11p ET Monday, May 10, 2010

Dear Friend of GATA and Gold:

We at GATA have sometimes called gold's enduring role in the international monetary system "the secret knowledge of the financial universe." This view is shared by the anonymous but most alert and well-informed blogger FOFOA -- for Friend of Friend of Another, a reference to the famous "Another" and "Friend of Another" postings at the old USAGold Forum of Centennial Precious Metals in Denver, many of which can be found here:

http://www.usagold.com/goldtrail/archives/another1.html

In his most recent essay, addressed last night to the European heads of state who were busily conjuring up a trillion of something or other to rescue themselves and their banks with, FOFOA remarked that the gold secret is known to only about a hundred people. This is not actually true, for the secret is known to hundreds and maybe thousands of the 6,000 people on the GATA Dispatch list and to thousands more on the membership list of GATA Chairman Bill Murphy's LeMetropoleCafe.com, as well as to many of the old readers of the USAGold Forum.

But FOFOA's remark was metaphorically true, even as he would bring still more people in on the secret, as GATA would.

That secret is that there are two gold markets -- a visible market to mislead other markets with, a largely paper market for which Kitco's Jon Nadler and CPM Group's Jeff Christian, among others, are the small publicity, and an invisible market, a market among the central banks, where gold is much different -- real -- and, because it is real, valued immensely more than it is in the visible and largely paper market.

FOFOA expects that governments will escape their impending bankruptcies by vastly revaluing their remaining gold reserves. He cites GATA and some of the things GATA has brought to your attention over the years, like the intriguing comments about gold made by former Federal Reserve Governor Lyle Gramley on Business News Network in Canada in December 2008:

http://www.gata.org/node/6989

FOFOA also quotes GATA favorites Eric Sprott and Jim Rickards. He plainly has been following GATA's work closely.

FOFOA's premise is similar to that of the British economist R. Peter W. Millar, founder of Valu-Trac Investment Research, whose May 2006 study, "The Relevance and Importance of Gold in the World Monetary System," predicted an upward revaluation of gold by between 700 and 2,000 percent to avert worldwide debt deflation:

http://www.gata.org/node/4843

When Millar wrote that study gold in the visible market was trading at about $650 per ounce. Millar thus envisioned the necessity of a gold price of between $4,550 and $13,000. FOFOA puts gold's secret market price at around $6,000 as of some years ago. On CNBC the other day, Rickards said he expected gold to reach $5,000 once the manipulation of the paper market was defeated. (See http://www.gata.org/node/8605.)

FOFOA observes:

"The effect of the contract gold market on the ordinary price of gold has been to keep it at manageable levels for 30 years now. But physical gold and contracts for gold are different things entirely. New contracts can be produced much faster than new physical gold can be mined. But when demand shifts from contracts to physical (which is happening), this puts great strain on the market that tries to price them as equals. And what must ultimately happen when this strain breaks the parity between physical gold and contract gold is that the membrane separating the Bank for International Settlements' physical gold price from the ordinary market will break.

"When this happens, all your debt problems will be reset to manageable and sustainable levels again. In fact, the entire monetary and financial order will be reset. This is going to happen. And the central bankers can make it happen whenever they want, when they finally feel the heat of the fire on their own butts."

Turning up the heat is GATA's work. FOFOA's commentary suggests that we're having some effect. If you're inclined to help with the heat, please consider contributing to GATA:

http://www.gata.org/node/16

Meanwhile, FOFOA's commentary is headlined "Open Letter to EMU Heads of State" and you can find it here:

http://fofoa.blogspot.com/2010/05/open-letter-to-emu-heads-of-state.html

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

To contribute to GATA, please visit:

http://www.gata.org/node/16

2:49p ET Saturday, May 1, 2010

Dear Friend of GATA and Gold (and Silver):

Alerted by our friend F.R. to yesterday's GATA Dispatch decrying the abuse of financial letter writer Marc Faber by people urging support of GATA (http://www.gata.org/node/8592), Faber has sent GATA a brief statement acknowledging suppression of gold and silver prices:

"My position is very simple," Faber writes. "I am grateful that precious metal prices have been manipulated down, so it gave me and my readers the opportunity to buy gold and silver at artificially depressed prices for the last 10 years. Eventually, if GATA is right, prices will explode on the upside."

(For information about Faber's letter, the Gloom, Boom, & Doom Report, please visit http://www.gloomboomdoom.com.)

GATA's officers also are glad to have gotten into the precious metals many years ago. But some people carry their acknowledgement of precious metals price manipulation a little too far -- carry it to acceptance and even indifference if not approval.

GATA first may have run into such attitudes with financial letter writer Dennis Gartman (http://www.thegartmanletter.com), who, while not quite acknowledging gold and silver price manipulation then (he since has come a lot closer), advised some of GATA's officers during the Vancouver conference a few years ago to consider it just a great opportunity to make money.

Concurring with Gartman, the other day our friend Mike Maloney, a metals dealer and market analyst, remarked of the manipulation of the precious metals market, "Let them manipulate it as long as they can," because the longer the manipulation lasts, the higher metals prices will go when the free market defeats the manipulation:

http://goldsilver.com/newsletters/newsID/7901/

And this month Vedant Mimani and Pratik Sharma of Atyant Capital Partners in Boca Raton, Florida, (http://atyantcapital.com/) produced a long report concluding, on its last page:

"The gold market is a manipulated market. It has been since the beginning of governments. Accept this fact and learn how to trade the market instead of complaining about it."

You can find the Atyant Capital report here:

http://www.scribd.com/doc/30714154/Final-Why-George-Soros-and-John-Pauls...

GATA has a few problems with such attitudes.

First, time is money. The eventual establishment of free markets in the precious metals will be little consolation to those precious metals investors who don't live long enough to see it happen. Many such investors have died since the manipulation became especially heavy-handed around 1995. They were profoundly cheated and there can be no justice for them. Other precious metals investors may not live very long after the manipulation ends. Unless they can find a way to take their winnings with them, they will have been profoundly cheated too.

Second, while market forces may overwhelm the manipulation eventually, the end of the manipulation can be hastened by education and agitation. That is what GATA was chartered to undertake, not to sit around smugly and wait for supposed nature to take its course.

Third, while there is one great economic certainty -- that Western currencies will be substantially devalued, Western central banking having been invented precisely to devalue the currency -- there is also one great economic uncertainty -- how, upon that substantial devaluation, governments will treat the private ownership of the precious metals. Precious metals in possession may have no counterparty risk, but they never will be able to escape political risk. Confiscation or disproportionate new capital gains taxes could take a lot of the fun out of owning them and mining shares, and even precious metals investors who still have long lives ahead of them when the price suppression ends could find themselves cheated of the rewards that were due to them years earlier while the suppression and different rules of ownership were still in force.

And fourth, regardless of everything else, the manipulation of precious metals prices is a cosmic deception and fraud, and the great enabler of all sorts of vast evils -- from what U.S. Rep. Ron Paul has called "the welfare/warfare state" to the expropriation and grinding down of the working class and the developing world by the financial class, a vile national and class imperialism -- in the here and now. People are suffering and even dying every day all over the world because of this fraud, and no eventual profit to gold and silver investors can ever undo that.

The people behind GATA would like to make money as much as anyone else, and we would not like to be forced to choose between making money or doing some good in the world. We are not monks or hermits -- we enjoy good lives -- and some of us have families to support. To us the ideal has seemed to be to try to prosper in the course of doing some good. If we could blow up the manipulation today, this very instant, even if waiting a week or a month or a year might profit us more, we'd be obliged to blow it up right now. If we ever have such an opportunity, we will seize it.

In the meantime we make progress every day. Even cynical urgings like those from Atyant Capital -- just make money off the manipulation and stop complaining about it -- advance our progress, because they spread the word and show that increasingly the manipulation is taken for granted in the most informed circles. The recent news shows that the bad guys are worried, possibly even on the run already. So:

... Say not the struggle naught availeth,
... The labor and the wounds are vain,
... The enemy faints not, nor faileth,
... And as things have been they remain.

Things are changing, and the more we all do, the faster they'll change.

CHRIS POWELL, Secretrary/Treasurer
Gold Anti-Trust Action Committee Inc.

To contribute to GATA, please visit:

http://www.gata.org/node/16

By Peter Warburton
April 9, 2001

More than 20 years ago, I was a research officer in a forecasting unit at the London Business School. We called ourselves international monetarists then and we had a model that determined the inflation rate from the growth of money stock per unit of output, with long and variable lags. The value of a currency was determined, in the long run, by its monetary growth per unit of output in relation to that of the rest of the developed world. Being a young man, I was heavily into econometrics -- or economic tricks, as some would have it -- and our research group published papers showing how well this model fitted the data of that time. Basically, we had it sown up. We knew how to predict inflation; we knew the equilibrium value of currencies and the untidy realities of economic life were mopped up in the balance of payments. We felt sure that if the authorities could regulate the growth of the money supply, all would be well. How wrong we were.

By the mid-1980s, central bankers had begun to enjoy a measure of success in controlling inflation, not by strict regulation of the money supply, but as a byproduct of financial deregulation and the liberalization of credit. Even allowing for the lapses of 1988-90, there was a growing confidence that the battle against inflation was won. Throughout the 1990s, economists were absorbed by the issue of the permanence of low inflation, as measured by the annual change in a weighted basket of consumer goods and services, the CPI. But was inflation dead, or merely sleeping? Residual fears that it may only be a long sleep led the US authorities to establish the Boskin commission, whose charge was to deliver inflation a heavy blow to the head. Stunned into submission, the CPI took a long while to stir from its slumbers and did not do so until higher oil prices came along last year. However, it is far from certain that this surge will persist, and quite conceivable that it will recede later in the year in response to weakness in the real economy. To all intents and purposes, inflation in its popular form looks dead or comatose.

The paradox of disconnection

During these past 15 years, the Anglo-American economies (US, UK and Canada) have experienced episodes of weak growth in broad money (M2 or M3) with moderate inflation (in the early-1990s) and episodes of strong monetary growth with little measured inflation of consumer prices, as now. As a result, most economists have given up on the monetary aggregates as a useful guide to anything important. Government economists, who have remained skeptical of monetary transmission mechanisms throughout, feel especially vindicated. They argue that, if double-digit money supply growth can sit happily alongside a 2 or 3% inflation target and an appreciating currency, then surely the argument is settled.

I no longer regard myself as a monetarist, but I retain a deep respect for the behaviour of bank liabilities and their close substitutes. There are some things that only money can do. However, there are many other things that credit can do just as well. The avalanche of non-bank credit that has swept across the economic landscape over the past 20 years has altered it beyond recognition. On the one hand, it has enabled the monetary aggregates to grow much more slowly than the credit aggregates, helping to keep inflation lower. On the other hand, the non-bank credit avalanche has enabled a furious pace of fixed investment in physical assets that has promoted structural global excess capacity in virtually all manufactured products and exerted downward pressure on product prices. The particularly vigorous investment in information and communications technology has served a dual purpose, through the spectacular lowering of capital goods prices and by connecting disparate market participants to a common network and database.

And what of the periodic bouts of monetary excess, in late-1998, late-1999 and again over the past 3 months? These can be explained by the increasing fragility of the financial system. The more obvious are the system's weaknesses, the greater is the fear of collapse and the larger the demand for liquidity within the financial markets. In these stressful episodes, it is the financial markets themselves that are the principal driving force behind the monetary expansion. Hence, there is relatively little monetary impact on the product and labour markets, that is, on prices and wages.

In this way, we can arrive at a crude understanding of the paradox of disconnection: how volatile and often rapid monetary growth rates can be consistent with seemingly low and stable inflation outcomes. In the US, the annual price deflator for GDP has been below 2.5% in every year since 1991. Consumer price inflation has been no higher than 3% in every year since 1991. In Canada, the record is slightly better; in the UK, slightly worse. To parody Paul Samuelson's quip about the productivity "miracle," credit excesses are visible everywhere except in the inflation figures. Time and time again, respected commentators and analysts have warned of the approaching inflationary backlash from the credit and monetary excesses, only to be humiliated and discredited by events. This is not because their instincts were at fault, but because they were looking in the wrong place.

However, this does not explain the strength of the US dollar: surely the value of the dollar in relation to euros and yen has to collapse under the weight of excessive money supply growth and a huge external payments deficit? Well, I certainly thought so as recently as December 1999 when I wrote a bulletin for Flemings entitled "US dollar: selling the silver and leasing the gold." Now, I’m not so sure. I am coming round to the view that the external value of all major currencies is eroding and that this general erosion is able to substitute for at least a portion of the decline that one might expect in a particular currency versus its peers. Allow me to explain.

The loss of a stable numeraire

In the physical world, there are constants that serve as dependable benchmarks against which to observe natural phenomena. Examples are the velocity of a falling object, the freezing point of water and the time taken for one rotation of the earth on its axis. In the economic and financial world, this degree of precision is lacking. Instead, we content ourselves with approximations, indices and averages. We pride ourselves in knowing the difference between an inflation rate of 2% per annum and 2.5% per annum. Small deviations of outcomes from expectations can trigger dramatic trading in financial instruments and result in the transfers of billions of dollars between investments. Yet, in the financial realm, can we really be sure of the value of anything?

Monarchs of old, when hard-pressed for finance, would debase their precious metal currency by reducing its weight or by mixing in base metals to create an alloy. Hey, presto! They were able to increase the money supply and buy more munitions and enlist more soldiers. By this deceit, they separated the face value of the currency from its inherent value, derived from the scarcity value of the gold or silver. These debased coins were, of course, the forerunners of our modern monies whose face value is established by government fiat or decree. The face or nominal values of the notes and coins in circulation with the public greatly exceed their inherent or commodity values, and do not purport to have stable ratios with them.

In the post-war period, economists have compensated for the lack of a commodity base (e.g. gold standard) for a currency by constructing weighted indices of commonly purchased items. The rationale for the purchasing power approach is that the supply of consumables is constrained by the availability of scarce resources such as land, capital equipment and labour services. Because the supply of these resources is finite, then an excessive growth in the stock of domestic monetary assets would give rise to an inflation of the market prices of the consumables. Hence, if consumer prices are constant, then this is a positive indication that the money supply is not growing too rapidly and that the internal value of the currency is being maintained. Countries with stable price levels, or equivalently low inflation rates, would also be expected to have currencies that held their external value with each other, and steadily gained in value versus countries with higher inflation rates.

The fatal flaw in the 'inflation target' mentality

Unfortunately, there is a giant flaw in this logical structure. Restraining the growth of the money supply does not prohibit the excessive expansion of the credit system, unless banks have a credit monopoly and operate only as lenders rather than investors. An excessive expansion of credit can create an environment where the factors of production -- land, capital and labour services -- appear to be in infinite supply. If sufficient (borrowed) financial resources are made available, then sterile, parched and polluted land can be fertilized, irrigated, cleaned up and turned to productive use. Similarly, more factories, kilns, assembly lines, steel mills, semiconductor plants and so on can be built using state-of-the-art technology. Idle and untrained workforces can be mobilized and organized into productive units. A rich country, with plenty of collateral assets against which to borrow, can indeed face a supply curve that is seemingly infinitely elastic. I can assure you that consumer price inflation will not be a problem for such an economy.

Where is the flaw? It lies in the fantasy that the stock of borrowings (of all types) can somehow be divorced from the money stock. The physical representation of the abundant supply of credit to producers and consumers lies in the overproduction of goods and services. When this has occurred on a global basis, then a point is reached when it becomes impossible to find new export markets and the degree of spare capacity begins to rise. Profit-seeking companies will be compelled to shut down capacity and lay off staff in order to restore ailing profitability. The financial counterpart is the erosion in the ability of borrowers to service their debts. In the limit, the construction of excess capacity gives rise to debt default, as the idle portion of capacity does not earn an income and cannot service the debt that financed its construction.

However, since all debt is borrowed money, in order to write off a debt, it is necessary to destroy part of the money supply. It may be that the debt was structured as a bond issue rather than a bank loan; it doesn’t matter. The bondholders exchanged money balances for those bonds when they acquired them. If the bond is cancelled, this money is lost. Actual and impending losses give rise to a desire for additional liquidity in the financial system. Here, only money will do.

Central banks are engaged in a desperate battle on two fronts

What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November, I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil and commodity markets? Probably, no more than $200 billion, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world's large investment banks have over-traded their capital so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices.

Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.

The US dollar is not as vulnerable as it may appear

The key to understanding how this can happen is to consider how little information the flow of funds accounts provides about the true ownership of assets and liabilities. As far as the US external capital account is concerned, hedge funds based in the Caribbean are overseas investors. The activities of overseas branches of US commercial banks are also considered to be foreign transactions. Also, London, and Zurich are clearinghouses for all manner of nominee accounts and anonymous trusts. Around two-thirds of all US bonds recorded as UK-owned belong to UK entities representing non-residents. To fear that foreign investors will one day abstain from fresh investment in US financial assets, leaving the current account deficit uncovered and the US dollar prone, is to suppose that foreigners are the sole instigators of these external financial flows in the first place. It is quite likely that a substantial proportion of these external flow-demands for US corporate bonds and equities are, in fact, US-originated. US residents' subscriptions to leveraged hedge funds reappear as foreign investment in US securities. US commercial banks’ overseas branches borrow in euros locally to invest the proceeds in US bonds, playing the yield curve.

Thinking in these terms, a collapse of the US dollar versus the euro appears much less likely. It may still occur, but more plausibly in the context of cancelled credit lines and forced asset disposals. The obvious example is the slump in the US dollar against the yen in 1998 as the hedge funds lost their credit lines from Japanese banks and were compelled to unwind their carry trades.

Beneath the surface, the values of the dollar, the yen and the euro have been eroded simultaneously by the over-extension of credit. The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. There has been a reduction in the quality of credit rather than an increase in the quantity of money (net of writeoffs). The search is on for a valid yardstick, a measure of monetary value that has not been (and cannot be) distorted by central banks’ firefighting and wrecking tactics.

The search is on for the perfect hedge

What would be the ideal characteristics of such a numéraire? First, it would be in fixed physical supply. Second, it would be resistant to weather-related influences. Third, its ownership would be diffuse, rendering futile any attempt to restrict supply through a non-competitive structure. Fourth, it must be freely tradable. Fifth, there would be no futures or options markets attached to it.

Finally, I list some of the candidates, in no particular order. Each seems promising, yet none of them seems to me to satisfy fully all five of the requirements above.

Arable land with a dependable climate

Oil-refining capacity

Electricity generating capacity

Water-treatment capacity

Drinking water, bottled or piped

Coastal access, harbours and ports

Palladium/platinum/diamonds

Real estate in long-standing, distinctive locations

Antiques, fine art, stamps and coins

Commodities without futures and options markets

Could these be the winning investments of the early years of the 21st century?

----

Peter Warburton is the author of "Debt and Delusion," Penguin, 2000.

By Adrian Douglas
Monday, January 18, 2010

Here are some Trivial Pursuit questions for you:

1) What is the biggest market in the world for a physical commodity?

2) Is the gold market one of the smallest markets in the world for a physical commodity?

I would guess that you answered:

1) Crude oil.

2) Yes. Gold is one of the smallest commodity markets in the world.

If those were your answers, you are wrong. What everybody believes to be the "tiny gold market" is in fact the world's biggest physically traded commodity market.

Let's have a look at some facts.

The London Bullion Market Association (LBMA) "over-the-counter" (OTC) gold market trades approximately 90 percent of the world's physical gold trade. The amount of gold sold each day is given at the LBMA's Internet site here:

http://www.lbma.org.uk/stats/clearing

The LBMA reports the net gold traded, which is termed "ounces transferred." This is not the gross trading volume. For example, if an investor were to sell 1 million ounces in the day and then buy 1.1 million ounces, the trade would be counted as 0.1 million ounces, the net difference between the purchase and the sale and the amount of gold "transferred" to the investor's account. Therefore the numbers are the amount of gold that changes ownership each day.

The value of the daily trading for November 2009 is given as $22 billion.

From looking at the data you might think that the trade amounts are for the entire month. But they are actually average daily figures for the month. This is clear from another page of the LBMA Internet site, which states:

"Gold ounces transferred rose from a daily average of 20.6 million in September to 20.8 million, an increase of 1.2%. There was a 4.7% increase in the average price to $1,043.16, resulting in a 6.0% rise in value to a daily average of $21.8 billion. The number of transfers dropped by 0.8% to a daily average of 1,908."

The world consumes 82 million barrels of crude oil each day. At $77 per barrel the physical trade of crude oil is worth $6.3 billion each day. This means that the amount of gold that changes ownership each day is, in dollar terms, 3.5 times the dollar value of crude oil that is consumed each day.

In a GATA dispatch in October 2009 the market analyst Paul Mylchreest estimated that the gross volume of gold traded on the LBMA each day was about 2,100 metric tonnes:

http://www.gata.org/files/ThunderRoadReport-10-15-2009.pdf

That equates to $77 billion each day at 1,150 per ounce. The NYMEX WTI crude oil contract trades 400,000 contracts each day, which is 400 million barrels. At $77 per barrel, the gross value traded is $30.8 billion, which is only 40 percent of the value of the gross trade in gold.

There is a myth among even knowledgeable gold investors and analysts that the gold market is tiny, but in reality it is the biggest physically traded commodity market in the world. The perception of gold being a tiny market comes from the tiny annual production of gold. Global gold production is only 2,200 metric tonnes per year, which is equivalent to the gross trade in gold on the LBMA in just one day.

In a previous article I analyzed the LBMA market numbers and deduced that it was impossible for the LBMA to have enough gold in its vaults to trade such large daily volumes. The inescapable inference is that the LBMA is operating a fractional reserve system and has sold much more gold than it has or could ever have. The amount of gold that has been sold is estimated to be around 65,000 metric tonnes, while the maximum amount of London Good Delivery bars that exist in the world is around 15,000 metric tonnes. So even if the LBMA possesses the world's entire stock of LGD bars there are 50,000 metric tonnes of obligations that cannot be met if the owners ask for delivery.

To put that quantity of gold into perspective, it is equal to all the gold reserves that remain to be mined in the earth.

Gold is unique among all commodities because its very nature and function enable such a fraud to be perpetrated. Gold has very few uses that consume gold. Its main function is to store wealth, and gold can perform that function while in your house, in your vault, or even on the other side of the world in someone else's vault. When it is acting as a store of wealth in someone else's vault, you have to trust that someone else that there is any gold at all in his vault.

Many wealthy individuals, institutions, and sovereign states buy gold through the LBMA in unallocated accounts and leave the gold they supposedly own in the custody of the LBMA.

That people are buying and selling gold without ever taking delivery means that there is the opportunity for the bullion houses to sell gold that doesn't exist. The bullion houses probably don't view this as illegal or dishonest, because they will operate a fractional reserve type of system just as the banks do with fiat currency and will make sure that they have enough gold on hand for what would be the maximum estimated volume of gold that could be called for delivery at any one time.

For this fraud to continue without being exposed, no requested delivery of gold by an LBMA customer must ever be defaulted upon or else a massive "run on the bank" would be triggered. When the bullion banks get into trouble and don't have enough gold on hand to meet delivery demands, central banks lease or sell them gold to cover the shortfall. The central banks are willing to aid and abet the crime because the selling of "paper gold" has the same suppressive effect on the gold price as selling real gold. Suppressing the gold price accommodates the central banks in masking their promiscuous fiat currency creation. In this way the traditional inflation "canary in the coal mine" is muted.

This is the basis of the "strong dollar policy" that allows interest rates to be lower than they should be, and in turn it lowers the price of commodities and imports as it artificially enhances the dollar's buying power. Further, the central banks are able to earn a lease rate on their gold hoards.

If commission fees are 3 percent, then the annual commission earned by the LBMA is approximately $585 billion on only $500 billion of assets. A 100 percent return on investment is certainly a handsome profit.

The much-heralded public auction by the Bank of England of half of its gold stock was open only to members of the LBMA.

From the thesis presented here it can be seen that the suppression of the gold price suits the central banks and that running a fractional reserve gold inventory is extremely lucrative for the LBMA, especially when it is backstopped by the central banks.

Mobilizing central bank gold to maintain liquidity in the market is essential. Maintaining secrecy of such gold activities is equally essential. Over the last 10 years GATA has amassed a large amount of evidence that more than half of central bank gold has been sold, leased, or swapped into the market. This is what lies at the core of the federal Freedom of Information Act lawsuit GATA has filed against the Federal Reserve. The Fed is denying access to hundreds of pages of documents pertaining to the U.S. gold reserves because they are deemed to be exempt from disclosure as "trade secrets." GATA believes that the Fed is trying to cover up its involvement in the suppression of the gold price as part of the implementation of the "strong dollar policy," which necessarily involved mobilizing or encumbering the U.S. gold reserve in some way. GATA intends to find the truth.

Investors in precious metals should take delivery of their bullion. No matter what the outcome of GATA's lawsuit, the fraud will be exposed by customers of the LBMA asking for their gold. When it becomes clear that there isn't enough gold to meet demanded delivery, the gold price must rise in accordance with the new market reality of a much smaller supply than previously was apparent. If you don't take delivery of your bullion, you might discover that investments you thought you had in gold are just promissory notes.

-----

Adrian Douglas is publisher of the Market Force Analysis financial letter (www.MarketForceAnalysis.com) and a member of GATA's Board of Directors.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16

Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
International Precious Metals and Commodities Show
Olympia Park, Munich, Germany
Saturday, November 7, 2009

Thank you for coming to listen to me today. Please forgive my inability to speak German. I'll be discussing many documents, some of them fairly complicated, but don't worry if you miss something about them. They'll be posted at GATA's Internet site with these remarks.

On Friday, September 25, Jim Rickards, director of market intelligence for the Omnis consulting firm in McLean, Virginia., was interviewed on the cable television network CNBC in the United States. Talking about the currency markets, Rickards remarked: "When you own gold you're fighting every central bank in the world."

That's because gold is a currency that competes with government currencies and has a powerful influence on interest rates and the price of government bonds. And that's why central banks long have tried to suppress the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power.

As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.

Of course what Jim Rickards said about gold was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, what Rickards said has been our premise for most of our 10 years, and we have documented it extensively. Rickards' assertion was spectacular simply because he was allowed to make it in the mainstream financial news media and was allowed to keep talking. While the gold price suppression scheme is a hard fact of history, it is seldom mentioned in polite company in the financial world. I have been asked to talk about it here. I am grateful for this invitation and I will try to be polite.

How have central banks tried to suppress the price of gold?

The gold price suppression scheme was undertaken openly by governments for a long time prior to 1971.

That's what the gold standard was about -- governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies that were backed by gold.

Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price. Throughout the 1960s the United States and Great Britain attempted to hold the price at $35 in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement came to be known as the London Gold Pool.

As monetary inflation rose sharply, the London Gold Pool was overwhelmed by demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold -- convertibility for government treasuries that wanted to exchange dollars for gold. At that moment currencies began to float against each other and against gold -- or so the world was told.

For since 1971 the gold price suppression scheme has been undertaken largely surreptitiously, seldom acknowledged officially. But sometimes it has been acknowledged officially, and with a little detective work, more about it can be discovered.

You may have heard GATA derided as a "conspiracy theory" organization. We are not that at all. To the contrary, we examine the public record, produce documentation, question public officials, and publicize their most interesting answers, or their most interesting refusals to answer. I'd like to review some of the public record with you.

The gold price suppression scheme became a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee's minutes, that the U.S. Treasury Department's Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed's Internet site:

http://www.federalreserve.gov/monetarypolicy/files/FOMC19950201meeting.p...

The gold price suppression scheme was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." That is, Greenspan himself, supposedly the greatest among the central bankers, contradicted the usual central bank explanation for leasing gold -- which was supposedly to earn a little interest on a dead asset -- and admitted that gold leasing is all about suppressing the price. Greenspan's admission is still posted at the Fed's Internet site:

http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm

Incidentally, while we gold bugs love to cite Greenspan's testimony from 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important today. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.

The Washington Agreement on Gold, made by the European central banks in 1999, was another admission -- no, a proclamation that central banks were working together to control the gold price. The central banks making the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement at the World Gold Council's Internet site:

http://www.reserveasset.gold.org/central_bank_agreements/cbga1/

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. That is when Barrick filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market.

Barrick's motion claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick's confession to the gold price suppression scheme is posted at GATA's Internet site:

http://www.gata.org/files/BarrickConfessionMotionToDismiss.pdf

The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. "Foreign currency reserve assets and gold," the Reserve Bank's report said, "are held primarily to support intervention in the foreign exchange market." The bank's report is still posted at its Internet site:

http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/...

Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.

There are five main purposes of central bank cooperation, White announced, 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." White's speech is posted at GATA's Internet site:

http://www.gata.org/node/4279

In January this year a remarkable 16-page memorandum was discovered in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis:

http://fraser.stlouisfed.org/docs/historical/martin/23_06_19610405.pdf

In August this year the international journalist Max Keiser reported an interview he had with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York. That interview is posted at the YouTube Internet site:

http://www.youtube.com/watch?v=EzVhzoAqMhU

Some people saw the Bundesbank's admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. On August 24 the Bundesbank replied to Kirby by e-mail with a denial of Keiser's report, but the denial was actually pretty much a confirmation:

http://www.gata.org/node/7713

"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."

The Bundesbank did not specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others -- like the United States, the custodian of German gold.

In September this year a New York financial market professional and student of history named Geoffrey Batt posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.

The first was a long cable dated March 6, 1968, from someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It is posted at the Zero Hedge Internet site:

http://www.zerohedge.com/article/declassified-state-dept-data-highlights...

The cable described the strains on the London Gold Pool, the
gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.

The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors "that there is no point any more in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.

The cable recommends creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposes "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable calls a "reshuffle club" that would apply gold where market intervention seemed most necessary.

These "reshuffles" sound like the central bank gold swaps of recent years.

The idea, the cable says, is for the central banks "to remain the masters of gold."

Also in September this year Zero Hedge's Geoffrey Batt disclosed a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too is posted at the Zero Hedge Internet site:

http://www.zerohedge.com/article/cia-chimes-gold-control-highlights-hist...

The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:

" -- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."

And:

"-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."

The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge, also in September this year, may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and gold and gold would be free trading.

The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It is posted at the Zero Hedge Internet site as well:

http://www.zerohedge.com/article/smoking-gun-fed-controlling-gold

Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."

Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."

While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was still 34 years ago. But now at last there has been a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a
denial, a denial based on proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)

Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps. Of course both requests were denied again. But through its Washington lawyer, William J. Olson --
http://www.lawandfreedom.com -- GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA's appeal but in his letter to our lawyer he let slip some stunning information:

http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf

Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

So there it is: The Federal Reserve today -- right now -- has gold swap arrangements with "foreign banks."

Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:

http://www.gata.org/node/1181

But now the Fed admits such arrangements.

Of course Fed Governor Warsh did not say that the Fed has actually swapped any gold lately, only that it has arrangements to do so -- and, just as important, that the Fed does not want the public and the markets to know about those arrangements, does not want the public and the markets to know about the disposition of United States gold reserves.

GATA is preparing to sue the Fed in federal court to compel disclosure of these gold swap arrangements.

There is a reason for the Fed's insistence that the public and the markets must not know what the Fed is doing in the gold market.

It is because, as the documents compiled and publicized by GATA suggest, suppressing the gold price is part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments, because this market rigging is the foremost objective of U.S. foreign and economic policy, and because this rigging cannot work if it is exposed and the markets realize that they are not really markets at all.

And the rigging increasingly is being exposed and understood.

In complaining about the manipulation of the gold market, GATA has not been called "conspiracy nuts" by everyone. We have gained a good deal of institutional support over the years.

First came Sprott Asset Management in Toronto, which in 2004 issued a
comprehensive report supporting GATA. The report was written by Sprott's chief investment strategist, John Embry, and his assistant, Andrew Hepburn, and was titled "Not Free, Not Fair -- the Long-Term Manipulation of the Gold Price." It remains available at the Sprott Internet site:

http://www.sprott.com/docs/PressReleases/20_not_free_not_fair.pdf

Then in 2006 the Cheuvreux brokerage house of Credit Agricole, the major French bank, issued its own report confirming GATA's findings of manipulation in the gold market. The Cheuvreux report was titled "Remonetization of Gold: Start Hoarding," and you can find it at GATA's Internet site:

http://www.gata.org/files/CheuvreuxGoldReport.pdf

And in 2007 Citigroup -- yes, Citigroup, a pillar of the American financial establishment -- joined the supposed conspiracy nuts. It published a report titled "Gold: Riding the Reflationary Rescue," written by its analysts John H. Hill and Graham Wark, declaring: "Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price." You can find the Citigroup report at GATA's Internet site:

http://www.gata.org/files/CitigroupGoldReport092107.pdf

Even those authorities who do not want to run afoul of government institutions that with a few computer keystrokes can create virtually infinite amounts of money may have to admit the opportunity for central banks to manipulate the gold market. For it is widely acknowledged that annual world gold production is about 2,400 tonnes, that annual net world gold demand is about 3,400 tonnes, that gold production has been falling as demand has been rising, and that the thousand-tonne gap between production and net demand has been filled mainly by central bank dishoarding and leasing.

What do you suppose the gold price would be if central banks were not supplying more than a quarter of annual demand?

That dishoarding was not all innocent management of a foreign exchange reserve portfolio. Much of it was meant as market intervention -- and after all, market intervention is exactly why central banking was invented.

Intervening in markets is what central banks do. They have no other purpose.

Central banks admit intervening often in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels. Central banks admit doing the same in the government bond markets. There is even evidence that the Federal Reserve and Treasury Department have been intervening frequently in the U.S. stock markets since the crash of 1987.

You do not have to settle for rumors about the "Plunge Protection Team," also known as the President's Working Group on Financial Markets. Again you can just look at the public record.

The Federal Reserve injects billions of dollars into the stock and bond markets every week, on the public record, through the major New York financial houses, its so-called primary dealers in federal government bonds, using what are called repurchase agreements and the Fed's Primary Dealer Credit Facility. The financial houses thus have become the Fed's agents in directing that money into the markets. The recent rise in the U.S. stock market matches almost exactly the money funneled by the Fed to the New York financial houses through repurchase agreements and the Primary Dealer Credit Facility.

Meanwhile, for years the International Monetary Fund, the central bank of the central banks, has been openly intervening in the gold market by threatening to sell gold. The IMF said its intent in selling gold was to raise money to lend to poor nations. This explanation was ridiculous on its face, though the IMF has never been challenged about it in the financial press. No, the financial press has been happy to tell the world that central banks that lately have effortlessly conjured into existence fantastic amounts of money in many currencies could find a little money to help poor countries only by selling gold.

Of course the intent of the IMF and its member central banks was not to help poor countries but to intimidate the gold market and control the gold price.

That the IMF intimidated the gold market so long with this threat of gold sales was all the more remarkable because the IMF probably has never had any gold to sell in the first place.

In April 2008 I wrote to the managing director of the IMF, Dominque Strauss-Kahn, with five questions about the IMF's gold. I copied the letter to the IMF's press office by e-mail, and quickly began to get some answers from one of its press officers, Conny Lotze.

My first question to the IMF was: "Your Internet site says the IMF holds 3,217 metric tons of gold 'at designated depositories.' Which depositories are these?"

Conny Lotze of the IMF replied, but not specifically. She wrote: "The fund's gold is distributed across a number of official depositories." She noted that the IMF's rules designate the United States, Britain, France, and India as IMF depositories.

My second question was: "If you would prefer not to identify the depositories for security reasons, could you at least identify the national and private custodians of the IMF's gold and the amounts of IMF gold held by each?"

Conny Lotze replied, again not very specifically: "All of the designated depositories are official."

My third question was: "Is the IMF's gold at these depositories allocated -- that is, specifically identified as belonging to the IMF -- or is it merged with other gold in storage at these depositories?"

Conny Lotze replied, still not very specifically: "The fund's gold is properly accounted for at all its depositories."

My fourth question was: "Do the IMF's member countries count the IMF's gold as part of their own national reserves, or do they count and identify the IMF's gold separately?"

Conny Lotze replied a bit ambiguously: "Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund in their international reserves."

This sounded to me as if the IMF members were still counting as their own the gold that supposedly belongs to the IMF -- that the IMF members were just listing the gold assets in another column on their own books.

My fifth question to the IMF was: "Does the IMF have assurances from the depositories that its gold is not leased or swapped or otherwise encumbered? If so, what are these assurances?"

Conny Lotze replied: "Under the fund's Articles of Agreement it is not authorized to engage in these transactions in gold."

But I had not asked if the IMF itself was swapping or leasing gold. I had asked whether the custodians of the IMF's gold were swapping or leasing it.

This prompted me to raise one more question for Conny Lotze. I wrote her: "Is there any audit of the IMF's gold that is available to the public? I ask because, if the amount of IMF gold held by each depository nation is not public information, there does not seem to be much documentation for the IMF's gold, nor any documentation for the assurance that its custody is just fine. Without any details or documentation, the IMF's answer seems to be simply that it should be trusted -- that it has the gold it says it has, somewhere."

And that was the last I heard from Conny Lotze. She didn't answer me again. I had spoken a word that is increasingly unspeakable in the gold section of central banking: audit.

This week the IMF at last announced the disposal of some of the 400 tonnes of gold it long had been threatening to sell. Two hundred tonnes have been purchased by the Reserve Bank of India. This may or may not be a real transaction, a real transfer of gold from an IMF vault to a vault of the Reserve Bank of India. More likely this transaction is only a bookkeeping entry among IMF member central banks. But in any case it seems likely that the gold with which the IMF has been threatening the market for years is never going to hit the market, if it even exists. Rather, this gold will remain in the mysterious possession of central banks.

Lately central bankers often have complained about what they call "imbalances" in the world financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers about "imbalances" are brazenly hypocritical, since these imbalances have been caused by the central banks themselves, caused by their constant interventions in the currency, bond, and commodity markets to prevent those markets from coming into balance through ordinary market action lest certain political interests be disturbed.

Yes, when markets balance themselves they often do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for the almost 150 years before then the country went through a catastrophic deflation every decade or so. Central banking was created in the name of preventing those catastrophic deflations.

The problem with central banking has been mainly the old problem of power --- it corrupts.

Central bankers are supposed to be more capable of restraint than ordinary politicians, and maybe some are, but they are not always or even often capable of the necessary restraint. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest -- to benefit especially the financial interests, the banking and investment banking industries. These interventions, subsidies to special interests, increasingly are needed to prevent the previous imbalances from imploding.

And so we have come to an era of daily market interventions by central banks -- so much so that the main purpose of central banking now is to prevent ordinary markets from happening at all.

By manipulating the value of money, central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret -- because, in choosing winners and losers in the economy, advancing infinite amounts of money to some participants in the markets but not to others, administering the ultimate patronage, central banking cannot survive scrutiny.

Yet the secrecy of central banking now is taken for granted even in nominally democratic countries.

Maybe the Federal Reserve's intervention to rescue Bear Stearns through the Fed's de-facto subsidiary, JPMorganChase, will cause some devastating public inquiries by Congress and the news media. But what a hundred years ago in the United States was called the Money Power is so ascendant today that it sometimes even boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in the United States in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: "The last duty of a central banker is to tell the public the truth."

The truth as GATA sees it is this:

First, gold is the secret knowledge of the financial universe, but it is becoming an open secret. That is GATA's work -- to break the secret open, to show how the gold price has been suppressed by central bank creation of imaginary gold in amounts to match and thus help conceal the vast inflation of the world's money supply. We will continue to use freedom-of-information law against the Fed and the Treasury Department about their policies toward gold and the disposition of the U.S. gold reserve. Of course central banks can no more afford to account fully for their gold reserves than the Fed and JPMorganChase can afford to disclose details of their negotiations for the rescue of Bear Stearns. Indeed, as my correspondence with the IMF suggests, the disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons.

Why can't the public and the markets be permitted to know exactly where central bank gold reserves are? Because in the hands of governments gold is a deadly weapon -- as the Reserve Bank of Australia acknowledges, the main weapon of currency market intervention.

Second, all technical analysis of markets now is faulty if it fails to account for pervasive government intervention.

And third, the intervention against gold is failing because of overuse, exposure, exhaustion of Western central bank gold reserves -- we estimate that the Western central banks have in their vaults only about half the 32,000 tonnes they claim to have -- and the resentment of the developing world, which is starting to figure out how it has been expropriated by the dollar system, a system in which people do real work and create real goods and send them to the United States in exchange for mere colored paper and electrons.

For years now the Western central banks have been attempting a controlled retreat with gold, bleeding out their reserves with sales, leases, and derivatives so that gold's ascent and the dollar's inevitable decline may be less shocking. Central bankers often convey part of this strategy in code; they warn against what they call a "disorderly decline" in the dollar, as if an "orderly" decline is all right.

The rise in the gold price over the last decade is just the other side of that coin -- an "orderly" rise, 15 percent or so per year, a rise carefully modulated by surreptitious central bank intervention.

But GATA believes that the central banks may have to retreat farther with gold than anyone dreams, and far more abruptly than they have retreated so far. We believe that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between, on one hand, the supply of real gold, actual metal, not the voluminous paper promises of metal, and, on the other hand, the explosion of the world money supply of the last few decades -- as the market begins to perceive the difference between the real and the unreal -- there may not be enough zeroes to put behind the gold price.

A century ago Rudyard Kipling wrote a poem that foresaw the decline of the empire of his country, Great Britain. Kipling's poem attributed this decline to the loss of the old virtues, the virtues that were listed at the top of the pages in the special notebooks, called "copybooks," that were given to British schoolchildren at that time -- virtues like honesty, fair dealing, Ten Commandments stuff. The title of Kipling's poem is "The Gods of the Copybook Headings," and its conclusion is a warning to the empire that succeeded the one he was living in:

Then the Gods of the Market tumbled,
And their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled
And began to believe it was true
That All is not Gold that Glitters,
And Two and Two make Four,
And the Gods of the Copybook Headings
Limped up to explain it once more.
As it will be in the future,
It was at the birth of Man.
There are only four things certain
Since Social Progress began:
That the Dog returns to his Vomit
And the Sow returns to her Mire,
And the burnt Fool's bandaged finger
Goes wabbling back to the Fire;
And that after this is accomplished,
And the brave new world begins,
When all men are paid for existing
And no man must pay for his sins,
As surely as Water will wet us,
As surely as Fire will burn,
The Gods of the Copybook Headings
With terror and slaughter return.

The gold price suppression story is important despite this week's dramatic rise in the gold price. For even as the price of gold has been rising, we really don't yet know what a fair price, a free-market price, for gold is, since gold has not traded in a free market for many years and is not trading in a free market now.

Indeed, since central bank intervention in the currency, bond, equities, and commodity markets has exploded over the last year, we don't really know what the market price of anything is anymore. Thus the gold price suppression story is a story about the valuation of all capital and labor in the world -- and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.

The specifics of the gold price suppression operation are complicated, but you don't have to remember them all if you know what they mean.

They mean that there is a currency war going on between countries and their central banks. There has been such a war for many years, only the victims were not really fighting back. Now some of them are. Signs of this war are now everywhere -- like the story published a month ago by the British newspaper The Independent that described an international plan to replace the dollar in oil trading:

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar...

Gold and silver have been and remain currencies and will be remonetized by markets eventually if not by central banks as well, because gold and silver are the only neutral currencies, the only currencies that are not the liabilities of any particular country.

But when you invest in currencies like gold and silver, you risk getting caught in the crossfire of the currency war. As in any war, truth is the first casualty in the currency war, even as secrecy is always the first principle of central banking.

Meanwhile, not asking the right questions of the right people seems to be the first principle of most mainstream financial journalists and even the first principle of some gold and silver market analysts. These journalists and analysts take government secrecy in central banking for granted, even as the evidence of market intervention and manipulation explodes all around them. This acceptance of secrecy reminds me of the bumbling police detective played by Leslie Nielsen in the "Naked Gun" movies, particularly his performance in this scene:

http://www.youtube.com/watch?v=rSjK2Oqrgic

Well, there is something to see here.

The precious metals promise great rewards to investors, but to get the necessary information you have to do a lot more work than other investors.

And you have to remember the remarkable properties of gold and silver. It's not just that gold is the most malleable and lustrous of metals, or that silver is the most conductive and reflective, but also that, once they get into the hands of central banks, bullion banks, and exchange-traded funds, gold and silver can become invisible.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16

Remarks by Chris Powell
Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
Hilton Riverside Hotel
Thursday, October 8, 2009

On Friday, September 25, Jim Rickards, director of market intelligence for the Omnis consulting firm in McLean, Va., was interviewed at length on the cable television network CNBC. Talking about the currency markets, Rickards remarked: "When you own gold you're fighting every central bank in the world."

That's because gold is a currency that competes with government currencies and influences interest rates and the prices of government bonds.

Of course such an assertion in itself was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, that assertion has been our premise for most of our 10 years and we have documented it extensively. It was spectacular that an analyst should have expressed it in the mainstream financial news media and have been allowed to keep talking. But since we met here in New Orleans last year there have been many spectacular disclosures of what central banks meant to be surreptitious intervention in the currency markets to suppress the price of gold -- particularly intervention by the central bank of the United States.

You may have heard GATA derided as a "conspiracy theory" organization. We're not that at all. To the contrary, we examine the public record, produce documentation, question public officials, and publicize their most interesting answers, or refusals to answer. I'd like to review the spectacular disclosures of the last year.

First, in January, was the discovery of a 16-page unsigned memorandum in the archive of the late Federal Reserve Chairman William McChesney Martin:

http://www.gata.org/node/7096

The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis.

Then in August the international journalist Max Keiser reported an interview with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York:

http://www.gata.org/node/7672

Some people saw that admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. On August 24, the Bundesbank replied to Kirby by e-mail with a denial of Keiser's report that was actually pretty much a confirmation:

http://www.gata.org/node/7713

"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."

The Bundesbank didn't specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market.

Then last month a financial market professional and student of history named Geoffrey Batt posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.

The first was a long cable dated March 6, 1968, from someone named Deming at the U.S. Embassy in Paris to the State Department in Washington:

http://www.zerohedge.com/article/declassified-state-dept-data-highlights...

The cable described the strains on the London Gold Pool, the gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.

The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince speculators "that there is no point any more in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.

The cable recommends creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposes "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable calls a "reshuffle club" that would apply gold where market intervention seemed most necessary.

These "reshuffles" sound like the central bank "gold swaps" of recent years.

The idea, the cable says, is for the central banks "to remain the masters of gold."

Then Zero Hedge's Batt disclosed a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool:

http://www.zerohedge.com/article/cia-chimes-gold-control-highlights-hist...

The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:

"-- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."

And "-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."

The third declassified U.S. government document published by Batt at Zero Hedge may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and gold and gold would be free trading.

The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold:

http://www.zerohedge.com/article/smoking-gun-fed-controlling-gold

Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."

Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."

While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was still 34 years ago.

But now at last there has been a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a denial, a denial based on proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)

Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps. Of course both requests were denied again. But through its Washington lawyer, William J. Olson -- http://www.lawandfreedom.com/ -- GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets.

Warsh denied our appeal but in his letter to Olson he let slip some stunning information:

http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf

Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

So there it is: The Fed today -- right now -- has gold swap arrangements with "foreign banks."

Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:

http://www.gata.org/node/1181

But now the Fed admits such arrangements.

Of course Fed Governor Warsh did not say that the Fed has actually swapped any gold lately, only that it has arrangements to do so -- and, just as important, that the Fed doesn't want the public to know about those arrangements, doesn't want the public to know about the disposition of the country's gold reserves.

There is a reason for the Fed's insistence that the public must not know what it is doing in the gold market.

GATA believes it's because, as the recently disclosed documents suggest, suppressing the gold price is part of the general surreptitious rigging of the currency and bond markets by the U.S. government and that this rigging is the foremost objective of U.S. foreign and economic policy, and because this rigging can't work if it is exposed and the markets realize that they aren't really markets at all.

And the rigging increasingly is being exposed.

Jim Rickards, the analyst who remarked the other day on CNBC that "when you own gold you're fighting every central bank in the world," was not quite right. For lately a few central banks -- those in China, Russia, and even in Europe -- have hinted that they've figured the so-called gold market out and are not playing along anymore. Now there is open reporting and commentary on what is being called the Chinese put on gold, and even open reporting and commentary on international collaboration to replace the dollar as the world reserve currency.

Meanwhile, as in the last months of the London Gold Pool 40 years ago, there has been vast dishoarding of Western central bank gold, and the supplies necessary to suppressing the gold price are drying up. World gold production has fallen dramatically because the rising price is not yet close to the price necessary to make more production profitable. And investors are realizing that most paper gold is not backed by real gold but rather that each ounce of real metal is probably supporting paper claims to 20, 50, or even a hundred ounces.

In any case, there's an important international story here, and GATA plans to pursue it by suing the Federal Reserve in U.S. District Court in Washington for the information being withheld from us about the U.S. gold reserve. Given all the new documentation, we hope that financial journalists and gold market analysts will get interested and start pressing central banks for detailed answers about gold.

This story is important despite this week's dramatic rise in the gold price. For even as the price of gold has been rising, we really don't yet know what a fair price, a free-market price, for gold is, since gold has not traded in a free market for many years. Indeed, since central bank intervention in the currency, bond, and equities markets has exploded over the last year, we don't really know what the market price of anything is anymore. Thus this is a story about the valuation of all capital and labor in the world -- and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.

The specifics of the gold price suppression operation are complicated, but you don't have to remember them all if you know what they mean.

They mean that there's a currency war going on between central banks. There has been such a war for many years, only the victims were not really fighting back. Now some of them are. Signs of this war are now everywhere -- like the story this week by Robert Fisk in the British newspaper The Independent, which rocked the currency and gold markets:

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar...

It described an international plan to replace the dollar in oil trading.

Gold and silver are currencies and will be remonetized by markets eventually if not by central banks as well. But when you invest in currencies like gold and silver, you risk getting caught in the crossfire of the currency war. There was crossfire last night when several Asian central banks intervened in the currency markets to support the dollar:

http://www.gata.org/node/7874

But this intervention was not officially acknowledged. Much central bank intervention is undertaken secretly.

As in any war, truth is the first casualty in the currency war, even as secrecy is always the first principle of central banking.

Meanwhile, not asking the right questions of the right people seems to be the first principle of most financial journalists and even many gold and silver market analysts. These journalists and analysts take government secrecy for granted, even as the evidence of market intervention and manipulation explodes all around them. Their acceptance of secrecy reminds me of the bumbling police detective played by Leslie Nielsen in the "Naked Gun" movies, particularly his performance in this scene:

http://www.youtube.com/watch?v=rSjK2Oqrgic

Well, there is something to see here.

The precious metals promise great rewards to investors, but to get the necessary information you have to do a lot more work than other investors.

And you have to remember the remarkable properties of gold and silver. It's not just that gold is the most malleable and lustrous of metals, or silver the most conductive and reflective, but also that, once they get into the hands of central banks, bullion banks, and exchange-traded funds, gold and silver become invisible.

If you would like to help GATA, we're recognized by the U.S. Internal Revenue Service as a tax-exempt educational and civil rights organization, and financial contributions to us are federally tax-deductible in the United States. Our Internet site is www.GATA.org and the documentation we have discovered is posted there. We'll be grateful for your help and promise to try to make good use of it.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16

By James Turk, Editor
Freemarket Gold & Money Report
http://www.fgmr.com/
Sunday, May 3, 2009
Copyright 2009 by James Turk. All rights reserved.

This week Bill Murphy and Chris Powell, co-founders of the Gold Anti-Trust Action Committee Inc. (www.gata.org), will be in London, England. Their trip is part of GATA's ongoing effort to raise awareness of the gold cartel and its surreptitious intervention in the gold market.

Bill and Chris will meet with the British news media to explain GATA's findings. They will also attend an important fund-raising event being held in support of GATA's work. Their trip is another important step by GATA aimed at creating a free market in gold, one which is unfettered by government intervention.

Governments want a low gold price to make national currencies look good. Gold is recognizable the world over as the "canary in the coal mine" when it comes to money. A rising gold price blurts the unpleasant truth that a national currency is being poorly managed and that its purchasing power is being inflated.

This reality is made clear by former Federal Reserve Chairman Paul Volcker. Commenting in his memoirs about the soaring gold price in the years immediately following the end of the gold standard in 1971, he notes: "Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake." It was a "mistake" because a rising gold price undermines the thin reed upon which all fiat currency rests -- confidence. But it was a mistake only from the perspective of a central banker, which is of course at odds with anyone who believes in free markets.

The U.S. government has learned from experience and has taken Volcker's advice. Given the U.S. dollar's role as the world's reserve currency, the U.S. government has the most to lose if the market chooses gold over fiat currency and erodes the government's stranglehold on the monopolistic privilege it has awarded to itself of creating "money."

So the U.S. government intervenes in the gold market to make the dollar look worthy of being the world's reserve currency when of course it is not equal to the demands of that esteemed role. The U.S. government does this by trying to keep the gold price low, but this is an impossible task. In the end, gold always wins -- that is, its price inevitably climbs higher as fiat currency is debased, which is a reality understood and recognized by government policymakers.

So recognizing the futility of capping the gold price, they instead compromise by letting the gold price rise somewhat, say, 15 percent per year. In fact, against the dollar, gold is actually up 16.3 percent per year on average for the last eight years. In battlefield terms, the U.S. government is conducting a managed retreat for fiat currency in an attempt to control gold's advance.

Though it has let the gold price rise, gold has risen by less than it would in a free market because the purchasing power of the dollar continues to be inflated and because gold remains so undervalued notwithstanding its annual appreciation this decade.

These gains started from gold's historic low valuation in 1999. Gold may not be as good a value as it was in 1999 but it nevertheless remains extremely undervalued.

For example, until the end of the 19th century, approximately 40 percent of the world's money supply consisted of gold, and the remaining 60 percent was national currency. As governments began to usurp the money-issuing privilege and intentionally diminish gold's role, fiat currency's role expanded by the mid-20th century to approximately 90 percent. The inflationary policies of the 1960s, particularly in the United States, further eroded gold's role to 2 percent by the time the last remnants of the gold standard were abandoned in 1971.

Gold's importance rebounded in the 1970s, which caused Volcker to lament the so-called mistakes of policymakers. Its percentage rose to nearly 10 percent by 1980. But gold's share of the world money supply thereafter declined, reaching about 1 percent in 1999. Today it still remains below 2 percent.

From this analysis it is reasonable to conclude that gold should comprise at least 10 percent of the world's money supply. Because it is nowhere near that level, gold is undervalued.

So given the ongoing dollar debasement being pursued by U.S. policymakers, keeping gold from exploding upward to a true free-market price is the first thing they gain from their interventions in the gold market. The other thing they gain is time. The time they gain enables them to keep their fiat scheme afloat so they can benefit from it, delaying until some future administration the scheme's inevitable collapse.

So how does the U.S. government manage the gold price?

They recruit Goldman Sachs, JP Morgan Chase, and Deutsche Bank to do it, by executing trades to pursue the U.S. government's aims. These banks are the gold cartel. I don't believe that there are any other members of the cartel, with the possible exception of Citibank as a junior member.

The cartel acts with the implicit backing of the U.S. government, which absorbs all losses that may be taken by the cartel members as they manage the gold price and which further provides whatever physical metal is required to execute the cartel's trading strategy.

How did the gold cartel come about?

There was an abrupt change in government policy around 1990. It was introduced by then-Federal Reserve Chairman Alan Greenspan to bail out the banks back then, which, as now, were insolvent. Taxpayers were already on the hook for hundreds of billions of dollars to bail out the collapsed "savings and loan" industry, so adding to this tax burden was untenable. Greenspan therefore came up with an alternative.

Greenspan saw the free market as a golden goose with essentially unlimited deep pockets, and more to the point, saw that these pockets could be picked by the U.S. government using its tremendous weight, namely, its financial resources for timed interventions in the free market, combined with its propaganda power by using the news media. In short, it was easier to bail out the insolvent banks back then by gouging ill-gained profits from the free markets instead of raising taxes.

Banks generated these profits through the Federal Reserve's steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990 and the Bank of Japan was pursuing a zero-interest-rate policy to try reviving the Japanese economy. A U.S. bank could borrow Japanese yen for 0.2 percent and buy U.S. T-notes yielding more than 8 percent, pocketing the spread, which did wonders for bank profits and rebuilding the bank capital base.

Gold also became a favorite vehicle to borrow because of its low interest rate. This gold came from central bank coffers, but central banks refused to disclose how much gold they were lending, making the gold market opaque and ripe for intervention by central bankers making decisions behind closed doors. The amount lent by central banks has been reliably estimated in various analyses published by GATA as between 12,000 and 15,000 tonnes, nearly half of total central bank gold holdings and four to six times annual gold mine production of 2,500 tonnes. The banks clearly jumped feet first into the gold carry trade.

The carry trade was a gift to the banks from the Federal Reserve, and all was well provided that the yen and gold did not rise against the dollar, because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which, if allowed to rise high enough, would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell half of its gold holdings. Gold was driven to historic lows, as noted above, but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered and demand for physical gold began to climb.

As demand rose, another more intractable and unforeseen problem arose for the gold cartel.

The gold borrowed from the central banks had been melted down and turned into coins, small bars, and monetary jewelry that were acquired by countless individuals around the world. This gold was now in "strong hands," and these gold owners would part with it only at a much higher price. So where would the gold come from to repay the central banks?

While the yen is a fiat currency and can be created out of thin air by the Bank of Japan, gold is a tangible asset. How could the banks repay all the gold they borrowed without causing the gold price to soar, worsening the marked-to-market losses on their remaining positions?

In short, the banks were in a predicament. The Federal Reserve's policies were debasing the dollar, and the "canary in the coal mine" was warning of the loss of purchasing power. So Greenspan's policy of using interventions in the market to bail out banks morphed yet again.

The gold borrowed from central banks would not be repaid after all, because obtaining the physical gold to repay the loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government's managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn't notice. Given gold's "canary in a coal mine" function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel.

So the objective is to allow the gold price to rise around 15 percent per year while enabling the gold cartel members to intervene in the gold market with implicit government backing in order to earn profits to offset the growing losses on their gold liabilities. The gold cartel's trading strategy to accomplish this task is clear. The gold cartel reverse-engineers the black-box trend-following trading models.

Just look at the losses taken by some of the major commodity trading managers on their gold trading over the last decade. It is hundreds of millions of dollars of client money lost, and the same amount gained for the gold cartel to help offset their losses from the gold carry trade -- all to make the dollar look good by keeping the gold price lower than it should be and would be if it were allowed to trade in a market unfettered by government intervention.

As I see it there are only two outcomes. Either the gold cartel will fail or the U.S. government will have destroyed what remains of the free market in America. I hope it is the former, but the flow of events from Washington and the actions of policymakers suggest it could be the latter.

------------

James Turk is founder and chairman of GoldMoney.com, editor of the Freemarket Gold & Money Report, co-author of "The Coming Collapse of the Dollar," which was recently updated in a new edition as "The Collapse of the Dollar" (www.dollarcollapse.com), and a consultant to the Gold Anti-Trust Action Committee Inc.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16

9:05p ET Friday, March 27, 2009

Dear Friend of GATA and Gold (and Silver):

GATA Board of Directors member Adrian Douglas, editor of the Market Force Analysis letter (http://www.marketforceanalysis.com/), has combined data from the U.S. Commodity Futures Trading Commission and the Office of the Comptroller of the Currency to show that the suppression of the prices of gold and silver in the last several years correlates exactly with the growing concentration of the short positions held by two U.S. banks, JPMorgan Chase and HSBC.

Short of the official admissions of the gold price suppression scheme collected and published by GATA over the years, Douglas' report is probably the best proof yet, and certainly the most detailed. Douglas' report is titled "Pirates of the COMEX" and you can find it in PDF format at GATA's Internet site here:

http://www.gata.org/files/PIRATES-OF-THE-COMEX.pdf

GATA's supporters may be wearying of our many similar requests, but only persistence pays off, so we ask you to print copies of Douglas' report and send them -- by regular mail, not e-mail, which is ignored -- to your U.S. senators and representatives with a covering letter requesting an explanation as to why nothing is being done to stop this market manipulation. For our friends outside the United States, please send copies with similar letters to your own national legislators.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16

By James Turk
Copyright 2009 by James Turk. All rights reserved.
Friday, January 16, 2009

An important document buried in the Federal Reserve's archives has been discovered by writer and researcher Elaine Supkis. This document is posted on her blog at:

http://emsnews2.wordpress.com/2009/01/15/1961-top-secret-fed-reserve-gol...

The document, which is marked "Confidential," is from the papers of William McChesney Martin Jr., and this collection is held by the Missouri Historical Society. A scanned image of the original document is posted by the Federal Reserve Bank of St. Louis at the following link:

http://fraser.stlouisfed.org/docs/historical/martin/23_06_19610405.pdf

Martin was the longest-serving chairman of the Board of Governors of the Federal Reserve System, and worked there under five U.S. presidents from April 1951 to January 1970. It was during his tenure that the dollar devolved from "as good as gold" to a perennially inflated fiat currency backed by nothing but government promises, which makes one ponder what could have happened to the dollar had Martin been an advocate of sound money dedicated to preserving the dollar's link to gold. Instead, during his tenure the U.S. Gold Reserve declined by nearly one-half from 633.2 million ounces to 339.5 million ounces, while M3, the total quantity of dollar currency, soared more than three-fold from $190.0 billion to $616.1 billion.

The author of this Federal Reserve document is not clear, but was obviously written by a senior staffer who was not only familiar with the Fed's operation and that of the Treasury, but also well attuned to their policies and procedures. It appears to have been written by someone in the Federal Reserve Bank of New York, given the obvious familiarity and extensive knowledge of the writer with that branch's trading desk that executes trades for the Federal Reserve and the Treasury, which explains why this document is so interesting and important.

It was written in April 1961, and the run on the dollar had already begun. It was becoming increasingly clear that the U.S. government was not managing the dollar according to the rules and the intended goals of the 1944 Bretton Woods Agreement. The dollar was being debased under Martin's chairmanship, and as a consequence, gold had begun to flow out of the U.S. Treasury as dollar holders realized that one ounce of gold was worth more than $35, the fixed exchange rate then in place. By April 1961, the U.S. Gold Reserve had already declined significantly from the beginning of Martin's tenure to 498.1 million ounces.

So the warning signs for the dollar were already apparent, not only to dollar holders, but also to the U.S. government. As this document makes clear, the government realized that the monetary course it was pursuing could not be sustained. Consequently, policy makers realized that something would need to be done, and this "confidential" Federal Reserve memo was obviously prepared to analyze one of the alternatives available to policy makers.

The document does not explain the alternatives, but there were three. It is the same three alternatives all governments have when deviating from the rules of the gold standard.

First, the government could follow the aims intended from Bretton Woods and raise interest rates to reduce new loan creation and the quantity of dollars. This action would dampen economic activity, and reverse the outflow of gold, thereby enabling the gold standard to be maintained.

Second, it could devalue the dollar as Franklin Roosevelt had done. In this way, the remaining weight of gold in the U.S. Gold Reserve would provide sufficient backing to the dollar, which would stop the redemption of dollars for gold.

Third, it could try experimenting with a course not taken before -- government intervention to force the market to bend to government will. This alternative was the worst of the three, and unfortunately it is the one chosen by the government, which brings me back to this newly discovered confidential document of the Federal Reserve.

In short, it lays out what the Treasury and Federal Reserve needed to do in order to begin intervening in the foreign exchange markets, but there is even more. This document plainly shows what happens when government operates behind closed doors. It also makes clear the motivations of the operators of dollar policy long described by the Gold Anti-Trust Action Committee and its supporters -- namely, that the government would pursue intervention rather than a policy of free markets unfettered by government activity. The run to redeem dollars for gold had put the government at a crossroads, forcing it to make a decision about the future course of dollar policy. This paper describes what the government would need to do by choosing the interventionist alternative.

This document provides primary, original source supporting evidence that GATA has been right all along.

I have long hoped that a "confidential" document like this one would eventually emerge. There are no doubt countless more like it, as evidenced by the Federal Reserve's and the Treasury's refusal to provide all the documents requested by GATA under its recent Freedom of Information Act request. Maybe those documents will eventually see the light of day too.

In the meantime, this newly discovered document is all we have. And a close reading of if is warranted because it is so revealing.

To analyze this document, I have copied it below in its entirety in italics, with my occasional comments embedded in the text in order to highlight key points.

Confidential -- (F.R.)

I assume F.R. stands for Federal Reserve, but it could also be the author’s initials.

U.S. Foreign Exchange Operations: Needs and Methods: Introduction

The current international position of the United States clearly demonstrates the advantages that would exist if the United States had at its disposal the resources and techniques for undertaking foreign exchange operations as a permanent feature of public policy. The present international financial structure, characterized by convertibility of the major currencies, relatively free short-term capital markets, and the existence of large dollar holdings by foreigners (both public and private), has greatly enhanced the possibility of large recurring movements of capital out of and into the United States. Such movements of short-term capital, as the Federal Reserve System has learned from its experience of the past year, can greatly complicate the execution of an appropriate domestic monetary policy.

Not really. What the Fed says can "complicate" simply means that the market process was moving in a direction different from what the Fed would like to see.

By 1961 the mechanisms of the gold standard were well understood, there being over 250 years of experience with it since its invention by Sir Issac Newton around 1700. What this document is really saying is that the Fed wants to let the banks extend credit and make greater profits by leveraging their balance sheets to take greater risk, without any consequences to the value of the dollar. That aim is of course an impossible task because credit extensions by banks eventually become too large and therefore imprudent, which debases the dollar. This debasement of the dollar had already begun by April 1961, which explains why dollars were being redeemed for gold.

Similar problems have been faced by monetary authorities abroad, in both the recent period and in earlier years. Solutions to problems relating to shifts in capital flows and their impact on national balances of payments, together with the relationship of such international flows to domestic monetary policies are perhaps best approached through joint action by central banks.

So-called "coordinated" central bank action was not practiced or needed under the gold standard. Gold simply flowed in or out of a country, depending on its monetary policy. So central banks only needed to look at the flows of gold to or from their own vault to see what they should be doing.

It is no accident that individual European central banks have developed highly sophisticated techniques of operating in the foreign exchange market, and have supplemented individual operations by joint measures of both a formal and an informal, ad hoc, character.

The European Common Market had already been created, so central banks there were learning to operate in a new environment with new circumstances. The European experience was not a reason to jettison U.S. monetary policy or ignore the precepts of Bretton Woods.

Monetary authorities in the United States, on the other hand, have not, until recently, operated in the foreign exchange market, but have maintained the stability (and primacy) of the dollar in the international currency structure by standing ready to buy gold from, and sell it to, foreign monetary authorities who either need or acquire dollars for exchange purposes. There can be little question that the interconvertibility of gold and the dollar at a fixed price will have to remain the keystone of the international currency structure.

If it didn't remain the keystone, the United States would be abrogating its commitments under the Bretton Woods Agreement.

At the same time, foreign exchange dealings by the United States monetary authorities, when judiciously applied, can serve to reduce capital flows, to dampen speculation, to minimize potential reserve effects, and hence, to minimize the impact on the United States gold stock.

So a way would have to be discovered to prevent the U.S. government from defaulting on its commitment to redeem $35 for one ounce of gold while still enabling the banks to expand credit imprudently in order to make greater profits.

The basic purpose of such operations would be to maintain confidence in the dollar.

This statement confirms one of the basic planks of much of the work by me and others that has been published by GATA over the years. The efforts to cap the gold price have one aim. It is to make the dollar look worthy of being the world's reserve currency when in fact it is not.

Foreign exchange operations would, of course, not be a substitute for other appropriate and basic actions to maintain the integrity of the dollar, but would serve as a highly useful and flexible addition to other monetary and fiscal policy measures.

There are other measures used by central banks that are not mentioned. These include propaganda and jawboning. Central banks only tell you what they want you to hear. If that weren't true, they would not operate behind closed doors, or as the Treasury and Federal Reserve have done, deny FOIA requests.

The continuation and expansion of such operations as have recently been executed respecting the German mark could make the United States an important factor in the exchange market and thus help to enhance its bargaining position in any international approach to currency problems.

Their objective was to make certain that the dollar remains the principal currency, to enjoy the power that comes with that privileged role.

Moreover, the holding of foreign currencies by the United States might strengthen confidence in such currencies and add to their usefulness in international trade and payments and hence contribute to an expansion of the movement of goods and services among countries.

I. Federal Reserve Operations for Its Own Account

The account with the Bank of England was opened in 1917 and subsequently used for a number of transactions involving exchange operations, investments and the purchase and earmark of gold. The account at the Bank of France was opened in 1918 in order that we might establish a sight account for possible use in transactions for the stabilization of exchange rates.

The Federal Reserve began operation in December 1913. It was envisioned to provide an "elastic currency" by providing credit during the bust that follows the boom that results from easy credit policies of banks. Its focus was domestic. There was nothing in its mandate to begin opening accounts with other central banks, but it didn't take long before the Fed did so.

The BIS account was opened in 1931 in the sum of $10 million.

The BIS is the Bank of International Settlements. It is noteworthy that the Fed chose to transact with the BIS, even though the U.S. government's participation in it was rejected by Congress.

In a letter from Mr. Harrison to Chairman Eccles in September 1936 it was stated that "The deposit was made for the same purpose, essentially, as the credits which the Federal Reserve Banks extended to foreign central banks during 1931. It was made in lieu of our having to respond to requests for assistance on behalf of various smaller European central banks." It was then used for the purchases of prime commercial bills for our account and finally closed in 1946.

Much is unclear here -- for example, why the Fed was extending credit to foreign central banks. But here's one way the Fed can hide its interventions. The BIS was buying "commercial bills" for the account of the Fed. If these were booked on the BIS's balance sheet and only guaranteed by the Fed, these bills would not be visible on the Fed's own balance sheet. The Fed would have only a contingent liability, which would only be recorded off-balance sheet in a memorandum account.

An account with the Bank of Canada was opened in 1943, almost entirely as a courtesy measure. Other accounts included those with Iran, Egypt, and India which were opened in our name in order that the Treasury would not be identified with certain transactions. These latter accounts have been closed.

Not only does the Fed want to hide its tracks, but so does the Treasury. We can only speculate why the Treasury would not want to be identified, but here's an interesting possibility. Was it to hide the money going from the CIA to fund the U.S. puppets in Iran, Egypt, and India?

Authority

Authorization for the opening of accounts abroad is contained in Section 14(e) of the Federal Reserve Act.

As noted above, the Federal Reserve Act was amended to grant the power to open these foreign accounts once the Fed was created, presumably because the Fed asked for this power even though it was not part of its original mandate. There were amendments made by acts of Sept. 7, 1916 (39 Stat. 754); June 21, 1917 (40 Stat. 235); and April 7, 1941 (55 Stat. 131).

Such accounts are subject to Regulation N and to other rules prescribed by the Board of Governors as contained in the "Statement of Procedure With Respect to Foreign Relationships of Federal Reserve Banks." Under Section 12A of the Federal Reserve Act, the investment of funds in the accounts are also subject to decision by the FOMC. Basic authority was granted in a November 13, 1936, resolution which authorized each Federal Reserve Bank to "purchase and sell at home and abroad cable transfers and bills of exchange and bankers acceptances payable in foreign currency to the extent that such purchases and sales are deemed necessary or advisable in connection with the establishment, maintenance, operation, increase, reduction or discontinuance of accounts of Federal Reserve Banks in foreign countries." Since at least 1944, the resolution has been reviewed regularly by the FOMC and, in each instance, the basic authority has not been rescinded. Finally, it should be noted that "due from" accounts with foreign banks may be participated among other Federal Reserve Banks; in the event of such participation, the operating bank make weekly reports to the participating banks.

Previous operation of the accounts has been carefully circumscribed. Thus, in a letter dated May 8, 1944, from Mr. Sproul to Mr. Peyton (President, Minneapolis Reserve Bank), it was stated that "The balances of the Bank of England, the Bank of France, and the BIS were approved by the Board of Governors at or near the figures shown; -- I guess to achieve something that is "at or near" is close enough for government accounting -- they they could not be increased (except for minor adjustments) without the prior approval of the Board of Governors." In substance, operations by the Federal Reserve Bank of New York are possible with the approval of the Board of Governors, the FOMC, and after participation has been offered to the other Federal Reserve Banks.

One approach would be for the Federal Reserve Bank of New York to purchase foreign exchange, either in the market or from the Treasury in connection with the repayment of foreign official debt or a drawing on the International Monetary Fund. Purchases of exchange in the market would, in view of current pressure on the dollar, be quite limited; favorable balance-of-payments developments, however, would make such operations possible in the future.

We are now starting to get into the substance of this document. The implications of government intervention begin to be explored.

In the case of transactions with the Treasury, the foreign exchange could be acquired by the Reserve Bank against the credit of dollars to the Treasury's account with the Federal Reserve Bank in a manner similar to the current practice with regard to the acquisition of gold certificates.

The U.S. Gold Reserve had by 1961 already been turned into dollar currency (i.e., "monetized") by the Federal Reserve. While the Treasury still nominally controls the gold because most of it is stored within facilities it manages, nominal ownership of the gold reserve has been transferred to the Federal Reserve.

The reserve effects of such operations would be similar to those involved in purchases of gold certificates and would require coordination with System open market operations as discussed below. Arrangements for the conduct of operations would have to be worked out among the FOMC, the Board of Governors, the Federal Reserve Bank of New York and other participating Reserve Banks. Some of the technical arrangements used by the System in the twenties and thirties might well be adaptable to current needs.

The 1920s and 1930s was a period when the classical gold standard had already been replaced by a gold exchange standard, where central banks intervened in gold and foreign exchange markets to prevent ("neutralize" in central bank words) gold flows between countries.

In the immediate instance, for example, the proposed German debt repayment of some $700 million could be made partially in dollars and partially in Deutsche marks (DM). The portion received by the Treasury in DM could be sold immediately to the Federal Reserve Bank against dollar credit to the Treasury. This procedure might serve to meet any requirement that the United States receive dollars in connection with the payment of foreign debt while, at the same time, furnishing foreign exchange resources for market operations and adding leverage to the conduct of United States international financial policy. The holdings of foreign money could then be used to operate in the exchange market, or, as occasion warranted, to "buy out" some portion of the Bundesbank dollar reserve or to meet other objectives.

In other words, if you intervene in foreign exchange markets, you need ammunition to do so. The easiest way to acquire the necessary ammunition is to create more credit.

In the above example, the Bundesbank would create Deutsche marks to repay a dollar loan, and these marks would then be turned into dollars by the Fed. The Bundesbank and Fed in effect create on their respective books entries that simply offset each other but do not get settled. These new credits remain outstanding. The net result is an expansion in the quantity of marks and dollars. It's easy to "repay" loans when you can simply create money "out of thin air" in this way with bookkeeping entries.

If operations were to be conducted by the Federal Reserve Bank on its own account, some provision would have to be made for protection against changes in the value of the currencies held, at least until such time as reserves had been accumulated. This could be provided by an agreement under which the United States would hold the Federal Reserve Bank harmless against loss arising out of devaluation of the foreign currency; appropriate legislation might be required in this connection.

Here is another principle contention by me and other GATA supporters. The above makes clear that the federal government acts as a backstop for any losses taken as a result of market intervention. Thus the gold cartel can act with abandon, knowing that it will be made whole by the federal government.

We are also seeing this principle being used in the numerous bank bailouts being regularly handed out by the federal government. For example, just today the Bank of America chairman said one reason he offered to buy Merrill Lynch when it was insolvent was for the "good" of the country, as if that was an excuse for a bad business decision. But it is being used as an excuse by it to get the federal government to backstop the transaction by bailing out Bank of America.

Federal Reserve Coordination of Open Market Operations

Federal Reserve operations in foreign exchange would require the closest coordination with open market operations. Indeed, they might become an integral part of such operations and could, in some circumstances, add desirable flexibility to System policy.

In other words, the Fed is grasping for excuses to broaden the scope of its market interventions.

On other occasions, the reserve effects of foreign exchange transactions might have to be offset by other open market operations in order to implement the Federal Open Market Committee's policy. Such offsetting operations would not represent an undue complication of System open market operations since in most cases the foreign exchange operations are likely to be alternatives for exchange operations by foreign monetary authorities, the timing and size of which have recently complicated the conduct of open market operations. System operations in foreign exchange, by permitting closer coordination as to timing and amounts, could have beneficial effects on over-all System operations in relation to the money market.

Here again there is blatant promotion of the heretofore rudimentary idea of coordinated central bank intervention.

To illustrate the effect on reserves, assume, for example, a German payment of $300 million in DM equivalent to the Treasury. The sale of these Deutsche marks by the Treasury to the Federal Reserve Bank would increase the Treasury's balance at the Reserve Bank and perhaps reduce the need for calls upon tax and loan accounts, or necessitate redeposits in "C" banks.

"C" banks is unclear, but probably means banks affected by Regulation C, or less likely, central banks.

Expenditures (or redeposits) by the Treasury would, of course, add reserve dollars to member bank accounts. Sales by the Federal Reserve Bank of DM in the market for dollars would directly reduce member bank reserve balances. Even in a strictly inter-central bank transaction important effects would be evident. Thus, if the Federal Reserve Bank used DM 100 million to buy $25 million from the Deutsche Bundesbank, simply by utilizing book entries for the transaction, the account of the Deutsche Bundesbank on the books of the Reserve Bank would be reduced by $25 million; the Deutsche Bundesbank might have to sell Treasury bills from its investment account in order to replenish its deposit account with the Reserve Bank. A sale of Treasury bills in the market would immediately affect bank reserves. Clearly, all operations would require close and continuing coordination.

We read above that the implications of new intervention methods are being considered. This process becomes particularly important when the desire to operate in secret is discussed next.

Meeting Requirements of Secrecy and Anonymity

It is of fundamental importance that foreign exchange transactions generally be subject to public analysis only with some delay.

Don't be misled here by the high-sounding note that disclosure will be made eventually. Assertions later in the memo make clear the desire to conduct these interventions without any disclosure, therefore to presumably enable the Fed to act without any accountability.

It is, therefore, necessary that published statements and data be appropriately devised.

This is an interesting choice of words. According to Webster's, "devise" means "to plan to obtain or bring about: plot," and Webster's defines "plot" as "a secret plan for accomplishing a usually evil or unlawful end."

I think the choice of "devise" speaks clearly to the mindset of the author of this memo and reflects the environment in which he was operating. Namely, central banks want secrecy and seek ways of operating as if they are above the law to achieve whatever ends they seek. We see this same attitude today in policy makers who imply that they are acting in the "national interest," even if they are taking actions that manifestly are unconstitutional.

Some thoughts should first be given, however, to the question of immediate publicity if foreign funds are acquired in connection with official debt repayment. In all probability, the paying country as well as the United States will immediately announce the payment. Perhaps, however, no mention would need to be made of the fact that some part or all of such repayments did not take the form of dollars. On the other hand, if circumstances warranted, it might be useful to let it be known that a local currency repayment was made and that such funds were available for use in the exchange market.

The phrase "let it be known" illustrates one of the Fed's basic tools -- propaganda. The Fed uses the media to tell us what they want us to know, even if it is just a half-truth.

The immediate problem of publication involves the weekly statement of the Federal Reserve Bank of New York.

The memo now starts to consider the accounting implications of market intervention, and the resulting public disclosure.

At present, foreign exchange holdings are included in "Other Assets," a category which includes in addition to such "due from" accounts, loans and securities past due three months; assets acquired account (industrial loan and closed banks); reimbursable expenses and other items; accrued interest; premium on securities; overdrafts; deferred charges; currency and coin exhibits, etc. Generally, on the weekly statement of the New York Reserve Bank, "Other Assets" is a relatively small item ranging between $30 million and $100 million. (On the consolidated statement for the System, the item generally ranges between $125 million and $400 million.) Substantial fluctuations in the item (say, $50 million or more) might lead to rather immediate questioning and close analysis would probably reflect foreign exchange dealings with perhaps embarrassing promptness.

In other words, though the Fed wants to hide its interventions in this grab-bag entry of "Other Assets," it may not be able to do so effectively because it contemplates interventions that are too large, and therefore too noticeable for this accounting line item.

There should be some way to avoid this adverse result. Possibly "Other Assets" might be grouped into a broader category so that the net impact of foreign exchange dealings would not be so readily evident.

The obvious intent here is dishonest and deceitful accounting. Central banker hollow rhetoric is high on transparency but their practices aim for secrecy. They prefer to operate in darkness.

Net operations would also be reflected in the statements of condition published as of month-end in the Federal Reserve Bulletin with a month delay, and in the statement on earnings and expenses (under the items "other income" and "other expenses") reported in the February Bulletin covering the previous year. These data, however, are published with some delay and pose no problem.

With respect to forward operations, disclosure could be avoided if such commitments were carried simply as memorandum accounts and thus not be made available in any published data; before adopting such a method, it would be necessary to consider to what extent a contingent liability should be shown.

Today the so-called "forward operations" would be called derivative trades, which is another important element of GATA's discoveries over the years. The gold cartel prefers to deal in "paper gold," namely derivatives, as these contingent liabilities on central bank balance sheets can be hidden from public view.

Evaluation of Fed Operations For Its Own Account

A major advantage to be gained by Federal Reserve operations on its own account in the foreign exchange market arises from the fact that the Federal Reserve Bank can create dollars while the Treasury is restricted to the use of funds held by it.

In other words, the Fed believes it can create dollars "out of thin air," while the Treasury has to follow the law. The Constitution prevents the Treasury from creating "bills of credit," which is the framers' terminology for creating currency "out of thin air." But the Fed believes it can lawfully do so.

This does not mean that there are no limits on what the Federal Reserve could or should do. There are very practical limitations upon such operations, the more important revolving about the need to meet other objectives of open market policy, current pressures in the exchange market, and/or the willingness of central banks to deal directly by providing local currency against dollars (or vice versa).

The limits on the Fed of course disappear with its desire and aim to have opaque accounting.

ln substance, the creation and destruction of Federal Reserve credit would provide vast resources for foreign exchange operations and defense of the dollar.

The "defense of the dollar" is a high-sounding phrase, but is terribly misleading here. There is only one possible defense of the dollar, and that is not market intervention. It is following the mandate of the Constitution that the dollar is defined as a weight of gold or silver.

If the decision should be made to conduct Federal Reserve operations of this kind, there would be a vital need for sufficient latitude so that operations could be conducted effectively and promptly under such rules and regulations as the Board of Governors and the FOMC [Federal Open Market Committee] deemed appropriate. Finally, there is a subsidiary problem of arranging our weekly statements so as to avoid or delay publication of the details of our foreign exchange operations.

The key words here are "avoid ... publication." The Fed does not want anyone to see what it is doing.

II. Operations as Fiscal Agent for the Treasury

Federal Reserve Bank of New York operations as fiscal agent of the Treasury operating through the Stabilization Fund involve an area in which considerable experience has already been gained.

The "Stabilization Fund" referred to above is of course the supra-governmental Exchange Stabilization Fund, which operates at the discretion of the secretary of the treasury and the president and without Congressional oversight. The ESF has been labeled a "slush fund" for the Treasury by Anna J. Schwartz, who co-authored with Milton Friedman their monumental "Monetary History of the United States."

The ESF is another important part of my work as well as that of others, which shows that government intervention in the gold market is from the ESF. It has been a basic plank of various writers and analysts published by GATA that the ESF has been the centerpiece of the manipulation of the gold market.

Because the Federal Reserve at the time was not yet intervening in the foreign exchange market, the "considerable experience" gained by the Federal Reserve Bank of New York must clearly come from its intervention in the gold market. In this regard, note the amount of gold "in play" on the balance sheet of the ESF presented in the Fed's memo below. At the $35-per-ounce rate then in effect, the ESF held 2.7 million ounces of gold, an amount which equaled about 7.2 percent of annual production at the time.

Gross resources of the Stabilization Fund amount to about $336 million. The composition of these resources and the amount that in practice would be available are approximately as follows:

(C) Argentina can draw an additional $32 million, thus making total drawings $50 million. Mexico and Chile can draw $75 million and $15 million, respectively.

These footnotes show that the ESF was hard at work with its various interventions back then. I am uncertain why any of those interventions would be required if the ESF's sole aim was to defend the dollar.

The above resources provide some latitude for operation, although exchange purchases in the market face at present the obstacle of current pressure on the dollar. Stabilization Fund operations are provided for under Section 10 of the Gold Reserve Act which grants wide-ranging authority to the Secretary of the Treasury, with the approval of the President. Use of the Stabilization Fund, however, would be limited to current resources since it appears that permanent additions to, or reductions in, assets of the Fund would require Congressional approval and appropriation.

Again, here is another example of the Fed's desire to work outside congressional oversight, and indeed, outside any accountability to the public.

There would, for example, seem to be considerable obstacles toward enlarging the Stabilization Fund by turning over to it, directly, official debt repayments from abroad. If, however, prepayments -- particularly in local currencies -- are contemplated, such prepayments might be sufficiently attractive so that Congress would approve allocation of those resources to the Stabilization Fund.

Within the resources, the holdings of (and operations in) foreign currencies could be readily handled. Operations could be either in the spot or forward market, although there would be some real advantage, in favor of forward transactions since such operations tend to afford maximum use of the Stabilization Fund's resources.

In other words, off-balance sheet derivative contracts that enable tremendous leverage would enable the ESF to have a greater impact in its market interventions than by dealing in an unleveraged way in the spot market.

Insofar as forward contracts involved parallel operations with foreign central banks, it would be sufficient for the Fund to hold a partial reserve adequate to cover any possible loss in the event of default. Thus, for example, if the Bundesbank were to fail to honor its contracts with us under present arrangements, it would be necessary for the Fund actually to buy spot marks for delivery to meet the contract at maturity. The Fund would have to have dollars to pay for the spot marks but it would immediately receive dollars when it delivered the spot marks to the purchaser under its forward contract. The possibility of loss would lie in the difference between the original contract price and the spot rate on the day the purchase would have to be made.

The notion of a central bank default is quaint, and speaks to the simple and undeveloped nature of this different path of government intervention being analyzed in this memo. We know today that governments and central banks don't default under their local currency (as opposed to foreign currency) obligations because they simply create more of their local currency "out of thin air" to meet any obligation. Inflation is the result.

If the foreign central bank were not under a parallel commitment, then a partial reserve would need to be held to cover possible losses in buying spot currencies (or shorter forward currencies) to meet contractual obligations. If parallel contracts were held, a reserve equal to 10 per cent of total obligations would seem desirable, subject to the proviso that the reserve would be adequate to cover total obligations undertaken for any given day. If no parallel contract was involved, a reserve somewhat larger than 10 per cent would probably be needed. Use of Fund resources would then actually be expanded by some multiple of the amount currently available. Thus, under parallel contracts, the $170 million noted as available in the table above might cover forward contracts of up to, say, $1 billion.

Today of course the leverage is much greater. For example, we saw how Long Term Capital Management was leveraged by more than 100-1, and it wasn't even a central bank with a printing press.

Spot operations would undoubtedly be necessary on occasion. Obviously such purchases would deplete the reserve by the dollar equivalent. Operations accordingly would be restricted to the amounts actually available in the Fund as noted above.

Here is another key point. This explanation of spot market transaction highlights exactly the point of many GATA writers that intervention in the spot market is done only sparingly and as a last resort because gold in central bank vaults is a diminishing resource.

Once it leaves the vault, the gold will likely be impossible to retrieve at current prices because it is being absorbed by "strong hands" in the markets around the world. These "strong hands" would rather own physical metal than any national currency.

Supplementing Stabilization Fund Resources

Added foreign exchange resources might be made available from a drawing on the International Monetary Fund or foreign debt repayments if such receipts were deposited in a special account of the Treasury which might be called the "Special Foreign Exchange Account," with transactions being channeled through the Stabilization Fund and with the Federal Reserve Bank of New York acting an agent. Such a procedure might be feasible if -- as seems likely -- the resources of the Stabilization Fund could not readily be supplemented by direct allocation.

This accounting treatment is clearly intended to hide the transaction in the ESF balance sheet. Secrecy is always a paramount objective of central banks, which is made clear by the following section.

Meeting Requirements of Secrecy and Anonymity

Insofar as Treasury statements are concerned, details of the Stabilization Fund are published quarterly with a delay of five months or so. Published figures are for end-of-quarter. Operations during the period are also shown on a net basis in the detailed statements of income and expense contained in the Treasury Bulletin. Thus, there seems to be sufficient publication delay from the Treasury side to meet requirements.

There is here not only some publication delay but a clear intent to hide. Note that operations are shown on a "net basis," which obviates the disclosure that would otherwise occur if each activity were identified and reported on a gross basis.

With respect to Stabilization Fund assets in the form of securities or foreign exchange, information is available only from the above sources with the noted delay; these assets do not appear in data published by this Bank or the Board. Current statements by this Bank and the Board, however, do reflect Stabilization Fund holdings of dollars and gold. Dollar assets are included in "Other Deposits" on our weekly statement and the System's consolidated statement.

This point makes clear that the ESF operates through the Federal Reserve Bank of New York. That is where the ESF keeps its dollar assets. In other words, that is where the ESF keeps its operating account (what individuals or companies might call a checking account).

The over-all category includes a range of other items such as nonmember bank clearing accounts, Regulation K reserves, deposit accounts of the IADB, IBRD, IDA, IFC, IMF, UN No. 1, etc.

It looks like UN No. 1 means that the United Nations keeps its operating account at the Federal Reserve Bank of New York too.

There is some nominal variation in this amount over weekly periods, but if net transactions in foreign exchange were of a substantial nature (say, $50 million or more), fairly close analysis of foreign exchange operations could be gained from these figures. Again, some regrouping of categories or use of special accounts would be necessary.

More to the point, the "regrouping of categories or use of special accounts" would be used to hide from the public and any congressional oversight the interventions by the Federal Reserve.

Gold holdings of the Stabilization Fund may he obtained with about a one-month delay from the Federal Reserve Bulletin, which shows the total gold stock and so-called Treasury stock. Moreover, a gold sale or purchase would be reflected in earmarked gold, but again with about a month to a six-week delay (the February Federal Reserve Bulletin shows data for January 31, 1961).

This disclosure confirms the conclusions in my article "The Smoking Gun" --

http://www.fgmr.com/smokegun.htm

-- published in December 2000, which used this reporting anomaly described above to illustrate ESF intervention in the gold market.

I should add that my article illustrated ESF intervention "for a time" because shortly after my article was published, the Federal Reserve Bulletin was changed. All ESF references were removed, once again hiding government intervention in the gold market, as explained in my article, "What Is Happening to America's Gold?""

http://www.fgmr.com/whatgold.htm

Published data may be illustrated as follows, bearing in mind that figures would be net, and hence any individual transaction might be offset. For illustration, assume that the Stabilization Fund purchases DM 50 million in the market with dollars currently in the account.

Essentially, the only real problem related to the foreign exchange position of the Fund would lie in our weekly statement which would show a direct impact on the Fund’s dollar holdings, as reflected in the item "Other Deposits." In order to minimize immediate analysis of operations over the short-run, it would be desirable to include a wider range of items in these categories. However, operations could under present conditions be masked to some extent by careful supervision of the account and a selective use of "swaps."

Here are two more important admissions. First, the accounting will be changed to make the Federal Reserve's balance sheet more opaque, which not only flies in the face of generally accepted accounting practices but also runs roughshod over prudent public policy requirements for close scrutiny of government operations.

Second, and just as importantly, is the mention of swaps. Several GATA supporters, including me, have written about the ways that swaps have been used to intervene in the gold market. Here we learn that swaps were a tool of the Federal Reserve (and presumably the ESF and Treasury) as far back as 1961. Because these entities were not yet intervening then in the foreign exchange market, we can only conclude that up to the writing of this "Confidential" memo, the swaps were being used in the gold market.

III. Conclusion

The approaches discussed above to foreign exchange dealings are suggested possibilities. Whatever the technique used, the United States will run some risk of changes in currency values. To have effective protection of the dollar, such risks -- minimized by careful management -- would seem a relatively small price to pay. Once a basic choice is made as between operations for the account of the Federal Reserve Banks and operations by the Reserve Bank for the Treasury as fiscal agent, detailed investigation of coordinating techniques and the requirements of secrecy can be made. It may be that fiscal agency operations offer some advantages in the way of speed and simplicity. However, there are distinct benefits to be gained from Federal Reserve operations for its own account. Foreign exchange operations by central banks are considered a normal part of their activities, and there is much to be said for utilizing resources that are not directly limited by a required cash position. April 5, 1961.

This Federal Reserve memo discovered in William McChesney Martin's papers is another important piece of evidence that monetary policy in the United States has run amok. It is one of the formative documents that have put U.S. monetary policy in general and dollar policy in particular on the wrong path. It clearly describes the intent of the Federal Reserve to pursue a dollar policy that was not only hidden from public view but also contrary to the law at the time, which defined the dollar as a weight of gold and required the maintenance of this standard of value. It was also contrary to the international obligations of the United States under the Bretton Woods Agreement that required the dollar'’s link to gold.

Rather than acknowledging that the dollar by 1961 had become debased, which would lead to a tightening of monetary conditions by raising interest rates (the traditional central bank response to maintain the gold standard) or a devaluation of the dollar to reflect its debased state (the approach taken by Franklin Roosevelt), the aim in 1961 was to pursue a different path. I purposely don't say it was a "new" path, because it wasn't. It had been tried before countless times by many governments and their central banks, and it has never worked. It is a path to the fiat currency graveyard, and the dollar was put on it by bureaucrats in the Federal Reserve serving their masters, the banks.

Today's problems with the dollar and countless insolvent banks thus began decades ago. Bankers got what they wanted, a license for the unbridled extension of credit. As a result, we see clearly today what they have wrought. They have nearly collapsed their banks and the dollar as a consequence. So the emergence of this "Confidential" memo from the Federal Reserve is timely, and hopefully today's policy makers can learn from it.

----

James Turk is the founder and chairman of GoldMoney.com, editor of the Freemarket Gold & Money Report, and co-author of "The Coming Collapse of the Dollar," which has been updated for a newly released paperback version, now entitled "The Collapse of the Dollar" (www.dollarcollapse.com).

----

The confidential memorandum from the Martin archive can be found here:

http://www.gata.org/files/FedBlueprintForIntervention.pdf

* * *

Help keep GATA going
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.

Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
New Orleans Marriott Hotel
Thursday, November 13, 2008

A year ago it was still a struggle to persuade some people that the gold and silver markets were being manipulated by Western central banks. Now, after months of financial turmoil around the world and constant central bank intervention in the markets, to believe that the gold and silver markets are not being manipulated by central banks you have to believe that those markets are the only markets not being so manipulated.

Why are the gold and silver markets manipulated by governments and the financial houses that serve as their agents? Because gold and silver are competitive currencies and because their value greatly influences interest rates, which ordinarily governments like to keep low.

Last year at this conference I reviewed in detail the official documentations and admissions of the gold price suppression scheme. Those documentations and admissions remain posted at GATA's Internet site:

http://www.gata.org/node/5654

Today I'd like to review some evidence that has turned up more recently, as well as some related developments.

Maybe most interesting have been the studies of the U.S. Commodity Futures Trading Commission market reports done by silver market analyst Ted Butler and by Gene Arensberg, a market analyst for ResourceInvestor.com. Butler and Arensberg reported that as of August just two banks held more than 60 percent of the short positions in silver on the New York Commodities Exchange. This was an unprecedented and seemingly illegal concentrated short position, and it implied that the smashing down of silver was very much a manipulation by one or two very rich and powerful market participants, a destruction of the free market. Complaints about this concentrated short position prompted the CFTC to undertake still another investigation of the silver market, this time by a different division of the commission, its enforcement division. Further, CFTC Commissioner Bart Chilton has told GATA that the agency is investigating the gold market as well.

This week Arensberg found that the CFTC's latest report shows that just three or fewer banks now hold half the short positions in gold on the Comex and more than 80 percent of the silver short positions.

Also this week Butler obtained a copy of a letter from the CFTC to U.S. Rep. Gary G. Miller, R-California, that sought to explain the concentrated short position in silver. The CFTC's letter implied that this extreme short position resulted from JPMorganChase's acquisition of Bear Stearns in March. If we construe the CFTC's letter correctly, that would make MorganChase the big short in silver now and imply that, in financially underwriting MorganChase's acquisition of Bear Stearns, the Federal Reserve was also underwriting MorganChase's assumption of that short position in silver.

Of course MorganChase was also the bullion banker to Barrick Gold, the biggest gold shorter over the last decade. In 2003 Barrick told U.S. District Court Judge Helen Berrigan right here in New Orleans that, in shorting gold, Barrick had become the agent of the central banks in regulating the gold market and thus should share their sovereign immunity against lawsuits.

MorganChase is also the world's biggest issuer of interest-rate derivatives, instruments by which interest rates are suppressed.

All this causes GATA to believe that MorganChase is in effect an agency of the U.S. government, or rather, perhaps, that the U.S. government is an agency of MorganChase. In any case, MorganChase has had an intimate relationship with the U.S. government since the days of J. Pierpont Morgan himself.

Incidentally, Jean Strouse's 1999 biography of Morgan, which won the Bancroft Prize for American History and Diplomacy, recounts that Morgan's first big triumph in finance was to corner the gold market in New York in 1863 during the Civil War. Nearly 150 years later there really may be nothing new under the sun.

Also lately raising suspicion about surreptitious government intervention in the precious metals markets has been the refusal of the Federal Reserve and the Treasury Department to release to GATA hundreds of pages of government documents about the disposition of the U.S. gold reserve. The Fed has told GATA's lawyers that the documents are being withheld in part because their release might compromise information that is proprietary to private companies. Why anything about the U.S. gold reserve should be considered proprietary to anyone is beyond those of us at GATA -- unless, of course, the reserve is being used to manipulate markets surreptitiously.

But we at GATA do not feel picked on by the Fed and the Treasury. For the Fed and the Treasury seem to be treating everybody as if the disposition of public assets is nobody's business but Wall Street's. This week Bloomberg News Service reported that the Federal Reserve is refusing to disclose how much it has lent to particular banks and exactly what sort of collateral the Fed has accepted for those loans, which have reached hundreds of billions of dollars. For example, is the Fed valuing the same kind of collateral from different borrowers the same way, and lending against it at the same rate? Or is the Fed giving advantages to certain borrowers and not others, depending on their political influence and straitened circumstances? That is, are the Fed and the Treasury Department now being operated as the greatest patronage and market-rigging schemes in history? The government is concealing the evidence.

Since we last gathered here in New Orleans many of us been cowering under the prospect of more official-sector gold sales, particularly gold sales by the International Monetary Fund, which has approved a plan of selling gold to raise cash to replace the income it is no longer getting from interest on loans to developing countries. But despite more than a year of loud talk about it, the IMF has not sold any gold yet, and GATA suspects that the IMF really does not have the 3,200 tonnes it says it has, only a tenuous claim on the gold reserves of its member nations, particularly the United States, which has a veto on any IMF gold sales and has not approved any yet.

Back in April I tried to engage the IMF in a dialogue about its gold and I had an exchange by e-mail with an IMF publicist, Conny Lotze.

My first question was: "Your Internet site says the IMF holds 3,217 metric tons of gold 'at designated depositories.' Which depositories are these?"

Conny Lotze of the IMF replied, but not specifically. She wrote: "The fund's gold is distributed across a number of official depositories," adding that the IMF's rules designate the United States, Britain, France, and India as depositories.

My second question was: "If you'd prefer not to identify the depositories for security reasons, could you at least identify the national and private custodians of the IMF's gold and the amounts of IMF gold held by each?"

Conny Lotze replied, again incompletely: "All of the designated depositories are official."

My third question was: "Is the IMF's gold at these depositories allocated -- that is, specifically identified as belonging to the IMF -- or is it merged with other gold in storage at these depositories?"

Conny Lotze replied, still not very specifically: "The fund's gold is properly accounted for at all its depositories."

My fourth question was: "Do the IMF's member countries count the IMF's gold as part of their own national reserves, or do they count and identify the IMF's gold separately?"

Conny Lotze replied a bit ambiguously: "Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund [the IMF] in their international reserves."

This sounded to me as if the IMF members are still counting as their own the gold that supposedly belongs to the IMF -- that the IMF members are just listing the gold assets in another column on their own books.

My fifth question was: "Does the IMF have assurances from the depositories that its gold is not leased or swapped or otherwise encumbered? If so, what are these assurances?"

Conny Lotze replied: "Under the fund's Articles of Agreement it is not authorized to engage in these transactions in gold."

But I had not asked if the IMF itself was swapping or leasing gold. I had asked whether the custodians of the IMF's gold were swapping or leasing it.

This prompted me to raise one more question for Conny Lotze. I wrote her: "Is there any audit of the IMF's gold that is available to the public? I ask because, if the amount of IMF gold held by each depository nation is not public information, there doesn't seem to be much documentation for the IMF's gold, nor any documentation for the assurance that its custody is just fine. Without any details or documentation, the IMF's answer seems to be simply that it should be trusted -- that it has the gold it says it has, somewhere."

And Conny Lotze ... well, she never wrote back to me again. After all, I had uttered the dirtiest word in government service: A-U-D-I-T.

That the International Monetary Fund refuses to account for the gold it claims to have should be potential news for the financial media. It would be nice if the financial media pursued that issue before their next attempt to scare the gold market with stories about IMF gold sales.

But even if such sales by the IMF should be undertaken, they might not be much for gold investors to worry about. For a month ago I happened to attend in New York City the annual fall dinner of the Committee for Monetary Research and Education, and it had an unscheduled speaker, Columbia University Professor Robert Mundell, who, as you may recall, won the Nobel Prize in economics in 1999 and is regarded as the father of the euro. Through great luck I got to sit next to Mundell on the platform and so heard him clearly as he went out of his way to join the discussion of my topic, gold. Mundell remarked that if the IMF sold any gold, China should buy all of it to diversify its foreign exchange reserves. Since Mundell is a consultant to the Chinese government, the Chinese government surely heard this advice from him long before the CMRE meeting did.

You can do a lot of market rigging when you can print legal tender to infinity, pass out huge amounts of it to your friends, and induce them to use derivatives to siphon speculative demand for real stuff away from actual possession of that real stuff. But in the end printing legal tender and contriving promises to deliver real stuff don't produce real stuff. With infinite legal tender and derivatives you can push the futures price of a commodity below its production costs and below its free-market price for a while, but you risk causing shortages. And of course that's what we have in gold and silver right now -- falling prices for the paper promises of metal even as little real metal is to be had and the spread between the futures price and the real price grows. Last night a GATA supporter in Bangkok, Thailand, who long has been in the silver business e-mailed me that real silver there is priced at $18 per ounce for orders of 1 kilo or more and $23 per ounce for smaller orders. Our friend in Bangkok added that when he shows silver dealers there the New York silver futures price on the Internet, they laugh at him. Shortages can have various causes but generally they are their own cure. When shortages persist, they well may result from government intervention in markets.

Of course prices always have been determined to a great extent by the volume and velocity of money and credit, and so the creation of money and credit is, all by itself, inevitably an intervention into markets. But lately money and credit have been disappearing and reappearing in a flash in the billions and trillions. How can so much come and go so quickly? Maybe because what passes for money and credit today is a bit too ephemeral, having little connection to reality and a lot of connection to politics.

That is why market advice today is more doubtful than ever: Markets have become more politicized than ever. Supply and demand and profitability are no longer the primary determinants of markets. No, the primary determinant of markets is now politics: Which countries will cut interest rates the most? Which countries will subsidize their banks and corporations the most? Which countries will get IMF and World Bank loans? Which countries will be given unlimited currency swap lines and which won't? Which companies will get bailed out and which won't? How much more dishoarding of gold will central banks do to keep the price down, and which central banks? When will central banks run out of gold or decide to stop spending it this way? Most importantly, when will the world decide to stop financing the wild irresponsibility of the United States by lending the U.S. money that can never be repaid?

These are all political questions, and only political decisions will answer them. Some of these questions may be answered as soon as this weekend at the international conference in Washington. Answers to some of the other questions probably will be conveyed in advance to certain insiders -- like the financial houses that serve as the market agents of the central banks -- and those insiders will get richer. As good as this conference is, you will not be hearing from any of those insiders here.

But we may gain some confidence from politics too, since we know that governments are no longer shy about intervening in the markets and since central banking was invented precisely to inflate, to avert debt deflation, to devalue the currency when that is deemed necessary or convenient by those in power -- which is most of the time. We know that the world is now drowning in debt, and in a research paper published in May 2006 a British economist, Peter W. Millar -- founder of Valu-Trac Research in London, formerly an executive with the Abu Dhabi Investment Authority -- forecast that to avert debt deflation and to increase the value of their monetary reserves, central banks would need to increase the value of gold by at least 700 percent and maybe by as much as 2,000 percent. This could be done easily, for to increase the value of their monetary reserves central banks need only to stop selling and leasing gold and to stop subsidizing the sale of gold derivatives by their agents, the financial houses. Revalued high enough, gold could cover all government debts and let the world start over again.

Millar kindly has given GATA permission to post his research paper at our Internet site, and you can find it here:

http://www.gata.org/files/PeterMillarGoldNoteMay06.pdf

When Millar made his forecast about such an upward revaluation of gold -- 2 1/2 years ago -- gold had just reached $700 per ounce, not far from where it is now. Multiplied by 700 percent, that would mean a gold price of about $5,000 per ounce. Multiplied by 2,000 percent ... well, if that happens, we may be able to afford to hire someone to do the math for us -- if, of course, those of us who do not live in free countries like China and Russia are allowed to keep our gold. But that is still another political question.

* * *

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.