-Caveat Lector- from: http://www.pei-intl.com/TOPICS/GOLD0699.htm <A HREF="http://www.pei-intl.com/TOPICS/GOLD0699.htm">Gold - Manipulation or Exaggeration? - June 10 </A> ----- Gold - Manipulation or Exaggeration? By Martin A. Armstrong Copyright Princeton Economics International June 10th, 1999 ------------------------------------------------------------------------ A two-man army calling itself GATA has begun to besiege the media attempting to gain a lot of press on the platform that gold is being "manipulated" by a cartel of investment banks. They constantly point to what they call the huge "carry trade" in gold were there is far more gold sold than exists. The basic tenents of the commodity markets, be it cash or futures, is that every position is offset by an equal and opposite position. There cannot be more outstanding short positions than long positions, yet the total number of positions combined can far exceed the actual supply. However, the same thing can happen in S&P 500 futures or even US 30-year bond futures. That is the nature of the free markets. Those who own a commodity have the right to sell it, lend it or hedge it to someone else who is willing to take the other side for whatever reason, be it hedging a future use or betting on the next bull market. Above all – this single misconception has been man’s greatest downfall! For during almost every great financial panic in history, government has launched intrusive investigations seeking to uncover that horrible short position that has manipulated the entire marketplace through its sheer ability to overpower it with size. Every investigation to date has begun with that misguided belief that a short position can be larger than a long position, failing to understand in the process that all positions must balance. In the wake of the Panic of 1907, short selling was declared a criminal act despite the fact that they never found that horrible person who overpowered the marketplace. Fortunately, the US Supreme Court struck down that law against short selling and the free market went on. The true cause of the decline was only finally revealed as a cash flow problem, which in turn gave birth to the Federal Reserve 6 years later. An investigation was launched following the Crash of 1929 from which the SEC was born. People from all over the country were questioned by Congress and accused, without evidence, of somehow being short behind the scenes. The mere accusation made against people ruined their reputations and provided the basis that launched a thousand lawsuits. When the evidence was finally collected, all the famous names were found to have been long – not short. From Rockefeller on down, they all lost staggering amounts of money. The multimillion-dollar short position never surfaced once again. The same was true following the Crash of 1987. Those who should have been short as a hedge against their stock portfolios were in fact found to have been significantly under hedged. No massive short position ever surfaced from the 1987 investigation and they imposed circuit breakers that needed to be revised in 1997. The "carry trade" in gold that has been the subject of much discussion is seriously misunderstood. There are those who would like to point to this position as the cause for the decline in gold. They are dead wrong. The "carry trade" in the OTC gold market has been around for years. The Arabs have used gold as a means to earn interest without calling it interest. Islam forbids the lending of money for interest known as the "sin of usury". The Arabs have used the carry trade in gold since the early 1980s. They buy spot and sell forward and collect the "carry" or premium on a back month. This premium is a reflection of the cost to "carry" a gold position. If you buy the current spot and sell the forward, you earn that net difference without being exposed to the price fluctuation of gold itself. In reality, the investment banks can book billions of dollars of such transactions that have NO impact or relevance to the gold market. Technically, the Arabs are not receiving interest but instead they are buying gold today and selling it for a few dollars more 3 months out. These profits are allowed under Islam, whereas normal interest earnings are forbidden. The Japanese are also involved in the "carry trade" in gold. Public futures funds in Japan are still regulated under the commodity acts even if they trade Nikkei or S&P500 futures. Since the definition of ALL futures funds remains that of a "commodity" fund according to Japanese regulation, there is a strict investment guideline. ALL futures funds must be invested 50% at all times in commodities. Hence, the Japanese futures funds are also using the gold "carry trade" in order to meet the crazy requirement that the fund must be invested 50% in commodities at all times. Again, gold is purchased on the spot and sold forward without risk. Again, this becomes a paper transaction where a bank will certify that there is a trade on their books thus allowing the fund to meet its requirements for being invested 50% in commodities at all times. The balance of the fund then CANNOT be invested in commodities and off they go into the financial futures world trading Nikkei, JGBs, S&P500 and the like. Of course, the last type of this "carry trade" involves the mining companies. Here, gold is sold forward in order for a company to plan its operating expenses. A budget can be established only if there is some assured return for their production. Others may borrow gold on an interest rate differential. In this case, a gold loan comes with a lower interest rate. The gold is sold on the spot and the loan is repaid from future production. It is a cheap means of acquiring financing. Interest on gold loans tend to be lower because it is a dead asset on the books of its owners since there is no income and often there is storage and insurance costs. Consumers of such loans are typically mining companies or manufacturers. The granter of gold loans are holders including central banks. Holding gold without lending can be very costly, but by lending the gold a holder retains ownership since the borrower is committed to repay the loan in gold plus interest thereby reducing the holding costs. Gold is no more being manipulated today in some grand conspiracy than it was going into the 1980 high. We disagree that the Hunts were market manipulators in silver back in 1980. Perhaps one could have argued that the Hunts manipulated silver IF it was the only commodity to have risen during the entire period. However, the CPI was hitting 17% annually and people were hoarding toilet paper. All commodities were in a strong bull market – not ONLY silver. Likewise, we find it extremely difficult to also accept that just because of the "carry trade" in gold that it is being manipulated lower when all other commodities are also in a bear market. To further argue that if these massive short positions were forced out of the marketplace then gold prices would rise makes no sense. If you chase the Japanese and the Arabs out of gold, nothing will change. These types of transactions do NOT impact prices but they do have an impact by making gold appear to be extremely liquid. If you outlaw gold loans you destroy the free market and most likely cause massive liquidations on the part of those who have such hoards but need some kind of income. Those who jump up on the soapboxes and cry foul about sales of gold by the IMF, England and the rest of the central banks seem to miss the point. The governments of the world DO NOT share their belief that only gold is money and that a return to the gold standard is inevitable. Such a step back in time would require the complete abandonment of virtually every social program introduced since World War II – a highly UNLIKELY political decision. The governments of the world have a self-interest in not returning to the gold standard. In 1985, we argued that governments must return to some fixed exchange rate mechanism or that volatility would escalate into 2003 disrupting the world economy as a whole. The White House responded by stating that any return to the fixed exchange rate system would mean that, "domestic policy objectives would be held hostage to international policy objectives." This was a fancy way of stating that such a system meant a return to a balanced budget, and in turn that meant that politicians could NOT offer wonderful social programs if they had to actually fund them long-term. We do NOT disagree that the floating exchange rate system has allowed national debts to explode and that at some point in the future there must be reconciliation with reality. However, such a collapse in society is not likely to come before the 2012 time period when the obligations of governments will be unbearable. In effect, the formation of the EMU this year is a step toward preparing for these serious default problems in the future. In France, there are plenty of guarantees by the government for your pension but there is no money set aside to support those guarantees. The French population has no 401K or private system that they can count on. This situation could spark the next French revolution when the population faces the fact that their pensions have only been political promises. The same is true in many regions of Europe. By banning together, Europe hopes to capture the capital that moves between the cracks and thus increase their revenues in an effort to reduce all future liabilities. A Federal Europe will be far better equipped to deal with the problems together rather than on a divided basis. By allowing the euro to collapse, they are in effect devaluing their future obligations, which is one way of getting out of the mess. You meet your obligations but you pay with a currency that is worth far less than it was at the point the promise was made. They then manipulate CPI in an effort to reduce any increase in liabilities by purporting that there is no inflation. There is a serious question that needs to be asked based upon the events economically since World War II. The gold standard gave way because governments continued to increase their debts but never readjusted the price of gold in proportion to the increase in money supply. Instead of admitting that their borrowings had created inflation, they chose to close the gold window and end the gold standard. The rally in gold during the 1970s was a natural response for any and all commodities that had been artificially restrained. Thus, if one wants to discuss manipulations, the gold standard was the biggest manipulation of all by keeping the value of gold fixed while the supply of money increased. Gold was NOT money; it was merely a store of wealth in which money was expressed. This is why the gold standard collapsed. The global economy is indeed showing signs of distress. The IMF loan portfolio looks like a charity case with assets that will never be repaid. Any normal bank would be declared insolvent and closed with a portfolio of this nature. The IMF has long past its expiration date. The original intent behind the IMF was to be a lender to nations who temporarily were unable to meet their obligations under the gold standard. Hence, the IMF became the largest holder of gold in order for it to provide gold loans. Since there is a political agenda that is intent upon never returning to a gold standard due to its impact upon the social goals of the left wing, it makes perfect sense that central banks and the IMF should in fact liquidate their gold assets. While this may be a major bearish factor short-term, it is also most likely going to provide a true free market in gold long-term. Gold will also be capped as long as the bulk of its supply remains in the vaults of the central banks. The idea that they are trying to manipulate gold lower is not well founded. Australia sold its reserves when they caught wind of the true agenda of liquidation. From the Australian perspective, they sold about $100 higher than the current price, saving considerable national reserves. For these reasons we do not see a conspiracy to push gold lower just an international policy that has not been publicly expressed. We do not see this as a manipulation but as a change in monetary system policy that is promoting the liquidation of gold assets and its "official" demonetization. We have been blamed and criticized intensely for our view on gold. We warned 6 months before the marketplace became aware that the central banks were going to be net sellers and we received hate mail claiming that we were making up the entire issue. We warned about the silver squeeze and that there was no true shortage but that the metal was instead headed to London where inventories are not disclosed. We were attacked again claiming that we were making up the entire affai r, and companies like CPM claimed that industrial consumption was the cause of the drain in silver inventories. When the Bank of England suddenly got involved, then Mr. Buffet admitted that he bought the silver and that it was in London where several other parties were engaged in front-running Buffet’s order out of sight from the CFTC. We did warn that some of the bullion dealers were selling gold aggressively and buying silver to help push it up to the $7 level, depressing gold in the process. Our sources on this entire matter have always been reliable and they have proven to be correct. There is most likely the typical summer rally from a June low that may yet develop. The public funds are all quite aggressively short and a rally is starting to appear overdue where a retest of $275-280 may be likely. Nevertheless, the prospects for lower prices into next year remain quite strong where a drop to just under $200 performs a retest of the 1974 high. The bullion trade has tried to use Y2K as a reason to rush out and buy gold. The central banks have been the sellers into that retail consumer demand as well. Even the British are now running advertisements offering new gold coins struck for the millennium. Some of the bankers have expressed a fear that the hype over Y2K that has been used by some bullion dealers could prove to be quite damaging to retail demand next year. The concern remains that a sharp drop in demand could unfold when the public sees that the banks have not collapsed and that life goes on. There is also a growing fear that perhaps net sales by the public may also emerge causing prices to decline even further. Those banks that are selling gold to the public do NOT want to see a price collapse. They naturally want to sell gold coins at the highest possible price, as was the case with Australia. We can entertain conspiracy theories and blame or threaten everyone who has ever uttered a bearish word about the precious metals, but this will not change a thing. It is going to be a very difficult period ahead for many involved in the precious metals and most other commodities as well. Nonetheless, the only hope will be new lows in 2000 and a return to inflation perhaps due in part to Y2K. Any disruption to supply will cause a shortage of goods and that is price inflationary as was the case during the late 1970s. If there is no serious problem and the stockpiling of goods and raw commodities by manufacturers going into year-end results in excess inventories, then there will be a risk of a further deflationary trend into 2002-2003. Such an outcome would prompt further deflation and postpone any bull market in commodities until the 2003-2007 time period. These are major economic issues that will take time and patience to resolve. Short-term price manipulation by dealers who run after the stops of fund managers are a commonplace event in the OTC cash markets of gold and foreign exchange. Nonetheless, this does not rise to the level of a grand conspiracy of monumental proportions intent upon forcing a particular long-term directional trend. If the central banks sell everything, they will have nothing left to prevent a bull market from unfolding. It will take time before we can see the new light of day and a shift in the economic prospects worldwide. ------------------------------------------------------------------------ ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. 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