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Whoever has been selling gold, the powerful are not omnipotent

Section: Daily Dispatches

11:30a ET Tuesday, September 12, 2006

Dear Friend of GATA and Gold:

This essay by Mike Kosares, proprietor of Centennial Precious Metals in Denver and host of the wonderful forum at the firm's Internet site,, is adapted from a couple of his posts there yesterday and today.

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

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By Mike Kosares
Centennial Precious Metals, Denver
Tuesday, September 12, 2006

In my view the Washington Agreement was signed to abort runaway gold loan volume. Previous to the agreement, gold loans were compounding in what might be described as a fractional reserve lending system. Red lights began to flash in certain quarters, and Rothschild led the way in calling for more "transparency" in the gold market and a new system to deal with the burgeoning gold lending market.

The same gold was being loaned and redeposited so that more than one entity believed it owned the same tonnages. The greater the overall loan volume being generated by the bullion banks, the greater the attrition rate in terms of physical ounces being returned to depositors on an annual basis. If you have 5 percent of depositors wanting their gold back and the overall gold volume is X tonnes, it is one thing. Five percent of four or five times X tonnes might be a problem -- and a drain on the central banks that eventually become the suppliers. To keep the system from running amok, the central banks agreed to a system that limited the amount of physical that could be put on the market annually, thus capping the overall loan volume and creating a manageable situation. Or so they hoped.

It is through a process of elimination that I suggest that the European central bank has been a potential seller recently. The recent seller could be an entity out of left field, but logic points me in the direction of the ECB, if there actually IS a seller. For there might not be one. Speculation may be academic but the situation does carry some import to gold investors moving forward.

Here's why.

The allotment of central bank gold sales for next year is 500 tonnes. If the central banks are unwilling to provide any more gold to the system than 350 tonnes, this will further shrink the lending market unless central banks outside the euro system are subscribed as sellers. You have to think that Germany's decision not to sell has something to do with the United States' unspoken policy to devalue the dollar, so it is doubtful that Germany is going to be pulled in as a seller next year either.

This same logic might be applied in the policy of other central banks. With the flak that Gordon Brown and the Bank of England have absorbed for the British decision to sell at market bottom, others can't have failed to take note. In my view, Axel Weber's position at the Bundesbank goes beyond politics and is one of principle -- that gold is an important and required aspect of a nation's reserves -- a position that, by the way, echoes comments made by Alan Greenspan in the United States. This is a major change and one that is likely to have an effect elsewhere as the dollar situation proceeds.

Odds are this latest drop in gold has to do with "black box" trading more than anything else and the pile-on effect we have witnessed all too often in the gold market.

The rebuilding process in gold will begin on technical factors and gather momentum once the market realizes that the central banks haven't made the 2006 gold sales quota and are unlikely to make it next year as well (if that indeed is found to be the case when the smoke clears). The current central bank gold agreement runs to 2009.

In my view this does not have to do with gold's allies coming together to push the price of gold higher. It has to do with saving the system and keeping the various bullion banks from getting in over their heads and creating a situation the central banks could not bail out. That is a more formidable and permanent force underlying the market than the desire to push the price higher. The system seems to require about 50 tonnes of central bank gold per month. The question is: Where is that gold going to come from if you get to a place where the previous sellers, or subscribed sellers, decide not to deliver?

That is the situation with which the armies of the night could very well be confronted when the smoke clears. ...

Treasury secretaries, finance ministers, and chancellors will play politics with money and finance and use whatever tools at their disposal to advance the interests of their political parties. That is a given.

At this moment the finance ministers in Europe want lower interest rates. They are campaigning for it, using every avenue open to them to make their argument. But as powerful as they are, they have opposition in Trichet and the European central bank. If you viewed only one side of the equation -- the finance ministers' side-- you might prepare your portfolio for a lower interest rate environment. If so, you might be in for a nasty surprise if the ECB holds sway.

It is also a given that the major players with their concentrations of capital and power will endeavor to move the markets in their direction. Some will view this as conspiratorial; others will view it, as I do, as just market elements that need to be figured into the equation.

If, in this example, the conspirators were to drive the price of a group of commodities lower, what would be the result?

A buying opportunity for those who have a need for or believe in the long-term value of that commodity.

Gold is a good example in this regard. Let me assure you that the East lies in wait, just hoping for lower prices.

Powerful players -- even if they sit as head of the finance ministry, the treasury department, or the chancellery -- are not omnipotent. They cannot have their way with the markets without opposition. To believe otherwise is the mistake that many conspiracy theory proponents make.

How often, do you believe, some powerful individual somewhere hasn't thought to himself: "No matter what I do to discourage these people from going to gold, it keeps going up. What's it going to take to calm their ardor? What's a finance minister to do?"

I believe that those who believe that the conspirators are godlike in their powers miss a good deal of the analysis by believing that the opposition resides on Mount Olympus. In my view, if the analysis ends there, it stops short.

Little do some analysts know how well they serve the lie by making others believe that those who are perceived as powerful can have their way unchallenged. In my view, a group can conspire to make a market do something but cannot continue for long if it is against the primary trend -- and cannot continue for long without substantial expense. As any student of ancient Greek literature knows, there is always a price to pay even if you dine with the gods and goddesses amid the clouds on Olympus.

We should ask ourselves a question:

If the anti-gold conspirators are so powerful, how did we get from $250 gold to $730 gold?

Now let me take you back to those dark days at $250 gold when we called ourselves knights and ladies of the table and gathered at the USAGold Forum to discuss gold. How successful might we have been if we believed even then that the forces opposed to gold were invincible?

I do believe that there is value in understanding the forces at play in these markets, including the powers within the Beltway and along the Hudson. But we make a mistake if we accord them status beyond mere mortals.

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