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April 03, 2006

The Phantom Cartel Part III
by Mark Taylor

In parts one and two of The Phantom Cartel we have been taking very close looks at the behavior of all participants within the gold market. As stated before, it is the conclusion of many gold commentators that the Commercial Traders at COMEX have and continue to suppress the price of gold. We have investigated the positions held by the Commercial, Non-commercial, and the Non-Reportable Traders at COMEX. It is quite evident during the period from March 1993 through September 1993 that the rise in prices was a matter of speculative buying on the part of both the Non- Commercial and Non-Reportable traders. The COT data from that period conclusively points to these same traders as those that began selling out of their long positions at the August high. Using information from the CFTC's oversight programs, it is also known that the Commercials primary use of futures contracts revolves around hedging against price risk of both current and future exposure to the physical ownership of gold. I offered a simple example of a seller's hedge in part two of this series. In this link, The Sellers Hedge, you can read for yourself examples provided by the NYMEX web site that are complete in detail and inarguable as to the functionality and importance of the Commercial Hedge.

Before continuing, and with the hope that interested readers will indulge this slight excursion, I will first respond to a recent article written by Mr. Dimitri Speck. Response to Zorro's Phantom Cartel. In the article it is said that I ignored his "statistical findings supporting a concerted effort to keep prices down" from the essay, "Price anomalies in the gold market". This is not entirely correct; I did not ignore the statistics that were presented. What I did ignore was the final conclusion of his thesis based upon some statements that were made in the article as well as an admitted lack of data. By Mr. Speck's own admission, a few quotes from that very essay:

"For the more recent past a reference price a few minutes after the London afternoon fixing would be better suited to our purposes than the closing price, but since these are not available before 1998 the closing price must be used. For the period prior to 2001 (since gold started rising) this approximation is close enough."

"The basic premise of a typical sharp drop during the Comex session hasn't changed. Only the test procedure, chosen because of data availability is too inexact."

The one quote, "We can hold the price of gold very easily." (A comment made by Fed Governor Angell in 1993) is just one of many quotes Mr. Speck has used as so-called "evidence" the Fed is suppressing gold prices. The quote is among 5 others that were listed in another essay FED-Musings on the Eve of the Gold Suppression.

The six quotes below were all taken from Fed Governor Angell's remarks (beginning on page 39 of the meetings minutes) and the link will take you to the original document. Because of the size of the file, I have also posted the pages of concern (Governor Angell's words) at my website so you will not need to download the entire file.

1.) "...The price of gold is pretty well determined by us. ... long-term interest rates can have a significant impact."

2.) "But the major impact upon the price of gold is the opportunity cost of holding the U.S. dollar. No other currency has a reserve base that causes someone to be able to say: 'Well, I don't like holding my own currency'. If you don't like holding your own currency, you always have the option of holding dollars instead."

3.) "... We've had a 20 percent increase in price of gold since last February's Humphrey-Hawkins meeting. Now, [yearly] world production of gold only runs 2.3 percent of world stocks."

4.) "... the value of the world's stock of gold is a measly $1.4 trillion. Now, a lot of that is held by central banks. But we were at one time in a restraining mode, making it unprofitable for central banks to hold gold."

5.) " ... this year those who have held gold have said they've got the best deal going as the [value of the] world's gold stock has appreciated $234 billion since our February meeting. We can hold the price of gold very easily;"

6.) "all we have to do is to cause the opportunity cost in terms of interest rates and U.S. Treasury bills to make it unprofitable to own gold."

These bits and pieces of an overall discussion seem fairly convincing that the speaker might be thinking of controlling the price of gold. However if one were to read the entire dialogue, it would become clear that Mr. Angell's concern was the impact that inflation, tax hikes, and low interest rates were having on a Retiree's savings. Prior to having begun discussing the gold effect, Mr. Angell read part of a letter from a Retiree that had complained how his savings were being depleted due to inflation. He then went on to discuss how (in other countries) the citizens will turn to gold (and often the dollar) to safeguard against paper currencies that have terrible inflation rates. He makes the assertion that gold prices are not rising because China, India, and Indonesia are buying gold. Mr. Angell goes on to explain that gold prices are determined by them because of the interest rate they decide will be paid. As the discussion progresses, it is plain that Mr. Angell sees a rising gold price as an effect caused by low interest rates. Not only will people seek to guard against inflation by purchasing gold, he explains that they will take undue risk in other markets such as the stock market and the junk bond market. He continues on to declare that it is "Our Job" to provide stability for savers (by setting a higher rate of interest) rather than to drive households towards undue risk in holding gold, stocks, or junk bonds. I think if one were to take time to read all of Mr. Angell's remarks, it would become evident that Mr. Angell's idea was to restore the Saver's faith in the dollar by paying a higher rate of interest, which would in return effect the gold price as people will invest in the safety of T-Bills instead.

Regardless as to how one might interpret Mr. Angell's remarks, it is undeniable as to how Mr. Angell said gold prices are affected; it is the Fed Funds Rate that determines the price of gold.

In Mr. Speck's essay "Price anomalies in the gold market", it is his claim that the Fed began manipulating the gold price one month after the July '93 meeting. Knowing that the only way the Fed can affect gold prices is by raising or lowering interest rates, one would expect that the Fed would have had to begin making some move in interest rates on or around the date gold prices began to fall. August 5, 1993 is the day prices began to fall but as you can see by scrolling down in this link, Fed Funds Rate there was no move to increase rates in August ‘93 or any other month in 1993. In fact the Fed Funds Rate did not begin to rise until February 1994 and even then it was not until 3 years later that an average rate near 5.25% (2-1/4 % points higher than that of 1993) had any effect on gold prices at all.

The cause of concern for all of Mr. Speck's essays involving gold price manipulation is the fact that he consistently refers back to a time and set of remarks that are easily explained away. As we shall see, it has been the practice of many Commentators to take a sentence or statement completely out of context and use it to further their claims of manipulation.

Below is a list of supposed confessions by various Bankers and Barrick Gold as suggested by GATA Secretary Chris Powell.

1) Alan Greenspan confessed to the gold price suppression scheme while he was chairman of the Federal Reserve. He gave his famous testimony to Congress on July 24, 1998: "Central banks stand ready to lease gold in increasing quantities should the price rise." -- Testimony of Chairman Alan Greenspan

The statement, "Central banks stand ready to lease gold in increasing quantities should the price rise." is taken completely out of context and left to stand on its own. A quick read of the entire testimony reveals that Mr. Greenspan was discussing the possible need to regulate OTC derivatives. Before discussing the gold market, Mr. Greenspan had been pointing out how hard it has become to manipulate large markets such as oil. He noted that the OTC derivatives markets need no similar regulation to that of some commodities as the supply of financial instruments are virtually unlimited and therefore not subject to easy manipulation. When discussing the gold market, Mr. Greenspan was clearly using it as an example to describe the difficulties one would have in manipulating the gold price higher.

He said; "There is a significant business in oil-based derivatives, for example. 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." It is reasonable to me, to think Central banks would stand ready to lease gold at higher prices in an effort to gain a higher rate of return. Central Banks lease gold to gain a return on the asset, gold at $400 has a higher rate of return than gold at $300.

2) "The European Central Bank confessed to the gold price suppression scheme when it entered the Washington Agreement on Gold on September 26, 1999. The bank's members acknowledged that they had gotten together to regulate the gold price through gold sales and leasing:"

Nowhere in the link Mr. Powell provides, ECB: Joint statement on gold do any of the Member Banks make such a confession as to price suppression in the gold market nor is it stated in any way the intent of the Washington Agreement was to regulate gold prices.

3) Barrick Gold confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003, when it filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit charging that Barrick was doing exactly what its motion admitted. The motion said that in borrowing gold from central banks and selling it, Barrick had become the agent of the central banks in the gold market:

http://www.lemetropolecafe.com/img2003/memoformotiontodis.pdf Again, reading the entire Court transcript reveals that Barrick Gold made no such confession as to it's involvement in a gold price suppression scheme. What Barrick Gold's Lawyers did do was use the Plaintiff's (Blanchard & Company) allegations, word for word, as a means to show they did not properly adjoin all parties that would have been involved in the alleged scheme. Not once did Barrick's Lawyers confess to or legitimize any of Blanchard's claims against Barrick gold.

4) "The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003."Foreign currency reserve assets and gold, "the RBA's report said, "are held primarily to support intervention in the foreign exchange market. In investing these assets, priority is therefore given to liquidity and security, in order to ensure that the assets are always available for their intended policy purposes." http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/operat ions_financial_markets.pdf

The above excerpt is yet another attempt to take statements out of context. The statement is as plain as day, "the reserves are held primarily to support intervention in the foreign exchange market"….not the gold market. Just as well, the RBA goes on to lend a little support to the reason for which "central banks stand ready to lease gold in increasing quantities should the price rise."

Higher gold prices cause higher returns on the gold lease.

The RBA continued to lend gold, a program that has been in place for over a decade now. However, interest rates on gold loans fell sharply over 2002/03. The average rate on one-year loans in 2002/03 was around 0.5 per cent, compared with 1.2 per cent in the previous year. Returns from gold lending were, however, cushioned to some extent by the decision in early 2002 to lengthen the average term-to-maturity of gold loans, as this locked in those earlier higher rates.The return for the year was $19 million, down only marginally from the previous year.

Taking into account the increase in the price of gold and the interest on gold loans, the total return on gold assets in 2002/03 (measured in SDRs) was 3.4 per cent, compared with 13 per cent in the previous year.The return in the latest year was below that suggested by the increase in the US dollar price of gold owing to the depreciation of the US dollar against most major currencies. While the gold price has risen in US dollar terms over the past couple of years, it has been fairly steady when measured, for example, in euros.

5) Last is a recent find a GATA supporter sent in to Mr. Powell concerning a statement made by Mr. William R White of the Bank for International Settlements.

And now the Bank for International Settlements (BIS}, the central bank of the central banks, has confessed to the gold price suppression scheme.

The confession of the BIS came last June in a fairly candid speech by the head of the bank's monetary and economic department, William R. White, to central bankers and academics gathered at the BIS' fourth annual conference, held in Basel, Switzerland.

The speech was provided to GATA this week.

White's speech was titled "Past and Future of Central Bank Cooperation" and he said in part:

"The intermediate objectives of central bank cooperation are more varied.

"First, better joint decisions, in the relatively rare circumstances where such coordinated action is called for.

"Second, a clear understanding of the policy issues as they affect central banks. Hopefully this would reflect common beliefs, but even a clear understanding of differences of views can sometimes be useful.

"Third, the development of robust and effective networks of contacts.

"Fourth, the efficient international dissemination of both ideas and information that can improve national policy making.

"And last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful."

Mr. Powell somehow takes the last sentence above and comes up with this conclusion; That is, central banks collaborate -- and since they do so in secret, it may be said that they conspire -- to rig the gold and currency markets.

To use White's word, the central banks collaborate "especially" to rig the gold and currency markets.

It is quite a leap to end up with such a conclusion in my opinion but before we see Mr. White's explanation of the statement, I think it is very important that one look at the title of the paper, so read carefully please and note that it is clearly expressed "Past and Future"

Past and future of central bank Cooperation: policy panel Discussion

Now that it is clear as to the time frames in question, let's read Mr. William R White's response to the notion that he had "confessed that the BIS was conspiring to suppress gold prices."

The following is a letter written to me by Mr. William R White. It is his personal response to a letter in which I asked that he explain what he meant when he said;

"And last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful."

Dear Mr Taylor,

Thank you for your email of 15 March. Against the backdrop of Professor Gianni Toniolo's book, "Central Bank Cooperation at the Bank for International Settlements, 1930-973" (published around the same time as the Conference), I was referring to past efforts at international central bank cooperation in the field of banking and finance. In this regard, I was thinking specifically of the numerous bridge loans (generally in anticipation of subsequent IMF funding) arranged for emerging market countries in recent decades, multi-lateral foreign exchange intervention at various times, and the operations of the "gold pool" in the 1960s. More recently on the gold front, I was thinking of the Washington Agreement of 1999 (recently renewed) among European central banks. The purpose of this Agreement was to put precise and publicly announced limits on the extent to which central banks (and the BIS) might sell (or lease) their significant holdings of gold.

I hope this is helpful. You might also want to look at the BIS website (www.bis.org) where the papers presented at last June's Conference have just been published as Working Papers: http://www.bis.org/dcms/fl.jsp?aid=3&pmdid=5&smdid=26&tmdid=0&fmdid=0&d t id=1&y=now. In particular, WP 197 (Borio and Toniolo) provides more detail on some of these financial operations.

Yours faithfully
William R White
Economic Adviser & Head of MED
Monetary and Economic Department
Bank for International Settlements
Centralbahnplatz 2
4002 Basel
Switzerland

So there you have it, there was no confession to be found in any of Mr. Speck's or Mr. Powell's one-liners taken out of context. What I see is one reckless attempt after another to affirm a wild theory that has no basis in truth. As we shall see in part 4 of The Phantom Cartel, the one-liners are becoming pure conjecture and many are quite admittedly, rumor.

Zorro

Mark Taylor aka Zorro
dowtheoryproject.com

Copyright © 2004-2006 Mark Taylor

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