, observes
"…we think they got exercised on some calls granted as part of a collar back in 97/98 area. There may be more and with different central banks. Gold didn't flinch…"
"According to the Bank of Portugal's 2001 annual report… out of its 606 tonnes of gold reserves (now 591) Portugal swaps 381 tonnes and lends 52 tonnes; ie over 70% in the lease market! They may be the second biggest gold lender in the world. Option sales 'structures' might conceivably lead to some further withdrawals?
"Are tighter lease rates coming?
"The footnote that discloses the distribution of the Bank of Portugal's gold is at: http://www.bportugal.pt/publish/relatorio/Chap_IV_01.pdf (scroll down to 9th page)
"The information that the Bank of Portugal has been so specific in its Annual Report is, I think, new to the market place. The news that 70% of Portugal's gold has, in effect already been sold, lends powerful support to the view that much of the global C Bank 30,000+ tonne hoard is gone. This insight into a Central Bank's gold option activity - with the insinuation others are also involved - further advances this case. And, once again, the new spectacle of junior bullion banks being willing to be so candid about (possible) clients suggests that they think that the era of Central Bank domination of the gold market is drawing to a close. JB
"Word is the Portuguese central bank sale was the result of an options structure arranged in tranches over 1997 and 1998 (a collar). This is exactly what MIDAS reported over the past years and may only be the tip of the iceberg. Central banks wrote calls above the market and gold is being called away from them.
"I doubt this gold will ever see the physical market because of the massive 15,000 tonne gold short position. There is a scramble out there to get hold of physical gold to honor prior commitments. The Portuguese have found that out.
"The big news, as far as GATA is concerned, is the revelation that 70% of the Portuguese gold is gone. How many other central banks are in the same predicament? The Portuguese gold loans/swaps are not in the gold loan numbers of the World Gold Council and GFMS. Their gold loan numbers are only 4600/ 5,000 tonnes. The GATA/Howe/Veneroso numbers are more than three times the official gold industry numbers.
"With this Portuguese central bank gold loan/swap news, it should make it easier for investors to understand that GATA has been right all along - that the Howe/Veneroso gold loan/swap numbers are the right ones. Our numbers, fifteen thousand tonnes, are only a little less than half of the reported gold in all the central banks.
"The central banks of the world have been purposely deceiving the public for years about the true state of the gold market. They have done so to perpetuate the gold price rigging operations of The Gold Cartel. Take the Bundesbank, for example. Do they have any gold left? As per the hideous instructions of the IMF, they report their gold loans, swaps and gold on hand as gold reserves. They fail to break their numbers down. James Turk has brilliantly written on this subject and posits that the Germans are, in essence, out of gold."
Legitimate Reasons for Gold Stocks to Rise
Profits for most sectors in our economy are in decline because of week markets. In fact, we are seeing very robust commodity prices which in addition to huge debt burdens and weak demand for finished goods are cramping profit margins. And with weak profit margins, the chances for improvement in the labor and capital goods markets appear poor at best.
Not so with gold mining for reasons that can be seen from the daily chart of gold, dating back to 1971.
What you see above is the average monthly gold price in depreciated January 2003 dollars. What we see with this recent rise in the price of gold is that the gold price in constant 2003 dollars are rising dramatically above its 20-year down trend line. That is exactly the opposite of what we are seeing in most sectors of the American economy where prices received by producers of goods and services are not keeping up with the cost of production. Assuming this trend continues, as I do, this dynamic figures to bode very well for the gold mining industry.
Will a New Treasury Secretary Squash Gold?
We can't help but note once again that the recent rise in the price of gold began in earnest the day former Treasury Secretary O'Neil left office. Since the ESF can buy and sell gold and manipulate it in any manner it wants with only the President and Treasury Secretary needing to know, could it be possible that the recent rise in the price of gold was made possible by no one watching the U.S. Treasury store?
While we are sure basic fundamentals are driving gold higher, those same fundamentals have been in place for quite some time now, according to Frank Veneroso's work. Could it be that gold will get hit real hard once the new Treasury secretary is installed? Or is it possible that gold reserves are now dangerously low at the U.S. Treasury as well as most other western Treasuries? The Portuguese gold report noted above lends credence to the notion that the western central banks may have few bullets left to shoot to drive the price of gold lower.
Or, might it be as James Sinclair has opined that a new weak dollar policy is now in place in an attempt to re-inflate our economy such that policy makers actually want a higher gold price. We obviously don't know the answers to any of these questions, which is why we continue to think it is wise to keep Richard Russell's warning in mind that "markets can do anything."
However, we are unfortunately confident that the stock market and the U.S. economy is in big trouble. At some point in time whether or not the Treasury has more ammunition to push the price of gold lower doesn't matter in the longer run. As the U.S. economy and its investments become ever more suspect, there will be an inevitable return to gold. In the mean time, as stocks continue to weaken and the dollar with it, we think our Prudent Bear Fund and Prudent Safe Harbor Funds should allow us to profit from our ability to think the unthinkable in terms of another deflationary depression.
January 21, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com