Bullion Banks Über Alles

May 15, 2001

Gold price manipulated?

Conspirator theory rattles the market.

Circumstantial evidence shall be presented at a conference in South Africa.

Independence of central banks questionable.

By Markus Stahl

Süddeutsche Zeitung, Germany

May 10, 2001

It is alleged that the gold price is manipulated and artificially kept low. Circumstantial evidence shall be presented this Thursday of a supposed conspiracy on the gold market from the Gold Anti-Trust Action Committee (GATA) at a conference in Durban, South Africa.

One expected speaker is the gold analyst and U.S. lawyer Reginald Howe, who in December 2000 officially took legal action in U.S. District Court in Boston against the supposed participants of the conspiracy. Accused are Alan Greenspan, chairman of the U.S. central bank; William McDonough, president of the New York Federal Reserve Bank; Lawrence Summers, former U.S. secretary of the treasury; and five prominent banks, J.P. Morgan, Chase Manhattan, Citigroup, Goldman Sachs, and Deutsche Bank.

Because of new information of gold business between the German Federal Bank and the U.S. Exchange Stabilization Fund -- under the control of the U.S. finance ministry -- which is in the center of the alleged conspiracy, the conference could be very interesting. The claims are serious and controversial.

In the opinion of GATA the cartels illegally kept the price of gold artificially low. That in turn has the mining companies, owners, and their workers disadvantaged. Those in the gold business, banks, and the whole finance system might be in danger because of the conspiracy.

If there was not a conspiracy the gold price might be higher, even at a price of $600 US per ounce and not at the current price of $270 US.

The GATA study shows the supposed circumstantial evidence of a manipulation. The study shows the supposed disorder of statistics of the amount of gold lending of the central banks. The study shows a significant increase of the gold business of the international banks. Those in the gold business operating banks are supposed to profit big through the gold lending business.

Credible motives are missing.

The controversial gold analyst Frank Veneroso, who also is expected to be in Durban, will give evidence that the gold lending of the central banks has reached at least 10,000 tons, a third of the central bank reserves of 33,000 tons.

The GATA conspiracy theory has been dismissed as absurd by the gold lobby, the World Gold Council. The study "Gold Derivatives: The market view," presented in August 2000 by the gold expert Jessica Cross, shows that the lending is below 5,000 tons and the open positions are only 400 tons.

The independent firm Gold Fields Mineral Services and Professor Anthony Neuberger of the London Business School do not believe that the conspiracy theory has much merits. More plausible explanations for the decline of gold are the lower inflation rates and the increase of the US dollar value toward the currencies of the main gold-producing countries like South Africa, Australia, Canada, and Russia. In a dollar-currency ratio the gold production costs are sliding down as those countries are paying their costs with their own currency. In a marketplace high competition leads to low production costs and to low market prices of gold.

The conspiracy theory is mainly dismissed because of a lack of believable motives. Why should central banks be interested to keep the gold price low? Why should the US central bank help business banks to get higher profits through gold lending? Why should the US central bank have helped a few bullion banks as in fall 1999 the gold price surprisingly jumped? And why should the German Federal Bank have helped as well?

If the rumors are true, that would mean that the central banks are not as independent as normally known, but that they cater to the interests of a few bullion banks.

Another explanation would be that the central banks helped the bullion banks in September 1999 as they were in such a problematic situation that a worsening of the gold market crisis would have affected all other finance segments of the market. In such a case the central bank would have been a hostage of the short positions of the bullion banks.

This however seems very unlikely to most of the finance experts.

One completely different explanation is given by the gold study of the Baden-Württembergischen Bank AG of Stuttgart, Germany. There, the theory goes, gold is the natural enemy of the central banks. Originally, the first private central banks had to promise to honor paper money with gold in order to build trust in the currency. Only the full gold-paper money ratio would have established a price and currency stability in the long run. However, as central bank gold and money production got further apart, was the gold market an indication of the real value of the paper money?

The gold standard can be seen a reducing the value of the paper money. And, in a system of flexible currency rates and missing gold cover -- as it is established now -- signaling a strong increase of the gold price, higher inflation rates, and therefore not very good future perspectives of paper money.

The credibility of a central bank is the measurement of the gold price. Maybe that is a reason that the central banks have an interest on a lower gold price. The market participants can be signaled that the money value and finance stability are in best health. The strategy of the gold sales and gold lending of the central banks is to put aside all money forms they cannot control by themselves. Money politicians who prefer finance crisis situations as a strong expansive strategy would, through a complete gold cover of paper money, become strongly disadvantaged. Because of these motives and the gold sales and gold lending, it is no wonder that there is a theory of a gold price manipulation.

Whether parallel interests or conspiracy, the participants of the gold market are given doubtful signals by the central banks. The phrase "never fight a central bank" strengthens the belief at the gold market that a rise in the gold price will be impossible. Such beliefs lead in the long term to collective misunderstandings. Potential gold buyers are hesitant, mine companies sell of their production too early, and banks are involved in empty gold sales on the gold market.

China is the world’s biggest gold producer with more than 355 tons annually. Australia is second.