Manipulation of the Gold Market

[MikeWB]

Brad Zigler's recent feature, "Has Gold Been Manipulated?", which dismissed the possibility of price manipulation in the gold market, ignited a firestorm of comments and emails from our readers. That's why we decided to sit down with Bill Murphy, chairman and director of the Gold Anti-Trust Action Committee [GATA], and hear the other side of the story.

GATA is a nonprofit advocacy and education group dedicated to exposing and opposing manipulation in gold, precious metals and other financial markets. Before he helped found GATA, Murphy worked as a commodities broker on Wall Street; in 1998, he launched the popular gold market website, Le Metropole.

Recently, HAI's associate editor Lara Crigger chatted with Murphy about GATA and its mission, including how manipulation would occur, where gold prices ought to be and who's really pulling the strings.

Lara Crigger (Crigger): GATA argues that for over a decade, gold prices have been kept artificially low. Who's behind the manipulation, and why?

Murphy: It's what we call "The Gold Cartel": The United States government is the main culprit, with "hit men" like Goldman Sachs and J.P. Morgan Chase, and other central banks, like the Bank of England. It's been going on for some time now.

Basically, it all started with [former U.S. Treasury Secretary under the Clinton Administration] Robert Rubin, back when he was the head of Goldman Sachs in London. He would borrow gold from the central banks at a 1% interest rate, and then sell it. He took this idea and made it the essence of his "Strong Dollar Policy" [while at the U.S. Treasury].

Then there was Lawrence Summers, who followed him as Treasury Secretary. He once articulated the relationship between gold and interest rates in his paper, "Gibson's Paradox and the Gold Standard": Keep the gold price down, he said, and you keep interest rates down.

Now, the U.S. [government] is very concerned about stock market interest rates, the dollar and so on. The main way to control all that is to keep the gold price down. So they'd borrow central bank gold and surreptitiously put it in the marketplace, via various leasing and swap operations. It's this gold that has kept the price from being $2,000 - or well over it.

Crigger: And the banks, why are they involved?

Murphy: Well, it's a very close relationship between Goldman Sachs and the U.S. Treasury. Half the Treasury is staffed by Goldman Sachs people. And the Federal Reserve - J. P. Morgan is the Federal Reserve's bank. They've worked closely together, sharing information, certainly helping in trading.

Being able to borrow gold - it's like free money when you lease it in the marketplace, as long as the price stays the same or doesn't go up too much. So they've made money trading this market against the specs, with the government's help, for well over a decade. And they made a lot of money doing it.

But now they're running out of central bank gold to meet the heavy demand showing up from everywhere. It's reported that the central banks have 30,000 tons of gold in their vaults. Three of our consultants have shown through different methodologies that they have a good bit less than 15,000 tons, which is less than half of what they say they have. The difference is the gold that's been used over the past decade in the gold price suppression scheme. So it's become a very risky deal.

Crigger: How so?

Murphy: Think of it simplistically: If gold were to shoot up $250 in the next few weeks, what would everyone talk about? They'd talk about too much inflation, the dollar falling apart; they might talk about a crisis. It would be all negative for the politicians in power, the banks and Wall Street. Gold is a barometer of U.S. financial market health, which is why they try to control it.

Crigger: Can you walk me through how such a price manipulation would work? You said banks let out gold "surreptitiously" - how do they do it without attracting notice?

Murphy: Basically what happens is J.P. Morgan goes to a central bank and borrows gold, leases it at, say, a 1% interest rate. Then they take the physical gold and they dump it into the marketplace, which adds to the supply. That supply helps to meet demand; without that supply, demand would overpower the dwindling stuff coming out of mines and scrap supply.

Gold has gone up nine years in a row. It's way up this year. Now they're in what we call a "managed retreat," because they can only stop the excitement so much, and they're just trying to manage it. They don't want it to get out of control. But it's coming, and it's so strong that they're in deep, deep trouble.

Crigger: What evidence is there suggesting price manipulation?

Murphy: Well, we have nothing but evidence that we've collected for 10 years. We haven't found anything in 10 years that shows us we were wrong, and we're always looking.

A lot of it is on the public record, such as Alan Greenspan saying "Central banks stand ready to lease gold in increasing quantities should the price go up." Well, that's what they did.

Crigger: Right, but rather than what officials have said or not said, is there any evidence in the market itself that you could point to and say, "That means manipulation?"

Murphy: Look at the concentrated position of JPMorgan Chase in the gold and silver markets. Their percentage of the shorts - theirs and HSBC's - are almost the entire short position in the silver market. That's far more of a concentrated position than you see in oil, corn or any other commodity. Nothing else shows anything like it.

In fact, J.P. Morgan is short more silver than Nelson Bunker Hunt was long. But they allow that to occur. It's just ridiculous. They're not supposed to be having such concentrated positions. That's one of the mandates of the CFTC [Commodity Futures Trading Commission], to make sure these things don't occur, because that's how manipulations can happen.

Crigger: Is the fact that two or three banks have a majority in these short positions necessarily indicative of manipulation?

Murphy: They told Nelson Bunker Hunt that his concentrated long position was not to be allowed, and they forced him out. Well, why do they allow J.P. Morgan to do the same thing on the short side?

They said that Bunker Hunt manipulated the silver market. We're saying that J.P. Morgan is part of the manipulation of the gold and silver market.

This all developed from Robert Rubin to Lawrence Summers, from the Clinton administration to the Bush administration and now Obama - who, by the way, is going through with the same policies. When Geithner as treasury secretary was the head of the Fed [Federal Reserve Bank of New York], he carried out the manipulation of the gold market. The guy who helped originate it, Lawrence Summers, is now the top economic guy for President Obama. It's very entrenched. But the difference is now they're running out of available central bank gold to carry it out.

Crigger: How do you know?

Murphy: At the GATA African Gold Summit, in May 2001, Frank Veneroso, who is a consultant of ours, delivered a brilliant presentation that said they would run out of gold in 7 to 10 years, based on his work. Well, that's about where we are.

In addition, European central banks can sell 9.7 tons of gold per week as part of the Washington Agreement. But they're not even selling 1 ton.

So we believe demand is 1,000 to 1,200 times greater than mined and scrap supply. That deficit was being met by the Gold Cartel's surreptitious selling of central bank gold. But now instead of getting 500 tons from the European central banks to help, their supply is drying up. They don't want to sell anymore.

Crigger: A few weeks ago, Brad Zigler wrote an article pointing out that banks have lopsided positions in all sorts of commodities contracts, and that large concentrations of short positions by banks are not necessarily an indication of manipulation. Do you want to comment on that?

Murphy: I totally disagree with that. As far as I know, there's nothing like it, in the sense of what J.P. Morgan and HSBC have in the silver market specifically. That concentration is far greater than any other position a bank or any other firm has. It's very abnormal to have this size of concentration for the open interest.

Crigger: What about platinum and palladium? In those markets, the banks only have short positions, right?

Murphy: That's basically what they have in the silver market also. But you're talking many banks, versus just one or two. Now if there were 10, 15, 20 firms with these positions, good for them. But in silver's case, it's just J.P. Morgan and HSBC. Their short position stands out far more than anyone else's.

Crigger: Assuming the price of gold has been kept artificially low, how much has the price been altered as a result? You threw out $2,000 earlier - where did that figure come from?

Murphy: This is a pretty commonly used number, even in the mainstream world. Had the price kept pace with U.S. inflation, it would be $2,300 per ounce, let's say between $2,000-$2,400 an ounce.

Back when we had our Gold Rush 21 Conference [in 2005], the price was $436, and I said it was going to take $3,000-5,000 an ounce price to clear the market. And I think that's the kind of price you're going to see in the years ahead. Once it takes out $1,000, gold's just going to take off like you won't believe.

Crigger: But what about manipulation? Won't that keep the price down?

Murphy: They'll lose control. That doesn't mean they won't do whatever they can to calm things down again, with whatever gold they have left. But that's the problem: They keep letting loose the gold they have left.

Nobody knows how much U.S. gold is left [in the U.S. Gold Reserve]. We're trying to find out through the Freedom of Information Act, and the Fed and Treasury won't tell us. They keep redacting or holding back information. Now if gold's just sitting there, and they've never done anything with it as they say, then what's there to hold back?

Crigger: Well, it could just be an issue of bureaucracy. Or stupidity.

Murphy: Well, why hold back 400 pages of something where nothing's going on? President Obama has called for transparency in our government. Well, we're asking for transparency. There hasn't been an official, independent audit of our gold reserves since the Eisenhower administration in 1955; can you imagine owning something since 1955 with no audit?

Crigger: Certainly, many things about all this appear strange. But just because something looks suspicious doesn't necessarily make it proof that manipulation is going on.

Murphy: Well, it's like a jury listening to a murder trial. As you sit there, I could probably come up with 250 things that all fit together. At the end of the trial, you'd say some of it's circumstantial to prove guilt beyond a reasonable doubt. But there's just so much of it.

People have said they're going to [manipulate]. Here's an exact quote from the Bank of International Settlements: "There are five main purposes of central bank cooperation, and one of them is 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."

Or this: the Reserve Bank of Australia said, "foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market." This is all on record. I don't even know why there's a debate about this.

Crigger: If it's true that the Fed is instrumental in this price manipulation, then how do you reconcile quantitative easing? One of the side effects of that is that gold prices are just going to shoot up, right?

Murphy: That's a very good question. Because that's where they're in trouble.

They're doing everything they can to keep the price of gold from going sky-high, and they're desperately trying to keep interest rates and Treasury bonds down, and with all this money they're printing, they're petrified. So it's actually making them more aggressive in trying to keep the prices of gold and silver down.

But it's such an obvious thing for people to see that demand is exploding all over the world. Whether it's with ETFs, the Chinese, or big hedge fund managers, the big money is pouring in, buying up the physical gold and silver. So they, I think, are on their last legs to try and hold the prices down, because if they don't keep interest rates down, the troubled real estate market's going to go right back in the tank. The quantitative easing will be the final straw that breaks the camel's back.

But they shouldn't have done this in the first place. That's what caused the problem. Had they not rigged the gold prices for the past 10 or 12 years, interest rates would've gone way up, and it would've had self-correcting mechanisms. This is hurting a lot of people, and yet they keep doing the same thing. But they're going to get beat.