Anybody Seen Our Gold?
Thomas Tan

At WSJ yesterday (1/31), there was a full page color ad (page C5) from a very interesting non-profit organization called GATA (Gold Anti-Trust Action Committee, website gata.org). This group is well known among gold investors, but is rarely heard of by the public. For almost 10 years, this organization has spent all their resources and made great efforts to find, reveal evidences and engage in public education on the alleged manipulation of the gold market by western central banks including US Fed. this ad reflects a major change of their strategy to promote public awareness.

I am not quite into the old conspiracy story and have no association with GATA. But I see the value of such organization existing to keep our government honest. There have always been speculations among gold investors on gold manipulation by central banks, especially in the 1990s, due to many strange price behaviors. Some of them are strong evidences, some are merely speculations. The strongest evidence is probably Bank of England selling gold in 1999 which will be discussed later. GATA lists some evidences on their website, and an interesting one is the lawsuit against Barrick Gold and J. P. Morgan at New Orleans. In order to dismiss this lawsuit, Barrick admitted that they were borrowing gold from bullion banks (in this case J.P. Morgan) which acted as agents of government(s) and received their gold by lease contracts from government reserves. This lawsuit eventually got dismissed due to technicalities since the plaintiffs seek injunctions among all bullion banks including all major investment banks in Wall St and all western central banks which have sovereign rights of immunity shielded them from such lawsuit.

However, this unsuccessful lawsuit has a profound impact on the major mining companies. After this lawsuit, large miners such as Barrick and Newmont became very careful not to engage in long term 10 year hedging, instead gradually starting to de-hedge and eventually unwind majority of their existing hedge contracts with bullion banks.

This lawsuit has substantially enhanced the shareholders of major miners, otherwise if miners hedge gold at $350oz, and with fast rising production and energy costs these days, they would not be profitable and enjoy the much higher gold price and revenues. Whether manipulation or not, financially I see incentives and benefits from central banks to lease gold to bullion banks during gold's bear market. It is a win-win situation for both CBs and big Wall St bullion banks.

CBs can lease gold and get 1% return otherwise gold would be just sitting at their vault doing nothing. For bullion banks, they can sell gold at the open market, use the proceeds to invest in other vehicles such as treasury, equity and bonds to earn a spread around 5%, much better return than the 1% which they need to pay CBs. And it is free money, no cost of capital and almost riskless.

However, the success of this gold cross trade is under one condition, gold has to be in a bear market. Otherwise if gold is on a explosive move like right now, bullion banks will suffer heavy loss when they buy back gold in the open market. Whether this can be called manipulation and conspiracy?

Maybe, but it is probably more financial driven, except one strange gold sale by Bank of England. Usually CBs will announce the sale and will take a couple of years to accomplish so that it wouldn't depress the physical gold market and sell into a downward spiral fire sale price which does not benefit them. However in May 1999, the then Chancellor Gordon Brown (now Prime Minister) of the Great Britain sold 415 tonnes of gold, almost 60% of its total reserves, leaving Britain with only 300 tonnes, at an average price of $275.

11 days earlier, Brown had requested the IMF sell $10 billion of its gold on the open market. When recently Prime Minister Brown was asked again the reason of such strange act, his answer is simply a decision of money management. Sure. When Tony Blair was asked about this some years ago, he simply said gold is a bad investment.

Even Tony was not responsible for this action, but he gave the most irresponsible answer. It is very ironic that now he accepted a job becoming the senior advisor of J. P. Morgan, one of the major bullion banks acted as an agent for central banks. Hopefully he will give some good investment advise this time. This sale by England is totally against any common sense of money management and the normal CB behavior of selling gold.

The only seemed logic reason is to knock gold price down in a very short time by dumping so much gold at once. According to "Time of the Vulture" by Mr. Darryl Robert Schoon, it is rumored that the real reason is: British was acting on behalf of US Fed and probably collaborating with US Fed in a joined effort to save a large Wall St bullion bank which had a 1,000 tonne short gold position loaned from the US government.

And it was at the brink of disaster when gold took a unexpected rise at that time in 1999. If true, this bailout is no different than LTCM and the current subprime bailouts, except the US government had absolutely no choice then since it had to get its gold back. Both Bank of England governor Eddie George and Sir Peter Tapsall had questioned loudly about the price her Majesty had to pay in order to save a major US bank by fire selling its gold reserves at rock bottom price.

Imagine with the gold price today, Great Britain would have been much more solid and secure in its reserves for the Queen and their citizens. At the US side, when Greenspan was asked by Congressman Ron Paul how stupid Bank of England was to sell most of its gold at the absolute bottom, worst timing ever possible, Greenspan ducked the question by saying "The British knew what they were doing." Perhaps he meant "The British were told what they should be doing"?

GATA has pointed out many interesting things. For example, there has been no audit on Fort Knox since 1953, 55 years ago, so no one know whether and how much gold is still left there. More importantly, western central banks for a long time, have engaged so many leases and swaps of gold cross trades with bullion banks, becoming a worrisome collusion between the two parties, and no one knows whether there is still enough physical gold to cover these derivative contracts? Would this turn into another credit default swap mess?

An organization such as GATA is healthy for the whole society and helps to make government more transparent, since as citizens and taxpayers we have the rights to know if our gold reserves are not there anymore, especially during a time when US dollar as a world reserves currency is under serious questioning. At the same time, GATA indicates that they are not seeking any legal damage, monetary payback or benefits, not even an apology from governments and central banks, but simply just the truth.

Some years ago, Gordon Brown was asked at a dinner party why he had sold 60% of the country's gold reserves, his answer was rumored as this: "We stared into the abyss and were concerned that a sharply rising gold price would alert the world to the crisis that the world was facing. That is why we sold our gold". What abyss he was looking at could be so scary?

Perhaps the collapse of the international monetary system with US dollar as the world reserves currency, which Fed, IMF, World Bank, governments and western central banks have worked so long and so hard together to establish and become so powerful. It is very scary for them that suddenly one day all the power is gone and gold is totally out of control.

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