Arabian Business magazine cites GATA's work

Section:

11p ET Wednesday, July 5, 2006

Dear Friend of GATA and Gold:

The essay appended here was published Sunday in the magazine Arabian Business, a regional publication based in Dubai, and incorporated research by Adrian Douglas, a gold market analyst and frequent contributor to GATA Chairman Bill Murphy's subscription Internet site, LeMetropoleCafe.com.

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

* * *

Where Banks Bury Their Gold

Faced with gold price increases, central banks are accused of a grand conspiracy to manipulate global movements of money. Stephen Corley reports.

By Stephen Corley
Arabian Business, Dubai
Sunday, July 2, 2006

http://www.itp.net/business/features/details.php?id=4628

Having already survived the resurgence of flares, platform shoes, and the reincarnation of aging rock bands, investors are now being buffeted by the return of commodity market trends from the 1970s.

Security worries in Iran, rampant demand from emerging market economies, and the motorist's love affair with gas-guzzling vehicles have created a prolonged spike in the oil price that has confounded every prediction that it could not go any higher.

In addition, thanks to a surge in the metals markets, the gold bugs crawled out of the woodwork, shouting that the shiny metal will end inflation worries, obviate currency risk in your portfolio, and, via a strange development of autoimmunity drugs based on
precious metals, even cure your rheumatoid arthritis.

The staggering rise in the gold price over the last year seems to have had its origin in the same worries that provoked the oil price increase.

Of course, the bulls had another strong ally in their pocket in the shape of the potential demise of the US dollar and its predicted failure as a reserve currency.

For traders, manufacturers and retailers in the Gulf Cooperation Council, the recent unwinding of gold's meteoric ascent back to levels as low as US$540 must be a welcome relief.

Dubai, in its capacity as the world's second largest importer of the stuff, will have experienced very serious imbalances. With prices climbing through US$730 and higher, the risk of business collapse in some areas was altogether real.

So a welcome and necessary pause, perhaps. After all, no market moves in straight vertical ascent (not even property; estate agents please note). But it would be prudent to be aware of what happened and whether forces other than normal supply and demand got us to this point. Gold is unique and occupies an important place to many because of what it signifies. Its price increase, to the bulls at least, is a harbinger of all manner of evils elsewhere in the financial system. Why?

Few economists today advocate a return to the gold standard. However, many prominent economists are sympathetic with a hard-currency basis and argue against fiat money. This school of thought includes former US Federal Reserve chairman Alan Greenspan, who said in 2000: "The reason there is very little support for it is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue."

The current monetary system relies on the US dollar as an "anchor currency" against which major transactions, such as the price of gold itself, are measured. Currency instabilities, inconvertibility, and credit access restriction are a few reasons why the current system has been criticised. A host of alternatives have been suggested, including energy-based currencies, market baskets of currencies, or commodities; gold is merely one of these alternatives. The reason these visions are not practically pursued is much the same reason the gold standard fell apart in the first place; a fixed rate of exchange decreed by governments has no organic relationship between the supply and demand of gold and the supply and demand of goods.

So people place their trust in paper money, even though it's possible to argue that the acceptance of a fiat currency is nothing more than a sales job. Gold advocates maintain that people are naïve and will believe anything if told enough times. Perpetuation of the myth, so it goes, needs careful management; a few key players and mass-market psychology will do the rest. At present some fund managers and analysts believe that fiat currency is the greatest con in history. The gold lobby believes it to be doomed and that the current environment is poised to deliver the death blow, whilst governments, in desperation, do their utmost to fend off the inevitable. When governments have to manipulate markets, whether stock, bond, currency, or gold, these are signs of desperation.

The US is printing new money at an unprecedented rate, under which circumstances the dollar would normally depreciate because of its dilution. This is where "management" comes into play, through its biggest "tool" -- the price of gold. As an overprinted currency depreciates, it would normally cause the price of gold and silver to rise. When gold and silver prices rise sharply, that could send a warning signal that the currency is going south. The US government is undoubtedly facing the inevitable demise of its currency but is desperate to delay things. The route it appears to have taken has been to depress the price of precious metals by flooding the market through central bank selling.

It goes without saying that it has been of no small concern to the central banks that commodities had a spectacular run in the first 4 1/2 months of the year. This bull run has been ubiquitous and long-lasting, with practically all commodities soaring and in many
ways reminiscent of hyperinflation. Clearly the central banks could not let this state of affairs continue while claiming that inflation was under control. They realised that something had to be done and gold took the brunt of the central banks' attack. The price of gold is the outwardly public manifestation of inflation. By bringing gold down, it must have been hoped that other commodities would be taken down as well, thus easing inflationary fears.

But therein lies the Achilles' heel of the central banks. They are relatively impotent when it comes to controlling the market for real things. As such, there is little they can do to manipulate the markets for, say, oil and copper. Oil, for example, trades to the
tune of US$6 billion per day and is too large for central banks to have any say over. The market for gold, on the other hand, is only 3 to 4 percent of the size and the easiest commodity to manipulate in the short term. Furthermore, the central banks still have some gold in their vaults as added ammunition. So the game plan was simple: Hammer gold and cause a selling panic in all commodities. Although some kind of correction may have been expected in commodities given the magnitude of their escalation in such a short time, the violence of it was orchestrated and in every which way intended and cajoled by central bank action.

It's not necessary to be a conspiracy theorist to swallow this one. If you were the head of a central bank and felt that gold?s rise was going to cause you problems, and you thought you had the means to keep it from doing so, might you not pull the appropriate levers? Almost certainly.

So are the central banks manipulating gold? According to the Gold Anti-Trust Action Committee (GATA), the answer is very much yes.

For seven years GATA has discovered one piece of evidence after another supporting the long-held contention that certain central banks and their agents, the bullion banks, manage the gold market. It is a price-fixing case involving some very powerful
people and institutions -- a gold cartel. The US attorney handling the Samsung conspiracy conviction said in an interview last year that the US had experienced an "epidemic" of price-fixing cases in the late 1990s. All GATA has done is uncovered the grandest of all.

The mainstream gold world says the central banks have nearly 32,000 tonnes of gold in their vaults. GATA says the central banks have less than half of that; the difference being what was clandestinely fed into the market to suppress the gold price over the last 10 years. The work of three respected GATA consultants -- Reg Howe, Frank Veneroso, and James Turk -- each using different methodologies, supports GATA's contention of vastly diminished central bank gold supply.

If central bank sales cannot halt gold's price rise in the long term, what about interest rates? Many analysts incorrectly state that rising rates strengthen the dollar and make gold go down. This is true in a stable and strong economy, but the US economy is arguably a pyramid standing on its point. Take the yield on 10-year Treasury bonds, which has been in a well-defined descending channel for 24 years. In June, however, it closed at 5.23 percent. Though six years ago the yield moved slightly above the upper resistance line, there has never been a confirmed breakout in 24 years -- until now -- and the implications could be enormous. It's the 10-year Treasury rate that drives the mortgage market, where the ever-decreasing cost of borrowing has fuelled an unprecedented boom in house purchases and refinancing.

If the new Fed chairman, Ben Bernanke, has a moment of hesitation and opts for a pause in rate increases, the dollar is going to tumble, which will in turn lessen the appetite of foreigners to hold US assets, particularly bonds. Alternatively, any rate hike whatsoever, virtually a certainty under Bernanke, is going to add fuel to this rate breakout, rendering it irreversible. In the last great gold bull market, the yield on the 10-year Treasury went from 6 percent in 1971 to 15 percent in 1981.

Trillions of dollars have been created over the last 2 1/2 decades that have not had an inflationary impact because they have been hoarded as the world's reserve currency or been used to purchase Treasuries, which was the principle driver of the declining rate trend. As these dollars are discarded, the inflationary effects will potentially be enormous, which is conducive to funds seeking out what the bugs believe to be the only real money in the world: gold.