The Fed's (Fictional) Intervention In The Gold Market, Part II: GATA's Faulty Evidence

| About: SPDR Gold (GLD)

Read Part 1 of this series

The Gold Anti-Trust Action Committee (often called GATA for short) is an organization founded, in its own words, to "expose, oppose, and litigate against collusion to control the price and supply of gold." GATA has become a well-known voice in the gold world, with its representatives garnering interviews from Fox News and CNBC, among others, and repeated mention on comments and articles here on Seeking Alpha. Indeed, on every one of my previous articles about gold (through the GLD ETF) and gold mining stocks (through GDX and GDXJ), I have received comments and/or emails directing me to GATA resources.

On its admittedly extensive website, GATA claims to have "collected and published dozens of documents showing Western treasury and central bank efforts to intervene both openly and surreptitiously against a free market in gold." The problem for GATA - and believers in the coordinated manipulation of the gold price - is that these documents hardly offer proof. For the most part, they are a collection of out-of-context quotes and reverse-engineered data sets, which rarely provide the support that conspiracy believers claim.

The "Documentation" section of the GATA site includes an article titled, "Chris Powell: The why and how of gold price suppression." (Powell is the head of the GATA; though his title is officially Secretary/Treasurer, the only other executive of the organization is chairman Bill Murphy, and Powell appears to have submitted nearly every article on the GATA website.) The article is a transcript of Powell's remarks at a series of investment conferences, updated and formatted for Internet readers. Powell opens with a startling accusation:

Gold is so important that Western central banks - particularly the US Treasury and its Exchange Stabilization Fund, the Federal Reserve, and allied central banks - rig the gold market every day, even hour by hour.

The GATA head then cites a 1988 study [pdf] co-authored by former Treasury Secretary (and then-Harvard professor) Lawrence Summers, which Powell claims "implied that governments could achieve their ideal of low interest rates and strong government bond prices by getting control of the price of gold."

The paper does nothing of the sort -- it is an examination of the relationship between interest rates and the price level during the period of the gold standard, a puzzle known in classical economics as "Gibson's Paradox." Summers and co-author Robert Barsky do note that "changes in long-term interest rates are indeed associated with movements in the relative price of gold in the opposite direction;" in other words, gold will rise as real interest rates fall. This, as I noted in Part I of this series, is exactly what has happened over the last few years, despite the alleged manipulation.

Powell goes on to detail what he believes is persuasive evidence documenting the alleged manipulation. Powell lists a series of essays - including one by long-time foe Jeffrey Christian - purporting to explain central bank intervention does. Powell then moves on to what must be his favorite quote, from Alan Greenspan in 1998:

Central banks stand ready to lease gold in increasing quantities should the price rise.

This quote appears nearly 800 times on the GATA website, according to a Google search. And yet, it is massively misleading. The full quote reads [emphasis mine]:

But unlike farm crops, especially near the end of a crop season, private counterparties in oil contracts have virtually no ability to restrict the worldwide supply of this commodity. (Even OPEC has been less than successful over the years.) Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.

The testimony from which Powell derives his seemingly damning quotation was given to Congress in an effort by Greenspan and the Fed to minimize regulation of derivatives by the Commodity and Futures Trading Commission. Greenspan's point was that the fear of a "cornered" market through the use of derivatives - a major factor in the push for regulation - was minimized by the fact that producers or owners of commodities - including central banks - would respond to rising prices by increasing supply in order to make more money.

Powell elsewhere argues, "GATA has construed this as Greenspan's telling Congress not to worry about a corner in the gold market because central banks already had cornered that market [emphasis in original]." Yet Powell offers no corroborating evidence for this interpretation; at no other time, in a nineteen-year career, did Greenspan again make a statement that even appeared to hint at a gold price conspiracy.

In another speech, Powell calls Greenspan a "whistleblower" based off this single out-of-context statement. "Greenspan contradicted the usual central bank explanation for leasing gold -- supposedly to earn a little interest on a dead asset -- and admitted that gold leasing is all about suppressing the price," Powell writes. The Chairman did no such thing; nowhere in his statement does Greenspan, as alleged, admit the existence of Fed-induced manipulation in gold prices. He simply points out that rising gold prices will lead to rising supply, limiting the ability of bad actors to corner the gold market. It is GATA -- not Greenspan -- who claims that central banks are dominating the gold market. And it is GATA -- not Greenspan -- who claims the Fed chairman is a "whistleblower." Greenspan is clearly not; a whistleblower voluntarily, clearly, and publicly, steps forward with detailed claims of illegal activity of which they are aware in an attempt to bring those actions to the light of day and to a halt. Were Greenspan truly a "whistleblower," one imagines he might have found more than one occasion, a clearer pronouncement, or a better forum, to come clean over nearly two decades as the public face of the Federal Reserve, or in the years since his retirement. And were Greenspan truly a whistleblower, he would have ceased the supposedly illegal actions.

Powell then attempts to answer the question, "How can we prove this market rigging?" He begins with a document from the Bank of International Settlements (known as the BIS), a bank used by the world's central banks. According to Powell, the BIS "advertised its services intervening surreptitiously in the gold market to help rig currency markets generally, [emphasis in original]."

Yet again, the "evidence" shows nothing of the sort. What GATA claims is a "brochure distributed to central banks" is actually a PowerPoint presentation entitled, "The Bank for International Settlements: An Introduction." Nor is the brochure clearly intended for central banks; indeed, were GATA's allegations true, one wonders why the BIS would have to "introduce" itself to the same central banks with whom it has been manipulated gold markets for decades.

The damning slide appears to be number 17 of the presentation [highlighting mine]:

BIS slide Click to enlarge

But the "interventions" listed could just as easily be for the "Forex" - foreign exchange - side of "Forex and Gold Services." That is what central banks do; that, in fact, is part of the responsibility delegated to the Federal Reserve by Congress. The New York Fed openly discusses Fed and Treasury intervention activities in the currency markets, though it claims that the US intervened in the currency markets only twice between August 1995 and the end of 2006. But the BIS is an international organization, and its services for currency markets have potential customers around the globe.

One can question the decisions made by Bernanke, Greenspan, and their Fed colleagues; one can even question the very existence, purpose, and/or benefits of the Federal Reserve. But the fact that it is performing its legal duties in currency markets does not, by association, imply that it is also performing illegal activities in the gold market. And a single term in an introductory PowerPoint presentation designed by a low-level bureaucrat at the BIS is not proof of market manipulation; nor is it even the "advertisement" GATA makes it out to be; nor does the presentation appear to be directed at central banks, who are already more than familiar with the BIS. Again, GATA makes claims unsupported by the evidence. Alan Greenspan is not a "whistleblower"; nor is a PowerPoint presentation a brochure; nor is that introductory presentation likely aimed at the central banks who have been working with the BIS since 1930.

Powell moves on. "Also among the records GATA has collected are admissions of gold market rigging -- yes, admissions -- from four former chairmen of the U.S. Federal Reserve..." The first is the above-mentioned quote from Alan Greenspan. The second "admission" comes from William McChesney Martin, Fed chairman from 1951 to 1970. GATA cites a document written in 1961 by an unnamed government official who "appears to [be]...someone in the Federal Reserve Bank of New York." According to the organization, the document "is a detailed plan of surreptitious intervention by the U.S. government to rig the currency and gold markets to support the dollar."

Unfortunately, there are a series of problems with this document. First, the US was still operating on the gold standard; meaning the Fed's legal mandate was to maintain the exchange rate of $35 US dollars per ounce of gold. Secondly, Martin made no admission; as even Powell notes, the document was written by an unnamed government official.

Finally, as Powell quietly notes in his piece on "whistle-blowers," "We don't know if this plan was ever fully implemented..." In other words, GATA is citing a plan with no evidence of implementation, that was prepared when the Fed was not just considering to, but legally required to, intervene in the gold market, as proof that 50 years later, the Fed - no longer under the same legal mandate - is manipulating the gold market. It is akin to citing an invasion plan for Moscow filed in 1961 as evidence that the US is currently planning an invasion of Russia; the world has changed, and again, there is no evidence the plan was ever implemented.

Third on the list: legendary chairman Paul Volcker. In his memoirs, according to GATA (via an excerpt from The Nikkei Weekly [pdf]), Volcker wrote about the 1973 dollar revaluation: "Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake." In other words, the damning quote here is that the US government didn't intervene in the gold market - at a time when it was most advantageous for the government to do so. But GATA uses Volcker's admission - also taken out of context; from Volcker's view, the "mistake" was the failure to support the still-wobbly fiat dollar, as opposed to allowing gold to rise - as evidence for market manipulation despite the fact that Volcker is clearly stating that the government did NOT intervene when it clearly could have.

In an email interview, Powell told me "there probably has not been a free market in gold for many decades"; as noted earlier, he has also alleged that central banks rig the price of gold by the hour. If this is the case, why would "joint intervention" in the gold market even need to be undertaken? According to GATA and many others, that intervention has been constant for decades, and thus would have been ongoing. Volcker's quote that intervention "should have been undertaken" invalidates, rather than strengthens, that theory.

The final Fed chairman to blow the whistle, according to Powell, was Arthur Burns, who in 1975 wrote a memo to then-President Gerald Ford in which he stated, "I have a secret understanding in writing with the Bundesbank - concurred in by Mr. Schmidt [Helmut Schmidt, chancellor of West Germany] - 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." But again, this statement, is context, provides little evidence for modern manipulation. Burns is quite clearly concerned about the fragile state of the Western financial system, which was adjusting to the US' leaving of the gold standard and facing stiff inflation at the time. In that memo, Burns notes that the International Monetary Fund was attempting to "ensure the role of gold in the international monetary system would be gradually reduced."

And, indeed, such a phase-out did occur; gold now reacts to, rather than drives, financial markets and monetary policy. But Burns' admission from 37 years ago, once again, does not create any evidence that current Fed officials continue to manipulate the market.

The only "modern" evidence for Fed intervention comes from a Freedom of Information Act (FOIA) request made by GATA seeking Federal Reserve records regarding its actions in the gold market. GATA notes two documents from that request - the first is a denial of many documents requested by GATA. GATA interprets that denial as proof that "it now has been established on the official record that the Fed and likely the U.S. Treasury Department too are heavily involved in surreptitious action to suppress the gold price."

Once again, there is simply no evidence to support this assertion. Yes, the Fed in secret, and yes, many reasonable and intelligent people have questioned - and continue to question - its role, its procedures and policies. But the fact that the Fed is requesting secrecy toward its swap and leasing activities in the gold market - the same secrecy it requests in every market it enters - is not proof that is actively manipulating the gold price downward. "Why should the Fed be allowed to have any secrets about gold [emphasis in original]?" Powell asks in his speech. Because they're the Fed, that's why. That's how it works. Again, the Fed is hardly immune to criticism, but its refusal to release information related to its trading strategies is not, as GATA claims, tantamount to an admission of a worldwide suppression conspiracy. It is the way the Fed does business in all markets.

Further damaging GATA's case is one of the documents released under the FOIA request; minutes of a meeting [pdf] of the Gold and Foreign Exchange Committee of the G-10 on April 7, 1997. Once again, Powell takes out of context quotes and selective interpretation to put a devilish spin on what is actually an effort by the committee to discuss central banks' attempt to prevent the price of gold being depressed by government selling. Powell quotes the US delegate "Fisher," arguing his statement was "as candid an acknowledgement as any of the U.S. government's profound interest in suppressing the price of gold." Here's is Fisher's (who Powell believes is Peter Fisher, a New York Fed official) statement, from the minutes:

Fisher explained that U.S. gold belongs to the Treasury. However, the Treasury had issued gold certificates to the Reserve Banks, and so gold (by these means) also appears on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the certificates would also be revalued upwards; however [to prevent the Fed's balance sheet from expanding] this would lead to sales of government securities. So the net benefit to Treasury would need to be carefully calculated, since sales of government securities would expand the public portfolio of government securities and hence also expand the Treasury's debt servicing burden.

Two key points on this passage:

1. When Fisher discusses the "net benefit to Treasury," he is discussing the net benefit to the Treasury of potential gold sales. Indeed, the committee was meeting to discuss coordination of government gold sales to prevent those sales at depressed prices. As GATA's Powell notes, the committee meeting would eventually lead to the Washington Agreement on Gold, in which European central banks announced, in advance, that they would not sell additional gold over a five-year period, and announced limits on already decided sales. This behavior is hardly indicative of a group looking to manipulate the gold price lower; in fact, the Agreement was clearly designed to prevent partial sales of central bank gold from decreasing the value of the remaining reserves, and thus impacting the reserve to currency ratio those governments were attempting to maintain. (In a 2007 interview, Powell called the Washington Agreement a "smokescreen" to protect the bullion banks who were shorting gold at the behest of the central banks. As such, Powell seems to be arguing that gold market participants should only believe what central bankers say, and not what they do. It's indicative of the weakness of GATA's case that a single utterance in a Congressional testimony is repeatedly touted as an epic admission of guilt, but a multi-national agreement requiring months of negotiations, that is then released to the public, is dismissed as nothing more than a head-fake.)

2. Note also that the potential loss due to revaluation of gold comes from Treasury, not the Fed. The Treasury will see higher debt expense if the Fed sells off government securities; but the Fed balance sheet would, in fact, be strengthened by an upward revaluation. In other words, the institution that has supposedly spent decades fighting the upward trend in gold is doing so against its own-self interest!

Powell concludes with a link to a study by GATA board member Adrian Douglas, titled "Gold Market is Not 'Fixed', It's Rigged." Douglas claims (despite the essay's title) that the price of gold is indeed "fixed" in a conference call between representatives of five bullion banks: HSBC, Deutsche Bank, Scotia Mocatta, Societe Generale, and Barclays. Douglas argues that intraday declines in the price of gold - defying the metal's upward climb over the last decade - proves the existence of market manipulation. Douglas uses a series of charts and graphs to "prove" the manipulation, concluding with this chart:

Click to enlarge

chart courtesy Adrian Douglas at

Douglas writes:

[The chart] shows that a staggering 88% of the data fall in the minus one percent to plus one percent range. Equally surprising 98% of the data lie in the minus 2 percent to plus two percent range. This also can not happen by accident. The gold price has increased 400% in nine years yet the percentage daily price range between the AM and PM Fixes remains locked largely in a 1% band. This is why the AM & PM fix price data appear to overlay in figure 5 because the daily variation is tightly controlled. This could only be achieved by market interference.

Douglas' conclusion is, to put it simply, delusional. Because gold has made just a handful of moves over 2 percent (in either direction) per year for the last decade, he concludes the gold market is rigged. By that logic, trading in Procter & Gamble (PG), McDonald's (MCD), and hundreds of other stocks; or in US Treasuries; or in crude oil, soybeans, and cotton; is equally rigged. Gold is a well-covered, heavily traded, liquid asset; those assets don't normally see moves over 2 percent without major news events, events that only happen every few weeks, at most.

In fact, were manipulation on a major scale happening, one would expect many more expansive moves, as central bank maneuvers overshot certain targets, or insiders made front-running trades on their knowledge of forthcoming central bank action. The addition in the last few years of high frequency trading in the gold market would only exacerbate this volatility; yet gold continues to trade in a moderate, even quiet daily range despite its decade-long bull run.

Again, Douglas' study - like the rest of the speech's evidence - falls apart upon even a cursory analysis. And yet, the sum of the above evidence leads Powell to make this staggering declaration, after asking "Why does all this matter?" [emphasis in original]:

It matters because rigging the gold market is part of a general scheme by which a secretive and unelected elite in the United States controls the value of all capital, labor, goods, and services in the world -- controls the value of everything.

Selected quotes, out-of-context statements, and dubious statistical analysis: on these Chris Powell and GATA build their case for the existence of a dominant elite that manipulates the world economy, and "controls the value of everything." It is a flimsy foundation, and simply falls apart under close inspection. In Part III, I'll discuss the errors in GATA's understanding of the market for gold and (in particular) gold derivatives, and how those errors have led to a belief in many circles that gold is due for an exponential bull run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: My household owns a small amount of physical gold in the form of jewelry, weighing substantially less than one troy ounce.