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A tribute to Jeff Christian, loyal soldier in the battle against gold

Section: Daily Dispatches

11:36p ET Thursday, May 27, 2010

Dear Friend of GATA and Gold:

CPM Group executive Jeffrey M. Christian this afternoon posted at Kitco what is headlined as his "final response to GATA," insisting that he has refuted GATA at every point of disagreement in our exchanges in recent weeks, but so angrily that he doesn't quite seem to believe it even as he writes that he will have no more time for it. GATA too is prepared to let readers draw what conclusions they will from our documentation file -- -- but we should not let Christian terminate our exchanges without a fond farewell.

For while Christian indeed has disagreed with GATA in many respects, in perhaps the most important respect we have agreed completely and we are indebted to him for confirming our case -- not just with his testimony to the March 25 hearing of the U.S. Commodity Futures Trading Commission, where he remarked that there are many more claims to gold in the London market than there is gold to back them, but again with his "final response" today, which confirms at great length that the London gold market, the biggest gold market in the world, is a "fractional reserve" market.

... Dispatch continues below ...


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This, Christian insists again, should not be a revelation, as fractional reserve banking has gone on for "thousands of years." GATA concedes that it has been going on for a while but maintains that it has special significance with gold, significance Christian doesn't seem to acknowledge, insofar as gold traditionally has been considered the primary hedge against monetary debasement because of its supposedly tightly limited supply. Such traditional thinking was displayed prominently in a leading financial newspaper, the Financial Times, just last week, in an essay about gold written by Merryn Somerset Webb and headlined "The Only Currency that Can't Be Printed on a Whim":

But of course a fractional reserve gold market disproves that most basic assumption about limited supply. A fractional reserve gold market, no matter how established it may be and no matter how familiar it is to Christian, permits the virtually unlimited inflation of the supply of what people may think is gold.

This explains why, as is often noted -- with puzzlement by gold's friends, with a sneer by gold's enemies -- gold's price in recent decades has badly lagged inflation and the rate of appreciation of other assets even as the world's population has risen substantially and gold mine production has fallen.

The British economist Peter Warburton may have been the first to perceive and explain the situation with his 2001 essay, "The Debasement of World Currency: It Is Inflation, But Not as We Know It":

Warburton wrote:

"What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value.

"Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value not only of the U.S. dollar but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets. [Emphasis added.]

"It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil, and commodity markets? Probably no more than $200 billion, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world's large investment banks have overtraded their capital so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices."

The fractional reserve gold banking system in London that Christian defends and from which he makes his living -- he says he has advised most central banks in the world -- is a primary mechanism in central banking's battle against gold and commodity prices, and Christian is a loyal soldier in that battle, a derivatives salesman helping to inflate and sustain the supply of imaginary gold so that, as Warburton wrote, the world might be deprived of its main "benchmark against which to measure the eroding value not only of the U.S. dollar but of all fiat currencies."

Christian says the fractional-reserve nature of the gold market "is well understood by professionals in the industry and by most investors involved in these assets." GATA suspects that it could be understood more widely, that the more widely it is understood, the less happy Christian's central bank clients will be with him for helping to make it understood, and that this may be the cause of his recent ill humor.

GATA hopes that Christian's central bank clients are not shutting him up. For he may have done more to advance understanding of the gold market than any of us, and we're grateful to him.

Christian's essay, "CPM Group [Executive] Jeffrey Christian's Final Response to GATA," can be found at Kitco here:

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

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