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For
11 years the Gold Anti-Trust Action Committee has been amassing evidence that
the prices of gold and silver are suppressed. The mechanisms by which this is
achieved are complex and multi-faceted. Attempting to convince industry
insiders and investors that such an intricate price suppression scheme is not
only active but has been active for more than 15 years meets a lot of
resistance.
In
this article I am taking a different approach; I am going to find some common
ground between what GATA says and what its critics say. I am going to define
some facts about the gold market that are practically undisputed and show
that those facts lead unequivocally to a conclusion that the gold price is
suppressed. Given that these conclusions are based upon facts on which
everyone agrees, then everyone should agree that the gold market is
suppressed.
What
everyone can agree upon is that through unallocated bullion accounts, gold
certificates, and pooled accounts the bullion banks and gold brokers are
operating a "fractional reserve" operation. This means that dealers
who undertake to sell and store bullion for their customers on an
"unallocated" basis can sell a lot more bullion than they actually
have. Many investors will buy and sell their bullion without ever seeing it.
This allows the dealers to keep in their vaults only enough bullion to meet
the demands of the small percentage of investors who demand physical delivery.
CPM Group executive Jeffrey Christian, a recognized
precious metals expert, makes no bones about the fact that the gold market
operates on a "fractional reserve" basis. He even goes as far as to
confirm that this is well understood in the industry:
http://www.financialsense.com/editorials/2010/0423.html
Christian
says GATA has "expressed shock" that gold held in unallocated
accounts is "seen as deposits on the books of the banks and dealers
holding those accounts, just like money deposited in a bank, and can be lent
against. When they realized this, they began to rant against the fact that
unallocated gold can be lent out by a bank holding it. They claimed I had
admitted that gold in unallocated accounts was a form of fractional reserve
banking. It is a form of fractional reserve banking, but I did not
'admit' that; it's a well understood fact in the industry, and was even the
subject of a recent Financial Sense interview with another expert
guest."
In
2000 Christian wrote a lengthy paper entitled "Bullion Banking
Explained." I made a critical analysis of this document in an article
entitled "Making Paper Bullion Explained":
http://www.gata.org/node/8627
In
his paper Christian explained what a bullion bank does with an ounce of gold
held on deposit for an unallocated account customer:
"Imagine, if you will, that the bank can line up three or more
producers and others who want to borrow this gold. All of a sudden that one
ounce of gold is now involved in half a dozen transactions. The physical
volume involved has not changed, but the turnover has multiplied. This is the
basic building block of bullion banking. This admittedly rudimentary outline
of bullion banking holds the key to understanding how bullion banking allows
for a multiple of trades to be based on one lot of metal.
Many banks use factor loadings of five to 10 for their gold and silver,
meaning that they will loan or sell five to 10 times as much metal as they
have either purchased or committed to buy. One dealer we know uses a leverage
factor of 40. (Long-Term Capital Management had a leverage factor of 100 when
it nearly collapsed in 1998.)"
As a
consequence of my article it appears that Christian has realized how damning
his paper was, and while it was posted at the CPM Group Internet site for 10
years, it recently was removed mysteriously. However, you can still find a
copy at the GATA Internet site here:
http://www.gata.org/files/CPMGroup-BullionBankingExplained.pdf
In
2003 Graham Tuckwell, chairman of Gold Bullion Securities,
made a presentation to the annual London Bullion Market Association (LBMA)
Precious Metals Conference. The transcript of his speech can be found here:
http://www.lbma.org.uk/docs/conf2003/2e.tuckwellLBMAConf2003.pdf
Tuckwell said:
"In
fact, you could argue unallocated gold isn't gold; it's just a piece of paper
issued by a bank, and in most cases, unsecured risk."
I
think it is reasonable to infer that you can't stand up at an LBMA conference
and say those sorts of things if they were not true. But we don't need to
take it on faith because we can see for ourselves from the language of the
bullion bank unallocated account agreements. The following definition of an
"unallocated account" comes from an actual customer agreement
issued by a bullion bank:
"'Unallocated
account' means, in relation to a Precious Metal, the account(s) maintained by
us in your name recording the amount of that Precious Metal which we have a
contractual obligation to transfer to you (or, in the case of a negative
balance, if so permitted by us, which you have a contractual obligation to
transfer to us)."
Nowhere
in the agreement does it require the bullion bank to hold the metal that it
has an obligation to "transfer" to the customer. Under the
liabilities section the only liability the bank accepts is to pay in cash for
any failure of the bank to perform under the agreement.
It is
reasonable to conclude that it can be taken as a fact that bullion banks
operate on a fractional reserve basis. The bullion bank apologists don't
dispute this but only argue that there is nothing wrong with such a system
provided that customers receive bullion when they ask for it or get
settlement in cash. But the bullion bank apologists do deny any notion that
the gold market is suppressed or manipulated.
Let
me demonstrate that once it is accepted that there is a fractional reserve
operation in the gold market, then there is de-facto
gold price suppression. They are flip sides of the same coin.
Imagine
if you had heard about the great Colorado River and how fast it flows. If you
were to go to the mouth of the river in Yuma, Arizona you would be astonished
to see what a small river the Colorado is. But perhaps what you wouldn't know
is that the river is dammed upstream, which has reduced the flow from its
native condition of the early 1900s by 90 percent. The water is diverted from
these dams for irrigation and municipal water supplies. For each 10 gallons
of water that flows into the reservoirs created by the river dams, only 1
gallon reaches the river mouth.
In
exactly the same way the bullion banks act as dams to the capital that flows
into their coffers to purchase bullion. For each 10 or maybe as much as 100
ounces of gold that are requested to be purchased and fully paid for by
investors, only one real physical ounce is purchased.
What
will happen to the price of gold if only a fraction of investors' money is
being used to purchase bullion and the rest is siphoned off to
"irrigate" the bank's balance sheet to be channeled into entirely
different investments?
Any
price rise will necessarily be muted.
This
is gold price suppression.
Make
no mistake about it; gold price suppression is an absolutely guaranteed
outcome of fractional reserve bullion banking.
In a
thought experiment we could imagine a world where all investors are content
to hold paper gold in an unallocated account and never ask for delivery. The
bullion bank could then purchase no real gold whatsoever. There could then be
massive demand of billions of dollars flowing into the bullion banks to
purchase "paper gold" while the price of real physical gold plummeted
because no one was buying the mine output of the gold mines. In our Colorado
River analogy you could have record rain fall upstream in the Rockies and the
river could dry up in Yuma.
In
2007 Morgan Stanley settled out of court a class-action suit by precious
metals investors. The complaint alleged that Morgan Stanley told clients it
was selling them precious metals that they would own in full and that the
company would store. But Morgan Stanley either made no investment
specifically on behalf of those clients or it made entirely different
investments of lesser value and security.
If
Morgan Stanley was the only one operating in this way, the price suppression
would be small. But we know from the London Bullion Market Association that
their member bullion banks collectively trade 24 million ounces of gold each
day on a net basis. This is $7.5 trillion annually. When a vast majority of
this capital never goes to purchase real physical metal, the suppressive
effect on the price is monumental.
The
dangers of owning "paper gold" have mainly been discussed as the
risks of receiving a cash settlement or the risks of losing an investment
entirely. These are certainly risks that everyone should take seriously. But
in addition to those risks one should add the contribution made to price
suppression. By allowing your investment to be channeled away from augmenting
the demand for physical metal, you are handicapping your own investment.
The
good news is that the tide is turning. More fund managers and institutional
investors are becoming aware of the difference between "paper gold"
and real bullion. This was highlighted brilliantly and eloquently by Ben
Davies, CEO of Hinde Capital in London, in his
recent interviews on CNBC Europe and King World News. (See http://www.gata.org/node/8683, http://www.gata.org/node/8805, and http://www.gata.org/node/8809.)
Imagine
what will happen when the proverbial dam bursts. As more investors who
already believe they own gold demand delivery of physical bullion in place of
their paper substitutes there will be a run on the bullion banks. The
suppressive effect of holding back demand from the physical bullion market
will be reversed with force and fury.
There
are already signs of massive cracks in the dam. Last week I wrote an article
analyzing the BIS gold swaps in which I concluded that the transaction had
the hallmarks of a bullion bank bailout. (See http://www.gata.org/node/8803.) It appears that the bullion banks
needed desperately 380 tonnes of gold. When coupled
with recent surreptitious monthly gold sales by the International Monetary
Fund, this BIS gold swaps are indications that gold
supply is drying up -- or, more appropriately, that demand is becoming
insatiable.
The
impending massive and rapid upward revaluation of gold and silver, or
conversely, massive and rapid devaluation of fiat currency will make any
discussions of deflation entirely moot.
Investors
should do their own due diligence to ensure that their bullion investments
are either held in their own custody or in the custody of institutions that
guarantee allocated storage that is verifiable and audited. Why hold an
investment that will be used by the dealer to prevent it from performing as
you anticipate?
The process
by which only a portion of an investment is used to purchase bullion -- what
is politely called "fractional reserve bullion banking" -- is
fraudulent because it acts against the investor's interests. CPM Group's
Jeffrey Christian said of fractional reserve bullion banking, "It's a
well-understood fact in the industry." If so, then gold price
suppression should also be a well-understood fact, because the consequence of
fractional-reserve bullion banking is undeniably price suppression.
Adrian Douglas
Marketforceanalys.com
Adrian Douglas is proprietor of the Market Force
Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of
Directors.
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