The Golden Ostrich

99
Mon, Aug 19, 2013 - 7:57pm

  Image cannot be displayed

In the world of precious metals investing there exists an interesting creature known as the Golden Ostrich, or Manipulus Denego. This creature is characterized by its fixed opinion that anyone claiming the price of gold and silver are manipulated is an overexcited nutcase, and must be largely unhinged from reality. Obstreperous in the extreme, the Golden Ostrich is utterly convinced that claims of manipulation in the metals markets deserve to be ridiculed at every opportunity. Its most distinctive behavior is its propensity to bury its head in the sand when presented with evidence contrary to its belief that precious metals prices are determined solely through voluntary exchange within a free market.

There are two primary camps in the world of precious metals investing: those who believe that precious metals markets are routinely manipulated (and who are astounded that anyone would think otherwise) and those who hold that precious metals markets are more or less freely traded and act like any other commodities markets (and who laugh-off claims of routine manipulation or price suppression as overheated nonsense). This topic is the PM world’s version of the famous feud between the Hatfields and the McCoys. Those in the “freely-traded” camp often deride those in the manipulation camp. They will cast aside claims of price suppression as merely sour grapes from amateur traders who were overly bullish and got smoked by routine market fluctuations. They will deride claims of suppression as the ravings of conspiracy theorists. Sometimes, those who argue against manipulation will craft a more sophisticated denial based on the nature of complex systems, as in this Zerohedge article by Jeff Thomas (link), wherein he essentially argues that so many different actors in different nations would have to be involved that such suppression would be impossible (never mind that we have a proven historical example of just this type of cooperation in the London Gold Pool affair, thus disproving his central thesis- we’ll get to that later). Needless to say, those in the suppression and manipulation camp are equally baffled that anyone could deny what seems to them to be quite evident and obvious.

The thesis of this article is simple: a reasonably open-minded person, when presented with a basic overview of evidence publicly known to date, would reach the common-sense conclusion that precious metals are routinely suppressed and manipulated. As a corollary, I believe that people denying this to be the case either are simply unfamiliar with the evidence and the historical record, and thus are ignorant of significant portions of the case, or have a specific reason or vested interest in not placing themselves in the “manipulation and suppression are real” camp. In short, given the totality of the evidence any open-minded individual honestly considering the question would necessarily conclude that manipulation is highly likely in the precious metals markets. Alternatively, any explanation attempting to deny manipulation in the face of this evidence would have to posit such a convoluted scenario as to be unlikely in the extreme.

Now let’s stipulate right up front that the people involved in this are not stupid; there is no one “smoking gun” document where Ben Bernanke signs an order to Jaime Dimon ordering him to crash the price of metals and providing leased Fed gold to sell into the market to cover deliveries. If there were, we would be seeing some very powerful people doing a Perp-walk for breaking multiple laws and market regulations (well, actually in this day and age, we wouldn’t- but that is another article entirely). But what we do have is a long and surprisingly clear trail of evidence that, in its totality, makes it stunningly unlikely that this is NOT taking place. Western governments and central banks have the Means (access to western nations gold hoard, bullion bank leasing), an exceptionally strong Motive (to support Dollar, Euro, etc. despite printing, yet keep bond prices low so cost of borrowing doesn’t bankrupt the system), a Prior Record (London gold pool), have made Public Statements Admitting both the Crime and the intent/recommendation to commit the crime in the future, and these actions are indicated in the present time by ample Market Evidence (clearly manipulative market movements).

1. Western Central Bank manipulation of the price of gold is an established fact

The London Gold Pool was a group of Western central banks who got together in 1961 for a single purpose- to hide the effects of their excessive monetary expansion through the deliberate manipulation of the price of gold. If the free market forces of supply and demand would have been allowed to function, the sharply rising price of gold would have sent a clear signal to markets and to savers that their governments were quietly confiscating their saved wealth through the devaluation of the currency denominating their investments and savings. The members of the London Gold Pool and their initial gold contributions in tons (and USD equivalents) to the gold pool and percentages were as follows, and from these percentages can be inferred the degree of control and involvement of the various countries:[1]

  • United States, 50%, 120t ($135 MM)
  • Germany, 11%, 27t ($30 MM)
  • United Kingdom, 9%, 22t ($25 MM)
  • France, 9%, 22t ($25 MM)
  • Italy, 9%, 22t ($25 MM)
  • Belgium, 4%, 9t ($10 MM)
  • Netherlands, 4%, 9t ($10 MM)
  • Switzerland, 4%, 9t ($10 MM)
  • The London Gold Pool operated for 7 years until 1968, and only fell apart when France decided the US was printing money too fast (in relation to France) and was gaining an unfair advantage, so they withdrew and only then did the episode slowly became public knowledge. Please note that in the aftermath of the failure of this conspiracy (and it was quite literally a conspiracy, as the actors were secretly conspiring together to suppress gold price), Nixon was forced to take the US off the gold standard. In the nine years following this action, gold rose from 35$ an ounce to a high in 1980 of 850$/ounce, a stunning 24 fold increase. In his book "Gold Wars", Swiss banker Ferdinand Lips wrote:

    "It was decided to keep the gold pool secret at the time. Keeping with traditional practices at the BIS meetings, not a scrap of paper was initialed or even exchanged; the word of each governor was as binding as any contract". (Lipps, Gold Wars, 2001: pg 53)

    So here are the clear takeaways from this episode: Western central banks are proven to have suppressed gold price. They are proven to have successfully conspired together for many years, despite the large number of actors and varying interests involved. The entire thing was kept so secret that not a single shred of documentary evidence was left, and this secrecy was a matter of policy as none of the actors involved wanted to run afoul of their countries market laws and regulations. Finally, when market forces were allowed to reassert themselves, gold increased by a factor of 24 from its “officially established” price- which both indicates what happens when such a scheme collapses, AND provided ample reason for future central bankers to fear allowing gold to reach its fair market value during times of intense monetary expansion.

    “Well”, quoth the Golden Ostriches, “That is ancient history, what I really meant to say was that Central Banks do not manipulate the price of gold in the present.” OK then, let’s examine the evidence for this by first establishing Motive.

    2. It is an established and well publicized policy of modern Keynsian Monetary Theory that gold price must be suppressed, particularly if central banks wish to rapidly expand the money supply.

    Former Secretary of the United States Treasury (and possible new Fed chief) Larry Summers wrote a well-known article on the subject of gold price and the motive centrals banks have to manipulate it. Back when he was a professor of Economics at Harvard, Summers and colleague Robert Barsky published “Gibson’s Paradox and the Gold Standard”. In it, they argued that gold is a powerful competitive currency that, if allowed to function in a free market, determines the value of other currencies and influences interest rates and the value of government bonds.[2]

    Please note an important implication of Summers article: that governments and central banks could achieve their “ideal atmosphere” of low interest rates and strong government bond prices by controlling the price of gold, but they could only do this by intervening in the “free market” as a deliberate matter of policy. Gold that achieves its “fair, free-market value” is a clear threat to the single greatest tool in the Keynsian toolbox- the ability to print.

    3. Western Central Bank personnel have publicly admitted that leasing gold into the market is standard practice, and that many western nation’s CB’s do this

    Senior management at the Bank of England have publicly admitted leasing gold into the market on a regular basis to meet benchmarks and support BoE policy, and note that many other central banks do so, as well. “But that’s just crazy talk!” you say? Well take it up with Mr. Graham Young, Senior Manager of the Foreign Exchange Division of the Bank of England.

    Like many other central banks, whether or not they have the reserves on their own balance sheet, our day-to-day management of the gold holdings in the reserves is aimed at achieving a return on them by lending a portion to the market. As is increasingly common amongst central banks, we have a strategic benchmark for this gold lending portfolio, in our case set by the Treasury. The Bank is able, subject to market and credit risk limits, to adjust the maturity distribution of the actual portfolio, relative to that of the benchmark, in search of additional returns. The return on the actual portfolio relative to the benchmark measures the value that the Bank has been able to add by this ‘active management.” [3]

    Well, certainly these are just routine “in-and-out of the market” operations to generate a little scratch for the always cash-poor central banks, right? Surely they keep above-board public records of such routine and harmless activities and welcome scrutiny, right? Errr, no. IMF documents show that when they attempted to get Central Banks to be above-board about their gold holdings and sales, the proposals were met with vociferous opposition and outright refusal by the central banks.[4]

    4. Outright admission by a Fed Chairman that the Fed was actively suppressing gold price as a matter of policy.

    Arthur Burns was Fed chairman from 1970 to 1978. On June 3, 1975, Burns wrote a letter to President Ford about surreptitious efforts by the Fed to suppress the gold price. This letter is available from various sources of declassified U.S. government records and is posted at GATA's Internet site. Burns told the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce." Burns added, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price." Please note: the chairman of the Fed in 1975, four years after the dollar was disconnected from any formal convertibility into gold, told the president that the U.S. government should discourage market pricing of gold.[5]

    5. Outright admission by a Fed Chairman that the Fed was actively suppressing gold price as a matter of policy, Part II:

    Former Fed chair Greenspan himself wrote in a formerly confidential report that "Monetary authorities in the United States ... have maintained the stability (and primacy) of the dollar in the international currency structure by standing ready to buy gold from, and sell it to, foreign monetary authorities who either need or acquire dollars for exchange purposes".[6]

    6. Outright admission by a Fed Chairman that the Fed was actively suppressing gold price as a matter of policy, Part III:

    Greenspan, while he was the sitting Chairman of the US Federal Reserve, also publicly admitted to the US congress in 1998 that “Central banks stand ready to lease gold in increasing quantities, should the price of gold rise.” In other words, if gold prices go up, the central bank will make sure they come back down. The Fed has publicly admitted as much.[7]

    7. Market movements today that are suspicious, or irrational, or in some cases totally unexplainable absent deliberate manipulation.

    Traders could write volumes about this: How major drops occur on “news” items that are, at worst, mildly bearish without corresponding rises when those “news” items prove to be unfounded. How large batches of shorts magically appear when gold or silver are about to cross above significant technical thresholds. How massive numbers of short contracts are dumped in thinly traded holiday markets at a time when best execution of these trades is impossible given the low volume flows, and when no ordinary profit-oriented entity interested in maximizing profit would do this absent deliberate intent to manipulate price. But one instance stands out above all others, in my mind- the “gold standard”, if you will, of deliberate manipulative price suppression.

    September 6, 2011.

    Gold had been on a stunning three year ride, moving from under $800 in September of 2008, to above $1900 in September of 2011. The unprecedented monetary expansion undertaken in the aftermath of the 2008 financial crisis had started an international game of competitive currency devaluation, and gold had performed its role as “barometer of the soundness of currencies” admirably. Indeed, in the western world only the Swiss Franc had stood with gold as a genuine “safe-haven” currency. Well, the Swiss came to believe that the ongoing strength in the Swissie was increasingly untenable, and they resolved to announce that they were pegging the Swiss Franc to the Euro and stood ready to buy as many Euros as it took to defend this level. In short, they were devaluing their currency, and this would have left gold in position as the sole safe-haven left in the world… and that just couldn’t be allowed.

    On the morning of September 6, 2011, traders all over the world watched their screens as gold climbed higher towards $1920 per ounce. It was known that the Swiss government was going to make an important announcement at what was 3:00am Eastern Standard Time, and the press had prepared the public with hints that the Swiss were going to devalue. Five minutes BEFORE the Swiss announcement – just five minutes prior to an enormously gold-bullish announcement that would have had traders everywhere frantically buying and likely would have fueled gold past the headline grabbing $2,000 per ounce level – tons of paper gold were dumped on the market and gold price was rocked for an 80$ loss in a matter of minutes.

    Everyone watching was shocked at the action (supposing that someone was front-running a Swiss announement that no, they weren’t going to devalue), and then were even more confused when the Swiss did in fact announce the Euro peg. But no matter: the massive pre-emptive strike confused gold traders and completely diffused what was assuredly going to be new all-time highs for gold.

    Don’t believe me? Here is the chart of the Swissie showing the precise moment at 3:00am when the announcement was made.

    Now here is the gold chart- note the massive dump five minutes BEFORE the announcement.

    This was not some insider front-running the news, because the actual announcement was wildly gold-bullish, not bearish. Nope, this was some insider deliberately drowning what was shaping up as a massive rally in gold at an important technical level BEFORE the news was released. I dare anyone to explain this market action absent manipulation.

    Hinde Capital CEO Ben Davies put it well in an interview afterward: "Why was it selling off just ahead of a really bullish announcement? You have to believe that there was some coordinated action. ... The central banks will all have been in on knowing ahead of time that the Swiss were going to announce this. So there was central bank selling because they really didn't want the price of gold to skyrocket on what is incredibly bullish news for gold."[8]

    . . .

    As professional money managers, traders, investors, and the gold-buying public becomes more aware of the information presented here, one would think the Golden Ostrich would eventually become an endangered species, yet still they persist. Ironically, the Golden Ostrich often likes to claim the mantle of the “rationalist” in the debate, pooh-poohing assertions of manipulation as far-fetched conspiracies fed to the gullible by hucksters of the PM world. And yet which side are the rationalists here? Think about what one has to believe, and to disbelieve, in order to claim that manipulation is a fallacy:

    1. One would have to believe that western central banks and governments have indeed conspired to suppress gold prices once (London Gold Pool), but would never, ever do such an underhanded thing again and certainly are not doing it now… despite the fact that this policy is central to mainstream (Keynsian) economic literature. Indeed, the need to “support the currency” becomes even more acute during times of stress (which these Central Banks have resolved to address through money creation and low interest rates). In other words, one would have to claim that central banks have an exceptionally strong motive to suppress PM’s, but aren’t doing so now, even in the wake of the financial crisis of 2008… a crisis many within their own circle have described as “existential” and deserving of extraordinary measures.
    2. One would have to believe that western central banks and governments have the means (each nations gold hoard) and that top bank officials have explained that it is routine to lease this gold into the market, BUT they never, ever do this to influence price.
    3. One would have to acknowledge that multiple former Fed Chairs have either stated that gold price should be suppressed to support CB or governent policy, or have outright stated publicly that the Fed would indeed control the price of gold if needed, YET one would have to insist that they aren’t doing it now.
    4. Finally, one would have to acknowledge multiple movements of price that would be stunningly unlikely and highly unprofitable for the perpetrators of these movements absent central bank intervention.

    How likely are these things? What does it say about those who continue to insist they are the rationalists in this debate?

    I believe 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. What does this mean for you and me? It means we can still buy gold and silver today at artificially low prices. It also means that this condition will not last forever.

    Keep stacking. For God’s sake, keep stacking.

    About the Author

    Subscribe or login to read all comments.

    Become member and subscribe to Turd's Vault

    Contribute

    Donate Shop

    Get Your Subscriber Benefits

    Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

    Key Economic Events Week of 12/6

    12/7 8:30 ET US Trade Deficit
    12/7 8:30 ET Productivity
    12/7 8:30 ET Unit Labor Costs
    12/8 10:00 ET JOLTS job openings
    12/10 8:30 ET CPI
    12/10 10:00 ET UMich consumer sentiment
    12/10 10:00 ET Five-year inflation expectation

    Recent Comments

    by Libertybella, 7 min 17 sec ago
    by mistymorning, 10 min 54 sec ago
    by Boswell, 21 min 28 sec ago
    by Blackwatersailor, 36 min 46 sec ago
    by mistymorning, 1 hour 12 min ago
    by mistymorning, 1 hour 16 min ago
    randomness