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Transcript of Lars Schall's interview with Pacific Alliance Group's William Kaye

Section: Daily Dispatches

1:34a ET Wednesday, July 17, 2013

Dear Friend of GATA and Gold:

Here's an edited transcript of yesterday's interview by the German financial journalist Lars Schall of William Kaye, founder and managing director of the Pacific Alliance Group in Hong Kong, about the rigging of the gold market by Western central banks and their bullion bank agents.

The interview was undertaken for the German Internet site Metal Week and can be heard in full here --

-- and was summarized in yesterday's GATA Dispatch here:

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

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LARS SCHALL: Hello, ladies and gentlemen. My name is Lars Schall and I am now connected with the founder, vice chairman, and senior managing director of the Pacific Alliance Group of Companies in Hong Kong, William S. Kaye. Hello, Mr. Kaye.

WILLIAM KAYE: Yes, Lars. How are you?

SCHALL: I am doing very well. How are you?

KAYE: I am doing well.

SCHALL: OK, great. Recently you received quite some attention related to some statements that you made to King World News. Can you tell us a little bit about this topic, because I was obviously quite confused.

KAYE: I think for people who are confused the best solution is to go to King World News and actually listen for yourself to the interview and read the written blogs as well. I think they faithfully represent the commentary:

I am a bit surprised at the attention that all this is getting, probably because to me it seems such an obvious state of the world. But it is causing a lot of excitement in the same sense that Ed Snowden revealing alleged secrets, and I didn't find anything that was revealed by WikiLeaks that I regarded as surprising. We expect the spying by the National Security Agency and so forth. I mean, that was all out there for people who were paying attention.

... Dispatch continues below ...


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That story has been covered in numerous places. Maybe not in the mainstream media but it is all over the Internet. That information was known to be true before Snowden released it and thereby further confirmed it.

And I guess you could by analogy say the same thing about gold because there is a lot of factual information. For people who are interested in facts, and we are -- we are not conspiracy theorists -- when facts lead to conspiracies as an explanation, then we are open to that possibility as an explanation. And conspiracies do exist. As it relates to the interview itself, I think what caused the greatest controversy -- and it was puzzling to me -- was a statement that I made because our firm runs physical bullion itself. We have 1.1 metric tons stored safely at the Hong Kong International Airport. I made the statement that I deal with one of the biggest refineries here in Hong Kong.

It is a German company, by the way, Lars, by the name of Heraeus, which is headquartered right outside of Frankfurt. And based on being one of their best customers -- at least currently -- we were able to have discussions that would not be possible if that were not the case. One of those discussions evolved by asking out of curiosity where they got their gold from. Their response was “from all over, from everywhere, from all available sources.” And I said, “You mean recyclers, bullion banks, inventory from the Comex as well as central banks?” And they just acted surprised at that question and thought that was pretty idiotic and said, “We repeat -- we get it from all sources.”

They went on to confirm that they obviously had to mean central banks as well, though they would not identify any specific central bank. But they obviously were incorporating central banks in that statement because they added that they have to be able to get gold from central banks because central banks are the largest players in the industry, which is of course a fact.

So all I did was corroborate what are known facts, what I think is certainly known to people who are in the industry. But when you report it to the vast numbers of people who know little or nothing about the gold industry, it shakes them up.

SCHALL: I think people understood [from your interview] that German central bank gold that is stored at the New York Fed ends up in Hong Kong.

KAYE: I didn't say that. I just want to be very clear that I did not say that.

SCHALL: What are your thoughts in general related to the German gold?

KAYE: Well, here I am inferring, OK? So far I think we have dealt with facts. Now I am going to make an inference, which I think follows thoroughly and logically from those facts. But it is still an inference, OK? So I am trying to be as clear as I can.

I am inferring because all the facts point in this direction that there is little or no available "eligible" gold -- and I will return to what "eligible" means in a moment -- but there is little or no eligible gold left along the major Western central banks. The way I arrive at that is quite simple. The big smash on gold, which commenced on April 12 and has continued ever since -- the catalyst for that was the default by a major European bullion bank, ABN Amro, on their obligation to supply gold under contracts they had issued to their customers. They sent out effectively a "force majeure" in which they informed their client base that held their paper, which had been redeemable for gold on demand. They sent out a circular saying, "We no longer will allow you to redeem for gold on demand. You must redeem for cash. So whatever the paper price for gold is, you will get that price. Just tell us what currency you want it in."

So that was effectively a default. That was the first major bullion bank to engage in "force majeure."

Now this should have incited a buying panic. But it didn't. And the reason it didn't is that very quickly in the aftermath of this default, which received very little attention in the mainstream media, the smash on gold, the manipulation of paper gold, began in earnest.

Now again I am making an inference. I want to be clear: My strong belief is that the purpose of this raid was to preclude the likelihood that all the major bullion banks would have followed in ABN Amro's footsteps. This is important, because we do have a lot of corroborating evidence that it wasn't just ABN Amro that was running on empty as it related to gold inventories, and if you actually checked the data that it is publicly available, JP Morgan has record modern-era lows of gold inventories that they record in their warehouse versus the massive claims against that gold.

Similarly the Comex is running close to empty at the moment as well against massive paper claims that are outstanding on its gold.

So essentially gold inventory in the system that would be available to the bullion banks is running very close to empty. That was the case in mid-April and it continues to be the case today. Then the question becomes -- and all this is covered in the King World News interviews I have done as well as on the accompanying blogs -- What is when the essential feedstock that has allowed the prosecution of this manipulation and has been diluting of the exchange-traded funds, the largest of which by a factor is the SPDR Gold Trust, GLD on the New York Stock Exchange?

What is interesting about all that is the way these exchange-traded funds were set up by the banks themselves. In other words the exchange-traded funds were designed by the bullion banks to serve their purposes as any number of insiders, including a good friend of mine, who is a lawyer who wrote the language for several of these exchange-traded funds, have confirmed is exactly the case.

The setup is a highly unusual one for people who are not familiar with this industry. And that is that the only people who can legally deal, exclusively deal with the trusts themselves are 14 or 15 major bullion banks. That's it. So even if you had a billion dollars' worth of gold, or at least paper gold, held in certificates of GLD, you would not be able to redeem those shares yourself for physical gold. You would have to enlist the cooperation -- and they are entitled to either give it to you or not -- of one of the eligible major bullion banks like JP Morgan or Scotia Mocatta or whatever.

So the structure lends itself to enormous potential mischief and abuse and this is exactly what we are seeing, particularly since mid-April.

This gold trust has itself lost over 30 per cent of the gold it had at the beginning of 2013 alone. Gold has trended from the bullion banks, where it is held by HSBC in London, to places like here in Hong Kong -- I am sure I have some of that gold -- as well as places like the People's Bank of China in Beijing and importantly also to the Shanghai Gold Exchange, where we have seen extremely high and elevated buy-ins in recent weeks and months.

This is really what in a microcosm is happening, and for you listeners who cannot be bothered looking into the King World News site, the way it works is, the Fed and Bank for International Settlements, I strongly suspect, have to be involved. Again I am making an inference based on the notion that the bullion banks neither have the wherewithal financially, and even if they did they would be in violation of various rules, including the capital rules and maximum open position rules.

There has to be somebody else involved. And the only somebody else that checks all the boxes and would also have a strategic motive to want to be involved would be a major central bank like the Fed, probably acting in concert with the central bank to the central banks, the BIS.

So the conclusion we draw, because we feel that it is the only conclusion that can be drawn, is that the Fed and probably the BIS are backstopping this. The agents that are responsible for the actual design of the trading programs, the algorithms and the price-depression schemes, are the bullion banks themselves.

Now the reason all this kind of ties together and makes sense is that it's a win for both sides. The Fed and BIS benefit for sustaining for a bit longer the mythology that "quantitative easing" is responsible policy and that fiat currencies are strong. If gold would go in the other direction, hitting all-time highs, which in our estimation it would be, absent this manipulation scheme, this would disrupt the emperor. This would show that fiat currencies are suspect, that these policies are suspect, and interest rates, typical sovereign debt, would likely be much higher.

If people saw themselves losing purchasing power and saw gold skyrocket, there would be very little interest in the sovereign bonds of all these countries that if they didn't have digital printing presses backstopping them would all be bankrupt. So you can see why the Fed and the BIS would have a strategic agenda in engaging a scheme like this, and the bullion banks are engaging in the scheme for two reasons: First, the alternative is that they would all have gone the way of their comrade ABN Amro, which they don't want to do. And second and probably more importantly, it is a great scam for them. For this scheme creates tremendous trading opportunities because it is a controlled manipulation by the bullion banks.

We believe that in practice this uses the balance sheet of the Fed and possibly the BIS. The Comex features at strategic times during the day when gold is hammered lower. Now happens during New York Stock Exchange trading time. GLD, which has to trade by in lockstep with the paper gold price, goes down as well. Once the bullion banks are happy with having gotten GLD to the stress level of their choosing, they gobble up their shares in denominations of 100,000 each, about $12 million each, so we are not talking about retail being able to play this game.

Most institutions aren't interested in doing this but the bullion banks are, which is why over 30 percent of the physical bullion of GLD is already gone in 2013 alone. So when they are happy with creating a highly distressed price that is attractive to them, they buy up the shares at GLD and they contact Bank of New York Mellon, which is the fund's trustee, and they ask the bank to cancel their shares and put in notice of physical delivery of gold from HSBC, which is exactly what happens.

Then that gold leaves London and often travels out here, either directly into Shanghai or into China through Hong Kong, and all the data that is available confirms what I am saying. For instance Hong Kong publishes -- China does not – line items for both exports and imports every month to and from Hong Kong. So we actually have very good data on the elevated levels of gold that is re-exported out of Hong Kong into China. The biggest customers are the People's Bank of China, it goes to major jewelers like Chow Tai Fook that are doing a booming business, it goes to the Shanghai Gold Exchange, and so forth.

SCHALL: If you were calling the shots at the Deutsche Bundesbank, would you withdraw all German gold from New York and London?

KAYE: My presumption is that that gold isn't there. To satisfy any demands by the Bundesbank, the gold would have to be borrowed from somewhere else. It would have to be borrowed from the inventories that do exist, even though they are very low, at the Comex. It would have to be borrowed from JP Morgan, et al., and these guys hardly have enough gold for their own day-to-day purposes. So I am pretty skeptical that that would succeed and there are powerful reasons for believing that the Bundesbank already knows this.

These Central Banks talk to each other all the time and this is world-known and anyone can look to the WikiLeaks cables to confirm that. It is almost unfathomable that the Bundesbank would not know what the situation is. Now that leads to a second question: Why are they propagating this myth? The Bundesbank is not in the dark and they are not being lied to. And the officials there -- at least the senior officials -- know or should know what the real state of the world is and that the gold is gone while they are playing this game with the German people.

And the answer is that they don't know what else to do. They, like the Fed, have an incentive to manage the price of gold. They don't want any more stresses on the euro. And certainly gold going through the roof, as it did in 2011 when the euro was last under enormous stress, is not something that the Bundesbank wants. So I suspect that they are playing this game not because they want to lie to the German people. I think they are playing this game because they really don't know what else to do.

SCHALL: And so they pretend in this confidence game that it will take seven years to repatriate 300 tons of gold from the New York Fed?

KAYE: Tthat is right and that itself points to the notion that they aren't serious about getting their gold back. Because why should it take seven years? It makes no sense. This quantity of gold could be delivered in less than seven weeks. It already should be back in Germany. If they were serious about getting it back and believe that they could get it back -- let's couple those two concepts because I think they are critical -- it may very well be that you have got well-meaning officials at the Bundesbank who, if they honestly believed that they could get the gold back in seven weeks, they would have insisted on seven weeks. So this is just another interesting point in the direction of the arguments I am making.

SCHALL: Now that there is a price smackdown, what are your thoughts on the fact that the big banks in the United States are now going long gold in the futures market?

KAYE: I think they have been very successful in managing this enormous manipulation. And for people who, like me, feel that all the evidence supports the notion that this is a bullion bank-engineered manipulation, this is very positive for the future price of gold. They have profited enormously from shorting gold, going back particularly to mid-April, when they became very serious, and now they have turned from being very net short to at least being somewhat net long. This is shown not only in the commitment of traders report; it is also shown in a much more constructive series of options.

You need to understand that the bullion banks have been profiting on the way down in multiple ways. They profited by shorting, for instance, the Comex gold contract and the SPDR Gold Trust trade on the New York Stock Exchange. They have also made money buying puts and selling calls on gold, knowing which direction gold was going to trade next. And of course that direction has been almost always down since April. This has generated enormous trading profits for these banks. JP Morgan, I think, reported 100 per cent profitable trading days and this [gold manipulation] would certainly account for the fact that they would have had 100 per cent profitable trading days on their proprietary desks. The same with Goldman Sachs and on and on.

Having run a proprietary desk for a number of years, I can tell you that that is not possible outside a rigged game, even a casino. I know the people at the Wynn Macau casino pretty well and I have talked to them and casinos are about as rigged as you can get, but a casino does have the appearance of randomness and chance to it. Even a casino like Wynn, basically one day out of roughly three or four, will have a losing day. Somebody will get lucky at the baccarat table even though the game would not be offered if the casino did not have a very large margin in its favor.

Taking "risk" on its proprietary trading desk JP Morgan has a better streak than Wynn Macau. You logically cannot account for that unless the game itself is rigged. And the bullion banks, I am alleging, are responsible for rigging the game in their favor and this is why they are immensely profiting.

Now the reason the Fed would be happy with this is you can also do this as a back-door method of recapitalization at these bullion banks. It wasn't that long ago -- in 2008, 2009 -- that we had a very controversial bailout directly by the Fed and Treasury Department in the United States of these banks. No one wants to see -- at least no one in a position of power and no one at the bullion banks -- a repeat of that controversial history and of course politically it would be very contentious.

Much better to engage in a bailout that is invisible to the vast majority of people. So you can view what is going on here in as a stealth recapitalization or further bailout of these same banks, only the public is not aware of it.

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