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A Summary of GATA's Work - Andrew Hepburn

Section: Essays

By Andrew Hepburn

January 12, 2004

The Gold Anti-Trust Action Committee (GATA) believes that central banks, acting through certain investment banks, have surreptitiously manipulated the price of gold. Such activity appears to have started in the mid-1990s and continues to this day. Prominent entities involved include J.P. Morgan Chase, Goldman Sachs, Deutsche Bank, the Federal Reserve, the Bank of England, and the Bank for International Settlements. GATA specifically alleges that the U.S. Treasury's Exchange Stabilization Fund has been used, contrary to official denials, for gold market interventions. Furthermore, GATA believes that the official sector intervened in the late 1990s to prevent an impending gold derivative crisis, the result of excessive short positions accumulated over many years.

These claims are based on analyses of publicly available government documents and statistics, trading abnormalities, and material presented in a GATA-backed lawsuit. Howe vs. Bank for International Settlements et al. accused the BIS, Federal Reserve, U.S. Treasury, and four bullion banks of gold market manipulation. Though the suit was dismissed in 2002 on two technicalities, the evidence presented in it is recognized by many knowledgeable observers as having sufficiently proven the price-fixing allegations. Nonetheless, important questions remain unanswered about the gold market activities of the investment banks and monetary authorities.

Some answers may be forthcoming via a lawsuit currently in the discovery stage. Blanchard and Co., the nation's largest retail coin dealer, filed suit in U.S. District Court in New Orleans against Barrick Gold and J.P. Morgan Chase, alleging that hedging arrangements between the gold miner and investment bank facilitated the manipulation of the gold price. Motions to dismiss the lawsuit were recently denied by the presiding judge. This legal action is independent of the GATA-sponsored lawsuit but is supported by GATA and touches on the same basic issue. Given gold's current bull market, it is very timely. Some of the reasons for gold's extended bear market may finally come to light. (For a detailed explanation of the Blanchard case, see an interview conducted with its CEO, Donald Doyle:

There are several possible motives for the Fed and Treasury to depress gold prices surreptitiously:

(1) To prevent rising gold prices from sounding a warning on U.S. inflation. Gold has long been considered a hedge against inflation, and a low gold price generally indicates that inflation is benign.

(2) To prevent rising gold prices from signalling weakness in the international value of the dollar. The Treasury Department has never articulated the mechanisms by which the "strong dollar policy" has been implemented. As mutual fund manager John Hathaway notes: "...there can be little doubt the low [gold] price has been one of the most important sound bytes for mass consumption underpinning the low inflation mythology of the new economy and the strong dollar."  Hathaway continues:

Gold retains its financial market role as the "canary in the coal mine." A sharply rising gold dollar price would send a clear message to even the most casual observer that something is awry with the Fed's " fine tuning" of the economy and financial markets.


(3) To keep interest rates artificially low. In an academic paper published during his tenure at Harvard, future Treasury Secretary Lawrence Summers concluded that in a free gold market unaffected by "government pegging operations," the price of gold would move inversely to real interest rates. This relationship broke down in 1996, indicating that central banks moved at that point to suppress gold prices. (A copy of the essay, "Gibson's Paradox and the Gold Standard," is available at For an analysis of Summers' work, see "Gibson's Paradox Revisited: Professor Summers Analyzes Gold Prices":

(4) To prevent banks and others that have funded themselves by borrowing gold at low interest rates and are thus short physical gold from suffering huge losses as a consequence of rising gold prices.  The bullion banks profited greatly from the "gold carry trade." As explained in Howe vs. Bank for International Settlements et al.:

Central banks lease gold either by making gold deposits with, or  by making gold loans to, bullion banks, the largest of which are international banks or other financial institutions. In both cases, the gold is placed with a bullion bank usually at a very low rate of interest, often 2% or less. This so-called "leased" gold is then sold into the market and the currency proceeds delivered for investment or other use by the bullion bank and/or its customer. When the gold deposit is called or the gold loan comes due, the physical gold required for repayment must generally be  repurchased in the market.


The benefit to the bullion banks lay in the difference between gold lease rates and prevailing interest rates. By borrowing gold cheaply, selling it into the spot market, and investing the proceeds in interest-bearing instruments, the gold borrowers realized substantial gains. At some point, however, at least theoretically, the gold might have to be repurchased in the market and returned to the central banks.

This short position caused a huge price spike in the aftermath of the so-called Washington Agreement, where 15 European central banks agreed to limit gold sales and curtail lending activities. The reaction to the short squeeze by the Federal Reserve, BIS and Bank of England was outlined in Howe vs. BIS:

According to reliable reports received by the plaintiff, this effort was later described by Edward A.J. George, governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, Chief Executive of Lonmin Plc:

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K."

Former World Bank consultant Frank Veneroso, currently global strategist at Allianz Dresdner, stated the following regarding the gold market activities of the central banks:

"In other words, the official sector intervened to prevent an explosive gold derivative crisis. We conclude from our argument based on the development of an inadvertent corner in the gold markets, from a "prison of the shorts," that, since the Long Term [Capital] Management crisis in late 1998, the official sector has been managing the price of gold."


In order to "prevent an explosive gold derivative crisis," the central banks have likely had to let the bullion banks off the hook for the majority of borrowed gold. Other possibilities include allowing the banks to settle outstanding gold loans in cash rather than metal. Whatever the case, it is also probable that an implicit agreement exists whereby the bullion banks will not suffer crippling losses as a result of their gold-trading activities. Simply put, to cover thousands of tonnes of physical gold in short order would both send the price soaring and significantly harm the balance sheets of major gold borrowers.

It is now appropriate to revisit the Fed-organized bailout of Long Term Capital Management. What was painted as an intervention financed completely by the private sector may have had public sector involvement that was never disclosed. Quoting an analyst at Bank of Montreal-owned Nesbitt Burns, reported in September 1999 that LTCM was short 400 tons of gold, "despite repeated statements to the contrary by the fund's spokesman."


More importantly, Veneroso recently stated:

"We believe the first round of gold short covering occurred after the LTCM crisis in the fall of 1998. I have received many testimonies that LTCM had extensively used gold borrowings to fund its leveraged positions, and believe it likely that the Fed removed these shorts from LTCM's books in the course of the bailout of LTCM."


The U.S. government has denied any recent gold market involvement. Writing to Sen. Joseph I. Lieberman in 2000, Federal Reserve Chairman Alan Greenspan asserted:   

Most importantly, the Federal Reserve is in complete agreement with the proposition that any such transactions on our part, aimed at manipulating the price of gold or otherwise interfering with the free trade of gold, would be wholly inappropriate.

The U.S. Treasury also denied intervening in the gold market. In a court filing dated March 15, 2001, then-Secretary of the Treasury Paul O'Neill asserted:

    Although unnecessary at this juncture, the secretary specifically denies that the Treasury or the [Exchange Stabilization Fund] since 1978 has traded in gold or gold derivatives for the purpose of influencing the price of gold or the exchange value of the dollar. In fact, the ESF has not held any gold since 1978.

See (page 3, footnote 4.)

These denials do not square with a remark found in a January 1995 Federal Open Market Committee meeting transcript. Responding to a question raised by then Federal Reserve Board Governor Lawrence Lindsey about the legal authority of the U.S. Treasury's Exchange Stabilization Fund to engage in the financial rescue package for Mexico then under discussion, J. Virgil Mattingly, general counsel of the Fed and FOMC, stated (p.69):      

  It's pretty clear that these ESF operations are authorized. I don't think there is a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very broadly worded in terms of words like 'credit' -- it has covered things like the gold swaps -- and it confers broad authority.   [Emphasis supplied.]


   Howe vs. BIS noted: 

Ordinarily the term "gold swap" refers to the spot exchange of gold for cash or securities together with a promise that the transaction will be unwound at an agreed future date and price. Gold swaps are sometimes used by central banks in the developing world to acquire needed foreign exchange, effectively offering gold as security for repayment. In recent years, however, gold swaps have also been used as an alternative to gold loans by certain central banks, which then earn interest on the cash or securities deposited with them while a bullion bank or other party has use of the gold. Another kind of gold swap is a "location swap" in which gold in one depositary or storage facility is temporarily swapped for that in another.           

It is not clear whether Mr. Mattingly was speaking of ordinary gold swaps, location swaps, or some combination of the two. Nor is it clear whether he was referring to a program of gold swaps known to some or all participants in the meeting, or to one or more special transactions with respect to which he had issued an opinion, or to some other set of transactions. What is clear is that he was referring to gold swaps that, so far as the plaintiff is aware, have never been identified or disclosed in any other publicly available materials relating to the ESF or the Federal Reserve....

Bolstering GATA's allegation that gold swaps may have jeopardized the ownership of a substantial portion of the U.S. reserve is an accounting change made in September 2000. The U.S. Mint reclassified approximately 1,700 tonnes of gold at West Point, New York, to "Custodial Gold Bullion" from "Gold Bullion Reserve." This, of course, suggests that the gold was being held in custody by the mint for its real owner. (Online copies of the August 2000 and September 2000 Status Report of U.S. Treasury-Owned Gold are no longer available. However, a reference to the accounting change is made on the Frequently Asked Questions section of the Treasury's website:

The mint did not explain why the West Point gold was reclassified and the gold at Fort Knox and Denver was not. But before it could be pressed on the issue, in July 2001 the mint redesignated 94% of the U.S. gold reserve as "Deep Storage." Once again, no reason was provided for the accounting change.

See for the July 2001 Report.

The reference to ESF gold swaps in the FOMC transcript was discovered after both the Federal Reserve and Treasury had denied any such activity. Perhaps that explains why the Fed's general counsel claimed in a memo released by Sen. Jim Bunning's office that:      

    Given the passage of time, some six years, I have no clear recollection of exactly what I said that day but I can confirm that I have no knowledge of any  "gold swaps" by either the Federal Reserve or the ESF. I believe that my remarks, which were intended as a general description of the authority possessed by the secretary of the treasury to utilize the ESF, were transcribed inaccurately or otherwise became garbled. [Emphasis Supplied.]

The above claim is simply not believable. As described by the FOMC (, transcripts of its meetings in 1995 were prepared "shortly after each meeting from an audio recording." While editing was done "primarily for syntax purposes" and generally "to facilitate the reader's understanding," the FOMC makes it clear in the prefatory note to the January 1995 FOMC transcript that "in no case did the editing alter the substance of the comments made. Meeting participants were then given an opportunity to review the transcripts for accuracy." [Emphasis Supplied.]

Unfortunately, it appears that the tape recording of the meeting in question no longer exists. At the January 1995 meeting, the FOMC discussed procedures for transcript publication and retention. A revealing exchange between Governor Cathy Minehan and Fed counsel Mattingly follows:        

MS. MINEHAN: We have tapes and we have lightly edited transcripts. Do we have to keep both of these? Are both the full record, or do we get rid of the tapes upon the development of the lightly edited transcripts? Would a potential subpoena, assuming it did not cover a recently completed meeting for which we have a tape but not yet a lightly edited transcript, cover only the lightly edited transcript? Or do we have to keep the tapes too?

MR. MATTINGLY: No. Once the edited transcript is approved by the participants, the tape can be dispensed with.

An article in Barron's confirmed the words of the Fed's lawyer. Written by Robert Auerbach, formerly an economist on the Senate Banking Committee, the piece notes that, "The FOMC...has shredded its unedited transcripts for 1994, 1995, and 1996." See It is quite possible that other references to ESF gold market activity were made during the January 31, 1995, meeting, only to be redacted later. The failure to redact Mattingly's "gold swaps" comment was probably an oversight.

Prolonged central bank interference in the gold market is nothing new. In 2002 an internal Royal Bank of Canada report endorsing the allegations of gold price manipulation was leaked. Its author stated:        

What is happening today is no different than what was happening in the late '60s and the very early '70s, when the Gold Pool was in existence and the gold price was contained at $35 per oz. by a consortium of central banks that dumped a considerable amount of gold to keep prices down. Today, instead of the overt action of yesteryear, it is covert because the market is allegedly free, and it has entailed a different mechanism, which has resulted in a humongous physical short position.


The effects of artificially depressed gold prices are numerous. The economies of many African countries dependent on the commodity were greatly harmed. Referring to South Africa, the Congressional Black Caucus noted in a 1999 letter to President Clinton "the terrible shock" to the country's economy "caused by the dramatic drop in the price of gold over the past three months." The letter also observed, "Since the mining industry draws much of its workforce from the poorest and most rural communities in the subcontinent, often 10 people or more are dependent on the earnings of each miner." See

Shareholders of gold mining companies suffered from the manipulation as mines closed and losses were widespread. Further, 10,000-15,000 tonnes of central bank gold were dumped on the market via leasing. This represented a third to half of all official-sector gold. As a result, many nations now guard vaults that are close to or completely empty. Ironically, the massive quantity of gold expended in the manipulative scheme over many years is making current efforts to contain gold prices very difficult. As the gold price climbs above $400, the central banks' attempts to control the gold market may be failing. 

U.S. citizens, lawmakers, and journalists should be particularly concerned about the manipulation of the gold market. The January 1995 Federal Reserve transcript raises the possibility that U.S. gold reserves have been put in jeopardy. These transactions have never been disclosed. Moreover, government officials have denied any activity in the gold market whatsoever, even when confronted with Treasury and Federal Reserve documents to the contrary. GATA believes that public policy should be made public. Citizens deserve to know the policies of their central bank, especially as they pertain to national gold reserves.