Who has their Goldfingers in the Pie?

February 25, 2001

The gold price has fallen for years. A conspiracy theory accuses world central and fat-cat banks of massive manipulation.

More and more gold market experts scent nothing less than a worldwide conspiracy behind a gold price that has been sinking for years. Various central and gold banks are accused of massive manipulation and are now being dragged before U.S. courts. Among others, Alan Greenspan is supposed to testify as well.

Author: Ernst Soler

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Not all that glitters is gold. This proverb is more fitting today than ever. While 20 years ago an ounce was still worth $800, and five years ago more than $400, today it costs only a pathetic $266.

U.S. gold market specialist Reginald Howe believes that this is too low for things to be quite on the up-and-up. In his estimation, the price of gold should be close to $600. He believes in a worldwide conspiracy, and he has recently filed a lawsuit at U.S. District Court in Boston. The action is supported by the Gold Anti-Trust Action (GATA) Committee.

The 16-page complaint, which CASH has a copy of, contains heavy artillery. It accuses the Bank of International Settlement (BIS), the U.S. Treasury, the U.S. Federal Reserve, as well as banking giants J.P. Morgan, Chase Manhattan, Citigroup, and Deutsche Bank of gold price manipulation.

Howe lists a plethora of evidence in his complaint that actually might permit one to conclude that the gold price is being manipulated knowingly. Uncontested is the fact that several central banks have repeatedly loaned gold to the banking giants at about 1 percent interest, which they continue to do. The big banks sell the loaned gold bars and use the profits to buy various paper securities, which yield them solid profits. This lucrative business on margin is also risky, though, because the borrowed gold must be returned to the central banks someday.

Independent experts estimate that the named big banks owe the central banks up to 7,000 tons of gold. If the fold price were to rally, the repurchases at market would be virtually impossible, and this is where the complaint finds its point of attack. In the opinion of Howe and GATA, Goldman Sachs, Deutsche Bank, and the BIS have in recent years choked off every perceivable rally through mass sales at the COMEX, the New York commodities exchange. They claim that the whole scheme was orchestrated by the U.S. Treasury Department.

The following quote from testimony given by Fed Chairman Alan Greenspan before the U.S. Senate Banking Committee in July of 1998 is used as one of the pieces of evidence in support of his theory: "Central banks stand ready to loan gold in increasing quantities, should the price rise." Aside from the Fed, Howe points to the BIS as a willing instrument of this manipulation.

The BIS, founded in 1930, today functions as a central bank of central banks. Forty-nine central banks own about 80 percent of the stock. The balance is currently being reacquired in a controversial stock repurchase program.

For example, the gold sales of the Swiss National Bank and the Dutch central bank were transacted through the BIS. BIS spokeswoman Margaret Critchlow categorically refuses any commentary regarding either the accusations of manipulation or the lawsuit filed against the BIS.

If the complaint is admitted, all hell is guaranteed to break loose.

Nobody expects that Howe will succeed with his complaint.

To Martin Siegel, editor of the financial newsletter "Gold Market," there is absolutely no doubt that the price of gold is being manipulated. Yet he does not think the complaint stands any chance at all. "Who is going to testify against whom, here?" he asks rhetorically.

But if the complaint is admitted by the presiding judge, which is still far from certain, it will undoubtedly create a huge hullabaloo. For then the individually named defendants, Alan Greenspan and Larry Summers, Clinton's secretary of the treasury, will be compelled to testify under oath.

In 1999 a total of 3,080 tons of mined (2,576 tons) and recycled (484 tons) gold had to satisfy industrial demand of 3,722 tons. There is no question that the gold price would explode if the central banks were to end their gold sales.

Yet not all experts believe in the conspiracy theory. The London consulting firm, Gold Fields Mineral Services Inc., described the theory to Der Spiegel Online as "off the wall" and accused Howe of statistical misinterpretation. Gold experts who wish to remain anonymous described the complaint as nothing more than a figment of Howe's imagination, and allude to allegations that GATA is a front for South African gold producers.

Klemenz Huser, the head of the Department for International Securities Research, ZKB, understands the frustration of the producers and their investors, but does not believe that the gold price is being manipulated. "Gold is simply out. The rate of inflation has been retreating since 1990, and if anyone hedges against inflation today, then they do it with derivatives, and not with gold." To Huser, the introduction of the euro was bad for gold as well, because it allowed the central banks to dump gold, which used to serve as support for their currencies, by the truckload.

On top of that, South American countries, which used to try and stabilize their currencies with gold reserves, nowadays simply seek refuge in the dollar. According to gold market specialist Bruno Bandulet, even some gold producers are responsible for the deterioration in the gold price, since they have massively worked against their own product by selling gold forward. According to Bandulet, the Canadian producer Barrick Gold has already sold its entire production for the next six years.

The situation of investors is unclear.

The fact that central banks take advantage of every small rally to dump gold is undisputed, but also understandable. After all this time there are still an estimated 30,000 tons of gold in their vaults, which produce zero income unless they are loaned out. The focal issue is whether these gold sales and loans constitute premeditated, concerted actions. This supposedly violates antitrust laws and the Sherman Act, which expressly prohibits price-fixing in international trade.

For investors, there remains the question whether to invest in gold or not. Martin Siegel believes that the central banks' gold sales will one day stop. On the one hand, of the 30,000 tons, 10,000 are said to have been loaned out already. On the other hand, central banks of a number of countries are expected to keep their gold reserves. While some predict a gold explosion already this spring, Siegel thinks it could happen in two or three years. He suggests speculators and gamblers should look at long-term options on gold mines. There are gold options that run to the year 2003 that are currently priced quite low.

One cubic foot of gold weighs more than half a ton (1,306 pounds).

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