The Fifty-Five Thousand Dollar Question

A few weeks ago, I wrote an article outlining  a  general (but, I thought, fairly persuasive) case for the routine manipulation of the precious metals markets- if you haven’t had a chance to read it yet, the article may be found here (Link).  The short version is that:

  1. Multiple former Fed chairs and/or Treasury Secretaries have either admitted directly to manipulating the metals markets or given testimony that they were prepared to do so should conditions warrant
  2. Multiple Western countries have cooperated in the past to deliberately suppress the price of PMs (the London Gold Pool) and this is a matter of historical record.
  3. Published scholarly works clearly establish “best practices” for Keyensian economics, noting that governments and central banks must achieve their ideal atmosphere of low interest rates and strong government bond prices by controlling the price of gold, particularly during a period of expansion of the money supply.  Conversely, it is well understood by these entities that if gold achieves its fair market value, this threatens the very foundations of their efforts.
  4. Personnel of Western central banks have admitted that leasing gold into the market is standard practice and done regularly.

Western central banks have the means, the motive, the opportunity, the scholarly justification, and exceptionally strong incentives to manipulate price.  They also have a proven (not hypothesized, proven) historical track record of doing so.  Frankly, the case seems to straightforward to me that I concluded “It would be incredibly strange that any fair and open-minded individual, viewing the totality of the evidence dispassionately, would come to the conclusion that gold and silver are not manipulated and that the price is set by free market forces alone.”

.   .   .

And yet, there are folks within the PM world who do, quite stridently at times, deny that routine manipulation takes place at the behest of Western central banks.  Some may simply be uninformed as to the historical record or the statements of former Fed chairs, others may just have an overweening faith in the honesty of the system or simply take pleasure in  asserting what they see as a ‘rationalist’ stance against the ‘conspiracy theorists’.  But individuals aside, I have found that several broad groups of people in the PM world consistently oppose this idea.

Many traders seem to be consistently opposed to the idea of manipulation.  I have genuine empathy for this position, because I understand where they are coming from.  In order to do what they do and to deal with the emotionally-fraught enterprise of engaging with risk on a constant basis, traders have to maintain a mindset that says 1. The market moves for rational, understandable reasons and 2. If I do my job properly, I can make money from understanding these moves and positioning myself accordingly.  It’s the same mindset as race-car drivers;  while acknowledging the obvious danger they face in every race, the NASCAR hotshot still has to believe (against all evidence) that they can foresee and control whatever situation arises during a race in the blink of an eye.  While the reality is that at any moment something totally beyond the driver’s ability to control might very well get them killed, the driver who dwells on this could never do the things necessary to be successful-  they have to believe the lie that THEY are in control and can avoid danger, even if this is logically irrational.  If they truly internalized the dangers beyond their ability to control, they would be paralyzed.  Traders have to maintain a similar mindset that whatever the market does, it does for a reason and should therefore have been foreseen under the polite fiction that “the market is always right” in order to do what they do. It is actually a healthy mindset for traders to cultivate to be successful.  One of my favorite exchanges on this took place at the old Blogspot, where somebody posted a long, detailed description of a set of fundamentals and facts leading to the conclusion that metals were going much higher.  In reply, a trader tersely replied “That is sound analysis. But Miss Market doesn’t care about your “story”.  Miss Market will go where she pleases.”  I get that mindset and understand why its cultivation is productive to a trader.  So if they think this manipulation stuff is hogwash, I understand.

In terms of businesspeople, without naming names I think we can all think of prominent people in the industry who have decried claims of manipulation for years (for example, the bankrupt Kitco employed one for many years).  It seems to me unlikely that these industry experts are unaware of the history of the London Gold Pool, are ignorant of the numerous quotes regarding price suppression by former Fed chairman or Treasury Secretaries, or are unaware of the clearly manipulative dumping of large numbers of contracts at slow market periods to deliberately overwhelming the bid.  Instead, it seems to me that their motivations likely stem from one of two possible sources. One of these would be an unwillingness to associate themselves with what is ostensibly treated as a “fringe conspiracy theory” (which, of course, would be bad form for serious businesspeople or money managers).  The second would be simply that, given the industry they are in, they have a strong vested interest in not pissing off very powerful market makers or regulators by telling too much truth.  In short, I suspect many of these folks know the truth, but they have professional incentives to maintain mainstream credibility and not scare off potential customers, or they simply do not want to create a big blip on the radar of very powerful entities.   

One other group sometimes pushes back against some aspects of the “Central Banks manipulate gold price by leasing into the marketplace” theory, and that is FOFOA adherents.  While it is a dangerous thing to try and summarize tens of thousands of pages of densely-worded prose (and I am sure I will be corrected ), here is the core of the theory as I have come to understand it:

  1.  Freegold is a separation of the “means of exchange” and the “Store of value” functions of currency; in other words, currency floats freely against the physical reserve (link)
  2. Freegold will result in a revaluation of gold many multiples higher by western central banks to essentially “recapitalize” their otherwise broken balance sheets, facilitate international trade, and put to rest the ultimately unworkable imbalances of the Bretton Woods and post-Bretton Woods monetary regimes.  To quote FOFOA, FreeGold is based on the theory that gold has a value much higher than what the markets say. The Central Banks of the world are aware of this value. They trade gold amongst themselves based on this higher value. The purpose of the lower gold price on the exchanges is to gain oil from oil producing nations at a low, dollar denominated price. So the low gold price has a real use, a function, that is maintained by the Central Banks…   Without FreeGold the Treasury is broke. It is insolvent. It is completely reliant on the future taxes to be paid by an economy in trouble. And its biggest asset, gold, is only worth $226 billion. That's hardly a drop in the bucket. But WITH FreeGold valued at $100K per ounce, that same stockpile is worth $26 trillion dollars. Now THAT is enough to be back in business on the world stage. Gold is, and has always been, the United States Treasury's "ace in the hole".(link)

Like many others, I have found FOFOA’s writing to be both helpful, and at times difficult to sort through- and let me state right here that I think there is much to be gained from reading this material.  And let’s face it, a $55,000 per ounce gold price has a certain, shall we say, ring to it! 

But there is one aspect of this story that bothers me greatly, and I believe this question is well worth our time and thought:  What if western central banks have leased their gold into the market and have actually lost a significant portion of their national gold?  What if they have lost nearly all of it?  This is why, I believe, FOFOA supporters sometimes provide push-back against the ideal that western central banks manipulate gold price by leasing their gold into the market, or hold that “bullion banks manipulate price but governments do not”. 

This is not just an academic question or idle speculation-  Eric Sprott and company have done some excellent research regarding the US gold hoard supposedly held at a static level of 8,133 tons since Nixon closed the gold window in 1971.  I encourage you to read their excellent research on the question here and here.

The short version is that there have been far larger physical sales, for many years, than can be accounted for absent western central banks selling their gold into the market.  For example, Sprott & company analyzed the US Census Bureau’s FT900 data releases summarizing all US international trade data monthly, and compiled this data going back to 1991.  Their conclusions were startling- they found that from 1991-2012 (taking into account mine supply, recycling, imports, etc.) the US exported 4,500 more tons of gold than they had taken in from all these various sources.  In other words, a total export this massive could only have come from our national gold hoard, which is officially reported to be stable at 8,133 tons for the last 40 years.  The key data was summarized in their chart, below:

If this estimate is roughly correct, it would mean that 55% of the US gold holdings have been sold into the market just since 1991, leaving the US with roughly 3,700 tons of gold.  And THAT would be assuming that no gold had been sold at any time between 1971 and 1991. 

The FOFOA hypothesis only makes sense if western central banks actually HAVE THE GOLD THEY CLAIM in order to benefit from a revaluation/recapitalization scenario.  If they do not, then the only beneficiaries of such a scenario would be those who have been buying this western CB gold for the last 20+ years, thus making it incredibly unlikely that western governments would accede to this willingly. 

.  .  .

I would much rather that the FOFOA scenario be true and that western central banks have every ounce of gold they claim in their official reserves, because that would imply stability and a chance to re-set the system in an orderly way (and it would be very profitable for the private gold and silver investors).  Frankly, I hope that they are right.

But what causes me to lose sleep at night is the accumulated evidence for central bank manipulation that suggests a massive dis-hoarding from western reserves.  And what really starts my stomach turning is the thought that dollar-centric Keyensian economists and central bankers have been on a monetary suicide mission for the last 40 years, burning their golden bridges one ton at a time into the open market so that there is no retreat and there is no gold left in the system.  Because if this is the case, then it means there will be no one-time reset many multiples higher. There will just be a smoking 3rd-world crater where the world’s most powerful economies once stood, bereft of any store of value, manufacturing capacity, or individual wealth.  That is a future I would rather not dwell upon. 

135 Comments

Bugzy's picture

never

me?

Numero uno?

TomMack's picture

tooth (2nd)

not again  second second in a row  and on a thread about PMs  winner winner.  thanks P4 ...

keep stacking

Big L's picture

2

Pining an excellent article!

Well done! Thoughtful and scary, just what we've come to expect of you. :-)

What will become of us?

2nd!!

Edit: nope, THURD!

Mr. Fix's picture

4th

  Pining, thank you for a great write up,  and lots of good points to consider.

I'll try not to dwell upon a future too painful to consider.wink

lnardozi's picture

Fjorth

Don't be sjore - I'm too pjore to do mjore.

foggyroad's picture

thankyou p4

P4 th?

Edit. The latest JW prediction on USA watchdog report is for a dual dollar ie. a domestic and a foreign dollar, the latter backed by a gold component, if I recall.

ps. the quality of the resident guest posts continues to impress the shit out of me, well done all.

foggyroad's picture

delay at correction =9th?

delay at correction =9th?

edit. no one else still playing,=7th

I was first to hat tip the post.

:0)

Well one thing I do know is that here in Canada, we do not have any Gold , we are not mentioned even at the very bottom of any countries gold holdings chart I have ever seen, we do however have beaver tails and maple syrup.

Infinitely more valuable, imho.

I think the US has so called 'Deep storage' gold, hidden in them thar hills, Willy Wonka factory rumor.

AngryCitizen's picture

So, Let's Assume

That they have sold most or all  of it, as I doubt they could round up all the recycle stuff every yr.

Now what? How would we recover as a country in a world with the reserve currency basket partially or fully backed by Au?

I mean, we have that "can do" spirit alive in the country still, as evidenced by the people on this site, at the very least...

AWESOME TOPIC P4! YOU GUYS ARE A GREAT ADDITION TO THE BLOG.

¤'s picture

CB Gold

No one knows for sure but I think it's possible the US has (or had) more gold then previously stated because of the spoils of WWII, The Gold Act 'confiscation' previous to that and the history of gold and silver being central to US banking history many decades preceding that.

I find it hard to believe that the western or US central bankers could be so short sighted that they'd sell or lease almost all of their gold out and would then tolerate that it was lost to them, never to be returned by those they gave license to use their gold.

That doesn't sound likely to me. What sounds likely is that they have more gold then anyone could ever know. Everyone thinks China is secretive about their gold or silver holdings or transactions?

The US seems pretty secretive and guarded regarding their gold/silver holdings. They don't speak or acknowledge it or it's value and keep it valued at $42/oz. Yet much is inferred about that gold by all of us even though there has been mostly decades of silence by them on the subject. Bernanke and other CB'ers playing dumb or being almost totally avoidant about their discussion of gold is a tell-tale sign they don't want to draw attention to it for a reason.

With no way of anyone knowing, my guess would be they have more then they've let on because they might not be real proud of the spoils of war aspect. Plus, they simply don't talk about it or refer to it. It's like their garlic yet it's their unspoken fixation.

My guess would be that if they've been leasing gold out that it was other countries gold they leased out before they'd ever lease their own out.

That could end up being the big scandal....that the US leased out most of the WWII gold holdings they kept safe for others.

I fear Pining's anxieties a bit on how this could shake out in many different scenarios leading to vastly unanticipated outcomes regarding revaluation and who wants it and who doesn't or why etc.

Good post. There's lots of variables in play.

The US will never truthfully disclose or prove by audit how much ( or whose) gold they have.

Countries fight wars over national treasures. Mum is the word.

Occasnltrvlr's picture

Whaddya Mean, "What If?"

Just ask the Germans and Malians.

Okay, yes, sorry, flip response.

There's one thing (among others) that bothers me about many analyses.  Seldom is a hard distinction drawn between (alleged) gold owned by the US Treasury, and (alleged) gold stored (and/or owned) by the Fed.

So, of this 4,500 tonnes, how much of it was mine, and how much was on our shores due to the misplaced trust of others?

Occasnltrvlr's picture

And Another Question

Santa says Jamie's selling the vault (and building above it) because they no longer need the pretense of holdings to cover massive shorts.

So...do you think Jamie would be selling it if Tyler hadn't revealed it, or is just coincidence?

prius_driver's picture

This is a great article

It was pretty obvious in the bernanke testimony 2-3 years ago where Sen Grayson was grilling bernanke about gold and other CB attrocities that bernanke fudged through the double booking between treasury and fed question.

DayStar's picture

Harvey's Up!

Ow! Ow! Ow!  Mr. Fix, I was dwelling on a future too painful to consider. smiley

Tonight, Harvey, should you choose to pursue it, will have to be a surprise.

http://www.tfmetalsreport.com/comment/348867#comment-348867

DayStar

Mr. Fix's picture

DayStar, .

Sounds painfull,

Stop doing that!

HappyNow's picture

-isms from last thread

I like John Lennon so I'm reposting his famous rant about -isms.

For GL

boomer sooner's picture

Awesome P4

I lean towards what DPH stated above.

My question is, when we send "items" in trust from the US, are these "items" noted as an export?  The German Gold will be returned @ 50 tons per year, will this show up in trade data?

I believe that the returned gold will not show up in trade data, because the US never actually showed the gold as an import.  The gold was never actually purchased for a trade import.

Hope this makes sense.wink

Agree about FOFOA site, lots of interesting info and opinion.  Been spending a little browsing time in there.  Careful, Motley might jump out of BOG's latest masterpiece.

cpnscarlet's picture

And.....it's gone....

2% loss in Ag in the last 2 hours...and the news was....

NOTHING.

Oh, yeah Mr. Turk...Sept looking really good for PMs.

A-hole. STFU.

Mr. Fix's picture

I just wanted to pass this along.

Vladimir Putin, the Russian president, addressed the Duma, (Russian Parliament), and gave a speech about the tensions with minorities in Russia:

"In Russia live Russians. Any minority, from anywhere, if it wants to live in Russia, to work and eat in Russia, should speak Russian, and should respect the Russian laws. If they prefer Sharia Law, then we advise them to

go to those places where that's the state law. Russia does not need minorities. Minorities need Russia, and we will not grant them special privileges, or try to change our laws to fit their desires, no matter how loud they yell 'discrimination'. We better learn from the suicides of America, England, Holland and France, if we are to survive as a nation. The Russian customs and traditions are not compatible with the lack of culture or the primitive ways of most minorities. When this honorable legislative body thinks of creating new laws, it should have in mind the national interest first, observing that the minorities are not Russians.

The politicians in the Duma gave Putin a five minute standing ovation.

If you keep this to yourself, you're part of the problem!

It is a sad day when a foreign Communist makes more sense than our Communist President, but here it is!

¤'s picture

Chinese shorts

The more you see the PM's hit during Hong Kong trading hours you could assume it's just like the NY pre-market and market opening hanky panky we see over here.

Does or has China (through banking/JPM proxies) shorted the PM's at times for their benefit by skimming the market of contracts and effecting price?

Seems likely.

Green Lantern's picture

Great article Pining!I just

Great article Pining!

I just took a hit of thorazine so I'm feeling stable but have to get to my group therapy session in 5 minutes or they put me in a straight jacket.  But before I go, I want to let you know that I have on good authority (ain't saying who) that there ain't much gold in Ft. Know and has been that way at least since the early 60's.  It was  documented  about 64 or 65 and I've been as certain as certainty can be about it for many years.   I am taking that information and that source to the grave so nobody PM and ask me where I got it.   Feel free to dismiss it. 

the gov.  has been spending it for covert operations and other nefarious programs that FOFOA, Eric Sprott probably can't tell ya much about.   Well actually Sprott is a pretty smart guy and I wouldn't put it past him  Probably smart enough that if he knows, he ain't stupid enough to tell anybody or go on KWN and tell the story.   Because it is a conspiracy-ism.    If I got him in a bar and pretty soused, I'd ask him if he knew anything about it.

Oh yeah, there are documents to back some of this stuff up.  But my doc says I'm just suffering from hallucinations so better not to focus on details.

Fairy Tales.  Do Come True.  They Can Happen To YOu!  

Green Lantern's picture

Re: Chinese Shorts

Confirmed

Hammer's picture

LOL Love those shorts !

It reads "love" on those shorts ;)

Green Lantern's picture

Very good Hammer.  I figured

Very good Hammer.  You're not supposed to give away the code but I figured you'd get that one.  The four strokes in the middle are a heart.

DeaconBenjamin's picture

Obama's rogue state tramples over every law it demands others up

 

For 67 years the US has pursued its own interests at the expense of global justice – no wonder people are sceptical now

US troops fire a white phosphorous mortar towards a Taliban position on 3 April 2009 in Helmand province, Afghanistan. Photograph: John Moore/Getty

You could almost pity these people. For 67 years successive US governments have resisted calls to reform the UN security council. They've defended a system which grants five nations a veto over world affairs, reducing all others to impotent spectators. They have abused the powers and trust with which they have been vested. They have collaborated with the other four permanent members (the UK, Russia, China and France) in a colonial carve-up, through which these nations can pursue their own corrupt interests at the expense of peace and global justice.

Eighty-three times the US has exercised its veto. On 42 of these occasions it has done so to prevent Israel's treatment of the Palestinians being censured. On the last occasion, 130 nations supported the resolution but Barack Obama spiked it. Though veto powers have been used less often since the Soviet Union collapsed in 1991, the US has exercised them 14 times in the interim (in 13 cases to shield Israel), while Russia has used them nine times. Increasingly the permanent members have used the threat of a veto to prevent a resolution being discussed. They have bullied the rest of the world into silence.

Through this tyrannical dispensation – created at a time when other nations were either broken or voiceless – the great warmongers of the past 60 years remain responsible for global peace. The biggest weapons traders are tasked with global disarmament. Those who trample international law control the administration of justice.

But now, as the veto powers of two permanent members (Russia and China) obstruct its attempt to pour petrol on another Middle Eastern fire, the US suddenly decides that the system is illegitimate. Obama says: "If we end up using the UN security council not as a means of enforcing international norms and international law, but rather as a barrier … then I think people rightly are going to be pretty skeptical about the system." Well, yes.

Never have Obama or his predecessors attempted a serious reform of this system. Never have they sought to replace a corrupt global oligarchy with a democratic body. Never do they lament this injustice – until they object to the outcome. The same goes for every aspect of global governance.

http://www.theguardian.com/commentisfree/2013/sep/09/obama-rogue-state-tramples-every-law

boomer sooner's picture

Latest Ft Know for ya GL

http://www.wallstreetdaily.com/2013/07/16/fort-knox-gold/

Published Tue, Jul 16th, 2013   Louis Basenese, Chief Investment Strategist

Welcome to the world’s most secure vault…

Completed in 1936, it’s encased in 16,000 cubic feet of granite and 4,200 cubic yards of cement.

The vault door weighs an astounding 22 tons and is made of a 21-inch-thick material that’s resistant to drills, torches and explosives.

It comes with a bombproof roof, too.

Additional layers of physical security include: video cameras, minefields, barbed wire, electric fences, armed guards – even unmarked Apache helicopter gunships.

Oh, and it’s stationed on a 109,000-acre U.S. army post.

So what’s inside?

Well, it depends on who you ask.

The government will tell you that almost 5,000 metric tons of gold, or roughly 3% of all the gold ever refined throughout human history, is safely sealed inside the vault.

The comments section could have been c&p from here.

Edit:  just noticed autospell on android changed Knox.  ha

Occasnltrvlr's picture

Real-world Chinese Shorts

(As Tyler says) Presented without comment... .

Mr. Fix's picture

The only reason Fort Knox is so heavily guarded:

is to conceal the fact it is empty. 

Occasnltrvlr's picture

Sure...

...I'm on board, there ain't no damn gold there.  But somebody hep me...which of the conflicting accusations is right???

Diligent students have seen this Globe article, but Dr. Willie accuses Clinton-Rubin (fully plausible).

BOG, can you help with this conundrum?!?

s2man's picture

Maybe the central banks

Maybe the central banks leased out physical gold and it is gone. Or, maybe they jut leased out paper claims to it which they will never honor, and they still have possesion of the phyz...

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