Posted on 06/24/2002 7:27:18 PM PDT by Black Powder
Imagine the excitement last week at the headquarters of GATA — the Gold Anti-Trust Action Committee — when noted Royal Bank mutual fund manager John Embry issued a report referring to a price-manipulation conspiracy in the global gold market. For GATA, which has been preaching that message for years now, it was probably a bit like the U.S. government admitting that yes, there was a top-level CIA plot to assassinate former president John F. Kennedy, and the whole lone-gunman theory was just a crock.
Gold conspiracy theorists might not like being compared with the Kennedy crowd — which is so synonymous with loopy theories that a group of geeky true believers on The X-Files were known as "the lone gunmen" — but GATA is seen in a similar light by traditional gold watchers. The Embry report is "tremendous credibility," GATA chairman Bill Murphy said. "Most of the gold world thought we were idiots. It turns out we're right."
The Royal Bank seemed less than impressed at being allied with the gold conspiracy camp, however. Mark Arthur, head of Royal Bank Investment Management, said Mr. Embry's report was done for internal use and "in no way reflects the views of Royal Bank." He described it as "a collection of various arguments for gold stocks" that was part of a larger discussion. But it was clear that GATA members saw it as an endorsement by RBC.
Mr. Embry is not a crank — he is one of Canada's leading fund managers. In his report, he lists several reasons why gold prices could rise, including "increasing evidence of unsustainable gold price manipulation." He refers to gold sales by New York's Federal Reserve Bank, the timing of gains in the government's Exchange Stabilization Fund, and a statistical analysis that shows "high probability of price suppression."
As jubilant members pointed out in e-mails, the report was a vote of confidence in the group, which makes many of the same points. For the past few years, Dallas-based GATA has been engaged in a crusade of sorts to prove that various central banks and the world's major gold traders — or "bullion banks" — have been manipulating the price of gold in order to keep it low. Bullion banks lend to short-sellers (who profit if the price falls) and also engage in hedging trades with various gold producers.
GATA launched a lawsuit last year against the Bank of International Settlements — the central bank of central banks — as well as Fed chairman Alan Greenspan and a number of commercial banks, alleging that they engaged in a conspiracy to manipulate gold prices. Why would a global conspiracy want to keep the gold price low? A couple of reasons, GATA says. For one thing, banks such as J.P. Morgan and Goldman Sachs make a nice return lending their gold and investing the proceeds in other financial instruments, and they generate better returns if the price of gold is low.
GATA also says the U.S. and other governments are concerned that the world's banks have sold so much gold in the past that a run on bullion could trigger a global financial meltdown. According to the group, world gold demand exceeds supply by 1,500 tonnes, and if there were no price manipulation, bullion would be $800 (U.S.) an ounce instead of $350. GATA also says the "notional value" of the gold contracts held by U.S. banks is $87-billion, or greater than that country's entire gold reserves of 8,140 tonnes. The World Gold Council, of course, disputes most of these figures.
The driving force behind GATA is chairman William J. Murphy III — a former wide receiver for the Boston Patriots football team who later became a futures trader. Other executives with the group include Chris Powell, managing editor of a daily newspaper in Connecticut, and Reginald Howe, a graduate of Harvard Law School who runs a private investment fund. Proponents of its price-manipulation theories have included such market luminaries as John Willson, the former CEO of major gold producer Placer Dome.
Part of what makes GATA's arguments attractive is that the gold market is notoriously shadowy and complex — even more so than other commodities. Fans of the price-manipulation theory like to point out that the U.S. Treasury and various central banks were involved in price-rigging in the late 1960s through the London Gold Pool. After the rigging program ended, the price of gold soon soared to a high of $800 an ounce.
So if there's a global effort to manipulate the price of gold in order to keep it low, why has gold been climbing higher for the past few months? Simple, the conspiracy theorists say: the plot is finally coming apart at the seams, and as it unravels it will push the gold price even higher. The only problem with this argument, as more than one observer has noted, is that it relies on the logical fallacy of circular reasoning, in which a lack of evidence is seen as further proof of a vast conspiracy — since a conspiracy would naturally suppress any evidence of its existence.
How come FBI special agents Mulder and Scully never got into this one while the X-Files was still on?
Current worldwide production is 2500 tonnes/year while demand is roughly 4000 tonnes/year. This imbalance has been somewhat satisfied by leasing gold from central banks, but it can't help for much longer. To inflate this situation further is the fact that there has been very little exploration during the past 5 years. Add up these factors and it's easy to predict the outcome.
Agreed. However, on the other side of the coin, the 130,000 tonnes in existence represents 30 years of supply in inventory and 25% of that inventory is held by central banks with a vested interest in keeping the gold price in check. Nonetheless, I hope your analysis trumps my analysis, because both my anti-fiat leanings and investment posture are rooting for a rise in the price of gold.
No, I am using the same demand to which Black Powder referred. I believe that was industrial and jewelry demand. What you call "investor" demand and I would probably call "store of liquidity/monetary" demand is not included in those numbers and is highly contingent on whether the purveyors of fiat are able to cover the fundamental flaw in the current monetary system or whether it is about to unravel on them.
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