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:
- 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
- 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.
- 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.
- 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:
- 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)
- 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.
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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.