Gold and Silver Market Suppression Failures Flash Buy Signal, Part 2

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Includes: GDX, GDXJ, GLD, SLV
by: Robert Kientz

In Part 1 of this 5-part series, we discussed two agreements that Central Banks used to suppress the price of gold in the marketplace. Please read Part I before proceeding with this article.

So do the Central Banks still have gold?

A nice quote from the GATA article regarding availability of Canadian central bank gold:

When I published my essay "When Irish Eyes are Smiling: the story of Brian Mulroney and Canada's gold," the good folks at the Bank of Canada told me that there had been no physical gold in the bank vaults for years. To quote my essay directly:

"They advised me (early in 2002) that Canada does not really own this gold at all (at the time we were supposed to have about 40 tonnes). What was left of it had been leased out to various bullion banks years ago ...and yes, it (was) being accounted for as requested by International Monetary Fund accounting rules regarding leased gold. Canada's gold cupboard is bare ... not a 400-oz. good-delivery bar in sight."

What about the US gold stocks?

In a book written by Chris Weber and summarized on Lew Rockwell’s site, we noted that in the one audit of Fort Knox:

The shocking admission Ft Knox holds very little good delivery gold was made to Mr. Durell by the chief official of the General Accounting Office (GAO).

By February 1975 Saxbe was Ambassador to India, so Durell communicated his displeasure through his local Virginia congressman.

As a result of this, the GAO sent four men to Durell's Virginia farm to try to convince him of the validity of their accounting practices. In charge was Hyman Krieger, the GAO's Washington regional manager.

The one concrete piece of information to emerge from this meeting was a bombshell. Krieger admitted that only a small part – 24.4 million ounces – of the official gold was of a quality of .995 or better. In other words, less than 10% of the 264 million ounce held by the Treasury could be considered good delivery gold.

Krieger confirmed this in a letter to Durell of April 11, 1975:

We analyzed, as agreed, the gold bar schedules for Fort Knox and found that fine gold in good delivery form (.995 or better) at Fort Knox totaled 24,411,140 ounces.

Note that an audit of Fort Knox has not been allowed since. Well, where did all this central bank-owned gold go? There are several ways to dispose of it, including selling, leasing, and swapping it.

Gold Sales

The first example comes from the Bank of England. The BoE, in June 1999, auctioned off gold reserves to the lowest bidder. In the linked announcement you will find the following:

Under the single price format, valid bids will be ranked in descending order of price, and allotments will be made in multiples of 400 ounces to bidders whose bids are at or above the lowest price at which the Bank of England decides that any bid should be accepted (the “lowest accepted price ”). Applicants whose bids are accepted will be allotted ounces of gold at the lowest accepted price. Bids above the lowest accepted price will be allotted in full at the lowest accepted price.

So, um.. I give you the lowest price for your gold and I win? Man, if only people on Ebay (NASDAQ:EBAY) would follow this logic.

It is a matter of historical record that the BoE received a horrible deal, as prices have risen to 6 times those auction sales. I guess the brilliant English politicos didn’t act in the people’s best interest to preserve the country’s wealth. Oops.

So what does Bank of England Governor Eddie George have to say about gold price suppression?

In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999: George said

We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K.

Leases and Swaps

Central banks are engaging in leases and swaps to flood the physical gold markets. Leases and swaps are types of loans for gold. In a lease, the bank gives physical possession to someone in exchange for ‘rent’ noted as a lease rate. In a swap, the bank exchanges the gold for currency as a loan with collateral, and at some point in time is supposed to get the gold back. Supposedly, banks gold-rich and cash-poor may do this to improve ‘liquidity’.

One of the issues with swaps is that they are counted as reserves on the books of the bank even though they do not retain possession of the gold. To wit: an excerpt from the bank of the Philippines on IMF guidelines.

Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign currency liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with non-central banks shall be treated as collateralized loan. Thus, gold under the swap arrangement remains to be part of reserves and a liability is deemed incurred corresponding to the proceeds of the swap.

And here:

The European Central Bank (ECB) also made it clear that the IMF policy is to include swaps and loans as reserves. The ECB responded to GATA: “Following the recommendations set out in the IMF operational guidelines of the ‘Data Template on International Reserve and Foreign Currency Liquidity,’ which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralized loans in balance of payments and international investment-position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet.” The Bank of Finland and the Bank of Portugal also confirmed in writing that the swapped gold remains a reserve asset under IMF regulations.

Fabulous.

And for a specific example, GATA demonstrates how German and US banks performed a swap of gold and muddled up the reserves count for both banks to the point we cannot tell who owns what. Yay.

The German Bundesbank (the secret "swapper" of gold with US) lists "Gold and Gold Receivables (loans)" as a one line item on its balance sheet. This approach is in direct conflict with Generally Accepted Accounting Principles (GAAP), and thus German banking law. So, from their published financial statements there is no way to determine how much gold Germany holds in its vaults. The refusal of the Bundesbank to provide a breakdown between physical gold and gold receivables belies any notion of market transparency.

Clearly deceptive accounting, countenanced by the IMF has allowed official sector gold to hit the market without a corresponding drawdown on the balance sheets of central banks. This has made it impossible for analysts to ascertain the exact size of official sector gold loans, swaps and deposits. The unwillingness of central banks to provide even a minimum level of transparency suggests that total gold receivables are substantially larger than the accepted industry figure of ~5,000 tonnes.

So here's the accounting. The U.S. government swaps gold with the Bundesbank, which now owns the gold at West Point. "Further, to secure this transaction, the Bundesbank receives SDR Certificates, which solves "The Mystery of the Disappearing SDR Certificates" (Freemarket Gold and Money Report Letter No. 289, August 13, 2001). The ESF gets the gold in the Bundesbank's vault, which it then lends to the bullion banks in an off-balance sheet transaction.

Further, we have a GATA commentary that gold suppression is public policy and public record, not conspiracy.

Talk of gold price suppression has also made public airwaves, where it is not usually taken seriously by TV pundits.

Ben Hinde at Hinde Capital talks openly with CNBC about decades of 'well documented" central bank gold suppression and schemes.

Tyche Group talks about gold and silver price manipulation through central banks. In addition, he talks about suppression and 'funny games' in all commodities by governments and banks.

In the next article I will attack paper options on gold and silver, and then make recommendations.

Disclosure: Long physical bullion as always