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Transcript of Hathaway interview with Fox News

Section: Daily Dispatches

8:14p ET Thursday, August 23, 2001

Dear Friend of GATA and Gold:

John Hathaway of the Tocqueville Gold Fund, probably as
respected a figure in the gold market as there is, has
come over fully to the GATA side with his latest essay,
quot;Gold As Theater,quot; which appears below, though without
the charts it refers to, since they can't be reproduced
in this format.

All by itself Hathaway's essay may strike a huge blow
against the gold-price suppression scheme, since the
more people realize that real gold is scarce -- not
plentiful, as falsely suggested by the commodities
exchange prices under the influence of central bank
gold lending -- the more pressure will be placed on
the physical gold market to produce real gold for
private investors.

GATA supporters may especially enjoy Hathaway's rebuke
of the World Gold Council for its promotion of gold as
jewelry and its neglect of gold as money. Of course
you've heard that here a few times before.

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

* * *

Gold as Theater

By John Hathaway
Tocqueville Securities L.P.
August 23, 2001

At precisely 1:57 p.m. on May 23rd, 2001, a seller
dumped 100 contracts (10,000 ounces) of gold on the
Comex market. The transaction was noteworthy as to the
amount and timing. It was the largest transaction by
far that day and for several weeks on the Comex where
trading activity has dwindled to the lowest levels in
two decades. More important, it took place 15 minutes
in advance of the announcement by the Federal Reserve
that the discount rate would be reduced by only 25
basis points instead of the 50 that had been widely

Gold, which had been rallying strongly since the stock
market lows at the end of the first quarter on the view
that the Federal Reserve's concern over the economy's
slide was reaching panic proportions, slumped during
the remainder of the day. In a few more days, it
settled at $265/oz, down sharply from the intra day
peak of nearly $300 reached on May 21st, a few days
before the Fed action.


The above chart is a minute by minute account of Comex
gold trading going into the Fed announcement at 2:15
(14:15). On the lower part of the chart, volume for
each trade is graphed. The trade in question took place
just before 2:00 pm (14:00), and initiated the
breakdown of gold. The seller, whoever it was, seemed
to be acting on the conviction of advance knowledge.
For anyone willing to spend the time, more about the
identity of the seller could be learned by examining
the public records of the Comex for that day's trading.
I'd love to know, but don't have the time to go to the
warehouse and pore through trade records. Whether it
was the Exchange Stabilization Fund (ESF) of the
Treasury or a bullion dealer with a hot line to the Fed
Conference room is of secondary importance.

If it were a bullion dealer for its own account, the
profits on the trade would hardly pay the rent. If it
were a bullion dealer for the account of a third party
such as the ESF, we may never know. What is more
interesting is the apparent use of gold to convey a
message to the markets: Gold tanks! The Fed has
everything under controlconcerns reflected in the
previous gold rally have been allayed. Gold remains a
highly visible barometer of the well being of financial
markets, despite concerted efforts by central banks to
demote its standing as a financial asset. In a private
meeting in June 1993, the late Sir Jimmy Goldsmith
asked me whether I thought his bullish stance on gold
at the time was correct. Yes, I answered. We agreed
that paper currencies were suspect and that the rising
gold price signaled legitimate concerns. He responded
with a question: quot;But what happens if the authorities
try to squash the signal?quot;

In retrospect, this was not only an excellent question,
but quite possibly foreshadowed what has been going on
in the gold market since then. The trade on May 21st
illustrates how a well-timed minor action in a very
thin market, can turn the tide. It is only a skirmish
in a very big picture. By itself, it proves nothing,
but it does suggest something. Government intervention
in financial markets is neither surprising nor new.
Gold is a financial asset.

Official denials notwithstanding, respected and
knowledgeable observers including Jack Kemp and
Professor Robert Mundell appear to regard it as a
matter of fact. On August 21st, the date of the most
recent Fed rate cut, a similar pattern could be
observed. This time, Goldman Sachs appeared as a
featured seller in the midday hours prior to the
announcement. Of the 24,000 contracts traded that day,
Goldman accounted for 10,000. A Comex floor trader told
me, the following day, that there had been a very large
drawdown of Comex warehouse stocks of 45,000+ ounces,
the same day as the Fed announcement. The drawdown
amounted to more than 5% and left the ratio of
warehouse stocks to open interest at a dangerously low
6% (ratio of physical to outstanding contracts),
normally a good precursor for a short squeeze.

However, the trader continued, in recent years it has
not been profitable to anticipate a short squeeze under
these circumstances. quot;Metal just comes back into the
market mysteriouslyquot;, he said. On the day of this
particular conversation (8/22), quot;every dealer is
selling, including Republic, Goldman Sachs, AIG, and JP

Action like today is what scares people away from the
gold market. The dollar is getting crushed, a short
squeeze should be happening, and gold does nothing.quot;
The price of gold in perpetual checkmate became a
central motif in the mythology of the new economic
paradigm. The imagery played a role in facilitating the
investment bubble that ended over a year ago. The
evolution of the financial markets has diminished the
role and effectiveness of traditional monetary policy.
The Fed no longer controls the monetary aggregates and
now only has a direct influence on interest rates.
Tinkering with the gold price would be a very tempting
way to reinforce the strong dollar rhetoric.

It would be simply shocking, even inconceivable if no
high level official had ever considered the idea.

A low or declining gold price would soothe financial
markets and, conversely, a rapidly rising price would
roil them. The price behavior of gold is a simple sound
byte able to penetrate the increasingly confusing
overload of electronic inputs and media circus
confronting traders and investors. It is a much more
efficient way to communicate a state of being than the
inscrutable or indecipherable pronouncements of various
economic policy spokesmen, especially for grass roots

The behavior of gold, notwithstanding repeated attempts
to write it out of the script, still affects market and
consumer psychology. Legions comforted by the
somnolence of the gold price assume that such behavior
is the result of a free market process. The history of
government intervention in currency markets alone would
strongly suggest otherwise.

The precedent of the London Gold Pool, a scheme
orchestrated by the US and Britain to rig the gold
price in the 1960's, exemplifies the keen interest of
our government in the matter. For these reasons alone,
believers in whatever low gold prices are signaling
should suspect a fairy tale. Given the long history of
official sector antipathy to gold, especially in the US
and the UK, one would be hard pressed to explain why it
had suddenly become sacrosanct.

In fact, there is growing body of credible evidence
that the US government and others may have been
manipulating the metal price for some time. A few years
ago, such claims were unsubstantiated and lacked
credibility, but recently some weighty evidence is
beginning to accumulate. Credit for the heavy lifting
on discovery of possible price fixing activity goes to
Bill Murphy, Reginald Howe, James Turk and their
associates. A useful source to learn more are the two
Gold Antitrust Action Committee web sites:
( or (

The Exchange Stabilization Fund controlled by the US
Treasury, and essentially unaccountable to Congress or
the American people, appears to be a key instrument for
intervention. It appears that US gold reserves have
been swapped or in some way encumbered. The basis for
this supposition can be found in the ESF financial
statements themselves.

According to James Turk in his Freemarket Gold amp;
Money Report ( dated August 13th, 2001,
SDR Certificates held by the ESF declined from a peak
level of 10.2 billion to 2.2 billion as of year end
2000. A precipitous decline from 9.2 billion as of
year-end 1998 to current levels coincided with an
accelerated decline in the gold price that began in May
1999 (announcement of UK Gold Auction) and the breakout
of the trade weighted dollar index from a multiyear
trading range. Each SDR represents 1/35th/oz of gold
held by the Treasury as monetary reserves for the
United States. What is going on here? Mr. Turk's very
erudite but complex explanation of the mechanics is
available on his web page. A decline equating to 227.7
million ounces, or 87% of the US gold reserve demands a
more than perfunctory explanation. Reg Howe
( has turned up
a number of curious efforts to reclassify various
portions of the gold reserve.

These reclassification attempts have occurred only
since Mr. Turk noticed that some of the gold held on
deposit at West Point had been reclassified as
custodial gold from gold bullion reserve as of 9/30/00.
This designation stood until July 2, 2001 when the West
Point gold along with 92% of US gold reserves or 245
million ounces was again reclassified, this time as
quot;Deep Storage Gold,quot; peculiar to say the least. There
has been no high level official response to these
points or many others made by Howe, Turk, or GATA.
There are only a few desultory low level denials
including an almost generic e-mail denial on the
Treasury's web site

If the US and other governments have been actively
involved in manipulating the gold market, there is far
greater upside potential for the gold price than I had
previously imagined. The US government may have already
expended considerable resources to hold the gold price
in check.

Public, press, and congressional scrutiny of these
matters should commence in earnest. It would have five
possible outcomes:

1) There is no monkey business at all and the
government provides the requisite information to
satisfy all legitimate questions on the subject.

2) There has been active intervention but because of
public scrutiny and accountability, carrying on will be
much more difficult.

3) Resources for future intervention have been severely

4) Because of a combination of 2 and 3, government
activity in the gold market ceases altogether.

5) There is something going on but the government is
able to deflect and otherwise thwart all attempts to
illuminate the facts.

The investment implication of 1 is simply a non-event.
The implications of 2, 3, and 4 are very bullish. Only
5 would be somewhat problematic, as it would prolong
the status quo.

On his Golden Sextant web site (,
Reg Howe has unearthed an article co-authored by
Lawrence Summers, former Treasury Secretary and current
President of Harvard University. The article, quot;Gibson's
Paradox and the Gold Standardquot; was published in June
1988 in the Journal of Political Economy. In this
article, the two Professors observe that in a quot;truly
free marketgold prices will move inversely to real
long-term rates, falling when rates rise and rising
when they fall.quot;

Most interesting is the failure of this relationship to
persist post-1995 during Summers' tenure at the
Treasury. quot;During this period, as real rates (30 year
T-bond less CPI rate) have declined from the 4% level
to near 2%, gold prices have fallen from $400/oz. to
around $270 rather than rising toward the $500 level as
Gibson's paradox and the model of it constructed by
Barsky and Summers indicates they should have.quot; Howe
goes on to observe that quot;the low real long-term
interest rates of the past few years may have been
engineered with far more sophistication than those of a
generation ago, including the coordinated and heavy use
of both gold and interest rate derivatives.quot;


This chart is courtesy of Nick Laird, proprietor of It plots average monthly gold prices
inverted on the right scale and real long-term interest
rates (30-year t-bond minus latest twelve month CPI) on
the left scale. The historical relationship
disintegrates in 1995. The mispricing of any commodity
leads to a shortage or a surplus depending on whether
it has been overpriced or underpriced relative to its
clearing price in a free market. Investment capital is
no less a commodity than soybeans, milk, or natural
gas. The systematic underpricing of investment capital
achieved by:

-- the manipulation of the gold price.

-- the debasement of inflation measuring statistics
issued by the Bureau of Labor Statistics.

-- the shrinkage of supply of 30-year treasuries.

-- and the use of derivative instruments would
indeed be a quot;sophisticatedquot; scheme.

Much about this has been written including Grant's
Interest Rate Observer and the Richebacher Letter spin
and manipulation to achieve its goals.

Academicians and politicians indifferent to the
distinctions between substance and artifice, and with a
shared disregard for free market forces, would be
easily drawn into a complicated price manipulation
scheme if it were deemed to be quot;in the public

Underpricing investment capital played a key role in
creating the financial mania that explains willingness
of investors to finance the dot com craze, telecom
infrastructure companies with only a business plan, and
other harebrained schemes too numerous to mention. The
underpricing of investment capital occurred in the
context of Greenspan's repeated willingness to commit
sovereign credit throughout the market crises of the
late 1980's and the entire decade of the 1990s.

Since the Latin American Crises of the early 1980s, the
Federal Reserve's response to anyone who had made a bad
investment was a massive bailout. The 1987 market
crash, the banking crisis of the late 1980s and early
1990's, Long-Term Capital Management, and the Asia
Meltdown all drew the same response -- a flood of
liquidity and low interest rates. By sending the
message that big mistakes would bear no adverse
consequences, the Federal Reserve engineered a tectonic
shift in the risk profile of investors, speculators,
and financial institutions in favor of ever more
leverage. It is the proliferation of leverage which has
rendered the economic system intolerant of the kind of
old fashioned recession that would cleanse the excesses
of the previous cycle and place the economy on a sound
footing for renewed expansion.

Those jeopardized by the Fed's bailout strategy and the
Clinton Treasury's flood of underpriced investment
capital extend well beyond lenders to bankrupt hedge
funds, sinking foreign economies, or bad banks. The
American public, having been suckered into pouring its
life savings into a dangerously overvalued stock
market, is now being called upon to maintain its
unhealthy spending patterns to keep the economy from
sinking further.

The Fed is targeting equity prices in order to prop up
the wealth effect, quite an evolution from its original
role of preserving the purchasing power of money.

In his May 24, 2001, speech before the Economic Club of
New York, Alan Greenspan said: quot;Owing to the variable
and long lags of monetary policy, the effect of our
recent policy initiatives will take time to strengthen
financial portfolios and spill over into demand for
goods and services.quot; The game plan is clear -- reflate
the stock market bubble. Money supply (M-2) is growing
at 9.2% year over year, the fastest pace since 1987,
the year of the October stock market crash.

Public policy has been painted into a corner by the
misdeeds of economic and political leaders held in the
highest esteem during the preceeding mania. There are
no choices left but to open the floodgates once again.
Prepare for more policy panic. The neat trick will be
inflating stock prices in the face of deteriorating

The investment mania in technology and telecom has
created sufficient overcapacity to last many years. It
also sparked a boom in consumer goods that will take
years to unwind as individuals struggle with record
indebtedness. It will not be long before widespread
recriminations and finger pointing become a favorite
media blood sport.

As the malpractice of economic policy and misdeeds of
the financial community come to light, investors will
rightfully begin to distrust the half-truths,
misconceptions, gurus, and institutions at the core of
the mania. They will gradually discard the idea that
the Fed or the Administration can quot;fixquot; any problem and
that buying the dips is savvy. Greenspan, the quot;price
fixer and central planner,quot; will replace Greenspan, the
quot;Maestro,quot; in the estimation of public opinion.

As James Grant wrote back in April (NY Times Op-Ed
4/20/01), quot;How does he do what he does? Nobody knows.
It is a mystery. He collects data and ponders them. He
conceives a course of action. This action takes the
form of a double manipulation, first of an interest
rate and second of the mind of the market.... This is a
mighty tall order. In fact, it is reminiscent of the
task that the economic planning agencies of the former
Soviet Union were famously unable to carry out.quot;

Unfortunately, Clinton's wild party has become Bush's
hangover. The equity markets are completing the first
year of a bear market. Rallies of course will interrupt
the decline, but will reach a string of lower highs.
The process has much further to go. Bull markets are
born in skepticism and die in overconfidence. The
prevailing views on gold are, if anything, skeptical.

It has been said that in bull markets investors are
more scared than is justified and in bear markets, they
are not as scared as they should be. We have traveled
only a short distance along the way to public
disaffection with financial assets. Instead of clinging
to the mantras and rhetoric of the previous decade,
economic policy makers should declare a clean break
with past practice.

Secretary O'Neill should be familiar with the time-
honored private sector practice of taking huge
writedowns to lower the bar for the next regime. This
would include permitting gold to trade freely. Gold,
which has been viewed as a problem and a threat to
public policy, can still be used as theater but in a
positive sense. As the world economy continues to
globalize, there is no reason that the dollar or the
euro should be called upon to perform the role to which
they now aspire, that of a reserve currency beyond
national borders.

As an apolitical financial asset, gold represents the
superior foundation for a new currency to facilitate
the expansion of borderless commerce.

The late 1990s mania stretched well beyond tech stocks,
dot coms, media and telecom. It included the
unprecedented and exuberant accumulation of physical
goods by American consumer ranging from SUVs to
MacMansions, made possible by the overvaluation of the
US dollar. The willingness of foreigners to exchange
their goods and services for our IOUs made every
American consumer wealthy by comparison to any other
time in history. We had low inflation because foreign
capacity became a substitute for home grown capacity.
Artificially low long term interest rates helped
consumers to spend more than they saved simply by
enabling them to issue record amounts of mortgage debt.

Government agency housing debt is now $2.4 trillion or
23% of GDP. At current growth rates, it will exceed
national debt in four years. It has reached a level,
according to the American Enterprise Institute, that
threatens systemic risk to the financial markets and
the US economy. The so-called globalization of the
world economy was in one respect a massive exchange of
US paper assets for non-domestic resources that enabled
US consumers/voters to dramatically improve their
living standards during the 1990s.

Foreigners now hold on a net basis $2 trillion of US
assets, or 20% of GDP. They own 44% of the liquid
treasury market, 23% of the US corporate bond market,
and 12% of the US equity market.

Nobody can say that the Clinton/Rubin/Summers strong-
dollar scheme didn't work, at least for a while.
However, it could work only on the belief that the
paper issued represented real value.

For this to be the case, foreigners had to buy into the
rhetoric and mythology promoted over the period. A
reassessment of these beliefs will bring about high
inflation and high interest rates. The alternative to
the virtuous circle is not pleasant to contemplate, but
the long running current account deficit that now
exceeds 4% of GDP is unsustainable.

Foreign investors have every reason to ask quot;where's the
beef?quot; A bear market in stocks, declining interest
rates and vanishing profits all qualify as quot;less than

When the dollar loses its lofty status, American
consumers and voters will no longer be happy or
confident. This will have political and financial
market repercussions. The case for gold is that the
dollar has been overvalued for an extended period, as
we wrote a year ago in quot;The US Dollar: Over-Owned and

Its overvaluation was integral to the financial mania
that has come and gone. The depressed price of gold has
been core to the system of beliefs underpinning dollar
overvaluation. To the extent the depressed price of
gold reflected more than natural causes, one can expect
the retribution of market forces to be fierce once they
gain the upper hand. The mania and the supremacy of the
dollar are history.

With so many of these positive macroeconomic
developments becoming more evident, it is disappointing
that the gold producers continue to emphasize the
promotion of gold as jewelry. A higher profile and
stronger stance on monetary issues would be timely and
most welcome.

It would not take much of an investment to bolster the
intellectual rationale to rehabilitate the metal's role
as a financial asset.

Restoration of gold as the foundation for a
multinational global currency is something the global
economy could actually use. Now, that would be really
good theater.