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GOLD - What Might End the Manipulation Game?

March 26, 2001

To understand what might force an end to the gold manipulation scheme, it might be instructive to again examine the economic motives put in place by the central banks to make it worth while for the bullion banks to play the game. As alleged in Reginald Howe's lawsuit, the bullion banks crucial to the manipulation of a lower and lower gold price included J.P. Morgan & Co., Inc., Chase Manhattan Corp, Citigroup, Inc., Goldman Sachs Group, Inc., Deutsche Bank AG.

Recall that bullion banks have, as far back as at least the early 1990's borrowed gold from central banks at rates that are typically below 1%. They then sell the gold for dollars and invest the dollars in say U.S. Treasury notes which may have provide them until recently with a 6% or 7% interest rate. This could have been risky business for these banks if the gold price began to rise, which it very well might have during the Asian crisis in 1998 except that Mr. Greenspan promised them that "central banks stand ready to lease gold in increasing quantities should the price begin to rise."

Recently, over the past couple of months, the 30 day gold lending rates have begun to rise into the 2% to 4% range, with temporary spikes over 7%. This is indicating an unusual shortage of short term gold supplies available to those wishing to borrow gold for the 30 day time frame. Longer term rates have risen too, though less drastically, indicating a tightening supply of gold to meet borrowing demands over longer and shorter time frames.

At the same time the gold interest rates have been rising, the U.S. dollar interest rates have been declining, thus making less profitable the gold carry trade scheme. Obviously, if this trend continues, the time for the short selling gold as a result of this mechanical practice will end. With a very huge short position, borrowers will be forced to go into the market so they can return it to the ultimate owners - the Central banks. This should lead to an explosion in the gold price.

What are the chances gold and dollar interest rate trends will continue in the same directions? Given our view of the economy, we think the chances for dollar interest rates continuing to decline, at least until inflation is perceived to be a big problem is very good. But what about the prospects for gold interest rates to continue to rise?

To answer the second question, it may be instructive to examine a bit of news that GATA told us about last week and that is that the Swiss have now said they will no longer sell the gold through the BIS. Admittedly, this is speculation on the part of GATA, but it seems a reasonable possibility non the less.

GATA speculates that the Swiss may have been willing to sell gold originally to help their own bullion banks climb out of their gold short positions. Moreover, GATA believes with some good reasons, that the BIS is now very much an instrument of the gold conspiracy cabal and as such that it is now an instrument of the gold cartel to channel gold to their favored bullion banks, specifically those named in the Reginald How lawsuit.

With the BIS no longer making gold available to the Swiss banks (which are not part of the Howe lawsuit because there has not been evidence of collusion on their part), GATA suggests that the Swiss may have made the decision to stop selling gold through the BIS, which is the same as selling it through the gold cartel. This may in fact help explain why gold interest rates are on the rise.

And, given the huge shortages in supply to meet world wide demand and given the reluctance of central banks to entirely empty their coffers of gold and given what is now perhaps a far greater short position in gold than almost anyone in officials circles will admit, there could be a continuing shortage of gold which could cause the gold interest rate to continue to rise. If so, the very natural forces of the markets will once again prevail and devastation will be wrought upon those who try to interfere with market forces. When will we ever learn?



Bill Murphy of GATA had the following to say which may shed some light on the real story about the gold markets, rather than the one the talking heads at CNBC believe and want you to believe.

"At the end of 1997, Clive McKeef, the former gold reporter for Reuters, asked a Greg Drury, the trader at Swiss Bank Corporation what he thought the size of the central bank gold loans were. McKeef was stunned by the answer he was given, which was 9,000 to 10,000 tonnes. That was at the end of 1997, mind you. Since then, the supply/demand deficit has run about 1500 tonnes to 1800 tonnes per year over the past 3 years. Thus, it is very easy to come up with a new total central bank loan number of 12,000 to 14,000 tonnes, just from this simple information alone.

"The reason for that is that gold supply had to come from some place to keep the gold price from rising to ration gold demand, which has been so firm. Other sources of gold supply during this time were dishoarding during the Asian crisis (600 tonnes) and central bank sales (1350 tonnes – 450 tonnes per year average x 3). The total for the two comes to approximately 2000 tonnes.

"The numbers work like this:

  • End of 1997 - gold loans 9,000 to 10,000 tonnes.
  • Supply deficit since then approximately 4800 tonnes to 5800 tonnes.
  • The gives us 13,800 tonnes to 15,800 tonnes.
  • Dishording plus central bank sales 2000 tonnes.
  • Which leaves a gold loan number of 11,800 tonnes to 13,800 tonnes.

"This is not how Frank Veneroso calculates his gold loan numbers, but it is anecdotal confirmation of his own work and relates to this commentary.

"Frank has also figured some kind of formula that relates a ratio of gold deposits to the gold derivative numbers. From information available in the public domain, Frank knows that the gold derivatives at the Swiss banks are 13,000 tonnes, U.S. commercial banks have 10,000 tonnes, and the German bank total is 7,000 tonnes - for a total of 30,000 tonnes of gold derivatives. Then, we have to add the uncounted US bullion banks like Goldman Sachs (that don't report to the OCC), the UK, the Japanese, the Australians, Canada, and other smaller countries. A not unreasonable number for all of them would be around 10,000 tonnes, according to Frank.

"That gives us a worldwide total of 40,000 tonnes of gold derivatives and we get closer to the point of this exercise.

"Based on Frank's own calculated research, he believes the gold loans at UBS (which took over Swiss Bank) are 3,000 tonnes and are around 1,000 tonnes at Credit Suisse. That is a staggering revelation when you consider that GFMS states that total of ALL the central bank loans is only around 5,000 tonnes.

"The ratio of gold derivatives to gold loans at the Swiss Banks is 0.3 times 4,000 tonnes divided by 13,000 tonnes. This ratio would vary from bank to bank and country to country. But, if this is the average ratio - or close to it - then we can ascertain from public information that the central bank gold loans are around 12,000 tonnes. All we have to do is apply the same ratio to the 40,000 tonnes of derivatives.

"40,000 tonnes of gold derivatives on the books of the banks of the world x 0.3 = 12,000 tonnes.

"This and much, much more is what Frank will explain to the attendees at the GATA Africa Gold Summit.

"To put this in perspective, GFMS tells the gold world that the central bank gold loans are only 5,000 tonnes. And, gold mine supply is only 2500 tonnes per year. A gold loan number of 12,000+ tonnes means there is an extraordinary imbalance here - an explosive gold price set up.

"This is what The Gold Cartel is panicked over. They are petrified that that the investment world will wake up and realize the predicament of the bullion banking world. That is why they smash gold in coordinated fashion on EVERY SINGLE GOLD RALLY. That is why they have GFMS spread supply/demand, gold loan disinformation intended to play down the real gold problem. That is why they continue to label the GATA camp as the conspiracy crowd. They want people to laugh first, before examining what we have to say.

"To this day, no one that has examined all of our documents has told us what is wrong with our evidence and why. NOT ONE PERSON. The best they can do and come back with is the "conspiracy" label.

"The Gold Cartel is scared to death that the truth be known because they will be routed when it is. Too bad for them, but it will be known to the world on May 10 in Durban. And, what is better, the attendees can check out what we have to say for themselves. That can happen in only a matter of a couple of weeks.

"That means The Gold Cartel goes tapioca."

So as Bill Murphy of GATA this past week, "Maybe the BIS, in desperate need to lend gold to others, was not playing ball the way they were supposed to. Thus, the Swiss yanked that role from them.

"That is no far fetched story as the extraordinarily high one month lease rates are signaling some kind of extreme tightness and stress in the physical gold market. Maybe the Swiss (via the BIS) were sending the gold to the desperate English instead of to the Swiss banks.

"The good news is that things are happening in the gold world that suggest that the days of The Gold Cartel are numbered. That means we have a gold price explosion coming and it might not be very far off."

A one-ounce gold nugget is rarer than a five-carat diamond.
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