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

Green Lantern's picture

If Leased means they took the

If Leased means they took the gold and spend it to buy secret stuff, then it was leased.  

Now this part is speculation.  For every gold bar that left, they replaced it with paper.

Green Lantern's picture

Who took the Wonka

Who took the Wonka tickets?

Just mice in here

Dr. Fix's picture

@ Occasnltrvlr Which one is right?

Neither. Back in 1971  when France simply requested for the return of its gold, we didn't have it for them then.

It was probably all stolen by the banks a hundred years ago, when they founded the federal reserve, and got their paper Ponzi scheme into high gear.

As far as they were concerned, the government didn't  need it anymore. 

They may even have invented the paper Ponzi scheme to hide the fact that  they had already stolen all the gold.

boomer sooner's picture

From Forbes, $40,000 Gold

http://www.forbes.com/sites/toddganos/2013/07/07/is-gold-really-worth-40000-per-ounce/

INVESTING | 7/07/2013 @ 5:28PM |27,475 views

Is Gold Really Worth $40,000 Per Ounce?

Investing in gold, gold bars, gold bullion and gold coins (Photo credit: Investing in Gold)

My mom – who is going on 95 years old – grew up on a farm in rural California.  Her home did not have electricity and she studied by kerosene lantern.  An uncle who lived in the city came for a visit and gave my mom and her two siblings a rectangular piece of paper measuring about 3 inches by 6 inches.  It had pretty pictures printed on each side.  Based on his demeanor, she could tell that her uncle thought it was a special gift and expected some level of reaction from her, her sister, and her brother.  But, there was none.  They held in their hands a novelty and they were more filled with curiosity than excitement.  My mom, her sister, and her brother asked, “What is it?”  Their uncle replied, “Why, that’s a dollar bill.  That’s money.”  The kids began to laugh, “Who are you trying to kid?  That’s not money.  Real money is made out of gold and silver.”  When my mom told me that story, it reminded me of one particular scene in the movie “Old Yeller.”

It so happened that paper money was a rarity in the rural parts of California – and perhaps many other locales – during the early 1920s and prior.  But, on a technical level, my mom and her siblings were correct.  “Real money” is in fact made of gold or silver or some other commonly accepted store of value . . . not paper.

Some believe that the paper money printed by a government should be backed by real money.  At a time, one could exchange one’s paper money for real money, whether gold or silver.  Then, the United States government ceased exchanging paper money for gold and silver and instead issued gold certificates and silver certificates.  In essence, although you can’t get gold or silver for your paper money, you can sleep well knowing that your paper money is backed by gold and silver that the United States government is holding.  Then that stopped.

Recently, there has been quite a bit of volatility in the dollar price of gold.  It certainly can’t be that the fundamental value of the United States dollar is experiencing wide swings.  We don’t see the dollar price of bacon or bread or a car wildly gyrating.  But, given that gold is money, in a sort of cross-currency context, the prices of bacon, bread, and a car ARE wildly gyrating . . . relative to gold.  Of course, history would suggest to us that the price of bacon, bread, a car, gold or most anything should be stable relative to each other over the long run.  So, it would seem that the recent price swings in gold are driven by speculation as opposed to fundamentals.

So, what should the price of gold be in dollar terms?  In prior articles, we’ve discussed this in terms of expansion of the money supply relative to the expansion of gross domestic product.  That analysis suggested the price of gold should be somewhere around $1600 to $1800 per ounce.  However, if we expect each dollar in the money supply to be backed by the gold stock of the United States government, as some believe, we are in for a big surprise.

According to a report released by the Federal Reserve last week, the M2 money supply is about $10.5 trillion.  The amount of gold held by the United States government is approximately 260 million ounces.  Doing the math, that translates to north of $40,000 per ounce.  This is too difficult to even comprehend.  But, whatever the real number might be, it seems that it is above the current $1200 area that gold in currently trading.  The SPDR Gold Trust (ticker symbol NYSE:GLD) is an exchange traded fund that holds gold; its shares are very liquid.  We think gold will be moving up and we’ve positioned our clients accordingly.

department of truth's picture

speaking of a smoking 3rd world crater

Where the world's most powerful economies once stood, 

consider the article in RT that says they have multiple reports of a false flag operation about to take place, no chance this would escalate, right? 

RT sources: Syrian rebels plan chem attack on Israel from Assad-controlled territories

http://rt.com/news/syria-rebels-chemical-attack-israel-618/

A chemical attack may be launched on Israel by Syrian rebels from government-controlled territories as a "major provocation," multiple sources told RT.

The report comes as Russian Foreign Minister Sergey Lavrov proposed that Syria puts its chemical weapons arsenal under international control for subsequent destruction in order to prevent a possible military strike against the war-torn country.  [continued]

El Gordo's picture

To quote Madam Hillary....

..."what difference does it make?"  Who has all the gold that I don't have is immaterial.  The part that matters is the part that I have, or at least that I had before that tragic boating accident. 

boomer sooner's picture

Another from the beginning

http://www.usagold.com/goldtrail/archives/another1.html

I have looked for this and finally found.  Thought others might want to take a peek.

Occasnltrvlr's picture

Mr. Fix, I Knew...

...there was a reason I liked you.

Forgive me for my rhetorical opinion, you sometimes spin a thousand words, when ten would do.

But your recent post in this thread was a bop in the back of my head.  Thank You.

Hammer's picture

@GL,When sumo wrestlers wave

@GL,

When sumo wrestlers wave their hand over the reward (money) they receive after the bout when squatting in the ring, it is those four strokes that make up the kanji for "heart." Pretty cool huh ?

Meantime, say it aint soooooooooo - are they really going down Bush Jr's tried and tested Axis of Evil template for bullshit reasons to bomb someone.....say it aint soooooo............

U.S. says strike on Syria would help deter N.Korea from using chemical weapons

Source: Reuters - Tue, 10 Sep 2013 04:31 AM

Author: Reuters
hum-war
Print

BEIJING, Sept 10 (Reuters) - A strong response to a Syrian chemical weapons attack would help deter North Korea from using its "massive chemical weapons arsenal", a senior U.S. defense official said in Beijing, as Washington presses its case for a military strike on Syria.

http://www.trust.org/item/20130910042443-a4x5a/?source=search

Chibster's picture

Simple decision

Do you trust Obama or gold?

...Bernanke or gold?

The choice is simple for me.

Crashtober - I feel the time is quite near.

Counterfiat's picture

The real question

The real question is if the global supply of gold in all history has doubled in the last few decades, where has this supply gone?

Motley Fool's picture

Hey Pining

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? 

You would have to define significant. They have leased gold into the market, and they have lost some of it. Brown's infamous bottom is part of this. What you would need to do is prove the latter part of this thesis.

We do not think there is no manipulation of pricing, though we do see different motivations for such, which can alter results. As to leasing, it is a known fact that central banks used to lease large amounts of gold into the system. America, not so much. They were smart and powerful enough to get other countries to lease their gold into the market for US needs.

This does bring us to the continuity of time though, in that leases, while something that had happened in the past, is no longer so much of a going concern, as you seem to imply it is.

You will excuse me if I don my captain obvious suit, and point out some things, while I reply.

I will start by pointing out that your rhethoric is standard goldbug rhethoric, and given the multitude of points goldbug rhethoric is flat wrong about, one has to at least doubt this thesis based on such a plethora of inaccuracies.

Your idea also assumes that central bankers are stupid, and do not know the value of gold. This, I believe, is a mistake.

“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.“

Actually, no.

It would make sense even if the Fed had no gold left.

The thing is, and this is hard to grasp for many US citizens, that the US doesn't matter much. The exhorbitant priviledge they have experienced was granted( at the post breton woods conference in 1944?) not taken. This happening is not about their benefit, but the rest of the world going back to a sustainable impartial store of value.

Even so, with no gold the US will still benefit from their coming HI, in that their debts will be printed away. That's (at least) $16 trillion in freebies, shipped over the years to them, that they will never have to pay for.

“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.  “

And there it is. Your thinking that they actually have a choice. America, fuck yeah? ;)

For americans, perhaps the hardest part is overcoming the egocentric thinking that you were brought up with.

Cheers

MF

Ps. Lastly, leasing does not mean what you seem to think it does. For the most part all they 'leased' was their good name on paper, in case other deals go astray and BB's came up short. Very little of that gold actually left their vaults. We will see if they pay up, when the BB's do come up short. ;)

nickelsaver's picture

CB Silver?

"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."

Now why would you go and lump silver in there, as if the Central Banks own silver and are going to recapitalize the system using it. No, no, no. Your GSR is toast my friend.

and Another thing, the only gold "investors" that are going to see that windfall are the ones that actually hold the physical metal in their hands. Kiss your ETF goodbye, it ain't going to show you that price. And the miners? They aren't going to pay out either.

knavechild's picture

Assad - Perceptions of the US, a Dying Empire

Assad - Perceptions of the US, a Dying Empire

http://www.libertyinformer.com/assad-perceptions-of-the-us-a-dying-empire/

So succinct, boils it all down.

-Knavechild

 

atarangi's picture

Hey Motley - - -

Hope you have noticed Bag of Gold's 'spot the Motley' mural. We have been having some fun with your avatar.    Your views throw a spanner in the collective works.   Always good to see things get a good stir up.   I woke up the other night in the middle of a nightmare with a vision of your avatar in my head.   I'm still getting counseling.    Keep the posts coming.        The last thing Turdville needs is a bunch geriatrics sitting around and agreeing with each other all day long.

atarangi's picture

Data mining - - -

137206 600 Data Mining cartoons

atarangi's picture

The King of Bling - -

                            Dingle     Barry                                                                                                                                                                                                                                       137205 600 Red Lines and Syria cartoons

atarangi's picture

Obamass sales pitch - -

137197 600 Obama Twerking cartoons

argentus maximus's picture

I like this subject.

I like this subject. Unfortunately it will always be diverted from getting to a satisfactory conclusion because of the lack of proof of central bank gold holdings. But that does not mean it isn't important to consider it.

Pining mentioned that traders usually assume the market is and will remain rational. But I prefer to think it is investors and not traders who rely upon the market being rational. This includes the addon careers, like eg economists assume more rationality in markets than eg technical analysts. The difficult thing is to know how much irrationality will be in the market, for how long will it last, and when will the market return to being more rational for another period.

The national gold which has been leased into the markets, but which still physically remains in storage upon national soil (of any country) is highly likely to end up as CB held gold via some kind of eminent domain seizure or alternative method of sovereign acquisition, and the unfulfilled obligations for it are highly likely to end up as the defaulted obligations of a bank which subsequently gets bailed in and consumes the wealth of it's creditors.

Just how much gold can be retrieved this way , as a percentage of the leased quantities, is a fascinating subject. It's kind of like any bankruptcy, with the earliest warned creditors attempting to get their assets back as quietly as possible before the final curtain comes down.

atarangi's picture

peace prize - -

137192 600 Peace Prize cartoons

Hammer's picture

Hmmmmm. Picked this up on my

Hmmmmm. Picked this up on my daily trawl of the net. No comment, just posting for debate.

atarangi's picture

Judge Jeanine - - -

Ha that's so funny -   -    -judge Jeanine makes Bugs Bunny  look like a flake.   Handing back the peace prize will be more painful than getting his nuts chopped off.

atarangi's picture

Bugs - - trying to lose Judge Jeanine - -

                                                                                                    16668a.jpg

ag1969's picture

Hammer, that video was great!

Judge Jeanine got that one right.  She will be losing her job like Judge Napolitano in three, two, one...

atarangi's picture

Judge Jeanine - -

 
Judge Jeanine Pirro for President                                                                                                                              Judge Jeanine Pirro for President
Motley Fool's picture

Hi atarangi

I did see the mural, and it was enough that I finally replied, here : http://www.tfmetalsreport.com/comment/346893#comment-346893

What people want and need is sadly not always the same. :)

Hammer's picture

Oops ! If this doesn't go

Oops ! If this doesn't go through, a few countries in Europe that were hoping this would get them out of a bit of a bind going forward, there might be a few problems perhaps ? Just musing......

EU lawyers say plan for financial transaction tax is illegal

 
 

By Huw Jones

A plan to tax financial transactions in 11 European Union member states from 2014 is illegal, the bloc's lawyers have concluded, dealing what could be a final blow to the measure as proposed.

The findings set out in a 14-page legal opinion obtained by Reuters will make it harder to press ahead with a measure aimed at making banks pay about 35 billion euros a year to make up for receiving taxpayer aid during the 2007-09 financial crisis.

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_10/09/2013_518039?

The report is encouraging for Britain, which is the EU's biggest financial center and is opposed to the tax. Britain, and several other EU states, refused to participate, leaving the 11 to go it alone and raising questions about how it would work without full participation.

Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia were planning to adopt the tax on stocks, bonds, derivatives, repurchase agreements and securities lending.

But the legal services for EU member states said in their opinion dated September 6 that the transaction tax plan «exceeds member states' jurisdiction for taxation under the norms of international customary law».

 
Dr. Fix's picture

Checkmate.

DEAL OR NO DEAL: JOHN KERRY’S HISTORIC DIPLOMATIC “MISTAKE” PROVES THAT OBAMA DOES NOT WANT PEACE

When it comes to diplomacy, Russia is playing chess, Syria is playing checkers and U.S. Secretary of State John Kerry is playing tiddlywinks.  On Monday, Kerry said that Syrian President Bashar al-Assad could avoid having his country bombed into oblivion by turning over “every single bit of his chemical weapons to the international community in the next week.”  Of course Kerry just assumed that Assad would never do such a thing, but the Russians immediately pounced on his statement.  Russian Foreign Minister Sergey Lavrov quickly announced that Russia would encourage Syria to turn over their chemical weapons to international control in exchange for a guarantee that the U.S. will not attack, and subsequently Syrian Foreign Minister Walid al-Muallem stated that his government was prepared for “full cooperation with Russia to remove any pretext for aggression.”  Later on Monday, UN Secretary-General Ban Ki-moon indicated that he is thinking about asking the UN Security Council to support such a deal.
Do you know what they call such a move in chess?
Checkmate. [Read more...]

Hammer's picture

Obsessing over sovereign

Obsessing over sovereign borrowing costs in the Eurozone is a very 2012 thing to do, but it has been observed that for the first time in awhile, Italy is paying more to borrow money than Spain is.

Spain is generally seen as the weaker of the two economies (much worse unemployment, a higher deficit, a much more fragile banking system, etc.) so this is surprising. Except the crux of the story is that Silvio Berlusconi continues to threaten to topple the Italian government, which is based on a fragile coalition of the major parties.

Berlusconi's threat is that if he's expelled from the Senate — over criminal convictions — then his party would withdraw support for the current Letta government, and that would require new elections, and new chaos. Hence the switch.

Read more: http://www.businessinsider.com/why-italian-borrowing-costs-have-now-surpassed-spanish-borrowing-costs-2013-9#ixzz2eUIK4zjx

Dr. Fix's picture

War postponed. Metals hammered. Same old, same old...........

[Most Recent Quotes from www.kitco.com]

Syndicate contentComments for "The Fifty-Five Thousand Dollar Question"