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Section: Daily Dispatches

10:30p EST Monday, February 8, 2000

Dear Friend of GATA and Gold:

The foremost analyst of world gold supplies, Frank A.J.
Veneroso of Veneroso Associates, addresses the question
of government manipulation of the gold market in the
essay that follows. He concludes that such manipulation
very well may be going on and that it will make the explosion
of the gold price even more violent.

GATA is grateful to Veneroso for his permission to
distribute this essay, which, we think, vindicates the
committee's work.

Please post this as seems useful.

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

* * *


GATA Provokes Interesting Responses
From the Fed and Treasury Department

By Frank A.J. Veneroso
Veneroso Associates


* Congress Questions the Fed and Treasury About Gold
Price Manipulation.

* The Fed Issues A Blanket Denial.

* The Fed's Denial Provides Grounds for Suspecting
Official Intervention.

* Large Undisclosed Official Supplies Reversed the Fall
1999 Gold Price Rally.

* If Such Supplies Are From Scattered Central Banks,
the Gold Price Will Explode Sooner.

* If Such Supplies Are From the U.S. Authorities, the
Price Will Explode Later But More Violently

* * *

At the beginning of this year we decided to discuss
whether the U.S. Federal Reserve or the U.S. Treasury
Department was intervening in the gold market. For us,
the question is posed by a simple process of inference.

All the price and income determinants of gold demand
suggest a strong recovery in demand should have
occurred since mid-1998. World Gold Council demand
surveys provide confirmation. Scrap supply from
distress selling in the Far East has stopped. Mine
supply has been flat. With such a dramatic improvement
in the market's overall supply/demand framework, the
price of gold should have recovered like the prices of
oil, copper, and most other commodities. It has not.
One must posit a very large undisclosed supply of gold
to explain current depressed prices.

In the past we could attribute such a supply to short
selling by funds, bullion banks, and producers. Because
of the Washington Agreement reached by the 15 European
central banks in September 1999 and the subsequent
explosion in the gold price, these former private
sector short sellers no longer regard selling short
gold as a one-way bet; their risk perceptions have

There is a great deal of evidence that producers have
been reducing hedge positions. There is evidence as
well that funds and bullion banks have moved to reduce
short positions. So former private sector short sellers
in aggregate have been buyers, not sellers.

This implies the existence of large official supplies.
The Netherlands has sold 64 tonnes since late
September. The UK has sold 50 tonnes. Some additional
small official sales have been reported. We hear rumors
that Brazil may have sold all its gold in recent months
(perhaps 200 tonnes). Gold Fields Mineral Services has
reported that two large holders that presumably do not
report to the International Monetary Fund were
significant sellers in the fourth quarter.

These quantities taken together may or may not explain
the implied large undisclosed selling of recent months.
The Washington Agreement of September 1999 makes it
unlikely that there were additional substantial
official supplies of European origin.

There are only 6,000 tonnes of official gold held by
countries outside Europe and North America that are
reported to the IMF. Much has been lent out. Most of
these countries are not likely candidates for large
official gold sales. Further, the expressed intention
of the Washington Agreement was to improve gold market
sentiment, reduce gold supplies, and thereby raise the
gold price. Why would other central banks, which surely
must be aware of this, become massive sellers of gold
at current depressed price levels?

We believe that there are perhaps 2,000 to 3,000 tonnes
of official gold held by Saudi Arabia, the Vatican,
Brunei, China, and others that have not been disclosed
to the IMF and that could be under liquidation. The
current high oil price removes any direct financial
requirement for oil-exporting nations like Saudi Arabia
or Brunei to sell gold. These official bodies also must
know the intentions of the 15 European central banks
regarding the gold market. A sudden avalanche of
selling by these parties at current depressed prices
amid rising global demand and commodity prices makes
little sense.

It is possible that many official holders have sold
large quantities of gold over the last four months and
that little of such selling has been disclosed. But it
is equally possible they have not.

Given this, by a process of elimination one must
consider it possible that the United States is the
undisclosed seller, as it may be the only official body
with the resources to sustain the supplies implied by
the prevailing supply/demand framework.

This possibility is strengthened by the U.S. policy in
recent years of encouraging a lower gold price. When
most of the European signatories to the Washington
Agreement were planning last summer to act to improve
gold market sentiment and restrict gold supply, the
U.S. Treasury was aggressively pushing for IMF gold
sales, knowing full well that its words and actions
were depressing market sentiment and the gold price.

Clearly, the objectives of the U.S. Treasury were very
different from those of the Europeans, who must have
made their views and objectives known to the United

Lastly, there are persistent reports that Goldman Sachs
has been the featured seller in the gold market on
price rallies. In the past Goldman Sachs has not been
the lead dealer for official sales, reducing the odds
that the large undisclosed selling of recent months has
been from one or more central banks outside Europe and
North America. The dominant role of a U.S. dealer with
close connections to the current administration
increases the possibility of the United States as the
source of undisclosed official selling in the gold

Because of the obvious logic of the above argument and
because more and more market participants have been
discussing possible U.S. manipulation of the market, we
decided to consider this issue in a straightforward
fashion at the beginning of this year.

In the past we argued against concluded that there had
been such intervention on the grounds that it made
little sense for the U.S. Treasury or Federal Reserve
to intervene in the gold market. We lacked a compelling
motive. We suggested that, if the gold market was under
manipulation by the U.S. authorities, it would have to
be part of a broader policy of management of
expectations in more important markets.

For that reason we distributed to clients an analysis
of the public record on possible Fed or Treasury
intervention in the stock market. We concluded that the
public record suggested that such intervention was
possible, though it did not provide strong evidence of
such intervention.

Since our last quot;Gold Watchquot; on this subject, there have
been several inquiries along these lines made by the
U.S. Sens. Christopher J. Dodd and Joseph I. Lieberman
of Connecticut. U.S. Rep. Charles T. Canady of Florida
posed similar questions last fall. Unlike the questions
posed by Rep. Ron Paul of Florida on possible Fed or
Treasury Department intervention in the stock market,
to which the Treasury failed to respond for more than a
year, these inquiries received prompt responses.

In the case of Canady's inquiry, across-the-board
denials were provided by both the Fed and Treasury. So
far only the Treasury has responded to Dodd and only
the Fed has responded to Lieberman. Though the
individual responses ignore or avoid some aspects of
these questions, taken together they look like a
blanket denial of any Fed or Treasury intervention in
all markets: stocks, bonds, commodities, and gold.

Does this finally settle the issue? At first, we thought
it might. But on review we have concluded that it does
not for the following reasons.

1) The questions posed by Senators Dodd and Lieberman
and Representative Canady were provided by the Gold
Anti Trust Action Committee (GATA). We understand that
several other House and Senate members have taken an
interest in this issue. According to GATA, Texas Sen.
Phil Gramm, chairman of the Senate Banking Committee,
has prepared similar questions for the Fed and the
Treasury. Rep. Jim Ryun of Kansas has contacted GATA
for information in order to prepare similar questions
in response to demand from constituents for answers.

This surprises us. The United States is a responsive
representative democracy. GATA has been very active in
the pursuit of its objectives. Nonetheless, it strikes
us as unusual that so many House and Senate members
would have responded to GATA's efforts with repeated
questions to the Fed and Treasury.

First, posing such questions that have already been
answered in response to an earlier inquiry implies that
the congressmen involved believe that it is possible
the prior Fed or Treasury responses have not been
completely straightforward. Second, their willingness
to pose such questions suggests that there is
considerable interest among their constituents on this
issue. Suspicions apparently extend beyond those of
GATA. Lastly, it is possible that the government has
intervened in markets in the past at times of crises
and that it informed key members of Congress, who were
bound to secrecy. So such interventions may seem more
plausible to members of the House and Senate than to
the public.

Second, the Treasury and Fed have provided blanket
denials of intervention in the stock market. Their
blanket denials encompass 1987. It is well known that
many market participants claim to know of such an
intervention at the time of the stock market crash of
October 1987. For such market participants, the blanket
nature of these denials places these overall denials of
the Fed and Treasury in doubt.

Third, Chairman Alan Greenspan of the Fed responded
directly to Senator Lieberman in a signed letter that
is available at the GATA web site, In
this letter Greenspan responds to a question about a
statement he made in congressional testimony to the
effect that quot;central banks stand ready to lease gold in
increasing quantities should the gold price rise.quot;

In his letter Greenspan argued that his testimony was
in the context of hearings on the regulation of over-
the-counter derivatives and has been taken out of
context. We have made this very point in past reports
in which we concluded that Fed or Treasury involvement
in the gold market was not likely. But we find
Greenspan's explanation of his remarks open to serious
question for the following reasons.

In his most recent response on the issue Greenspan
states that he presumed that everyone would know that
his statement was not referring to the Federal Reserve
since (in his words) the Fed's quot;own public balance
sheets indicate no ownership of gold,quot; and quot;I did not
think it was necessary to indicate that the Federal
Reserve was not part of the group of central banks who
do lease gold since the Federal Reserve owns no gold.quot;

In some countries such as the United Kingdom the
Treasury owns official gold. But it is common parlance
that it is also the central bank's gold, since it is
classified as a reserve asset. In addition, such common
parlance has considerable justification. If one looks
at the Fed's own balance sheet, there is a line item on
the asset side labeled quot;gold stock.quot; Its total is $11
billion. Valued at its quot;officialquot; value of $42 an
ounce, it appears to encompass the entire U.S. official
gold reserve.

It has been explained to us by James Turk that this
gold stock refers to gold certificates held by the Fed,
which are claims on the Treasury's bullion holdings.
But this would not be apparent to most observers from a
reading of the Fed's balance sheet and its accompanying
notes. Chairman Greenspan is surely aware of these

The following statement comes from the legislation that
created the Fed in 1913. It appears to involve the Fed
directly in the gold market and authorizes the lending
of gold. We understand that, in the opinion of GATA's
lawyers, Berger and Montague, this provision is still
applicable despite changes in monetary regimes since

quot;Every Federal Reserve bank shall have power to deal in
gold coin and bullion at home and abroad, to make loans
thereon, exchange Federal Reserve notes for gold, gold
coin, or gold certificates, and to contract for loans
of gold coin or bullion, giving therefor, when
necessary, acceptable security, including the
hypothecation of United States bonds or other
securities which Federal Reserve banks are authorized
to hold.quot;

We presume that Chairman Greenspan is aware of this as
well. We conclude that his explanation of his statement
that quot;central banks stand ready to lease gold in
increasing quantities should the gold price risequot; is
close to a ruse.

For there is no evidence we know of which suggests that
central banks stand ready to lease gold in increasing
quantities should the gold price rise. Central banks
that admit to leasing gold indicate they do so to earn
interest on an otherwise barren asset. Earning interest
is their avowed motivation. The lease rate on gold has
always fallen on gold price rallies. So the propensity
of central banks to lease gold should fall, not rise,
on such rallies.

The chairman says that he was not referring to the Fed
but only to quot;more than one central bankquot; other than the
Fed that stand ready to lease gold. Since September
1999 this statement no longer applies to the 15
European signatories to the Washington Accord. How does
Greenspan know that other such central banks stand
ready to lease gold in quot;increasing quantities should
the price risequot;?

In his congressional testimony regarding possible
regulation by the Commodities Futures Trading
Commission of OTC derivatives markets, Greenspan was
apparently referring to the possible manipulation of
commodity markets by quot;private counterpartiesquot; who might
quot;restrict supplies.quot; Greenspan appeared to be arguing
that there was no need to extend CFTC powers to the OTC
gold market since a Hunt-type manipulation of the
market could be prevented by the authorities through
the leasing of gold. But even if central banks stand
ready to lease gold in increasing quantities should the
price rise, this will not in and of itself curb any
rise in the gold price due to a restriction of supplies
by private counterparties. Though central banks might
be willing to lease gold on a price rise, there must be
willing parties to borrow that gold if the increased
propensity to lease of these central banks it is to
matter in any way to the gold market.

The historical record suggests that, when the gold
price rises, private market participants in aggregate
do not add to short positions. Producers sometimes do
add to short positions on a scale-up, but speculators
almost always cover short positions and go long. That
lease rates fall on price rallies suggests that private
market participants, taken in the aggregate, reduce
rather than increase short positions when the gold
price rises. So the increased propensity of quot;more than
onequot; central bank to lease gold in increasing
quantities would not tend to curb a Hunt-like
manipulation of the gold market. Only if another
central bank was willing to borrow such gold and sell
it into the market would increased lending frustrate a
Hunt-type manipulation.

It seems to us that there is a hidden implication in
Greenspan's remarks that some central banks stand ready
to borrow gold leased by other central banks should the
gold price rise. Greenspan is arguing that CFTC
regulation of the OTC gold market is not necessary
because central banks can handle possible
manipulations. But how would Greenspan know about such
official short selling of increased gold available for
lease? Is there an implication here that the Fed knows
of such contingency measures to preserve gold price
stability that the market is unaware of? Is there an
implication that the United States need not extend CFTC
supervision to the OTC gold market because other U.S.
government agencies (the Fed, the Treasury?) stand
willing to sell leased official gold should the gold
price rise?


The debate about whether the Fed is part of a
manipulation of the gold market has now blown wide
open. Despite Fed and Treasury denials, we remain open
to the possibility of such intervention for the reasons
we have set forth above.

We are more convinced than ever that our supply/demand
framework for the gold market is correct. That means
that there have been large undisclosed official sales
depressing the gold price. If these sales have been by
official bodies outside Europe and North America, such
as Saudi Arabia, the Vatican, et al., the current large
gold market deficit and the new propensity to cover
gold shorts by private market participants will exhaust
these supplies sooner rather than later and the gold
price will explode.

If these supplies involve coordinated intervention by
bullion banks with official support, possibly from the
United States, the price will be contained for a longer
period. If the Fed or Treasury is manipulating the gold
price, our supply/demand analysis suggests that they
will eventually fail and in a fairly spectacular

We could conceive of no outcome that could be more
bullish for gold. If the Fed or Treasury thought gold
was so important as to manipulate its price, the
disclosure of its manipulation would lend greater
luster to gold.

When the manipulation was eventually overwhelmed by
market forces, the failure of the clandestine official
effort would lend greater luster to gold. If this all
occurred amid a bursting of the U.S. stock market
bubble and the long and deep decline of the dollar that
must follow in the wake of a record U.S. current
account deficit, yet greater luster would be restored
to gold. Under such circumstances, investment demand
for gold, which we have always disparaged, would
probably soar. It might well eclipse the commodity case
for gold that we have always made -- which will prevail
in the end in any case.

* * *


Frank A.J. Veneroso is the head of Veneroso Associates.
Formerly he was a partner of Omega Advisors, where he
was responsible for investment policy formulation.
Prior to this, acting through his own firm, Veneroso
has been an economic consultant and investment strategy
adviser to governments, international agencies,
financial institutions, and corporations around the

He acted as an economic policy adviser to international
agencies and governments in the areas of money and
banking, financial instability and crisis,
privatization, and the development and globalization of
emerging securities markets.

His clients have included the World Bank, the
International Finance Corporation, and the Organization
of American States. He has been an adviser to the
governments of Bahrain, Brazil, Chile, Ecuador, Korea,
Mexico, Portugal, Thailand, Venezuela, and the United
Arab Emirates.

Veneroso graduated cum laude from Harvard University
and has written articles on subjects in international

Veneroso Associates is a global investment strategy
firm. It seeks to identify markets that are in extreme
disequilibrium, understand the dynamics generating such
disequilibria, and identify turning points in these

Veneroso Associates provides global economic analysis
to an array of money managers, governments, and
multilateral agencies.