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An Exchange with Dennis Gartman on the Sprott Report
On Gold Bugs and Net Shorts
By Dennis Gartman
The Gartman Letter
Tuesday, September 14, 2004
The gold bugs are a strange lot, really. They see conspiracies everywhere and at all times. If the government is not conspiring against the public, then business is conspiring against the government, or business AND the government are conspiring against the public, and, if not that, then all three are conspiring against ghostly, foreign forces that are set to wage some sort of economic war against the country.
We see this as a wondrous waste of time and money as they try to prove the merits of gold ownership based upon conspiracies, far and near, visible and invisible. However, as long as they do no damage and stay within their small sphere of influence, they have the absolute right to make their case and move on.
That having been said, we are always concerned when we write about the gold bugs because in the past we have gotten some of the most disconcerting threats from them, including phone calls at odd hours; e-mails threatening harm; name calling, etc. We trust today's article will draw nothing more.
Having been taken to task rather often by the gold bugs, we thought we'd take the time to read a report put out by Sprott Asset Management of Toronto that has been much in the news amongst the gold bugs of late for having "proved" the case that GATA puts forth.
GATA, as our clients should know, argues that there is a vast conspiracy amongst the gold bullion dealers, the Wall Street trading houses, and the various governments of the West to keep gold prices down.
The Sprott paper is rather weighty, and we decided to take it with us on our long flight to Shanghai recently in order to read it cover to cover. We did, and we took notes at length.
We disagree with this report in its entirety, although we do admire the sheer volume of the work done. Under normal circumstances we would call this yeoman's work and applaud the endeavor, but this is not a normal circumstance.
We could, time permitting, cite passage after passage with which we disagree. However, our major point of contention is simply this: It is odd that the major analysts supporting GATA's thesis are really rather few, and they include Mr. Frank Veneroso, Mr. Reg Howe, Mr. James Turk, and Mr. Bill Murphy, GATA's founder and guiding spirit.
These are fine, educated, deeply intelligent men who have done stunning amounts of work on the details of the gold market. We are especially fond of the work done by Mr. Veneroso and we do indeed rather like Mr. Murphy, for he is a wonderful conversationalist and Renaissance man.
What we find odd is that Sprott, having taken GATA's position that there is indeed a conspiracy among the leading central banks and brokerage and trading firms, relies almost solely upon these other analysts who hold to the same thesis to prove the thesis. Page after page, footnote after footnote, textual citing after textual citing is done ontologically; each cites the other; each uses the other's facts and figures; each believes the other is right and each "proves" each other's proof by the proofs of the other.
We had hoped to see independence amongst the citations used in Sprott's paper, for in using independent sources we might well have been willing to listen and to accept their analysis. However, in 68 pages of text, Mr. Veneroso, Mr. Howe, GATA, and Mr. Turk are cited a total of 87 times (Due to some minor printing errors in the text we used, some of the notations were garbled and so we may be off perhaps two or three citations in either direction, a variance which we think shall make little if any difference to our case.)
Further, we take issue with the manner in which this report always seems to use the terms "may" or "might" while making its case. For instance, on Page 58 the report says: "As James Turk suggested in 'Behind Closed Doors,' the leasing of gold by another nation may in fact be directed by the United States."
"May be" and "is" are materially different, of course -- (unless you are William Jefferson Clinton -- and the Sprott report seems always to pile on the references to possible machinations taken by the U.S. government, the sheer weight of which it hopes shall make its case. It does not.
Further, the report consistently tries to make the case that the U.S. government has lied regarding the use of the Exchange Stabilization Fund, where the report believes that the government hid gold and used it for market manipulation. It cites a statement by U.S. Treasury Secretary O'Neill that the Treasury Department "intensively monitors foreign exchange markets and maintains continuing monitoring of gold markets and related developments."
GATA and Sprott will argue that "monitoring" equates to manipulation. We shall maintain that "monitoring" is precisely that: monitoring, watching, learning from the markets what the market is saying to Treasury and the Fed concerning policies that are either in place or may be put into place. But "monitoring" need not be real action, and likely is not.
We've not the time to go on this morning, and although our case is perhaps not made with the same sheer volume that the Sprott report has weighed in with, we trust it is made. Conspiracies rarely exist, and when they do, they are far more often than not exposed.
GATA's followers are legion and very often they are wise. Would that they spent their collective wisdom on worthier efforts. There are times when it is appropriate to be bullish on gold; there are times when it is not. To GATA and the gold bugs, it is always time to be so. To us, gold is merely another asset bidding for our capital, and it is there that they fail.
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In Reply to Dennis Gartman
By Chris Powell, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. Wednesday, September 15, 2004
Dennis Gartman doesn't want to argue the details of the Sprott Report -- which is fine, because that's not necessary to prove a great conspiracy against the price of gold, "conspiracy" being a more or less surreptitious agreement to commit a wrongful act.
The conspiracy against gold needn't be proved in the first place, because it has been admitted over and over again by "the gold bullion dealers, the Wall Street trading houses, and the various government of the West" even as they deny it when the question is put to them plainly.
Like Tim Wood, formerly of MineWeb.com, Gartman might not be able to see this even if Federal Reserve Chairman Alan Greenspan knocked on his door to deliver a notarized confession. For Greenspan and the heads of the other Western central banks have practically done as much already, and most financial analysts just don't want to know.
After all, what was the Washington Agreement of September 1999 if not a proclamation that the 15 participating central banks were colluding to regulate the gold price?
Of course in the Washington Agreement the central banks affected to be SUPPORTING the gold price; they pledged to limit their gold sales to 400 tonnes per year for five years -- lest, they said, the gold market be flooded with metal and the gold price collapse, taking with it the economies of gold-producing countries.
GATA has put a different construction on the Washington Agreement. We consider it the device by which central bank gold LOANS are written off as SALES at discounted prices, rather than be called back and cause a short squeeze in gold.
That is, far from supporting the gold price, the Washington Agreement was how the central banks kept gold's price from rising and prevented the bankruptcy of the financial houses that, at the invitation of the central banks, eagerly joined the gold carry trade of the 1990s. In that carry trade gold was, in effect, loaned by the central banks for next to nothing and sold by the financial houses to depress its price, strengthen the U.S. dollar, reduce interest rates, and inflate the price of paper assets, which were purchased with the proceeds of the gold sales.
But no matter how you want to construe it, the Washington Agreement was ADMITTEDLY a co-ordinated action by the central banks to regulate the gold price, using bullion banks as intermediaries.
While their meetings are closed to the public, that central banks get together to discuss and unify their policy toward gold is a matter of ordinary public record. The bankers come out of these meetings and hold press conferences and issue press releases saying that they have been coordinating their policies on gold -- and financial analysts like Gartman and Wood can't see the forest for the trees.
Does Gartman, like Wood, really believe that this collusion by the central banks is always benign, in the public interest, and without ulterior motives, that it never involves more than the bankers say it involves, and that it never should be questioned?
He should try attending one of their conferences, or should ask to inspect the records of the Exchange Stabilization Fund, or should ask to audit the central banks' gold vaults. That would be called journalism, it would be thwarted -- for none of this has ever been done -- and then maybe he might begin to question his premises.
The Washington Agreement wasn't the first coordinated intervention of the central banks in regard to gold. It was at least the second and probably much more belated than that. How do we know? Because that's what Federal Reserve Chairman Alan Greenspan told Congress. On July 24, 1998, Greenspan remarked to the House Banking Committee: "Central banks stand ready to lease gold in increasing quantities should the price rise." He repeated that statement a few days later to the Senate Agriculture Committee. His statement remains posted on the Fed's Internet site: http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm.As usual, few in the financial press seem to have been paying attention.
Of course, like the central banks that participated in the Washington Agreement, Greenspan was disguising the true purposes of the gold policy he described. He was explaining why he didn't think that the derivatives market needed federal regulation, and he was suggesting that central bank gold leasing was a safeguard against a private corner on the gold market, a safeguard that made derivatives regulation unnecessary.
GATA maintains that, as with the Washington Agreement, the purposes of the central banks were the opposite of what their leading spokesman was suggesting. Far from working together to prevent a private corner on the gold market, the central banks were using gold leasing to maintain a corner on the gold market themselves.
Construe Greenspan's testimony as you will -- like all critics of GATA, Gartman doesn't want to argue details -- but there it is again, from Greenspan himself: Central banks admit that they work together to regulate the price of gold. And, more than that, Greenspan told Congress, if inadvertently, that the purpose of gold leasing was not really the purpose long maintained by the central banks involved in it -- to extract a little income from a supposedly dead asset -- but rather to prevent the price of gold from rising.
Central bankers aren't the only ones in the gold business who have acknowledged collusion to control the gold price. The biggest hedger among the gold-mining companies, Barrick Gold, has gone so far as to confess, in federal court in New Orleans, to participation in this scheme. Sued along with its bullion bank, J.P. Morgan Chase, by Blanchard & Co., the New Orleans coin and bullion dealer, Barrick filed a surprisingly candid motion in court on February 28, 2003.
Barrick moved for dismissal of Blanchard's lawsuit on grounds of sovereign immunity. That is, Barrick claimed that, in borrowing gold from central banks through Morgan Chase, Barrick became the agent for central bank gold policy; that, as the agent of central banks, the company could not properly be sued without also suing the real parties in interest, the central banks; and that, since the central banks, as the agencies of sovereign governments, have immunity and could not be made party to the Blanchard suit, the suit should be dismissed. Barrick's confession can be read here:
Fortunately Judge Helen Berrigan dismissed Barrick's motion, and so Blanchard's lawsuit has gone to the evidence-collecting phase. The suit is similar to Reg Howe's federal lawsuit, which was brought in U.S. District Court in Boston, underwritten financially by GATA, included government defendants, and failed on the very issue of sovereign immunity -- the issue that is now out of the way in the Blanchard case so that the world yet might get a close look at how the gold market really works.
But there it is again -- an admission, this time in court, that central banks, bullion banks, and even mining companies work together to regulate the gold price.
Just as the true purpose of gold leasing is to suppress the gold price rather than earn a little interest on a "dead asset," some central banks even acknowledge that the ONLY purpose of holding gold reserves now, in the absence of any currency's formal convertibility, is to rig markets.
Here's what the Reserve Bank of Australia says on Page 31 of its annual report for 2003:
"Foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market. In investing these assets, priority is therefore given to liquidity and security, in order to ensure that the assets are always available for their intended policy purposes."
The RBA's statement can be found here:
All this shows that while the formal convertibility of currencies into gold has been ended by the articles of the International Monetary Fund, gold continues in its nature and function as money and as the independent international currency, the competitor of the dollar and the euro -- and that central banks recognize as much, however grudgingly.
Central banks often acknowledge intervention in currency markets -- direct intervention, as with the Bank of Japan's printing yen to buy dollars and the People's Bank of China's enforcing a fixed exchange rate with the dollar; and indirect intervention, as by the heavy purchases by many central banks of U.S. government bonds. Meanwhile the Federal Reserve intervenes in and supports the U.S. bond and equity markets every week through the strategic purchase and sale of U.S. government bonds.
Amid this constant collusion and intervention, why should it be so hard to accept that central banks might be more involved in the gold market than they make plain and that their purposes might not always be consistent with the free markets they tout?
As for those crazy gold bugs who are "always bullish on gold" and whom Gartman alternately sneered at and patronized in his letter today, they are so not because, like him, they are in the investment advice business, where "gold is merely another asset bidding for our capital," but because they consider gold the great mechanism for holding government accountable, for preserving limited government against unlimited government, preserving liberty against the sort of government lately running rampant nearly everywhere.
That is, as much as gold bugs might like and even expect to make money, all this is about a lot more than that. It's about saving the world. -END-