The world is catching on to the gold price suppression scheme

Section:

Why Is the Yellow Metal Not Taking Off?

By George Kleinman and P.V. Ramanathan
Khaleej Times, Dubai
Monday, September 19, 2005

http://www.khaleejtimes.com/Displayarticle.asp?
section=georgekleinmanandpvramanathan&xfile=data/georgekleinmanandpvr
amanathan/2005/september/columnistgeorgekleinmanandpvramanathan_septe
mber1.xml&col=yes

Our June 27 article in Khaleej Times (entitled "A Silver
Opportunity") called for higher gold prices. We have been
consistently bullish on gold for quite some time now. While gold
prices have been generally buoyant, we have not seen any of the
significant spikes that one would normally associate with a
potentially highly inflationary background of galloping energy
prices and runaway deficits.

Gold closed around $459 this past Friday (Sept. 16) with a monthly
change of +4.3 percent and a one year change of +13.53 percent. In
fact it has only just regained its March 11 high of $458.5.

Why is gold so slow in going up? Here is an interesting insight from
Doug Casey.

After the price of gold spiked over $850 in January 1980, gold
production increased substantially -- and it stayed up, even with
the steep falloff in gold prices. Production has gone from about
1,200 tonnes per year in 1980 to its current level, over 2,500 tpy.

Where did all that new gold production come from? Aside from the
dramatic increase in price incentive in 1980, new technologies have
matured, such as heap leaching and satellite prospect
identification. In addition, since the collapse of communism, many
prospective areas of the world have opened to modern exploration.

Another economic factor keeping the price of gold down recently has
been producer hedging. This is a particularly complex part of the
puzzle, but in a nutshell, when gold was falling, as it was from
1980 to 2000, many big producers, starting with Barrick,
"hedged" against decreasing prices by selling large portions of
their future production at substantially over the then-current
prices. Since gold is a "carrying charge" market, it's usually
possible to sell several years forward at a price reflecting current
interest rates and storage costs. In the mid 1980s, when gold was,
say, $400, it meant they could sell three years out for, say, for a
little over $500.

When time came to deliver, the metal might actually have traded for
only $350. That was a very smart thing to do -- at the time. What
wasn't so smart was failing to recognise when gold bottomed out and
prices started rising again. The producers have started de-hedging
in the last couple of years but still have massive short positions.
By some estimates, to the order of 1,700 tonnes of gold -- almost
half last year's entire gold supply from all sources -- is still
sold forward.

Obviously, gold sold forward in the last five to seven years at
prices considerably below today's is costing these companies a
fortune, but the big impact on price may come from the bullion
banks. Why? Because they could borrow gold from central banks for
nominal interest rates (0.5 to 1.0 percent), sell it on the open
market (believing they will be able to return it when they take
delivery on futures contracts bought from hedging mines), and invest
the proceeds, conservatively, to clear a 4 to 5 percent profit
margin.

This had the effect of increasing the global supply of gold,
basically adding already produced (borrowed) reserves onto the
production/supply side of the scales.

Another purely economic factor holding the price of gold back may
simply be traders selling every time gold approaches $440. How can
one say that?

In part because you can see gold retreat time and time again, as it
approaches $440-$450. As Jon Nadler, a senior executive with
Kitco.com, explains: Traders, not being long-term-oriented folks,
are not waiting for gold to go to the moon. They are perfectly
happy to buy in the $417-$430 range and sell the moment they can
make $20-$30 per ounce.

In addition, investor fascination with real estate is drawing
capital from other investments, even undervalued ones like gold. Why
did investors focus on real estate, rather than gold, after the tech
bubble burst, the dollar started falling, and broader equities
markets started trading sideways? It could be attributed mainly to
the fact that gold was in a secular bear market from 1980 to 2001.
As a consequence, a whole generation of investors grew up thinking
of it as an investment "dog" as well as a monetary anachronism.
Strong growth in the past of the U.S. economy and the years of low
interest rates have spawned a complacent mentality among most
Americans. Given the record levels of debt among individuals and the
federal government, this feeling of prosperity must be a form of
mass delusion.

Rising interest rates are already putting the squeeze on credit card
and mortgage holders with variable interest rates. That could get
very ugly, very quickly. Though we are seeing the beginnings of a
change in attitude, most institutional and retail investors still
think putting capital in gold and other precious metals is a little
loony.

When the housing bubble bursts, stocks, bonds, and the depreciating
dollar won't provide a refuge. The herd is going to head into
commodities in general, and gold in particular. Gold is, after all,
the crisis commodity.

The Gold Anti Trust Action Committee (GATA, www.gata.org) feels a
scandal is brewing. Central banks may not be able to control the
price of gold, as was the case before 1971, but they have the
motive, means, and appearance of influencing it. The United States
in particular, since its dollar has in good measure replaced gold as
a reserve asset around the world, has an interest in seeing low gold
prices, and a quiet gold market.

Why? Because the value of the world's fiat currencies, particularly
the dollar, rests mainly upon the confidence of the public.

Unfortunately, confidence is not a stable foundation upon which to
build the world economy. Like any attitude, confidence can change
overnight.

Governments want to maintain confidence at all costs, and the one
thing most likely to destroy it and set off a full-scale monetary
panic, is a runaway gold price. Therefore, it's quite logical that
they will make every effort to suppress the price of gold.

How? The key component of GATA's claims is that the central banks
are lending gold to bullion banks and still keeping the gold on
their books as reserves. In these "swaps," each bar of gold
essentially gets counted twice, exerting a negative pressure on the
gold price when the borrowed gold gets sold on the open market.

There's no question that bullion banks are selling borrowed gold --
what makes this the stuff of a "conspiracy" is that GATA says the
central banks are not being truthful about whether or not they are
counting gold not actually in their vaults as reserves.

Specifically, GATA chairman Bill Murphy says the central banks are
reporting an aggregate of about 31,000 tonnes of gold held in
reserve but have only about half as much in their vaults. The amount
of gold they actually have on hand may be as little as
14,000, or even 12,000 tonnes.

Murphy says the International Monetary Fund claims that
it "recommends" that swapped gold be excluded from reserve assets.
However, some central banks report otherwise. For example, a
footnote on the central bank of the Philippines web site contradicts
the IMF's claim: "Beginning January 2000, in compliance with the
requirements of the IMF's reserves and foreign currency liquidity
template. ... Gold swaps undertaken by the BSP with non-central
banks shall be treated as collateralized loans. Thus, gold under the
swap arrangement remains to be part of reserves."

The European Central Bank, the Bank of Finland, the German
Bundesbank, and the Bank of Portugal also confirmed in writing to
GATA that swapped gold remains a reserve asset as per IMF
regulations. So clearly there is a disconnect here.

Summarising the GATA argument, in their own words: "GATA believes
that the implications of IMF accounting procedures for reversible
gold transactions are very significant. Clearly deceptive
accounting, countenanced by the IMF, has allowed official sector
gold to hit the market without a corresponding drawdown on the
balance sheets of central banks. This has made it impossible for
analysts to ascertain the exact size of official sector gold loans,
swaps, and deposits. The unwillingness of central banks to provide
even a minimum level of transparency suggests that total gold
receivables are substantially larger than the accepted industry
figure of approximately 5,000 tonnes. Macroeconomist and former
World Bank consultant Frank Veneroso contends that 10,000 -15,000
tonnes of gold have left central bank vaults via loans, deposits,
and swaps."

Would central bankers really lend out gold to people who are selling
it, in return for a measly 0.5 percent interest?

The jury on this is out. Let us wait and watch responses GATA gets
from them. If what GATA says is true, bullion banks could be in
trouble every time gold spikes. If they can't replace the gold
they've sold from new mine production, they'll have to get it on the
open market, and that could wipe them out. And if the bullion banks
go bust, what will happen to the central banks if GATA is right?

Fear of that outcome could certainly drive them to lend even more
gold to the bullion banks, adding selling pressure whenever the
price of gold goes up, making the hole they are digging deeper each
time.

Whether or not there's any deliberate price manipulation may be hard
for GATA to prove.

We are obviously providing all this as background information. We
will continue to maintain our stance that trend is your friend. On
the charts, we now have a weekly close above $453. We now look for
an orderly progress to $475. Stay tuned.

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