"Gold is the sovereign of all sovereigns." - Democritus, Greek scientist and philosopher, circa 430 BCE.
July 24, 1998, was an epic day for the global financial system. In "The Money Matrix - Bring Light to Dark Derivatives! (PART 11/15)," we reviewed the consequences of FED Chairman Alan Greenspan's decision to allow negotiation of OTC derivative contracts without the use of an exchange to make transactions transparent and reduce counterparty risk.
Greenspan also stated:
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.
Translated, this comment simply means that the international central banks will suppress the gold price by releasing central bank gold reserves. Why is the gold price so important? Isn't it just a yellow metal mostly used for jewelry? How exactly is this manipulation accomplished? These are the questions this article will answer.
THE LONDON GOLD POOL AND THE "REAL RATE OF INTEREST"
Before proceeding, I recognize that many hearing this for the first time may be incredulous. To that end, please read "R.I.P. - The London Gold Pool, 1961-1968". This article painstakingly demonstrates - using the FED's own documentation - that the international central bankers secretly colluded to manipulate the gold price in the 1960s to hide the dollar's debasement. Note the severe aftermath: the London Gold Pool was utterly destroyed in 1968 and the end result was the national bankruptcy of the United States in 1971 when President Nixon blocked the redemption of dollars for gold by foreigners. The collapse of the London Gold Pool heralded the era of free-floating fiat currency. If additional proof is please read this 1961 FED document and analysis by James Turk from the Gold Anti-Trust Action Committee (GATA) entitled "The FED's Blueprint for Market Intervention."
In the recessions and energy crises of the 1970s, the gold price rose from $35 to $875 per troy ounce. With the vast increase of powers granted by the Monetary Control Act of 1980, FED Chairman Paul Volker jacked interest rates into the stratosphere to squeeze the inflation out of the dollar. In 1981, the federal funds rate reached a maximum of 19%, and would not subside to single digits until 1985. [And what was Volker's only regret from his memoirs? That "Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."]
The next part is crucial to the plot. In 1988, a young economist out Harvard, Larry Summers wrote a verbose paper entitled "Gibson's Paradox and the Gold Standard." In the paper, Summers explains that when the real interest rate is positive, the gold price will not increase and even decrease as parties will prefer fiat currency that increases in purchasing power. However, when the real interest rate is negative, the price of gold will increase as parties will seek to preserve their purchasing power. Gold serves as "the canary in the coal mine" for all fiat currencies. When the price of gold rises, this is the prime signal that the currency is being debased.
Summers well understands the world gold market and the axiom "at all times, in all places, gold is money." Few today recognize that gold (XAU) and silver (XAG) are internationally recognized currencies and compete with the USD, EUR, and all others. Few recognize that the daily trading of gold on the London Bullion Market Association exceeds $80 billion USD per trading day. To put this in perspective, the London market accounted for $20 trillion USD in 2007 which by itself is larger than the $14 trillion GDP of the United States, which is the trade from all the goods and services our country produced. Gold is not just a currency, not just money, gold is a commodity that is the world's smallest major financial market.
Now, the real interest rate remained positive until 1990 due to Volker's draconian inflation-fighting measures. As explained in "Unlocking the Money Matrix - The Real Interest Rate (PART 12/15)", the real interest rate not only went negative, but it kept plummeting. The prime reason for this is the massive creation of new dollars that debased the currency by the FED, or classical Austrian monetary inflation of the money supply.
In the 1990s, the American government in collusion with the central bankers decided to execute the Summers' scheme although they may have simply been building on his mentor Robert Rubin's gold trading practices at Goldman Sachs. By suppressing the price of gold AND silver - a far smaller and easier-to-manipulate market than gold - and publishing rigged CPI numbers, they could slowly and steadily confiscate the purchasing power of their populations while masking the debasement of the dollar and hence all other fiat currencies while not causing a loss of consumer confidence.
THE SUMMERS GOLD PRICE SUPPRESSION SCHEME
Here is how the scheme works:
Central banks, like the FED, take gold bars from their vaults and lease them to cartel entities like Goldman Sachs (NYSE:GS) at a low rate, typically around 1%. Unless the sale is announced like Gordon Brown's infamous sale of 60% of England's gold reserves from 1999-2002 at $275/oz., the central bank continues to carry gold on lease and gold in the vault as one line item on its balance sheet.
The cartel then sells the physical gold into the futures market at spot price. The spot and future prices were suppressed by this extra supply. Large dumps can be orchestrated to cause "waterfalls" in the price due to algorithm or stop-loss trading.
Now the cartel has plenty of capital which could be leveraged by an investment bank at 30:1 or higher and used for ANY transaction. (Similar plays on interest rate mismatches were also executed on fiat currencies, most infamously the Japanese Yen-US Treasury carry trade, but these plays were made far easier with the golden 'canary' silenced.)
The physical gold bars leave the exchanges. Most of the central bank gold is melted down to meet the supply deficit, and now adorns the necks of Indian women or rests in the vaults of investors.
There are approximately 160,000 metric tons of aboveground gold stock. The World Gold Council reports that the world's central bank gold reserves are at 29,698 metric tons as of June 2009, and this is a fall from the 35,582 metric tons reported in 1990 while the world's money supply has more than tripled since then. However, the WGC statistics do not have the rigor of independent audits and are incorrect as shown by the abrupt doubling of China's disclosed reserves overnight. As Ed Wener of GATA reported in 2005 and James Turk related in 2009, it is highly probable that 12,000 to 15,000 additional metric tons has been leased by the central banks into the marketplace.
In the March 2001 audit of the Exchange Stabilization Fund (ESF), the Treasury refers its (unconstitutional) powers to "deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary" to promote "orderly exchange arrangements and a stable system of exchange rates." Along with the blatant remark by Greenspan above, this appears to me to be a carte blanche to trade in the gold market, and as late as 2000 the FED still publicly reported the ESF as controlling an unspecified portion of our nation's gold. To this day, the US government and the FED report gold stock on lease and gold in the vault as a single line item.
It is not outside the realm of possibility – though unproven - that the US government completed a gold swap transaction with Germany, where we traded gold stored in the US for gold stored in Germany as Turk surmised in "Behind Closed Doors," which was based on FED meeting minutes in 2001. Of course, the swapped gold from Germany would then have been used by the US government to dump gold on the London market. Recent events with Germany and subsequent Obama-Merkel meetings hint that they may be calling for the return of their gold. The Bundesbank even published a document back in 2000 that gave a hypothetical example of a gold swap with the FED, see page 37/56.
THE COMMITTEE THAT COULD DESTROY THE WORLD
In February 1999, Time Magazine published a cover with the bold title "The Committee to Save the World." In the future, the truth may be revealed as quite the opposite. Now, almost certainly, Summers, Rubin, Greenspan and the rest of the cartel believed in the mid-1990s that the gold suppression scheme could be carried out for 40-50 years before its failure enough time for either a new solution to be found or to see the Keynesian wet dream of one or very few regional fiat currencies realized. Unfortunately, if the global monetary system melts down, the entire world will be adversely affected.
A key component of the plan was also psychological. Robert Rubin, Treasury Secretary from 1995-1999, first coined the "Strong Dollar" policy. When these words needed to be turned into action, Greenspan over at the FED could manipulate interest rates, create dollars, and conduct foreign currency operations. Summers worked under Rubin and continued the policy as Treasury Secretary until 2001. Summer's successor was Paul O'Neill who had this to say in 2008:
When I was Secretary of the Treasury I was not supposed to say anything but "strong dollar, strong dollar." I argued then and would argue now that the idea of a strong dollar policy is a vacuous notion... When people say strong dollar, if they don't mean that "we believe intervention can work and we're prepared to intervene," then strong dollar is ridiculous.
Any veteran investor also realizes the powerful effect of FED statements by Greenspan and now Bernanke have had on stock and bond market volatility. In 2001, the gold price began its slow upward march, starting at $275/oz. As James Turk has documented, gold has risen eight years in a row, with an annual average gain of 16%. The gold cartel has been beating a retreat.
However, the plan to quietly confiscate the wealth of the American people has an Achilles heel, the same which destroyed the London Gold Pool. If physical gold becomes too scarce on the futures exchange and enters backwardation, or if the fiat currency debasement becomes too obvious, the gold price will skyrocket in response and the exchange will lose all its metal and the cartel will default. Furthermore, the gold on lease cannot be repaid to the central banks without causing the gold price to soar, and as more people realize the scam worldwide, or become more alarmed by the price rising, the more physical gold is saved.
THE WILES OF "PAPER GOLD" AND "PAPER SILVER"
As previously stated, Gold is the world's smallest major market. In 2007, the last reported year, the London Bullion Market Association (LBMA) exchanged over $20 Trillion USD in gold. This was larger than America's GDP of $14 Trillion USD, and the LBMA trading only represents about 75% of the world totals. Furthermore, the IFSL estimates the LBMA's volume is quite likely three-to-five times larger since much of the transactions are increasingly netted out and cleared without appearing in the statistics. This is despite the fact that all of the aboveground gold stock 160,000 metric tons melted down would fit inside of a cube roughly 20 meters to a side.
Due to industrial consumption, a shocking surprise to many is that silver's aboveground stocks are far less than gold's. The best estimates range from 30,000 metric tons on the low end to 60,000 metric tons on the high end - a cube that is at most 18 meters to a side. As seen in the graph, the market capitalization of silver is just a small fraction of gold's which makes it far easier to manipulate.
In 1974, New York's COMEX futures market was opened to gold trading, paving the way to the "paper gold" derivatives and ETF's of our modern day. In December 2008, the notional value of all gold derivative contracts was $395 billion USD, or roughly equivalent to 15,000 metric tons of gold. To put this in perspective consider than futures markets are typically used as hedging operations for commodity producers, trading basis risk for price risk. Since the annual production of gold is around 2,500 metric tons, and the contracts are all within a year, the large notional value becomes questionable. And to put this in perspective with silver, in 2007 the equivalent of the entire aboveground stock of gold was exchanged every 269 trading days while the equivalent of the entire aboveground stock of silver is exchanged every 9 trading days.
Here is another little known fact I dare not omit since gold is saved and not consumed, it's stocks-to-flow ratio is about 60. This means that there is the equivalent of ~60 years worth of production in aboveground stock for every year of mine production. This is in stark contrast to all other commodities, where the stock-to-flow ratio hovers around 1. Please see the graph. This ratio is the key reason why gold is money and a currency.
Perhaps this chart Theodore Butler graciously allowed me to publish from his article "Making the Case" most aptly the gold and silver manipulation by U.S. Banks most clearly below.
Furthermore, in a 2003 lawsuit against the world's largest gold producer, Blanchard and Company charged Barrick Gold (NYSE:ABX) with manipulation of the gold price by using central bank gold, Barrick replied that they could not be sued without the central bank and other bullion dealers present as necessary parties, and that the central banks had sovereign immunity. Barrick's motion to dismiss was also a confession of the state of the gold market.
Termination of the forward sales contracts would leave the bullion banks with no right to recover the promised gold from the gold producers; yet, they will remain obligated to repay the borrowed gold to the central banks. In order to satisfy their obligations to the central banks, the bullion banks would have to purchase gold on the spot market at prices that may be substantially higher than the price at which they sold the borrowed gold... It would expose the bullion banks to monumental financial losses. (p. 20-21/24)
Barrick's motion to dismiss was settled out of court, and shortly thereafter Barrick announced its hedging operations were terminated.
The Barrick Gold case was preceded by Howe vs. BIS, where, as a BIS shareholder, Reginald Howe charged the Bank of International Settlements, Alan Greenspan, Treasury Secretary Larry Summers, Goldman Sachs, Deutsche Bank, and others with fraud and manipulation of the gold price in the derivatives market and on the COMEX in 2000. In a long, twisting decision, U.S. federal Judge dismissed the case due to lack of standing. However, none of the claims were refuted and Lindsay resorted to questionable logic that Greenspan and Summers were above the law and unable to be sued in 2002. James Turk picks apart the decision in his commentary here.
One final but quite important note that due to the nature of futures markets, the gold cartel just as easily can profit when the price rises as when it falls. It is typically rare (~1%) for a paper gold futures contract to be settled in gold. Most often, it is simply rolled over. The game of golden musical chairs stops when the expected deliveries of physical metal off the exchange shake the confidence that metal will be delivered, resulting in a heightening of counterparty risk.
It took me extensive amounts of research to conclude that the gold and silver prices are manipulated, and GATA was the first and prime source of this information. For many seeing this for the first time, I apologize if the above is too complex. Looking back, it should have been much easier – if you listen to the central banks, they literally state they doing this.
One must not forget that central banks are simply government-sanctioned tools of the elite to debase and manipulate the currency in an orderly and politically-expedient manner, regardless of their claims to maintain "political independence." The simple truth is that the central banks were designed to control the "money power" which eventually MUST and WILL BE returned to We the People.
However, I expect no one to believe the same as I without doing the same research as I have, and to that effect, please see my source list. Any questions, especially feedback to the contrary, please ask them below and I will do my best in replying in a timely fashion.
Lastly, let's ask what if I am wrong, and what are the consequences? Nothing.
But what about the possibility that GATA, myself, and many others are correct? Then Larry Summers, the director of the Obama administration National Economic Council, should receive a trial by jury, not left free to continue to meddle with the world economy. As individuals, we must end this charade and help destroy the gold cartel or the gold cartel will proceed to annihilate what's left of the free market in our America, the greatest nation to ever be conceived in the liberty of the individual by the minds of men.
Got physical gold? Physical silver? (Please note ETF funds like GLD and SLV, run by cartel members HSBC Bank and JP Morgan Chase Bank, do not count.)
Disclosure: No position in Barrick Gold, Goldman Sachs, Citigroup, or Ford Motor Company