May 12, 2006
A GOLD BUG'S GOLD BUG SPEAKS
It's yellow, it's malleable and its price is soaring.
An ounce of Gold yesterday moved above $725. That's up about 40% so far this year, and double the price from about three years ago. The precious metal, in short, is enjoying its greatest bull market in a quarter century.
The general assumption for the ascent is that inflation fears are stoking demand for the metal. Gold, after all, has a long history of proving itself as an inflation hedge, and a few thousand years of pricing aren't easily dismissed. But one fiercely independent gold bug says there are other forces pushing the price of gold upward. In particular, gold's price has taken wing because of the unwinding of the so-called gold cartel, which rigged the price of gold over the past ten years. This according to Bill Murphy, a former commodities trader who's now chairman of the Gold Anti-Trust Action Committee (GATA).
Murphy and GATA have been called extremists, even by other gold bugs. Indeed, GATA spins a heavy tale of a government and Wall Street conspiracy, charging that the Federal Reserve and powerful banks have been manipulating gold for years, keeping its price lower than it otherwise would be. This is strong stuff, and even some card-carrying gold bugs are inclined to distance themselves from the theory. Euro Pacific's Peter Schiff, for instance, yesterday told The Wall Street Journal (subscription required) that GATA is "a little conspiratorial, for me even. I don't know if there was any real orchestrated event."
Nonetheless, the fact that the Journal is writing about GATA and its theories suggests the world is coming around to taking Murphy's conspiracy talk seriously. Or so says GATA's chairman in the following interview. Another example he cites of the rising respect for GATA's message: a gold report published in January by European bank Cheuvreux that references GATA's research.
The Capital Spectator talked with Murphy yesterday by phone to learn more. With gold prices soaring, the time is ripe for a chat with a gold bug's gold bug. Indeed, Murphy thinks a run in the metal to as much as $3,000 or more isn't beyond the pale.
In any case, we can't confirm or deny Murphy's assertions, but given the strength in gold prices of late we're not ruling anything out at this point.
WHAT'S DRIVING THE GOLD BULL MARKET THESE DAYS?
There's a short squeeze of epic proportions going on.
The gold cartel--the United States government, some other central banks and the bullion banks like Goldman Sachs and J.P. Morgan Chase--rigged the price of gold in the mid-1990s. It started with [former Treasury Secretary] Robert Rubin and the strong dollar policy. To help rig the price, in clandestine fashion, [several large banks] borrowed gold from the central bank and leased it into the marketplace without telling anybody--this was the gold cartel.
What happened was that the bullion banks could borrow gold at, say, 3/4% to 1% from a central bank, and then they would sell it. And that sold [shorted] supply would keep the price down. They would invest the proceeds [elsewhere], and for years they were trading in a rigged market, which allowed them to make money [at the expense] of the speculators who were unaware of what was going on.
HOW MUCH GOLD ARE WE TALKING ABOUT?
Most people say the central banks have 32,000 tons of gold. GATA figured out that they have less than half of that--around 16,000 tons. It's no longer in their vaults. This gold, a lot of it, has been loaned out, and it eventually has to be paid back, at least paid back in cash or something equivalent in value. But you now have a gold market with a 1,500 ton-per-year supply deficit. New mine supply's only 125 tons a year, and that's going down. So the gold cartel's short, say, 16,000 tons of gold. How do you cover that when there's already a 1,500-ton-a-year deficit?
HOW DID THE BULLION BANKS ORIGINALLY GET SUCH A GREAT DEAL WITH THE CENTRAL BANKS?
They're big bullion dealers. They're also ring leaders of what I call the gold cartel. At Goldman Sachs, for example, you had Rubin, who was very close to the government [when he left Wall Street to become Treasury Secretary in the Clinton administration]. Meanwhile, J.P. Morgan Chase is probably the United States' major bank.
WHAT WAS THE INCENTIVE BEHIND ALL OF THIS RIGGING OF THE GOLD MARKET?
They made a fortune; made billions. They had free money for all those years. And because they knew the price wasn't going to go up, they could trade against the speculators [by shorting gold]. The speculators would buy, and the bullion banks would get short, and they'd flush out the speculators. The banks knew [that gold's price] wasn't going to go up. And whenever it went up temporarily, they sold more. But now the gold cartel's hit the wall.
They don't have the central bank gold [to short] anymore because it's gone. The banks that still own some want to keep it.
WHY ISN'T THE REMAIN CENTAL BANK GOLD AVAILABLE TO SHORT?
It just ran out. They hit the wall. It was fashionable for to sell gold years ago. Now, [the central banks] are terrified to announce they've sold gold. Plus, the European Central Bank has announced that they will sell no more gold this year. So has the Bundesbank. The gold cartel is screwed.
The whole thing was outlined at the GATA Africa Gold Summit in Durban, South Africa on May 10, 2001. The price back then was about $258. We predicted [the bull market in gold]. It was also laid out at Gold Rush 21, our second conference on August 8 and 9, 2005, when gold price was $436 an ounce. We had the most brilliant guys I've ever met as speakers. But most importantly, we had Andrey Bykov, economic consultant to Putin, Russia's president. The speakers all laid out what was going to happen and why. Bykov said it was the best conference he was ever at. He went back [to Russia] and gold's price has gone up since. [For some perspective, take a look at a story in the British press from last November on the subject of gold purchases by Russia's central bank.]
WHAT'S THE CONNECTION BETWEEN BYKOV AND GOLD?
The Russians left our conference and started buying gold two days later, when the price was $436. In addition to the Russians buying, the Chinese have been buying--I know that for a fact. And I learned today that Iran is buying all the gold they can get their hands on. It all stems from what happened at Gold Rush 21. Word got out. The Russians learned about the short positions of the gold cartel. They sent Bykov there to make sure we were correct. I'm going to send you a link by email to help you tie it all together. The Bank of Russia talked about GATA a year earlier at a big bullion dealer meeting. They cited our work. They've been following us for a long time.
Once Bykov left, the gold world changed for ever. In essence, [the Russians] realized the price of gold was going to explode, and it would probably do so soon. They also realized they could probably squeeze the gold market, and take advantage of the people who have to cover their shorts. How long can you stay short? They're getting killed.
I'm going to send you a link to a report from a European investment firm, Cheuvreux,--a 56-page report that said GATA's correct about the rigging of the gold market, and that the gold price was going to explode. That report's going to the biggest money [investors] in the world.
WHAT SHOULD PEOPLE UNDERSTAND ABOUT THE GOLD MARKET GOING FORWARD?
They should understand that this move is for real, and it's only the beginning. We're probably going to see $3,000 to $5,000 an ounce. Also, most people don't understand what GATA knows, because we were blackballed from the U.S. mainstream press until this past week [the Wall Street Journal quoted Murphy in a story (subscription required) yesterday.] The biggest money--the Russians, the Chinese, the Iranians, the tycoons--they know that GATA's correct.
YOUR BASIC MESSAGE IS THAT THE GOLD MARKET'S HAS BEEN MANIPULATED BY CENTRAL BANKS, BUT NOW IT'S COMING BACK TO BITE THE CARTEL.
Right. Now they've lost control.
THIS IS THE FLIP SIDE OF THE PREVIOUS MANIPULATION?
Exactly. It's like Newton's law: for every action there's an equal and opposite reaction. That's what's happening, and the gold cartel can't get out--they're trapped. They're trying to get out--they're buying every day. I'm not guessing on this either. Gold has rallied, but the open interest for gold futures contracts on NYMEX hasn't changed--it's not going up.
WHAT DOES THAT SIGNIFY?
That this isn't a speculative move higher. I used to be a limit position trader, so I know what I'm talking about. In a speculative move, the speculators come in, and there's all this excitement, and everyone gets bullish, and then the market tanks and the specs get washed out. It's not happening this time. The open interest is staying flat. This is almost unprecedented in that there's a strong upward move in prices and the open interest doesn't go up. The reason is because the gold cartel is getting out as possible [from the short positions]. They've been exiting the market now for months because they're getting killed.
WHATEVER THE REASON BEHIND THE GOLD BULL MARKET, THIS REFLECTS POORLY ON THE FEDERAL RESERVE AND THE DOLLAR, RIGHT?
What happens normally every time gold goes up? What do you hear people say? Inflation, prices. It's always bad for what I call planet Wall Street and the U.S. government. In 1988, Larry Summers [a former Treasury Secretary], when he was a professor at Harvard, wrote a paper about Gibson's Paradox and the gold standard. He said there was a relationship between gold and interest rates. If you could keep the gold price low, you could keep interest rates low--that's basically what he said in the paper. What Robert Rubin did [when he was Treasury Secretary] was make rig the gold price for the strong dollar policy. The government wanted to keep interest rates lower than they would have been, to disguise the inflation going on behind the scenes in the U.S., and to keep money coming in to the stock market, and to keep confidence high in the dollar.
Posted by jp at May 12, 2006 10:36 AM
This was a very fine post and supporting links. Like David above, it caused me to review the Cheuvreaux report. Haven't read much about cartels in awhile.
Posted by: Richard at May 15, 2006 12:40 PM
Interesting, thanks for posting this info. I finally got around to looking at that Cheuvreux report because of it. Good example of a blog going out and getting a first hand story/report as well, you are to be commended for that.
Posted by: David at May 12, 2006 9:12 PM