first majestic silver

A Case for the Manipulation of Gold

March 12, 2001

All of us have friends, sometimes even very good friends – otherwise – who simply do not seem able to grasp that there really is massive manipulation of the gold price. "Naw", they say, "Gold is now just an outdated commodity. Its time has come and gone. There is no longer need for 'gold as money', not in a world where there is no inflation."

And no amount of talk can sway them.

Of course, it is a little difficult to convince them that there is something big happening to gold all the time, something that knocks it down again whenever the price shows signs of new life, unless someone comes out and says, "Look, Ma! No hands on!. But see what I'm doing to gold!" Which, of course, they haven't.

And won't.

When pressed, they retreat behind, "I see no evidence that gold is being manipulated! I see no reason why anyone would even want to manipulate gold."

In this essay an attempt is made to address exactly those two statements. To provide some hard evidence that there is something going on behind the scenes that can have only one explanation – somebody is actively meddling in the gold market to influence the gold price downwards and, secondly, to present a logical argument in favour of a reason why one would expect intervention in the gold market to keep a lid on the price.

An analogy

The problem in all this polemic about gold is that there is no party openly admitting to the manipulation of the gold price. All is conjecture and speculation on indirect evidence and hearsay. And, since precious metals markets have always been and continues to be a somewhat secretive affair – e.g. the London Bullion Market Association (LBMA) had existed in secrecy for some 80 years or so when they suddenly, and quite fortuitously for some people, announced their existence in 1997 – hard facts are not so easily obtainable.

Which means nobody has "observed" any actual manipulation going on, captured it on video and splashed it across the TV screens of the world. And, since for the majority of people, reality is what is said and shown on the idiot box, their views of gold is as an antiquated relic that no longer has a place in modern economic societies. That is the only conclusion they draw from the minimal time given to gold on their favourite medium.

But do we need first hand, visible proof of something before we accept its existence?

Nobody has ever "seen" a magnetic field. The field itself. Have you? Do you therefore doubt that such a thing exists?

Of course not! We all know that magnetic fields exist because we can infer that from objective evidence. There is no need to engage in fruitless speculation whether such a field exists or not, based simply on our intuition and gut-feel or on analogies drawn from other parts of science. We can do experiments to prove the presence of a magnetic field, say by tying a thread to a magnetised needle and observing what happens when it swings.

If it keeps on swinging in smooth oscillations and only gradually slows down to end up pointing in a random direction, one knows there is no magnetic field. But, since we see the oscillations decrease quite rapidly and that the needle always ends up pointing in the same direction, we know that we are observing evidence of the earth's magnetic field – without seeing the field itself.

In the same way, we can search for evidence that gold is being manipulated; in the face of the claims being made it would be foolish to just assume that the market for bullion is similar to all other markets, subject only to normal supply and demand, before one has tried to find any differences that may tell us otherwise.

It is also not good enough to draw on historical precedent in the discussion of the bullion market, as it might be that a condition has arisen for which no precedent exists.

Objective evidence in favour of "Gold Manipulation"

In researching the possibility of manipulation we should proceed in the same way as was done in the study of magnetism. There one could use a magnetic needle to determine whether a magnetic field is present and, if so, what its alignment and strength is. Or use more modern equipment that can do this with speed and precision.

Similarly, with respect to gold, one should design a kind of "lodestone test" that would be widely accepted and which could offer objective evidence that manipulation is taking place. If a positive result is found, then one has to accept this evidence, even though the widely held common sense view we are being told by anyone in the media who even bothers to say anything, namely that, "It is very silly to think that anyone would do something like that. I mean, it is not even necessary. Gold is dead."

And, of course, our objectives experiment or test fails to find any evidence of dirty little fingers plucking away at the strings of the gold market, then that reduces the probability that there is some form of manipulation going on. Unless another equally objective and acceptable test can be devised that does result in positive evidence.

Today it would be generally though quite foolish if anyone were to say, "There is no such thing as a magnetic field. Come on, just show me one."

In similar vein, objective evidence exists that the gold price is being manipulated. We may not "see" the actual manipulation being done, but just as a magnetised needle can be used to show the presence of a magnetic field, so is there a way to reveal the presence of manipulation – of consistent intervention in the gold market that can only be due to a persistent and willful manipulation.

Evidence of active manipulation of the gold price that people should interpret in the same way they accept the fact that magnetism exists.

The matter of conspiracy is being left alone for the time being. Let us concentrate on the presence or not of manipulation first and see whether there really is something happening to gold behind the scenes.

Statistical analysis

Academics hold a hypothesis that markets behave randomly. The statistical evidence in favour of this Random Walk Hypothesis (RWH) is not perfect, yet very strong. Over many years and under many different conditions it has been found that markets subject to the normal forces of demand and supply behave in a distinctive manner, irrespective of any major trends that might be contained in the cumulative day to day changes in price.

Briefly, they have found that when a large enough sample is examined, thedirection of a daily – or hourly, or weekly – change in the price follows a 50-50 rule. The probability that the price will go up is the same as that it will go down – days when the price do not change can be excluded. Secondly, they consistently find that the size of the day to day changes obey what is known as a 'normal distribution'. This basically says that relatively small changes in price – up or down – occur much more frequently than medium sized changes and that quite large changes are quite rare, all in relative terms.

Very much common sense and proven to hold true for all kinds of price series under all kinds of free market conditions. These results are so consistent that they are effectively taken for granted under all normal market circumstances.

The question is whether this general rule applies to gold as well.

Prof. Harry Clawar has published results of some statistical analyses on the gold price. He wanted to see whether there was any statistical evidence that could point to the gold price being manipulated and, since he had observed what he considered to be anomalous behaviour of the price in New York, that is what he set out to examine.

He split the global trading day in two "halves" – one half beginning from the time of the London AM fix until the time that US markets close and the second half starting at the time of the US close through until the next London AM fix.

Since the RWH is assumed to hold over all time frames, it should also hold for each of these two periods. Prof. Clawar found strong evidence that the behaviour of the gold price is anomalous – that it does not obey the normal rules for market behaviour. While the price shows a string inclination to decline during US trading, it exhibits a similar and equally strong inclination to rise while America is sleeping.

While America sleeps, the price "corrects" upwards, as one might expect from a market where the price is perceived as too low. Then, when New York later begins to trade, the opposite happens – the gold price comes under pressure and consistently moves lower.

This deviation from the 50-50 rule for the two time slots is very marked. The degree to which this behaviour deviates from "normal" is well beyond what could be explained by "chance", i.e. by the probability that it is just the expected kind of variation one would expect between markets. What happens to the gold price during the two trading periods has a very low probability of being explained away as normal market behaviour – and thus points to external forces intervening in the market – and this behaviour is also consistent over a substantial period of time.

There are two possible explanations for this anomaly

The lower trend in the price in New York is the normal behaviour, while the rising trend in the other time slot is the result of persistent manipulative efforts to get the gold price higher, and

The lower trend in the gold price in New York is the result of persistent manipulation, while the generally rising trend in the other time slot is merely a correction based on perceptions that the price has fallen too low in US trading.

Discussion to follow should state a very strong case in favour of the latter explanation.Today, if someone should say on being shown the consistent behaviour of a magnetic needle that is suspended on a string, "It must be the wind!", or perhaps "Stop breathing on it and will swing in circles again.", we would consider that person to be quite foolish, simply unwilling to accept the evidence of his eyes.

Given the statistical evidence on the gold price, as presented by Prof. Clawar in a series of articles at the website, the same reaction should befall someone who still denies the presence of some form of persistent manipulation of the gold price, and as will be shown below, likely to be that the price is being taken lower consistently during US trading hours.

It could of course be argued that the gold price is in a consistent bear market because of excess supply and that is why the price behaviour is so enormously skewed. Yet, most strangely, other bear markets in equities and commodities and currencies do not display the same skewed statistics, nor does this explains the direct opposite behaviour of the gold price during the time slot from the US close to the AM fix – with trade taking place during the same bear market that is seen as the cause for the persistent decline during US trading hours.

Which makes the US anomaly all the more difficult to explain, unless one accepts that there is persistent and active manipulation of the gold price over quite a long time.

Readers who are interested in Prof. Clawar's analysis can down-load his articles from his personal archive at the Gold Eagle website (

Other evidence There is further evidence of some shenanigans taking place in the gold market, perhaps more circumstantial, in the declarations that US Banks have to make on their derivative positions, firstly to their own oversight institutions in the US, but also to the Bank of International Settlements, or BIS, in Switzerland – the central bank to central banks.

Readers who are interested in this aspect of the evidence can read all about it at two websites, (the personal site of Reginald Howe, who instituted the law suit to prove conspiracy) and also at where John Hathaway, a respected gold fund manager and commentator on gold offers his observations. If doubtful regarding their objectiveness, disregard their personal opinions, but look at and consider the implications of the official statistics they quote.

What is strange in these figures is that the derivatives positions of these banks increase markedly whenever the gold price shows a very steep increase, as had happened during September-October 1999, after the European Central Banks announced the Washington Agreement that limited gold sales and gold leasing for a period of 5 years.

Now one could assume that these derivatives positions are examples of those positions that financial institutions establish in order to make a relatively low percentage profit from large spreads and other hedged derivative positions – something that would conform to prudent practice and the reduction of risk.

Yet the simultaneous jump in the lease rates of gold on these occasions tend to support the conclusion that the price rise is being capped and thus that the derivatives market is being used to place undue pressure on the gold price. In which case the derivatives positions will be very skewed to the short side – a very risky position if the gold price should not respond to the manipulation and move even higher, but positions which would mean substantial profits to the institutions if the gold price can be forced lower and then kept there at the lower level until the short positions expire out of the money.

Gold as safe haven of last resort

The argument against a higher gold price usually states that with inflation gone, there is no reason to hold gold. That central banks will continue to sell and lease gold in order to obtain some return from a "dead" asset and that this supply augments the natural flow of gold from the mines to result in an over-supply. And a declining price.

This argument could perhaps be equated to a decision to save money by canceling one's short term insurance as there has not been a burglary in 10 years and thus one seems unlikely to suffer this disaster during the next 10 years.

By all accounts, the past two decades, more so the past 6-8 years, have been unique in recent global and particularly US economic history. Low inflation in a climate of steeply rising money supply is quite exceptional.

Yet, there is no proof that this could continue indefinitely, in the same way that 10 years without a burglary does not constitute proof of immunity. In fact, what is happening on Wall Street right now could already be an early indication that trends are changing and could bring inflation or perhaps the other dragon of financial markets, deflation, back for a visit. If inflation should increase, or deflation send the US into a depression, and then, as expected, cause the US dollar to nosedive, as some economists are starting to predict, how many central bank governors would rue the day they started to lease their gold to the bullion banks and hedge funds in order to increase their dollar reserves!

But that is an aside. What these people neglect to mention is that gold has always been a safe haven for funds whenever there was significant uncertainty and risk in financial markets – inflation being only one of these risks.

Panics in the larger financial markets, collapsing economies and also the risk of war have in the past always been triggers that sent investors scurrying back into gold – typically with a very positive effect on the gold price.

Yet, since 1997, when SE Asia imploded, we have had all manner of uncertainties due to financial markets subject to deep trouble and currency crises and even murmurs of war. Then, when gold responds in its age old manner as some people turn to the safe haven of last resort, it suddenly gets halted in its tracks and resumes its downward trend.

From this behaviour one could almost come to think that investors no longer believed in gold as their safe haven of last resort, if it were not for the fact that on these occasions the lease rates on gold spike steeply upwards to indicate that lenders were queuing up at the central banks to get sufficient bullion to feed the market, before the gold price rises to a level where it would become very uncomfortable for the institutions, as explained below.

The case for manipulation

Many commentators have over the years successfully predicted the decline in the gold price, using on technical analysis as well as from fundamental views based on an analysis of normal market forces. In the latter case is always assumed that it is quite natural for central banks to lease or even sell their gold in a climate of low inflation, seeing that gold brings in no income whilst lying in the vaults. By implication these commentators thus accept that for some time now, probably since gold spiked above $400 in early 1996 and perhaps even long before that, central banks have been selling and leasing gold.

The total quantity of gold thus disposed, and in particular the quantity that has been leased, is not known, but could be quite substantial. In fact, one could postulate that over the years quite a large portion of the estimated 35 000 tons of gold held by central banks might already have been leased, sold into the market to liberate funds for investment by the bullion banks and hedge funds, and that this gold now hanging around the necks and arms of women and men world wide. Perhaps never to return to the market.

Yet the financial reports of these banks would still reflect the leased gold as being safe in the vaults, as that seems to be normal practice in these institutions.

GATA estimates that somewhere between 5000–10 000 tons have been leased and sold and mostly dissipated into the wide, wide world. Some authoritative estimates go as high as 14 000–17 000 tons, partly on the premise that GATA's estimate reflects only gold sold during the last 5 years or so, but that gold has been leased for a much longer time.

Even after conceding that much gold had been leased and sold into the market – which is necessary to account for a declining price in a market where natural supply fails to match or even approach annual demand – these commentators obviously do not consider all the ramifications of a substantial rise in the gold price in a situation where the physical gold, the hard yellow bullion, that has been leased from central banks and sold can never be recovered from the market. It is gone, really gone, for all practical purposes.

Perhaps, if they did consider what would happen if the price should rise steeply, it would have been obvious even to them why one could make at least a reasoned and logical case for manipulation of the gold price. To illustrate this, consider the following case study.

Case study

Assume that you, the reader, are Chairman of a large bullion bank – a major bank with a long history of dealing in gold, and that you have many clients who are always looking for sources of cheap capital, such as hedge funds and even gold producers.

By 1995 you would have reason to believe that inflation has been conquered, except in a few global backwaters. Further, you would share the then common view that expertise in managing the global economy – as exhibited by Mr. Greenspan in the US and others in the major economies of the West, and as displayed by both the IMF and World bank in actively assisting other countries to manage their own financial and economic systems – has reached a stage where the risk of unpleasant surprises has faded away and could be completely disregarded when making strategic decisions.

As a consequence, you have decided to give the go ahead to the officials of your Bank to begin leasing gold in quantity from central banks, paying a lease cost of less than 1% p.a. and reaping a neat profit of 5-6% on the investment of the proceeds of the sale. The Bank did so for itself and also made a great deal of money by brokering similar deals on behalf of various clients, in particular the major and even some smaller hedge funds.

However, you have also convinced mining houses to sell forward their production as the price of gold is likely to decline and they should lock in the current high prices while they could. The money to pay for the forward sales from the producers of gold was easy to obtain – simply lease more gold from a central bank, sell it into the market and voila!, the cash was available. And a good profit was made for the Bank. Later, as the producers delivered gold against forward contract, more gold was available to sell directly into the market again, since the central banks were eager to roll over existing lease contracts.

An easy assumption to make, isn't it, once one begins to dream of the kind of bonuses one would receive on the (paper) profits made as the gold price spiraled down from $400 to $300 and even less. Much reason to celebrate and to be grateful of the early decision to start leasing and selling gold – known as the "Gold Carry" – before most others, so that much of the leased gold had been sold at a high price, near $400/oz. Thus ensuring really big bonuses as the gold price keeps falling. Oh, a sweet dream!

But this dream can easily turn into a nightmare.

Your paper profits only exist while gold is trading at a price below the level where your Bank – and your clients – had sold it. Only while the price is lower can you buy back the gold that you had sold earlier to lock in the paper profit and bank it. And return the purchased gold to the central bank to cancel the lease.

If gold – heaven forbid – should rise above the price where you had sold it, your bank and your clients will start to lose money rapidly and the bonuses would disappear. And perhaps the Bank as well.

Having a short position in some currency is hardly a major problem. If the market turns against you, go to a bank, arrange a loan in the desired currency that is large enough to cover your short position and close it. Easy. As a rule, having a short position in one of the base commodities, metals or pork bellies or whatever, is also not a problem. The out and out "short" positions in these commodities are typically only a small part of the total market, since nobody in their right minds would build up a short position that is too large compared to the total physical market.

Since these markets are relatively "open", everyone knows what the overall short position is and a too large short position will be squeezed to death. And everyone knows a major bear squeeze is a killer – it leaves the corpses of even major market players in its wake if they should have taken on too much risk.

Yet, within a few years from starting the "Gold Carry", we have a short position that is not just larger than the annual physical market, but at conservative estimates exceeds at least 2-4 years of current production.

In a commodity that is highly desirable among most common people in many parts of the world, and once purchased by them is very unlikely to ever return to the market. In fact, the estimated short position is a significant fraction of the total global reserve of that commodity, and an even more significant fraction of the easily accessible gold in the vaults of the central banks – of which reserves some quantity approximately equal to the total short position has to be deducted to determine what remains left in the vaults!

And also a commodity that has no substitute and is impossible to replicate and takes a lot of labour to dig out from below the earth.

With mines beginning to close down because of the low gold price, thus reducing supply even further.

Taking all of this into consideration, what can you do to close out your substantial short position if the price of gold should begin to rise?

Without, of course, triggering a massive surge in the gold price as you change from seller into a market with tight supply into a new buyer intent on acquiring a very large slice of annual production. Which means you have to continue purchasing practically all of the normal daily turnover in bullion. And probably more.

Because, if you do so and the gold price does rocket in response to the jump in demand, not only are your bonuses gone, but almost definitely your bank as well.

Oh, I see. So the short gold position in your bank is small fry compared to your assets and the rest of your positions? Your bank is safe even if gold should rocket to $1000/oz.

Have you considered what your standing in the international banking community will be once you have informed all the central banks that you are defaulting on the gold they have leased to you? That you hope they will accept cash in lieu of bullion?

After the governors announce to their constituents that the gold is now gone from the vaults, but that you have supplied the Central Bank these lovely new greenbacks to replace the gold in its reserves?

While the value of the dollar is falling and the price of gold rising steeply?

Would that not constitute an admission that you were greedy – or stupid – enough to get trapped in an untenable situation of your own creation and that there is no way out? An untenable situation that any numerate person with some of the basic facts noted above soon could have identified as a no-win situation while all your "rocket scientists" failed to do so? Or was it because you had failed to listen to them?

How many banks would continue to deal with you? How many clients would you retain? Excluding the hedge funds of course, since, thanks to your advice, they are also going to the wall and for the very same reason as you are.

To trigger the real nightmare, assume that the conditions that have led you believe the gold price can only decline undergo a major change. Uncertainties in the markets are resurrected, inflation rears its head and some people – not many, not even a substantial minority – decide to get some gold to tide them over as a store of value until conditions have calmed down again. While few in number and perhaps even quite small, their fresh demand is enough to cause the gold price to react upwards, because the market is so tight.

At first the solution is easy. Borrow even more gold from the central banks and sell to them. Once this new demand is satisfied, the gold price will decline again and you can heave a sigh of relief and look forward to some more bonuses.

But then more problems crop up and some more people decide to buy a little gold. You do what you did before and again your bonuses seem safe.

But then it happens again. And again.

Seeing that there is only a limited amount of gold available to lease, and seeing that some central banks might become reluctant to play this game that has DISASTER written all over it and so publicly announce that they are restricting their participation. Lastly, you also discover that some central bank that have looked most kindly on your endeavours in the past is on the verge of running out of gold, what do you do?

Dear reader, you have two options. Decide for yourself whether in this situation

  • You will sit back and let the markets take their course and let the chips fall where they may and retire, perhaps in disgrace, but nevertheless with a very nice nest egg of accumulated bonuses to serve as salve for your injured reputation and pride, or
  • will you do what you can to keep a lid on the gold price for as long as you can – because that would keep the bonuses coming a few years more. That would maintain your prestige as Chairman of a global bank and preserve this feeling of power you so much enjoy

If you would opt for the second alternative, also decide at what stage of this dream would you begin to act? Would it be quite early, at the first sign that trouble is brewing? When it is still easy to have people believe that gold is really dead. That it has no future at all.

Or only when the situation has turned really critical? When the gold price has run up $50 or more and when all the media are talking about the new lease on life gold is enjoying?

And, if under these circumstances you personally would decide to do something to stop the crisis from erupting in your face, and that you would do so from the early signs of trouble, as you cannot afford the risk of letting loose the Gold Genie, then my case for manipulation rests.

Since the Chairmen of the other large bullion banks would probably have reached similar conclusions back in 1997, when the gold price first tried to escape from the clutches of the short sellers in the wake of the SE Asian crises. And the lease rates first spiked to show a massive increase in the leasing of gold, an activity that could only have been intended to cap the sudden increase in demand.

Just manipulation, or conspiracy too?

In the beginning it would have been quite easy to lease more gold and halt any rise in the gold price due to new demand. Most people still believed that global financial markets were well managed – except for those pesky upstarts in SE Asia, of course, and its all their own greedy fault – and that inflation was going, going gone! And thus that gold had no future.

However, as crises in a financial sense came closer to home, in South America and in Russia, more people got spooked and at the same time it became clear that the reserves available for leasing are declining. Even with additional support from announcements by Switzerland and Holland and Great Britain and others that the central banks were selling gold, the excess demand for gold required a constant fed of leased gold into the market.

Then the Washington Agreement further clouded your future as this capped the amount of gold that could be drawn from the EU and some other central banks. Now the futures or paper market became the remaining lever that really could be used to keep the gold price under control. But that entailed entirely new risks to the Gold Carry – although it too could be very profitable, if calls can be sold to halt a rise in the gold price, forcing the gold price lower and thus causing the calls to expire out of the money.

But, since there is a lower level below which it would be impractical to let gold fall – a level where mines close in quantity and thus collapse the regular supply – the price has to be maneuvered into "waves".

The gold price must be allowed to rise, so that many gold calls can be sold and then it has to be pushed down, so that the premiums can be safely banked. But this is risky – every rise in the gold price becomes more difficult to control. And now the mess on Nasdaq, that is threatening to spill over on Wall Street, makes investors even more skittish, and that is really bad news for you and all the other Banks in a similar situation as yourself.

It is now getting critical and a matter of backs to the wall.

Now, given these circumstances, decide whether you would consider speaking to other bullion banks that are in the same position and exhort them to close ranks; telling them they should at all costs not submit to the desire to buy gold to close their short positions, as that would be

  1. Impossible and
  2. Trigger Armageddon as far as you all are concerned.

Would you, if you were so requested by the Chairman of another Bank, agree to stand together and to use your combined might in the market place to screw the lid on the gold market as tight as required to stop the price from moving higher.

Because the alternative if gold managed to escape is just too horrible to contemplate.

Consider this carefully – how would you decide?

Would you say "I cannot cooperate, as that would be collusion and probably even be seen as conspiracy?" and then try to battle on alone.

Or would you do what has to be done to make absolutely sure that gold does not escape?

Consider these two alternatives, and then decide for yourself what are the odds that there just might be an active and ongoing conspiracy among the larger players in this leasing market. Zero? Perhaps only 25%? As much as 50%?

Or near certainty, as far as you are concerned?

Lastly, given this situation and assuming you were a governor of a central bank that has leased a significant fraction of its gold, what would you think of the situation where you might be called upon to inform your constituents that you have effectively sold much of their gold at between 1% and 4% of market value. But that you are trying to get the defaulting bullion bank to pay dollars for the gold it had leased. Unfortunately, they too are in trouble and you are now hoping for at least 60c on the dollar.

With this prospect to consider, how would you react if called upon to assist in keeping the lid on the fold price?

And if you still wonder whether all of the above really could be true, go and read what Prof. Clawar has written. And Reg Howe and John Hathaway. All in the archives at Gold Eagle and frequently in Le MetropoleCafé.

[Note: Market analyst Jack Milne in his regular column in "Smart Investor" in South Africa presented arguments against the claims made by GATA in a full page ad in "Business Day". The above piece is an adaptation of an article written to refute the arguments by Jack Milne, and it first appeared at the website]

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