Saturday, January 25, 2014

Financial Times sounding like Gold Conspiracy Wonks ? The FT Goes There: "Demand Physical Gold" As One Day Paper Price Manipulation Will End "Catastrophically" .... Ed Steer's Saturday January 25 , 2014 Gold and silver report -- data , news , views focused on / touching on the precious metals ! Of special note , there is a link to Doug Nolands's Friday missive " Credit is Gold # 1 and Icebergs " 1

You can see the set up , right ? Consider China physical demand and then look at Comex situation......

Week 3, 2014 Withdrawals From SGE Vaults 60 Tons, YTD 159 Tons

Again an astounding trading week on the SGE; from January 13 – 17, 2014 physical withdrawals from the SGE vaults accounted for 60 tons of gold, year to date 159 tons. Although withdrawals are down 25 % from the previous week, the amount is still well above weekly global mine production.

This strong demand could be related to the Chinese Lunar year, which is celebrated on January 31, 2014. SGE withdrawals in the first three weeks were up 60 % compared to the same period in 2013. 

A friend of mine who is traveling through Asia at the moment sent me a text message yesterday, it stated:

On three separate occasions I met with Chinese men who told me with a big smile China is buying A LOT of physical gold with printed dollars, they don't understand why the rest of the world is just watching this happening. These people are positive the price of gold is going to rise substantially.

  The Real Asset Co. Buy Gold Online  

Overview SGE data 2014 week 3

- 60 metric tonnes withdrawn in week 3, 13-01-2014/17-01-2014
- w/w  - 25 %, y/y + 98 %
- 159 metric tonnes withdrawn year to date

Sources: SGEUSGS

My research indicates that SGE withdrawals equal total Chinese gold demand. For more information read thisthisthis and this.

Shanghai Gold Exchange withdrawals 2014 week 3

This is a screen dump from Chinese SGE trade report; the second number from the left (本周交割量) is weekly gold withdrawn from the vault, the second number from the right (累计交割量) is the total YTD.

Shanghai Gold Exchange gold withdrawals week 3 2014

This chart shows SGE gold premiums based on data from the Chinese SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

Shanghai Gold Exchnage gold premiums

Below is a screen dump of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

Shanghai Gold Exchange premiums week 2 & 3 2014

In Gold We Trust

SGE foreign exchange gold system

25 JANUARY 2014

Comex Potential Claims Per Deliverable Ounce 112 to 1 As Their Warehouses Show Thin Inventories

As you know January is a non-active month for gold on the Comex, but February tends to be quite lively.

Here is the warehouse inventory picture for registered (deliverable) gold ounces. As you can see without exception the levels of bullion ready to be sold is quite low.

As a reminder, that is only one side of the picture. There is an additional category of gold held in these warehouses in 'eligible' bullion form that can be transferred to deliverable with the issuance of some fairly simple paperwork.

So I think that those who talk about a default on the Comex are probably missing the bigger picture.  Supply and demand suggests that higher prices might be required to persuade profit maximizing bullion holders to make the switch from storage to sale.

But then again it is not bad to recall that not everyone who is trading bullion is making their profits on the Comex, especially by actual bullion sales. The great bulk of trading traffic is what the FT calls 'pixelated' or paper gold, claims upon rehypothecated claims. 

Therefore I have suggested that if there is a break in the gold market, it will not be likely to originate on the Comex, but rather in some physical delivery market in Asia, and even perhaps at the LBMA in London.   Any failure at the Comex would most likely be collateral damage to a panic run on bullion, either in a fail to deliver from a bullion bank or exchange, resulting in a massive up limits short squeeze deleveraging.

The current structure of the market looks a bit dodgy.  JPM has the clear whip hand on the paper markets.  But Asia and the Mideast are dominating the physical delivery markets.

India demand is being throttled by the government sahibs that seem quite eager to accommodate the Anglo-American Banks, which is too bad for their people.   I doubt that posture will be sustainable for long.

So let's see what happens.  But it looks as though February could be interesting.  And if not, then the next active month is not far away. 

At the end of the day the market structure must be allowed to reach its clearing prices, and that does not seem to be the current case judging by the relationship of paper to physical.

As always, a special thanks to chartsmaster and data wrangler Nick Laird of

The FT Goes There: "Demand Physical Gold" As One Day Paper Price Manipulation Will End "Catastrophically"

Tyler Durden's picture

What have we done: after a series of reports in late 2012 in which we showed, with no ambiguity, that not only might the Bundesbank's offshore held gold be severely diluted (follow our 2012 exposes on German gold hereherehere, and here), but that on at least one occasion, the Fed and the Bank of England conspired against the Buba in returning subpar quality gold, the Bundesbank shocked everyone in early January 2013 when it announced it would repatriate 300 tons of gold helt in New York and all of its 374 tons of gold held in Paris. But convincing the Bundesbank to demand delivery was peanuts compared to changing the tune of the Financial Times - that bastion of fiat "money", and where the word gold is mocked and ridiculed, and those who see the daily improprieties in the gold market as nothing but "conspiracy theorists" - to say the magic words: "Learn from Buba and demand delivery for true price of gold", adding that "one day the ties that bind this pixelated gold may break, with potentially catastrophic results."
In other words, precisely what we have been saying since the beginning.
Welcome to the 'conspiracy theorist' club, boys.
A year ago the Bundesbank announced that it intended to repatriate 700 tons of Germany’sgold from Paris and New York. Although a couple of jumbo jets could have managed the transatlantic removal, it made security sense to ship the load in smaller consignments. Just how small, and over how long, has only just become apparent.
Last month Jens Weidmann, Bundesbank president, admitted that just 37 tons had arrived in Frankfurt. The original timescale, to complete the transfer by 2020, was leisurely enough, but at this rate it would take 20 years for a simple operation. Well, perhaps not so simple. While he awaits delivery, Herr Weidmann is welcome to come and look through the bars in the Federal Reserve’s vaults, but the question is: whose bars are they?
In the “armchair farmer” fraud you are told: “Look, this is your pig, in the sty.” It works until everyone wants physical delivery of their pig, which is why Buba’s move last year caused such a stir. After all nobody knows whether there are really 260m ounces of gold in Fort Knox, because the US government won’t let auditors inside.
The delivery problem for the Fed is a different breed of pig. The gold market is far more than exchanging paper money for precious metal. Indeed the metal seems something of a sideshow. In June last year the average volume of gold cleared in London hit 29m ounces per day. The world’s mines are producing 90m ounces per year. The traded volume was many times the cleared volume.
The paper gold in the London Bullion Market takes the familiar forms that bankers have turned into profit machines: futures, options, leveraged trades, collateralised obligations, ETFs . . . a storm of exotic instruments, each of which is carefully logged, cross-checked and audited.
Or perhaps not. High-flying traders find such backroom work tedious, and prefer to let some drone do it, just as they did with those money-market instruments that fuelled the banking crisis. The drones will have full control of the paper trail, won’t they? There’s surely no chance that the Fed’s little delivery difficulty has anything to do with the cat’s-cradle of pledges based on the gold in its vaults?
John Hathaway suspects there is. He worries about all the paper (and pixels) linked to gold. He runs the Tocqueville gold fund (the clue is in the name) and doesn’t share the near-universal gloom of London’s gold analysts, who a year ago forecast an average $1700 for 2013. It is currently $1,260.
As has been remarked here before, forecasting the price is for mugs and bugs. But one day the ties that bind this pixelated gold may break, with potentially catastrophic results. So if you fancy gold at today’s depressed price, learn from Buba and demand delivery.


As I mentioned in The Wrap in yesterday's column, the gold price did nothing through all of Far East and early London trading on their Friday.  But the rally that developed shortly after 11 a.m. GMT got capped about 30 minutes later, with the high tick coming at the noon silver fix.
From there, the gold price got sold down until just before noon in New York---and then it chopped quietly higher for the remainder of the day.
The high and low ticks were recorded by the CME Group as $1,273.20 and $1,256.80 in the February contract.
Gold finished the Friday trading session at $1,269.00 spot, up $4.40 on the day.  As far as the volume was concerned, once the roll-overs out the February delivery month were subtracted out, the net volume was down to 115,000 contracts, which is still quite a bit for such a 'quiet' trading day.
Up until the noon silver fix in London, the silver chart looked similar to the gold chart, except for the fact that silver price was up 2% during that rally.  Once the silver "fix" was in, the price got sold down until just before 11:30 a.m. in New York.  Then the HFT boyz really put the boots to the metal---and within 30 minutes, they had carved another 30 cents off the price. [The same happened to the gold price at that time, but it was a much smaller move in percentage terms, although very visible on the Kitco chart above. - Ed]
The low tick came around 2:15 p.m. in electronic trading---and the subsequent rally, such as it was, got capped an hour later---and from there the silver price was flat into the 5:15 p.m. EST electronic close.
The high and lows price ticks in the March contract were recorded as $20.285 and $19.715---an intraday move of almost 3%.
Silver closed in New York on Friday afternoon at $19.91 spot, down 10.5 cents from Thursday.  Volume, net of January and February, was very decent at 48,500 contracts.
Platinum and palladium did nothing in Far East and early London trading.  However, the moment that the Comex began trading at 8:20 a.m. EST in New York---the HFT boyz showed up.  Here are the charts.
The dollar index closed the Thursday session in New York at 80.48---and then traded flat until 11 a.m. GMT in London, when there was a quick down/up move to its low of 80.20---and then back up to unchanged.  From there it traded flat into the close, finishing on Friday at 80.46---which was down 2 whole basis points.


With very few days left in the January delivery month, the CME's Daily Delivery Report showed that only 14 gold contracts were posted for delivery within the Comex-approved depositories on Tuesday.  JPMorgan was the issuer---and Canada's Bank of Nova Scotia was the stopper.  The link to yesterday's Issuers and Stoppers Report is here.
There were no reported changes in GLD yesterday---and as of 9:35 p.m. EST yesterday evening, there were no reported changes in SLV, either.
The U.S. Mint had a tiny sales report.  They sold another 10,500 silver eagles.  Month-to-date the mint has reported selling 89,500 troy ounces of gold eagles---39,500 one-ounce 24K gold buffaloes---and 4,014,000 silver eagles.  Based on this data, the silver/gold sales ratio is 31 to 1.
Over at the Comex-approved depositories on Thursday, they reported receiving 4,822 troy ounces of gold.  However, the big surprise was that precisely 11 metric tonnes of gold were reported shipped out.  Ten metric tonnes out of JPMorgan---and 1 metric tonne out of Canada's Scotiabank.
If you remember back in the December delivery month, there were days on end where JPMorgan was receiving precisely one or two metric tonnes of gold every day.  I commented on that at the time saying that it was unusual, because gold kilobars are not good delivery bars---at least not in the West.  They are, however, exactly that in China.  I would guess that would be where the bars were headed.  If that's the case, the question that I'm asking is this:  If that was their final destination, why did they have to make a pit stop at JPM's vault in New York on the way?  Always questions with no answers.  The link to Thursday's action ishere, so you can see for yourself.
By the way, there was a story about this posted on the Zero Hedge website early yesterday afternoon.  It's headlined "JPMorgan's Gold Vault Has Biggest One-Day Withdrawal Ever"---and the link to that is here.  I thank West Virginia reader Elliot Simon for being the first reader through the door with this story.
It was also a big day in silver as well, as 1,560,856 troy ounces were reported received---and 39,799 troy ounces were shipped out the door.  The biggest deposit---1,260,606 troy ounces---went into Scotiabank's vault.  The link to that activity is here.
Yesterday's Commitment of Traders Report, for positions held at the close of Comex trading on Tuesday, January 22, contained a mixed bag, with no really significant changes.
In silver, the Commercial net short position declined by 858 contracts, or 4.3 million ounces.  The Commercial net short position now sits at 119.8 million ounces.  Ted Butler said that JPMorgan still has a short-side corner in the silver market of about 16,000 Comex futures contracts, which works out to 80 million ounces of the stuff.  That's no change from the prior week.
In gold, the Commercial net short position increased by a tiny 836 contracts, or 83,600 troy ounces.  That's a rounding error in the grand scheme of things.  The Commercial net short position now stands at 4.61 million troy ounces.  Ted pegs JPMorgan's long-side corner in the Comex gold market at somewhere between 60 and 61 million ounces, an increase of maybe a million or so ounces from the prior week's report.
Of course the above data is already "yesterday's news," as what has happened in the three days following the cut-off of this week's COT Report, has changed everything.  I mentioned in my Friday column that this would be the case.  We also have Monday and Tuesday's data from next week to add---and who knows what will happen on those days.  So, again, we wait.
Here's a chart that Casey Research's own Jeff Clark sent my way on Thursday.  But because I already had lots of "stuff" in my last column, it had to wait until today.  Jeff has sent this chart our way before---and it needs no introduction or explanation.
Here's another chart.  This one is courtesy of our good friend Nick Laird.  He sent it to me in the wee hours of this morning---and I thought I'd stick it in here.  It's updated as of this week's market closes around the world---and as you can see, the hand-wringing has already started and the current decline is barely visible on this chart---which needs no further explanation from me.


Selected non redundant news and views touching on the PMs.....

Japan-China war of words goes ballistic in Davos

Anybody who thinks China's dispute with Japan is subject to rational calculation should have heard the astonishing outburst a few minutes ago by China's foreign minister, Wang Yi.
"We will never allow past aggressors to overturn the verdict of history," he began. It went downhill from there.
When asked what he thought about the latest warning by Japan's leader Shinzo Abe that the two countries are like England and Germany in 1914, he exploded with barely contained rage:
"Why would he make such a statement? Japanese leaders like to rewrite their history, but the Chinese people cannot forget episodes of history. The invasion of Manchuria in 1930 was an infamous chapter in Japan's history. In 1937 they instigated the Marco Polo bridge incident before launching an all-out onslaught on China.
"Thirty-five million Chinese soldiers and civilians were killed. Who was the instigator? Who was the troublemaker? It is all too clear."
This must read Ambrose Evans-Pritchard blog was posted onThe Telegraph's website sometime yesterday---and I thank Roy Stephens for sliding it into my in-box just after midnight.

Doug Noland: Credit is Gold #1---and Icebergs

The Emerging Market (EM) crisis took a turn for the worse. 
Backdrops conductive to crises can drag on for so long – sometimes seemingly forever - as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where new-found momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared.

EM currencies came under intense selling pressure this week. Most dramatically, the Argentine peso sank 15.1%. The Turkish lira fell 4.4%, the Brazilian real 2.3%, the Russian ruble 2.9%, the South African rand 2.0%, the Chilean peso 2.0%, the Colombian peso 1.5%, the South Korean won 1.9%, the Indian rupee 1.8%, and the Mexican peso 1.6%.

The apt Bloomberg currency market headline read: “Contagion Spreads in Emerging Markets as Crises Grow.” Note plural “crises” as opposed to a singular EM crisis. This is a pertinent issue. A popular CNBC contributor posited Friday that EM-related market stress was not as troubling because if was related to individual country issues as opposed to what would be more challenging “macro” forces. I would counter that the unfolding global crisis will be particularly problematic because of what has been a dangerous interplay between global “macro” and individual country “micro” Bubble dynamics.

As Doug said---the Emerging Market crisis took a turn for the worse last week---and is that an understatement.  Nobody is better qualified to talk on this issue than Doug Noland.  His weekly Credit Bubble Bulletin is always a must read for me every week---and that particularly applies now.  Reader U.D. dropped it in my in-box before I could dig it up myself.

Four King World News Blogs/Audio Interviews

1. Art Cashin: "World Now Worried About Contagion and Chaos".  2. Andrew Maguire: "Stunning Physical Gold Buying Terrifies Shorts".  3. Gerald Celente: "The Entire World is Now Unraveling Before Our Eyes".  4. The audio interview is with Michael Pento.

Gold Mint Runs Overtime in Race to Meet World Coin Demand

Austria’s mint is running 24 hours a day to meet orders for gold coins, joining counterparts from the U.S. to the U.K. to Australia in reporting accelerating demand boosted by the bear market in bullion.
Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.
Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group Inc. predicts bullion will “grind lower” over 2014.
Here's a Bloomberg reporter attempting to make a sow's ear out of a silk purse.  This news item was posted on their website at 6 p.m. MST on Friday---and it's courtesy of Ulrike Marx, for which I thank her.

Platinum miners, AMCU meet, but little resolved

South Africa's main platinum miners union will resume government-brokered talks next week with the world's top three producers, in an effort to end a strike that showed flickers of violence on its second day, officials said on Friday.
Union leaders representing as many as 100,000 miners who walked off the job on Thursday sat down with management from the three companies, which produce more than half the world's platinum, a metal used in catalytic converters in cars. 
The three - Anglo American Platinum (Amplats), Impala Platinum and Lonmin - say union demands to more than double the miners' basic pay are "unaffordable and unrealistic."
Amplats said the strike was costing it 4,000 ounces per day, while Implats was losing about 2,800 ounces daily. Smaller rival Lonmin estimates losses at some 3,100 ounces a day.
This Reuters story, filed from Rustenburg, South Africa, found a home over at the Internet sit yesterday---and it's another contribution to today's column from Ulrike Marx.

Asia Gold-Indian premiums fall on speculation about easing import curbs

Gold premiums in India, the second-biggest buyer of the metal after China, fell more than 30 percent on Friday from earlier this week on speculation about easing of restrictions on bullion imports.
Premiums were quoted at $75-$85 an ounce on London prices on Friday, compared with $110 on Wednesday. Premiums hit a record high of $160 last month.
The leader of India's ruling Congress party, Sonia Gandhi, has asked the government to review tough import restrictions on gold, which include a record 10 percent import duty, local media reported on Thursday.
Here's another Reuters story, this one filed from Mumbai---and it was posted on their Internet site very early in the morning EST.  And, once again its' courtesy of Ulrike Marx.


I continue to be amazed at the amount and level of commentary in gold and silver that centers on manipulation. While I don’t agree with everything that is being said, there is no denying that the commentary about price manipulation in gold and silver is intensifying to an extent never witnessed previously. Hardly a day goes by when someone new doesn’t raise the issue, either pro or con. Further, the subject of manipulation appears to be unique to gold and silver, as I am unaware of any similar discussion in any other market. What does this mean? Since this is a highly unusual circumstance, there is no sure way of blueprinting how it turns out. But something tells me that the more widespread the subject of gold and silver manipulation becomes, the greater the likelihood it will end. - Silver analyst Ted Butler: 22 January 2014

As you're already aware, the 11 a.m. GMT rallies in both gold and silver during the London trading session weren't allowed to get far---and the HFT boyz that work for JPMorgan et al actually drove the silver price back below the $20 spot level once London closed for the day.

And why they would also take platinum and palladium to the cleaners during the Comex trading session is hard to fathom.  I guess it's because they can---and with their massive short positions in the Comex futures market in both both these metals, an engineer price decline has the technical funds heading for the hills.  And also, one wouldn't want to have a price rally in these two precious metals while the entire South African platinum industry is shut down, now would we?
Silver is being kept from seriously breaking above its 50-day moving average, but the gold price is already there---and the technical funds that are rushing to cover their short positions are being met by a wall of selling by JPMorgan et al, so it was the "same old, same old" again yesterday.
Both Ted Butler and myself are not exactly happy with this state of affairs as we are fearing the worst for next week's Commitment of Traders Report.  The technical funds are covering shorts and going long---and JPMorgan et al are selling long positions, plus buying all the short positions that the tech funds are selling.  That's why these rallies aren't running away to the upside, because these not-for-profit sellers/short sellers of last resort , are ever watchful.
Ted is more than concerned that "da boyz" have enough ammunition to engineer a semi-serious sell-off in gold if they really want to---and that would drag silver with it.
Here are the six-month charts for both gold and silver.
We have the Fed meeting on Tuesday and Wednesday---and what JPMorgan et al do when the smoke goes up the chimney at the end of the meeting on Wednesday afternoon will be something that I'll be watching most carefully---and so should you, dear reader.
Here's another graph that Nick Laird sent out way early this morning.  It's his famous "Total PMs Pool" chart---and even though it's not rising, one can be comforted by the fact that it's not declining, either.
If you've been reading Doug Noland for any length of time, he's been giving dire warnings about the world's credit markets for some time now---and it's obvious that Planet Earth's economic, financial and monetary systems as we currently know them, are under serious stress.  Will the powers that be try to save them once again?  I would suggest that an even more important question will become---will they even try---and if they do, how much money will they have to print to make it so?
I've been writing about this for almost fifteen years now---and it appears the day of reckoning is at hand.  Let's hope we've done enough to protect ourselves.
That's it for the day---and the week.
See you on Tuesday.
And additional items......

Fed 'almost assuredly' no longer has Bundesbank's gold, Gold Newsletter's Lundin says

8p ET Friday, January 24, 2014
Dear Friend of GATA and Gold:
Dan Ameduri of Future Money Trends this week interviewed Gold Newsletter editor Brien Lundin, sponsor of the annual New Orleans Investment Conference, who reviews the German Bundesbank's apparent inability to recover much of its gold from the Federal Reserve Bank of New York. The Fed, Lundin says, "almost assuredly does not have the gold." Audio and a rough transcript of the interview are posted at Future Money Trends here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Alasdair Macleod: Updating fiat money quantity relative to gold and silver

1:40p ET Friday, January 24, 2014
Dear Friend of GATA and Gold:
GoldMoney research director Alasdair Macleod today recalculates his fiat money quantity figures and determines that gold remains "extraordinarily undervalued" relative to fiat money and gold's own above-ground stocks. Macleod's commentary is headlined "Fiat Money Quantity Update and the Implications for Gold and Silver Valuations" and it's posted at GoldMoney's Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

The Big Reset, Part 2

This is part two of a Q&A with Willem Middelkoop about his new book The Big ResetIn his book a chapter on the ‘War on Gold’ takes a prominent position. Willem has been writing about the manipulation of the gold pricesince 2002 based on information collected by GATA since the late 1990’s. So part two of our interview will focus on this topic.

Te War On Gold

Why does the US fight gold?

The US wants its dollar system to prevail for as long as possible. It therefore has every interest in preventing a ‘rush out of dollars into gold’. By selling (paper) gold, bankers have been trying in the last few decades to keep the price of gold under control. This war on gold has been going on for almost one hundred years, but it gained traction in the 1960's with the forming of the London Gold Pool. Just like the London Gold Pool failed in 1969, the current manipulation scheme of gold (and silver prices) cannot be maintained for much longer.

What is the essence of the war on gold?

The survival of our current financial system depends on people preferring fiat money over gold. After the dollar was taken of the gold standard in 1971, bankers have tried to demonetize gold. One of the arguments they use to deter investors from buying gold and silver is that these metals do not deliver a direct return such as interest or dividends. But interest and dividend are payments to compensate for counterparty risk – the risk that your counterparty is unable to live up to its obligations. Gold doesn’t carry that risk. The war on gold is, in essence, an endeavor to support the dollar. But this is certainly not the only reason. According to a number of studies, the level of the gold price and the general public’s expectations of inflation are highly correlated. Central bankers work hard to influence inflation expectations. A 1988 study by Summers and Barsky confirmed that the price of gold and interest rates are highly correlated, as well with a lower gold price leading to lower interest rates.

Nixon kissinger

When did the war on gold start?

The first evidence of US meddling in the gold market can be found as early as 1925 when the Fed falsified information regarding the Bank of England’s possession of gold in order to influence interest rate levels. However, the war on gold only really took off in the 1960's when trust in the dollar started to fray. Geopolitical conflicts such as the building of the Berlin Wall, the Cuban Missile Crisis and the escalation of violence in Vietnam led to increasing military spending by the US, which in turn resulted in growing US budget deficits. A memorandum from 1961 entitled ‘US Foreign Exchange Operations: Needs and Methods’ described a detailed plan to manipulate the currency and gold markets via structural interventions in order to support the dollar and maintain the gold price at $ 35 per ounce. It was vital for the US to ‘manage’ the gold market; otherwise countries could exchange their surplus dollars for gold and then sell these ounces on the free gold market for a higher price.

How was the gold price managed in the 1960’s?

During meetings of the central bank presidents at the BIS in 1961, it was agreed that a pool of $ 270 million in gold would be made available by the eight participating (western) countries. This so-called ‘London Gold Pool’ was focused on preventing the gold price from rising above $ 35 per ounce by selling official gold holdings from the central banks gold vaults. The idea was that if investors attempted to flee to the safe haven of gold, the London Gold Pool would dump gold onto the market in order to keep the gold price from rising. During the Cuban Missile Crisis in 1962, for instance, at least $ 60 million in gold was sold between 22 and 24 October. The IMF provided extra gold to be sold on the market when needed. In 2010, a number of previously secret US telex reports from 1968 were made public by Wikileaks. These messages describe what had to be done in order to keep the gold price under control. The aim was to convince investors that it was completely pointless to speculate on a rise in the price of gold. One of the reports mentions a propaganda campaign to convince the public that the central banks would remain ‘the masters of gold’. Despite these efforts, in March 1968, the London Gold Pool was disbanded because France would no longer cooperate. The London gold market remained closed for two weeks. In other gold markets around the world, gold immediately rose 25% in value. This can happen again when the COMEX will default.

More evidence about this manipulation?

From the transcript of a March 1978 Fed-meeting, we know that the manipulation of the gold price was a point of discussion at that time. During the meeting Fed Chairman Miller pointed out that it was not even necessary to sell gold in order to bring the price down. According to him, it was enough to bring out a statement that the Fed was intending to sell gold.
Because the US Treasury is not legally allowed to sell its gold reserves, the Fed decided in 1995 to examine whether it was possible to set up a special construction whereby so-called ‘gold swaps’ could bring in gold from the gold reserves of Western central banks. In this construction, the gold would be ‘swapped’ with the Fed, which would then be sold by Wall Street banks in order to keep prices down. Because of the ‘swap agreement’, the gold is officially only lent out, so Western central banks could keep it on their balance sheets as ‘gold receivables’. The Fed started to informing foreign central bankers that they expected that the gold price to decline further, and large quantities of central banks’ gold became be available to sell in the open market. Logistically this was an easy operation, since the New York Fed vaults had the largest collection of foreign gold holdings. Since the 1930's, many Western countries had chosen to store their gold safely in the US out of fears of a German or Soviet invasion.

Didn’t the British help as well by unloading gold at the bottom of the market?

Between 1999 and 2002, the UK embarked on an aggressive selling of its gold reserves, when gold prices were at their lowest in 20 years. Prior to starting, the Chancellor of the Exchequer, Gordon Brown, announced that the UK would be selling more than half of its gold reserves in a series of auctions in order to diversify the assets of the UK’s reserves. The markets’ reaction was one of shock, because sales of gold reserves by governments had until then always taken place without any advance warning to investors. Brown was following the Fed’s strategy of inducing a fall in the gold price via an announcement of possible sales. Brown’s move was therefore not intended to receive the best price for its gold but rather to bring down the price of gold as low as possible. The UK eventually sold almost 400 tons of gold over 17 auctions in just three years, just as the gold market was bottoming out. Gordon Brown’s sale of the UK’s gold reserves probably came about following a request from the US. The US supported Brown ever since.

How do they manipulate gold nowadays?

The transition from open outcry (where traders stand in a trading pit and shout out orders) to electronic trading gave new opportunities to control financial markets. Wall Street veteran lawyer Jim Rickards presented a paper in 2006 in which he explained how ‘derivatives could be used to manipulate underlying physical markets such as oil, copper and gold’. In his bestseller entitled Currency Wars, he explains how the prohibition of derivatives regulation in the Commodity Futures Modernization Act (2000) had ‘opened the door to exponentially greater size and variety in these instruments that are now hidden off the balance sheets of the major banks, making them almost impossible to monitor’. These changes made it much easier to manipulate financial markets, especially because prices for metals such as gold and silver are set by trading future contracts on the global markets. Because up to 99% of these transactions are conducted on behalf of speculators who do not aim for physical delivery and are content with paper profits, markets can be manipulated by selling large amounts of contracts in gold, silver or other commodities (on paper). The $200 crash of the gold price April 12 and 15, 2013 is a perfect example of this strategy. The crash after silver reached $50 on May 1, 2011 is another textbook example.

For how long can this paper-gold game continue?

As you have been reporting yourself we can witness several indications pointing towards great stress in the physical gold market. I would be very surprised when the current paper gold game can be continued for another two years. This system might even fall apart in 2014. A default in gold and/or silver futures on the COMEX is a real possibility. It happened to the potato market in 1976 when a potato-futures default happened on the NYMEX. An Idaho potato magnate went short potatoes in huge numbers, leaving a large amount of contracts unsettled at the expiration date, resulting in a large number of defaulted delivery contracts.  So it has happened before. In such a scenario futures contracts holders will be cash settled. So I expect the Comex will have to move to cash settlement rather than gold delivery at a certain point in the not too distant future. After such an event the price of gold will be set in Asian markets, like the Shanghai Gold Exchange. I expect gold to jump $1000 in a short period of time and silver prices could easily double overnight. That’s one of the reasons our Commodity Discovery Fund invests in undervalued precious metal companies with large gold/silver reserves. They all have huge up-side potential in the next few years when this scenario will play out.

In Gold We Trust

Synopsis of The Big Reset: Now five years after the near fatal collapse of world’s financial system we have to conclude central bankers and politicians have merely been buying time by trying to solve a credit crisis by creating even more debt. As a result worldwide central bank’s balance sheets expanded by $10 trillion. With this newly created money central banks have been buying up national bonds so long term interest rates and bond yields have collapsed. But ‘parking’ debt at national banks is no structural solution. The idea we can grow our way back out of this mountain of debt is a little naïve. In a recent working paper by the IMF titled ‘Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten’ the economist Reinhart and Rogoff point to this ‘denial problem’. According to them future economic growth will ‘not be sufficient to cope with the sheer magnitude of public and private debt overhangs. Rogoff and Reinhart conclude the size of the debt problems suggests that debt restructurings will be needed ‘far beyond anything discussed in public to this point.’ The endgame to the global financial crisis is likely to require restructuring of debt on a broad scale.

About the author: Willem Middelkoop (1962) is founder of the Commodity Discovery Fund and a bestselling Dutch author, who has been writing about the world’s financial system since the early 2000s. Between 2001 and 2008 he was a market commentator for RTL Television in the Netherlands and also appeared on CNBC. He predicted the credit crisis in his first bestseller in 2007.