GATA makes Financial Times


1a EDT Wednesday, July 7, 1999

Dear Friend of GATA and Gold:

GATA egroup member Vincent Cook has offered what strike
me as compelling answers to the questions recently
raised by another GATA egroup member, Martin Armstrong
of Princeton Economics International.

Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *


By Vincent Cook

In dismissing the claims made by GATA, Martin Armstrong
of Princeton Economics International has expressed some
puzzlement as to the motives of central banks in
participating in the gold market manipulation alleged
by GATA. In his latest essay, his reply to Professor
Von Braun (posted to the GATA egroups forum July 1),
Armstrong wrote:

"The word 'manipulation' implies that there is some
goal to be achieved. No one seems to have defined that
goal, and the assumption that a conspiracy has been in
motion among the central banks for some time shows the
lack of understanding that governments themselves have
no memory beyond the current administration.... It
does not make sense that the central banks, including
Germany, would try to drive down the price of gold.
What purpose does this serve? Surely, if the goal is to
fight inflation, governments have already manipulated
the consumer price index statistics to achieve that

While I can't speak for GATA, it is not difficult at
all to infer what the goal of the colluders against
gold might be.

If factors such as inflation, default risk, etc., don't
justify the considerable interest rate spread between
gold loans and currency loans, then any economist worth
his credentials has to ask why arbitrageurs haven't
moved in to bid up gold loan rates over the last few
years. The answer appears to be that there is no real
free market in gold loans; gold is not being
competitively lent to high bidders. Instead, gold is
being lent to a few selected institutions, comprising a
group of low bidders who happen to be politically

The implication of this is that central banks are in on
the scam and are coordinating it. If GATA is correct,
central banks must be deliberately serving the
interests of certain investment banks and cooperative
mine operators by giving them credit at a discount.
GATA doesn't have to make grandiose assumptions about
the memory of public institutions or the integrity of
consumer price indices; it is enough to assume that
central bankers and treasury officials are willing to
collude with influential constituents (and in many
cases their former and future employers as well) by
generating a political rent for their constituents'
benefit in the short run.

While it isn't strictly necessary to have a price
decline for privileged short sellers to profit from
this kind of interest rate spread, even subsidized
short sales carry with them the risk of losses due to
gold price increases. Accordingly, this scheme also
requires that gold price increases be stifled by
strategically timed injections of additional gold
supplies into the marketplace, which is accomplished by
the concerted action of central banks (by increasing
the volume of gold loans) and cooperative mines (by
making forward sales triggered by the price increases).

As gold rallies keep getting stomped by timely
intervention by central banks and cooperative mines,
bullish speculators get driven out of the market. The
only remaining long positions are then held by people
who intend to take physical delivery. Of course it also
helps to have a torrent of anti-gold propaganda being
manufactured by the media to dampen any pro-gold

Eventually the central banks will eventually run out of
gold reserves to feed the market and keep prices
depressed, and the cooperative mines will grow less
cooperative as the prospects for profiting from an
enormous short squeeze begin to outweigh the benefits
of continued borrowing at discounted interest rates.
Thus, this scheme can't go on forever. But it can
continue in the short run, and that may well be enough
for people whose memory doesn't precede the last
election and whose powers of anticipation do not
stretch beyond the next one.

Mr. Armstrong's argument that gold is a "dead asset"
that simply eats up storage and insurance costs by no
means justifies the discounted interest rates being
charged for gold. If a central bank truly believed that
gold no longer had any useful role as an alternative
source of liquidity, it might reasonably seek to
convert its gold holdings into income-producing assets.
Why would a central bank want to earn a trivial rate of
return on a gold loan when it could sell its gold,
invest the proceeds, and get a much higher real return?
Why should investment banks be allowed to capture the
interest rate differential between gold loans and
currency loans when the central banks could capture
this differential for themselves?

Of course the truth is that gold hasn't ceased to be
liquid. The physical demand for all forms of gold is at
or near record highs, and its purchasing power isn't
significantly different from what it has been for
hundreds of years. When compared to the sorry long-run
performance of fiat money throughout history, gold has
always been a far more reliable as a monetary reserve.
Likewise, it isn't likely that gold loan rates fairly
reflect free-market time preferences when you have
persistent interest rate differentials without a
correspondingly higher risk or higher depreciation of
the currency loans. The rate differential isn't
compensating the gold short sellers for anything; it is
just a gift to them from the central banks.

The de facto issue the central bankers are confronting
isn't whether central bank gold should be kept as a
reserve asset or even how it can best serve as a source
of income in lieu of being a reserve asset. The issue
is how their gold reserves can best serve the interests
of the privileged constituents of the central banks.
The point is precisely that central banks are willing
to be looted for the benefit of a few elite private
institutions. The central banks don't care about
anything as noble as fighting inflation.

From that perspective, GATA's scenario makes a lot of
sense, even if hammering down the price of one's
reserve assets and lending them at discounted rates is
irrational otherwise.


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