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SRA Interview with Bill Murphy

June 19, 2000

". . . THERE IS

AN

ORCHESTRATED

EFFORT

TO HOLD

DOWN

THE

GOLD PRICE."

CBS: How did your interest in the gold market arise?

BM: I have traded and invested in the commodities markets for twenty-seven years. Before then, I was fortunate to have studied supply/demand fundamentals with the likes of Dan Ritchie, who is now Chancellor of Denver University, Ray Dalio who founded Bridgewater Associates (Wilton, Conn.) and Frank Veneroso, macro-economic guru and advisor to many governments. They all possess great market minds and looked for supply/demand dynamics that could result in large price moves to the upside. A few years ago, Frank Veneroso felt that was the case for gold, so I jumped all over it. In September 1998, I started my own financial web site, www.LeMetropoleCafe.com, that has a special gold focus along with commentary of a contrarian nature.

CBS: The price action in gold over the last few years could, to a naïve observer, seem odd. After all, oil prices have tripled, inflation has doubled recently, monetary base growth rates are at very high levels, but gold prices have fallen. What's going on?

BM: The anecdotal evidence could not be clearer that there is an orchestrated effort to hold down the gold price. It is hard to pinpoint when it all began, but I became aware of it right after the Long Term Capital Management bailout was effected.

For many, many months prior to that bailout and the surrounding financial crisis, we had heard LTCM was short 300 tonnes of gold as part of a "carry" trade. All of my associates expected the gold price to explode as they exited their short gold position.

As the autumn passed, many of the bullion banks that bailed out LTCM were always there at the same time to knock back the price of gold every time it looked as if it would take off. The gold market manipulators took no chances of losing control of this rigged market and money making bonanza. Their line of defense was, at first, right above $300, then ratcheted down to $296 and then $290. We then heard this same cartel was offering unheard of relaxed credit terms to producers if they would just sell forward. At the same time, we twice received feedback from reliable sources that our officialdom had asked the Asian officialdom to refrain from any aggressive gold purchases as they were in the market at the time.

 
Sanders Research Associates
 

These bullion banks, led by Goldman Sachs, had a significant motive to hold down the gold price as many of them, and their clients, were short gold at the time as a result of large "gold carry trade" positions. They borrowed gold from the central banks at 1% interest and invested those funds in the markets. Not a bad deal being able to borrow money at almost interest-free rates. The hitch is that the gold price must stay flat or go down. A sharp rise in the price of gold would make the loan a prohibitive one and, for some, could result in a financial disaster. For example borrowing gold at $300 and paying it back six months later at $400 means the loan is a 34% one (33% on the trading loss plus 1% interest). Annualised it is a 67% interest rate.

Finally, word spread that LTCM was let out of their short gold position in a rigged "off-market" transaction which prevented the gold price from exploding as it should have, something I pointed out in my gold market commentary on my web site.

After all this, the Counterparty Risk Management Group, led by Goldman Sachs and JP Morgan, was formed to manage risks in the financial sector along with the likes of scandal ridden Credit Suisse.

"How long do you think it would stand if Chrysler, GM and Ford got together to do the same thing in the automobile industry," asked Chris Powell, managing editor of the Journal-Inquirer in Connecticut and one of my subscribers. Chris has dealt with anti-trust issues in his paper's business affairs for many years. He wondered if some bullion dealers might be violating the Sherman and Clayton Anti-Trust Acts.

"THESE

BULLION BANKS,

LED BY

GOLDMAN SACHS,

HAD

A SIGNIFICANT

MOTIVE

TO HOLD DOWN

THE

GOLD PRICE."

 

In essence, if two or more bullion dealers were consorting to fix the gold supply and price, it might qualify as an anti-trust violation. With that in mind, we formed the Gold Anti-Trust Action Committee in January, 1999, to find out what was really going on in the gold market.

Eighteen months after the LTCM bailout, the price of gold is even lower, yet we have:

Diverging With Gold. What's Going On?

CRB Precious Metals Index (1967 = 100) Price Index

  • The Fed in a tightening mode due to inflation concerns.
     
  • Record gold demand according to the World Gold Council while mine supply is flat.
     
  • No financial crisis dumping of gold as there was in 1998 when prices were this low. Korea alone dumped 250 tonnes of gold then.
     
  • Some major producers such as Anglogold and Placer Dome are not rolling over their forward sales, they are delivering into them, reducing supply hitting the market
 

"YET THE GOLD

PRICE DOES NOT

RISE, NOT EVEN TO

A MODESTLY

HIGHER NEW LEVEL

LIKE $330 PER

OUNCE.

NO, $290 IS A SORT

OF MAGINOT LINE

THAT GOLD IS NOT

ALLOWED TO

BREACH TO THE

UPSIDE FOR ANY

LENGTH OF TIME."

  • Fifteen European central banks in the Washington Agreement announced on September 15, 2000, that they are curtailing their gold lending and limiting their gold sales to 400 tonnes per year. That number includes the publicised sales of the Dutch, British and Swiss.

Even the Economist is raising questions about the gold price: From the February issue of the Economist: "Until recently it has been easy to dismiss them (gold bugs) as flat-earthers, clinging to outdated ideas. Now, however, it is harder to explain why the gold price remains so low."

The Gold Anti-Trust Action Committee strongly believes that the gold market has been manipulated over the past couple of years, at minimum, by certain bullion banks, mostly headquartered in New York, and a certain facet of U.S. officialdom.

We believe there has been an actual conspiracy to hold down the price of gold. In the past I shied away from the word conspiracy, preferring the word "manipulation." However, the more we investigate what has occurred, the more appropriate the word appears as it best defines orchestrated collusion and the confined state of the gold price.

CBS: "Conspiracy" is a loaded term in any context. In the case of the behaviour of the gold price, it is dynamite. We are, after all, talking about a market in which the key actors include "independent" central banks, large bullion banks, and a number of mining companies. Conspiracy implies collusion among these parties. What makes you think that there has been collusion?

BM: The anecdotal evidence is overwhelming.

First, there was the noticeable capping of the gold price during the financial crisis of October 1998. In my opinion, Frank Veneroso, whom I referred to earlier, is as well acquainted with the supply/demand numbers of the gold market as anyone in the world. His work shows that there is a yearly supply demand deficit of 1500 tonnes per month and the central bank gold loans have risen to over 10,000 tonnes. According to Veneroso, if the manipulation of the gold market were to cease, the price of gold would rise to $600 per ounce. That is the kind of price move it will take before an appropriate equilibrium price can be attained. In other words, for the past few years, too much gold has been consumed at too low a price. Since we expected a big move to begin in the Fall of 1998 due to those fundamentals, the capping of the gold price was very apparent when certain bullion dealers checked price advances in a concerted fashion.

Back to $600?

Gold Bullion $ / Troy Ounce

The evidence of gold price capping has mounted since then. It looked as if the gold price would take off in the spring of 1999. Gold share prices were surging on bourses around the word and gold had risen six days in a row to $289. Then on that afternoon of May 6, I received word that Deutsche Bank was telling its clients the price of gold would not go past $290 (only $1 higher).

The very next day, May 7th, the UK announced its new gold sale policy. They were the first government in over twenty years to announce a gold sale in advance. They knew this announcement would devastate the market and send gold prices crashing and, of course, it did. The gold price went straight down more than $30 per ounce. This assured British citizens the worst price possible and cost the country many millions. In Abbot and Costello "Who's On First?" comedic style, no one in the British government would own up to making this mysterious decision which devastated poor African countries and gold companies alike. However, it pleases me to tell you that the National Accounting Office in London has launched an official investigation.

Then, last Fall, in a surprise move, fifteen European central banks announced they were going to curtail their selling and lending of gold for the next five years, the gold price exploded $84 per ounce. The shorts were stunned, trapped and desperate. Voila! Another unprecedented announcement:

  • Kuwait deposited 79 tonnes of gold reserves with the Bank of England for investment on world markets (that meant gold supply lent into the physical market).
     
  • That was followed by rampant rumours that the Exchange Stabilisation Fund was active in calming down the gold market via a trading account at Goldman Sachs.

The price of gold was pushed back all the way to below the magic $290 level. When Anglogold and Placer Dome announced that they were not going to rollover their forward sales, the gold price shot up to $320 in spike-like fashion. Like clockwork, Goldman Sachs showed up a seller along with other bullion dealers and the price was again pushed back to below $290.

 

 

"THE GOLD PRICE

PLUMMETED THAT

SUMMER AND

LANGUISHED

MOST OF THE TIME

IN MID $250'S

PRICE RANGE"

Gold spiked again last week when the stock market was crashing from $277 to $289.50 when Goldman Sach's massive selling again aborted a rally. Getting right to the point, all GATA's investigative roads lead to Goldman Sachs, the former home of former Treasury Secretary, Robert Rubin.

Earlier, I referred to unheard of credit terms offered by bullion dealers to producers if they just would sell forward. A major gold producer in South Africa furnished that information to me. It is public knowledge that Goldman Sachs was criticised for its conflict of interest roles in advising Ashanti, the African gold producer, that blew up because of the "exotic" hedging advice it received from its bullion dealers. Goldman Sachs was its most significant hedging advisor.

 

 

"THE BORROWED

GOLD IS SOLD

INTO THE

MARKET.

GOLD PRODUCERS

CAN USE THE

PROCEEDS AS A

CHEAP SOURCE

OF FINANCING.

SPECULATORS

TAKE THE CAPITAL

AND INVEST IN

WHATEVER

INVESTMENT

VEHICLE THEY

CHOOSE..."

CBS: For the benefit of our readers who are not market people, could you describe exactly how a short sale transaction works? How do the short sellers make delivery, how does the gold lending market work, that is, how does the transaction flow, and how is it priced?

BM: There are different types of short sales. A producer or speculator can sell a futures contract or a "forward" which are commitments to deliver gold at a certain price in the future. Speculators usually buy back their short position prior to the delivery time. If the price is higher they lose the difference, if it is lower, they profit. The producer will deliver their gold production into that forward delivery commitment or roll over the company's "hedge".

Central banks own gold, for currency reserve purposes, which sits in vaults. To earn some interest on the gold, they lend some of it out to bullion dealers who re-lend it to jewellry fabricators, gold producers and recently to big clients such as hedge funds. The loan rate can fluctuate dramatically, but 1% is a good average number to use. The borrowed gold is sold into the market. Gold producers can use the proceeds as a cheap source of financing. Speculators take the capital and invest it in whatever investment vehicle they choose that they believe will give them returns substantially greater than 1%.

This borrowed gold is also a short sale and a commitment to deliver gold at some designated time in the future back to the bullion dealers. Gold producers have the option of delivering their own gold back to the bullion dealer. Speculators, who wish to return gold, must go into the physical market, buy the gold and then deliver it to the bullion dealer.

CBS: It is always useful in such situations to try and assess just how big is big. In other words, what is the level of outstanding short positions in the gold market today? Who holds them?

BM: The answer to that question may determine what the price of gold does in the months and years to come. Gold Fields Mineral Services, an industry statistical group, believes the gold loans are only 4,500 tonnes and publishes that fact. Frank Veneroso, whom I believe is correct, believes they are 10,000 to 12,000 tonnes. That is an extraordinary difference.

Precious Metals and Inflation Correlate

US CPI, All Urban Sample: All Items - Annual Inflation Rates
CRB Precious Metals Index (1967 = 100) - Price Index (Right Hand Scale)

What is different about these so-called loans is that much of the loan is already sold and rests on the necks and fingers of the citizens of India and the Far East. One cannot just call in those loans without cutting off body parts. That is why the gold market is potentially much more explosive than most market observers understand. Mine supply in 1999 was only 2559 tonnes. What if a good number of the gold lenders decide to cut back on their gold lending? Where would the borrowers find thousands of tonnes of gold in a short period of time? What price would it require to allow that kind of supply to find its way to the market place?

Veneroso is not alone in his assessment of the gold loans. On April 10, 2000, noted U.S. economist, David Hale, told Reuters and Bloomberg News at the Australian Gold Conference in Perth, Australia, "We have a leasing market now that is three or four times as large as world mining output, and the growth has meant we have had selling pressure."

At that same conference, Dinsa Mehta, the chief gold dealer for Chase Bank, told the attendees that the gold loans have risen to 7,000 tonnes which is 2,500 tonnes greater than the accepted official number of 4,500 tonnes presented to the gold industry by Gold Fields Mineral Services.

 


I cannot stress what a breakthrough this is for our case and I suggest that is why the gold market rallied $84 last autumn (when the European central banks first announced a future cutback of their gold lending). The gold industry has been told the gold loans are only 4,500 tonnes. The knowledgeable Mehta says 7,000 tonnes, the esteemed Hale says 7,500 tonnes to 10,400 tonnes, sleuth Veneroso says 10,000 tonnes to 13,000 tonnes. I personally watched how Veneroso did his homework in collecting the gold loan data. I will bet on Frank's numbers. He has been in the trenches to assess what the gold book is for individual bullion dealers.

What Veneroso has done is sophisticated. His assessment of the gold supply/demand fundamentals suggests that gold demand is greater than presently thought. They also indicate that gold loans are at dangerously high levels and, if not restricted, could present bankers with defaults in the future. Perhaps even the Swiss are more concerned today about defaults as they are now conducting lending operations in which counterparties put up securities as collateral so that the credit risk is reduced.

CBS: Who carries this risk? What is the exposure, say, of US banks?

"... GOLD LOANS

ARE AT

DANGEROUSLY

HIGH LEVELS"

The Gold Anti-Trust Action Committee has an investigator tracking down various tidbits of gold market statistics. He came across some that are staggering. Three large US banks reported the following to Office of the Controller of the Currency:
Outstanding Gross OTC Gold Derivatives ( Billions)
Excludes Basis Swaps
 
Dec. 98
Sept. 99
Dec. 99
Citibank
6.6
10.7
11.7
Chase Manhattan
24.0
22.6
22.0
Morgan Guaranty
16.7
30.4
38.1

In addition, the notional amount for gold contracts for all commercial banks (not including non US entities or investment banks) went from $63.4 billion at the end of the third quarter 1999 to $87.6 billion at the end of the fourth quarter 1999. This number ranged from $53.8 billion at the end of 1995 to $74.1 billion at the end of the third quarter 1998 (the LTCM bail out period). The average for that period was about $61 billion.

CBS: These are big numbers. What do you make of them?

 
Gold in Euro Terms
(Gold Bullion Euro / Troy Ounce)
BM: The $24.2 billion run up during the fourth quarter of 1999 was after the Washington Agreement was announced on September 26, 1999. The gold price rocketed some $84 in a couple of weeks after that announcement. There was great stress in the bullion bank financial system and much greater than during the 1998 period when Long Term Capital Management had to be bailed out to avoid "a systemic risk" situation.

"AS A RESULT

OF THE

WASHINGTON

AGREEMENT,

15 EUROPEAN

CENTRAL BANKS

AGREED TO LIMIT

GOLD SALES

TO 400 TONNES

PER YEAR AND

TO HOLD GOLD

LENDING TO

PRESENT LEVELS"

 

"... MANY

BULLION BANKS

WERE IN A STATE

OF PANIC DURING

THE PRICE SURGE."

In both of these stressful periods, the gold price shot up, only to come right down again. We cannot say exactly what these gold derivatives represent, but as the gold price retreated down as they increased on the books of the banks, one can easily reason that they represent gold supply hitting the market in some form. In addition, we have received an interpretation of this derivative position from a well known bullion dealer and the dealer tells us: "such positions correspond to the total value of a bank's gold loans plus the face value of option positions vis à vis clients." From the footnotes to the Office of the Comptroller of the Currency (OCC) report, these gold derivatives encompass OTC positions only. There are additional futures market positions that are not covered by this data. These statistics exclude basis swaps and all similar derivatives not subject to bank capital adequacy requirements. That means they refer only to "at risk" positions."

The fourth quarter of 1999 is of most interest. As a result of the Washington Agreement 15 European central banks agreed to limit gold sales to 400 tonnes per year and to hold gold lending at present levels. At the same time, certain major gold producers were taking in gold forward positions, further reducing supply during that quarter - while gold demand continued its record surge for the year (slowing down only for a brief period on the $84 price surge due to price sticker shock short term resistance).

Many bullion banks were in a state of panic during the price surge. That is a well-known fact. Gold supply had to come from somewhere to get the price of gold down. Since there was a $24.2 billion gold contract increase during this period on the books of just the commercial banks, one can surmise there was a gold mobilisation of sorts to prevent the gold price from heading towards its natural supply/demand equilibrium level.

It is also well known that Morgan Guaranty has a special relationship with the US government. Even though their derivative position went up $21.3 billion over all of 1999, Morgan eliminated its New York gold trading operation at the end of the year, leaving a skeleton crew of a couple of sales people. Something does not make sense.

CBS: Does this have political implications?

BM: We are evaluating this information and gathering more of it. GATA is also taking this information to present to every US House and Senate banking committee member in a document entitled, "The Gold Derivative Banking Crisis."

We believe the gold loans of the central banks are now greater than 10,000 tonnes and present a danger to the financial system, as they cannot be paid back in a short period of time. That became very evident during the $84 run up.

The longer too much gold is consumed at too cheap a price, the more explosive the potential danger of a derivative blow up. Only by moving the gold price much higher, to slow down demand, can this problem be rectified without a serious financial catastrophe.

Gold In Yen Terms
(Gold Bullion 000 Yen / Troy Ounce)

 

The massive increase in the derivative gold positions on the books of the commercial banks in the fourth quarter of 1999 suggests that our thesis may be valid and that it is time for an immediate Congressional investigation into this matter.

It is of special note that it appears that Morgan, or more likely its client(s), have put on a 2,200 tonne short position in gold over the last 6 months of 1999. We cannot imagine that this "at risk" gold derivative position has been taken on by Morgan Bank; it must represent a change in client positions. Because private participants in the gold market were probably reducing, not adding, to short positions in the second half of 1999, this position must be for the official sector. That is the only interpretation that can be drawn from the data. Because the European central banks agreed to cease all new net gold lending and gold forward and options sales last September, this increase in Morgan's book cannot be attributed to them. No other central bank or group of central banks is large enough to have increased their gold derivative position with just one US bullion bank. The odds are that the increase in Morgan's book corresponds to a short position by the US Treasury or Fed. CBS: One of the things that comes to mind listening to you speak is the lack of transparency in the gold market, and the fact that it seems to be possible for public sector entities to act quite decisively but without accountability? How is it possible for the US Treasury to get involved?

BM: The gold market is one of the least transparent markets in the world, with most of the gold business transacted in the over the counter market which is not regulated. That is why it is so easy to manipulate. All it takes is a few players stopping the gold price at key technical and strategic points. The collective market then senses the gold price cannot advance and begins to sell. That selling then feeds on itself. We believe the odds are very high that the Exchange Stabilisation Fund has been assisting certain bullion dealers by lending gold or writing calls at these strategic times. That lending or writing of gold calls feeds gold supply into the market.

"THE

GOLD MARKET

IS ONE OF THE

LEAST

TRANSPARENT

MARKETS

IN THE WORLD

WITH MOST

OF THE GOLD

BUSINESS

TRANSACTED IN

THE OVER-THE-

COUNTER

MARKETS

WHICH ARE

NOT

REGULATED."

"ALAN

GREENSPAN...

DENIED ANY

FEDERAL

RESERVE

INVOLVEMENT

IN THE

GOLD MARKET

ALTHOUGH

HE HAS YET

TO GIVE US A

SATISFACTORY

EXPLANATION OF

THIS STATEMENT

TO CONGRESS IN

LATE JULY 1999

THAT 'CENTRAL

BANKS

STAND READY

TO LEASE GOLD

IN INCREASING

QUANTITIES

SHOULD THE

PRICE RISE.'

HOW DID

HE KNOW

THAT AND WHY

DID HE MAKE

THAT PUBLIC

STATEMENT?"

CBS: Quite apart from the obvious profit and loss implications of this situation, the political ramifications seem huge. This is, after all, an election year in the United States. It seems that the use of the Exchange Stabilisation Fund to finance gold market intervention is, at best, contrary to the original spirit of the ESF. It certainly seems to violate the principle of legislative oversight of financing. Have you encountered any interest in Congress?

BM: The ESF Transparency and Accountability Act (H.R. 1540) was introduced by Joint Economic Committee Vice-Chairman, James Saxton last year. House Majority Leader, Dick Armey, is a co-sponsor. Part of the reason for that bill is what Anna J. Schwartz, a research associate at the National Bureau of Economic Research, wrote in a paper dated August 26, 1998, entitled "Time to Terminate the ESF and IMF". In it she wrote:

"The ESF was conceived to operate in secrecy 'under the exclusive control of the Secretary of the Treasury, with the approval of the President, whose decisions shall be final and not subject to review by any other officer of The United States. . .' A second objective was to permit the Treasury, if it so desired, to conceal information about any other operations the ESF might undertake. . . "

What better place to orchestrate trading and to hold down the price of gold if our strong suspicions of manipulation are correct? Again, GATA is not alone in our evaluation of the gold market.

The Financial Times journalist Barry Riley wrote, "The gold manipulation might well have started out as a minor smoothing operation that got out of control." (February 12, 2000).

CBS: Where do things go from here?

BM: The Gold Anti-Trust Action Committee believes its best hope to expose the manipulation of the gold market is through Congress. On December 9 of last year we asked eleven questions of Alan Greenspan and Treasury Secretary Summers in an open letter in Washington's Roll Call. Many Senators and Congressmen all over the United States requested that both gentlemen respond to those questions. Alan Greenspan did so and denied any Federal Reserve involvement in the gold market although he has yet to give us a satisfactory explanation of his statement to Congress in late July 1999 that, "central banks stand ready to lease gold in increasing quantities should the price rise." How did he know that and why did he make that public statement?

Secretary Summers has not responded, but two other Treasury officials have also denied any Treasury involvement. None of the Treasury officials' responses precluded gold trading activity by the ESF.

At the moment, GATA is scheduling meetings with various Senators and Congressmen including Denny Hastert, Speaker of the House, and Dick Armey, House Majority Leader. We will request an investigation into the gold market to determine if there have been any improprieties and if the gold loans have risen to such a degree that they pose a potential "systemic risk" to the U.S. financial arena.

Such an investigation should first ask Secretary Summers to respond under oath whether the ESF is trading in the gold market in any fashion, as we do know that the ESF has gold deposited at the New York Fed for some reason. In addition, we would ask the investigating committee to request the "gold books" from twenty of the largest bullion dealers in New York. The goal of that request will be to determine the size of the gold loans on those books. If the bullion banks have nothing to hide, there is no reason not to present that information to Congress. The banking committees should then be able to assess the situation and take action before a crisis occurs. If we are correct about the manipulation and the size of the gold loans, and that is recognised, it will make the $84 explosive rally last Fall look tame.

The three recent gold price spikes in the past six months remind me of a dormant volcano that is coming to life. The smoldering and small eruptions are indications that great, hidden stress could give way to a violent, massive explosion. The warnings are clear for gold lenders and the big gold shorts: cut back your gold price exposure or face years of clean up of financial debris. The longer too much gold is consumed at too cheap a price, the bigger the coming gold price explosion and resulting financial chaos.

"IF THE

BULLION BANKS

HAVE

NOTHING

TO HIDE,

THERE IS

NO REASON NOT

TO PRESENT THAT

INFORMATION

(THE SIZE OF THE

GOLD LOANS) TO

CONGRESS."

 

POST SCRIPT:

· On May 10, Bill Murphy met with Speaker of the House of Representatives, Denny Hastert, and Chairman of the House Subcommittee on Domestic and International Monetary Policy, Spencer Bachus, (as well as six of Bachus' staff) and the Chief Economist of the Senate Banking Committee, Dr. John Silvia.

· They were presented with a 119-page document entitled "Gold Derivative Banking Crisis." It must have made an impression as the Select Committee on Intelligence, Technology, Terrorism, and Government Information requested that GATA send the document to them as well.

· Secretary of the Treasury, Larry Summers, cannot be reached for comment

 

 

 

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