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Tocqueville's Hathaway summarizes and updates the gold suppression scheme
10:55a ET Saturday, July 18, 2015
Dear Friend of GATA and Gold:
In his new gold strategy letter, Tocqueville Asset Management's senior portfolio manager, John Hathaway, updates and summarizes the central bank gold price suppression scheme, which is getting more obvious every day with the counterintuitive behavior of the markets.
"We and others have commented at length about the contradictions between the markets for paper (synthetic) and physical gold. The declining price of paper gold quotes in NY and London doesn't square with worldwide physical flows that reflect demand far in excess of mine production. It appears to us that gold positions traded in London and New York among bullion banks, high-frequency traders, hedge funds, and commodity traders constitute highly levered derivatives with only distant and notional relationships to the physical substance. The power of synthetic gold markets (COMEX in New York and over-the-counter in London, in conjunction with the London Bullion Market Association fix) to determine gold prices could start to ebb as physical gold migrates to Asian financial centers.
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"China has built an institutional infrastructure in the form of the Shanghai Gold Exchange, shortly to be merged with the Hong Kong Gold Exchange, which will facilitate settlement of international transactions in physical, not synthetic, gold, as described by Yao Yudong in his recent LBMA presentation. We expect an increasing percentage of gold transactions to be denominated in renminbi.
"The well-documented disappearance of bullion from Western vaults may mean that credit required for transactions in synthetic gold -- that is, some sort of claim on underlying physical gold -- will become increasingly difficult to obtain. ...
"Evidence of possible stress on this system of credit links between physical gold and derivatives may have been revealed by the first-quarter Office of the Comptroller of the Currency (OCC) report, which showed that JPMorgan's commodities derivative contracts (less than one year) exploded from $131 million to $3.8 trillion in just one quarter -- a staggering and unprecedented change.
"The mystery deepens because the OCC for the first time inexplicably obfuscated the reporting categories by eliminating the separate, long-standing category (at least 10 years) for gold by including it together with foreign exchange. This curious retreat from transparency by the OCC suggests to us attempted deception. By whom and for what reasons we can only speculate.
"For our part, it makes us wonder whether we are witnessing the final moments of a second, more sophisticated version of the 1960s London Gold Pool (the 'Gold Pool'), a scheme organized by the U.S. and European governments to suppress the free-market gold price to camouflage the growing adverse fundamentals for the U.S. dollar. ...
"A bit of history is instructive here: The collapse of the 1960s Gold Pool, the aforementioned secret and collusive effort by seven central banks to keep a lid on the gold price, preceded a most difficult decade for financial assets. A lesson to be learned from the 1960s is the unpredictability of government actions, their inherently anti-free-market nature, and the unintended consequences that can arise from them.
"The Gold Pool was, in retrospect, a clumsy attempt by Western democracies to disguise the deteriorating fundamentals of the U.S. dollar stemming from the Vietnam War, rising inflation, and the weakening balance of payments. The dollar had been pegged to gold at $35/ounce since the end of World War II, a number that proved too low in light of the changing fiscal realities for U.S. sovereign credit caused by the escalation of the Vietnam War and the introduction of large scale welfare policies under the umbrella of the Johnson administration's 'Great Society' initiative.
"In retrospect, the scheme was clumsy because the manipulation of the gold price was accomplished by the exchange of physical gold for dollars held by foreign creditors who saw the writing on the wall. The objective of the Gold Pool was to disguise reality. In the long run, that price-suppression scheme did not work. The failure of the Gold Pool of course was resolved by the suspension of dollar/gold convertibility in 1971. When free-market gold trading resumed in 1974, the gold price rose by nearly 20 fold over the next eight years.
"The present-day magnitude of fiscal and monetary irresponsibility in our view exceeds the precedent of the 1960s by multiples. It is only fitting that the elaboration and complexity of disguise required to beautify the underlying realities would be proportional. Government intervention via price suppression (interest rates, currencies) or price inflation (financial assets) seems to pervade all financial markets. Why should gold be exempt?
"At some basic level, all investors are aware of the gold price. Unruly behavior by the metal could render the 'Truman Show' dysfunctional. Allowing free-market expression of gold prices may have been seen as a serious risk at the highest policy levels. The strong rise of the gold price amidst liberal doses of QE post-2008 through 2011 would have been a note discordant with an otherwise happy fable. Gold strength might confirm what many investors suspect: QE and ZIRP have failed to produce economic growth and may well have jeopardized future prospects for a return to solid economic footing.
"We hypothesize that, having learned from the misadventures of the 1960s, the policy elites, well-versed in the practice of financial engineering and market manipulation, would have seen no need to dump stocks of government gold reserves onto the market, 1960s style, to keep the price in check. Instead, synthetic gold, sourced in pyramids of credit extended to bullion bankers by central banks with little or no claim on physical substance, have provided a more efficient, better-camouflaged form of intervention. COMEX synthetic gold and related over-the-counter derivatives are traded in macro strategies implemented by hedge funds, high-frequency trades, and commodity funds in pair trades with interest-rate, currencies, equity futures, or even more exotic offsets. The volumes traded are huge, and bear little resemblance to actual flows of physical metal.
"We suspect that shorting gold has come to seem like a riskless proposition as long as there is confidence in the Fed. Synthetic gold is the perfect substance for a carry trade: an easy borrow with very low carrying cost and little upside basis risk. Such a hypothesis, in our opinion, does much to explain the incongruity of a declining gold price while fundamentals for paper currency, and the U.S. dollar in particular, obviously deteriorate; while demand for physical gold has exceeded new mine supply for several years running; and while above-ground 400-ounce .995-gold bars located in London, New York, and other financial capitals (in cohabitation with speculative trading activity in paper markets) have steadily dwindled and disappeared into Asian financial centers reformulated as .9999 kilo bars."
Hathaway's letter is posted at the Tocqueville Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
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