Skip to comments.Panic Is Near if "The Gold Is Gone"
Posted on 02/19/2003 3:19:30 PM PST by Publius
Gold. It's been called a barbarous relic, and those who focus on its historic role as a standard of value frequently are labeled "lunatic fringe." Given the recent highs in the gold market, it looks like the crazies have been having a hell of a year. With the stock market taking its third yearly loss, gold returned nearly 30 percent to investors, moving from $255 an ounce to six-year highs of $380.
Just about every analyst and "expert" on Wall Street willing to mention any of this has been quick to explain that the increase in the price of gold is due to impending war with Iraq. But hard-money analysts are arguing that should the United States go to war it will be of very little consequence to the price of gold -- a momentary blip -- because gold is a commodity and its price a matter of supply and demand.
The "lunatic fringe" long has argued that the price of gold was being manipulated by a "gold cartel" involving J.P. Morgan Chase, Citigroup, Deutsche Bank, Goldman Sachs, the Bank for International Settlements (BIS), the U.S. Treasury and the Federal Reserve, but that the manipulation had been sufficiently exposed to require that it be abandoned, producing the steady upward increase in the price of the shiny, yellow metal.
In fact the "gold bugs," as they're known, are so sure of their research that not only do they believe the price of gold will continue to climb, but many are expecting to see prices of $800 to $1,000 an ounce. Until recently, most in the gold and financial worlds scoffed at such a prediction, but last month the Bank of Portugal made an announcement that shocked those who credit official gold-reserve data and added fuel to the contention of the gold bugs that the "gold-cartel" manipulation is in meltdown.
What the Bank of Portugal revealed in its 2001 annual report is that 433 tonnes [metric tons] of gold -- some 70 percent of its gold reserve -- either have been lent or swapped into the market. According to Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA), a nonprofit organization that researches and studies the gold market and reports its findings at www.LeMetropoleCafe.com: "This gold is gone -- and it lends support to our years of research that the central banks do not have the 32,000 tonnes of gold in reserve that they claim. The big question is: How many other central banks are in the same predicament as the Portuguese?"
Murphy explains: "The essence of the rigging of the gold market is that the bullion banks borrowed central-bank gold from various vaults and flooded the market with supply, keeping the price down. The GATA camp has uncovered information that shows that around 15,000 to 16,000 tonnes of gold have left the central banks, leaving the central-bank reserves with about half of what is officially reported."
This is why those who follow such arcana are predicting an explosion in the price of gold. According to Murphy, "The gold establishment says that the gold loans from the central banks are only 4,600 to 5,000 tonnes," but his information is that these loans are more than three times that number, which means "they're running out of physical gold to continue the scheme."
According to Murphy, "The cartel has been able to get away with lying about the amount of gold in reserve because the International Monetary Fund [IMF] is the Arthur Andersen of the gold world." He has provided to Insight documents from central banks confirming that the IMF instructed them to count both lent and swapped gold as a reserve. "In other words, the IMF told the central banks to deceive the investment and gold world[s]. Once this gold is lent [or] swapped, it's gone until such time as it can be repurchased. And with the skyrocketing price of gold we're now seeing, it would be incredibly expensive, let alone nearly physically impossible, to get it back."
What is important to understand, says Murphy, "is that there is a mine and scrap supply deficit of 1,500 tonnes, which is an enormous deficit when yearly mine supply is only 2,500 tonnes and going down. On top of that, there are these under-reported gold loans and other derivatives that are on the short side. There is no way to pay this gold back to the central banks without the price of gold going up hundreds of dollars per ounce. So the peasants and women of the world will have to sell their jewelry at say $800 an ounce to bail out these short positions or someone is going to have to tell the world that they don't have the gold that they have reported," shaking the world's financial system to its core.
The gold bugs appear to be basing their identification of a world gold shortage on industry data, much of which has been summarized in two papers prepared by four different gold analysts at different times using separate methods. The first paper was written by governmental investment adviser Frank Veneroso and his associate, mining analyst Declan Costelloe. Titled "Gold Derivatives, Gold Lending: Official Management of the Gold Price and the Current State of the Gold Market", it was presented at the 2002 International Gold Symposium in Lima, Peru, and estimates the gold deficit of the central banks at between 10,000 and 15,000 tonnes. The second paper, "Gold Derivatives: Moving Towards Checkmate", by Mike Bolser, a retired businessman, and Reginald H. Howe, a private investor and proprietor of the Website www.goldensextant.com, estimates the alleged shortage of central-bank gold at between 15,000 and 16,000 tonnes -- nearly a decade's worth of mine production.
George Milling-Stanley, manager of gold-market analysis for the World Gold Council (WGC), a private organization made up of leading gold-mining companies that promotes the acquisition and retention of gold, is aware of these papers and shortage numbers but tells Insight that "there are no official [gold-reserve] reports." That is, "The central banks are under no obligation to report what they lend into the market, what they place on deposit and what they do with their swaps, so there's a conventional-wisdom view, and a couple of different bodies have done some fairly serious research in[to] this and have come up with a figure [of] around 4,500 to 5,000 tonnes."
Stanley's estimate is based on data provided by so-called "serious" researchers, including London-based Gold Fields Mineral Services (GFMS), one of the world's foremost precious-metals consultants, and a report titled "Gold Derivatives: The Market View", commissioned by the WGC to London-based Virtual Metals Consultancy. While these two groups appear to be the research choice of the official gold world, there are in fact no "official" figures, and both studies, like the Veneroso/Costelloe and Bolser/Howe reports, are based on interviews, data analysis and other research generally available to the industry.
Those who believe the central banks to have misrepresented their actual gold holdings place much of the blame for the lack of transparency on the shoulders of the IMF, which presents itself as being responsible for ensuring the stability of the international financial system. Although the IMF would not respond to questions about its gold-loan/swap requirements, what information has been made public appears to support GATA's understanding of how central-bank reserves are reported.
For example, in October 2001 the IMF responded to questions posed by GATA by saying it is not correct that the IMF insists members record swapped gold as an asset when a legal change in ownership has occurred. According to this response, "The IMF in fact recommends that swapped gold be excluded from reserve assets." Nonetheless, says GATA, there is abundant evidence that this is not the case, citing as an example the Central Bank of the Philippines (BSP).
A footnote on the Website of the Central Bank of the Philippines (www.bsp.gov.ph) in fact directly contradicts the IMF's claim: "Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign-currency-liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with noncentral banks shall be treated as collateralized loans. Thus gold under the swap arrangement remains to be part of reserves, and a liability is deemed incurred corresponding to the proceeds of the swap."
The European Central Bank (ECB) also made it clear that the IMF policy is to include swaps and loans as reserves. The ECB responded to GATA: "Following the recommendations set out in the IMF operational guidelines of the 'Data Template on International Reserve and Foreign Currency Liquidity,' which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralized loans in balance of payments and international investment-position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet." The Bank of Finland and the Bank of Portugal also confirmed in writing that the swapped gold remains a reserve asset under IMF regulations.
Although the WGC's Stanley stands by the data provided by the industry's "serious" researchers, he insists he cannot say for certain that the numbers are accurate. "There is no requirement on any country to tell the IMF how much gold it owns," says Stanley. "The requirement is to tell the IMF how much gold it has decided to place in its official reserves. Nobody knows whether that is the total of what they own or not. Obviously they can't report more than what they own, but they can certainly report less if they chose to. That gold may have been lent out, but is nevertheless still owed to them. It's a bit like any company reporting a cash position. It will report cash on hand and cash due -- money owed by other people. I'm not saying this is ideal, but this is how it works."
John Embry, the manager of last year's best-performing North American gold fund and manager of the Royal Precious Metals Fund for the Royal Bank of Canada, says he is putting his and his clients' money on the "lunatic fringe" in this dispute: "I've examined all the evidence gathered by GATA and everyone else, and I think these guys are anything but lunatics. They've done their homework and have unearthed a lot of interesting stuff. The problem, though, is that the market is sufficiently opaque that there is really no way to know who is right and who is wrong."
"The fact is," continues Embry, "a lot of this stuff is based on estimations. I do however believe that, based on the evidence dug up by Veneroso and Howe, they are presenting equally if not more credible numbers than the other side. I find the campaign to undermine their credence simply bizarre. I think these guys [GATA] are right and that the number put out by Gold Fields Mineral Services as the amount of gold loaned out by the central banks is definitely wrong. Now, whether it's as much as 15,000 is up for interpretation. The recent release by the Bank of Portugal is important. When a central bank has 70 percent of its gold loaned or swapped, I don't think it is operating independently, and I suspect there are an awful lot of them that have loaned out much more than has been reported."
Embry says, "I've made a fortune for my clients investing in gold and gold stocks because I have operated on the premise that the Veneroso/Howe reports are right -- that gold was significantly undervalued in the daily quote and that it was going a lot higher. The circumstantial evidence, and I bet my clients' money on it, was very much in favor of the guys who said a great deal more central-bank gold had entered the market and driven the price down far too low. GATA has had this story from day one. I think that they're right and that officialdom doesn't want this exposed. GATA is willing to have a public debate but the gold world won't debate. I think there is a tacit admission of anyone who has an IQ above that of a grapefruit that Veneroso and Howe have a pretty good point. I'm an analyst who has looked at both sides of the issue and I bet my money on GATA. So far they've been right."
Whether the gold bugs are right about the reasons for the meteoric rise in the price of gold is uncertain, but, according to GATA's Murphy: "It's all the more reason to have the central banks come clean about the actual amount of gold that physically exists in their reserves. Either way, the price of gold will continue to rise because, as we already know and others are discovering, the gold is gone."
Kelly Patricia O'Meara is an investigative reporter for Insight magazine.
There is a sharp bend in the supply curve for gold. Much above $300 and low grade ores become economical. Obviously different mines have different economics, many are around $300. Short copper, it is a byproduct of gold extraction. More gold equals more copper.
Invest in gold mining stocks. Gold is only for survivalist modes where it is significantly less valuable then guns.
Since this thread pertains to gold and silver, there is one 'commodity' that is not flexible and that's rare coins. Specifically, United States rare coins. (but I think that JimRob would not want me to post my advice on this topic...too many rare coins to list and would use up a tremondous amount of bandwidth..rofl)
Let me politely knock down this idea of investing in gold only via gold mining stocks with the following:
1. With gold mining stocks you get a very nice piece of paper. Yes, just as like fiat money.
2. These 'survivalist' you refer to did sound extreme to back in my coin dealer days. I had my share, yes. However, even though I chuckled at some of them...one thing that was always in the back of my mind was that if worse did come to worse, they sure would be better off with all those small United States pre-1964 silver dimes when looking to trade them for loaves of bread, or gasoline if they ever needed to. Yep!
3. All my clients back then took a great amount of pleasure walking out of my shop with all that cold, hard metal to take to their safe deposit boxes. Yes, they felt quite secure with the actual bullion coins, bars of silver, gold and platinum -then they would have with a piece of paper from a mining stock. Anyway.......bttt.
If you truely expect social collapse the only sensible investment would be rural land, guns and other trade goods.
That is only sort of true. It depends on the region, and frequently it is the other way around; good copper ore is a low-grade gold ore. Most of the currently active gold producing regions in the US aren't producing any copper, even though there is plenty of it. I own a disgustingly concentrated copper ore body; it is something to be seen, with the rocks being completely covered in verdigris and blue crystals. The only reason it was never exploited is that copper ore bodies have to be huge to be profitably mined, and this one was too small for anyone to put in the effort, particularly with copper prices being what they are. It turns out that there is a modestly good gold ore body in and under this copper ore body. Are they processing this ultra-rich copper ore? No, they dump it.
Incidentally, a lot of the new gold ore bodies that they've been finding in Nevada are largely copper and silver free. They have a different search strategy these days geologically speaking. A weird trivia fact about Nevada gold bodies: When they drill test bores using their current prospecting strategies, they often find oil. One famous test well in northern Nevada has delivered over 20 million barrels of oil to date with millions more expected. Nevada's oil is considered something of a geological mystery. The geology formations where it is found are often very young. No "liquid dinosaurs" here; in a bore drilled just below some land I own that pulled up a bunch of oil that was dated to only 20 million years, about 45 million years too young to be buried dinosaur bodies. Small tar seeps are pretty common in the Nevada desert.
Yes, my property has an incredibly rich geology. I let the UNR geology and mining department use it for field trips, because for them it is like a candy store.
In my post #104, kindly note that I was giving examples of my clients that had their reasons for wanting the actual metals.
But, just like them, if worse does come to worse, I'd much rather run around with some real hard money,
some small, tradeable United States 90% pure silver dimes - trying to trade for bread and gas....
....then with an - oh so valuable - piece of paper with a mining company name on it.
Each to their own I guess, huh.
There is a pile of them; I hardly remember. Most are privately held, though Google will probably pull up a number of them. Because many have totally unmemorable names, I tend to only remember the big old ones (like Coeur-Rochester), and these aren't the ones that I'm personally familiar with that are doing interesting new projects. My business partner usually deals with these companies far more regularly, otherwise I'd probably remember. I'm supposed to have a meeting with him about some suddenly interesting mineral rights on one of the parcels (gold again) this weekend. Over the years it has turned out by dumb luck that we accidentally bought a lot of dirt cheap land that suddenly became very valuable. We never really bought any of it intending to make any real money from it; they were just lovely parcels in the middle of nowhere that nobody wanted (mostly because they were really remote) that we would use for hunting, ranching, or other recreational activities.
Not trying to be humorous, but let's all consider the following scenario:
"Yes Sir, I'm kinda hungry today - so would you consider me trading you
a shovel full of my nice dirt ... for a few slices of your bread?"
Short of that, owning a gold mining company is like owning a strip of call options at the gold mines cost of production. Admittedly much more leveraged then owning actual gold.
A SMALL part of your worth in gold or silver makes sense. Reloading gear and a breading pair of horses could be worth the crown jewels.
Now I have to agree, guns are a good investment, however, in the event of social collapse, let's also consider this scenario:
"Yes Sir, I'm kinda hungry today - so would you consider me trading you
my 22 rifle for a loaf or two of your bread?"
"One or two or three or four or five guns/rifles...hmmm, guess I can cut them into pieces so I can buy bread everyday."
"Hmmmm, a $1000 bag of United States 90% silver dimes has 10,000 dimes in it - hmmm, how many trades for bread can I make - for how many days?"
None. For zero days. What possible use is a silver dime to someone concerned with starvation? You would drop your bag of dimes because you are week from hunger. At least gold is possible to travel with.
Trading away your guns in this scenario would be insane. Hunting with them as well as using them for self protection is more what I had in mind.
Well, this could go on all night, but let's switch from bread to eggs:
"Yes Mr Chicken Famer, I see you have thousands and thousands of eggs -
would you consider trading me a few of your many thousands of yummy, nice eggs for a...a few pieces of silver?"
So forget the .22 rifle, you only need one, two tops. A box of 50 .22 cartridges, on the other hand, is something that I might be able to use. Worse case scenario, I'll have no problem finding someone else who could use them.
It is an unlikely scenario where society has collapsed to the point were all paper is valueless yet silver retains significant barter value. Picture a world were the citys are burning and nobody knows where the next few years (yes years) worth of food is coming from. Would you trade eggs for silver? How about a box of .22LR?
I have to agree with this. Yes, I sure do. However, what I'm getting at is that I'm recommending - just 5% of a portfolio in bullion silver and gold coins. I suppose one could also invest -another 5% - in bullets. Yes, I have to agree with your logic.
Yes and in my post #118, I concurred with the idea of having bullets. We can all put another 5% of our portfolios in ...bullets. Sure, yes, why not.
I'm putting my net worth into single malt scotch. ;-)
Good night Sir.
Yes, that does sound ...quite drinkable. Good night good man. :)
My basic philosophy has always been that if things become so bad that nobody is accepting paper money any more, they have become bad enough that gold won't be particularly useful either.
If I stock up on "stuff" while other people collect gold and silver, in the worst case scenario I'll get a really good exchange rate for my "stuff" in gold and silver bullion.
Well, to be just a bit flip one could make silver bullets for vampires.
I guess the main point in bringing up the Chicken Farmer/eggs scenario is that there are varying degrees of turmoil involved that could be taking place - and in some of the lesser variations of ecomonic stress - that might linger on for only a few days (rather than a year and more), small silver pieces such as U.S. dimes - might very well come in handy.
There have been rumors that, back in 1973, most of Fort Knox's gold was moved to the Federal Reserve Bank of New York. At the New York Fed it was then moved from one country's "room" to another country's "room" as the gold was transferred as payment for one thing or another.
Fort Knox has not been audited since 1959, and some of the tinfoil hat types have said that the vault is currently storing wooden bars painted gold. Since an awful lot of tinfoil hat stuff related to gold is now turning out to be true, I'm not ready to dismiss the story as a lot of paranoid BS.
The key to the posted story is that the central banks lent gold to the bullion banks, who then sold the same gold over and over again in paper form (options and derivatives) to keep the price down. This lower gold price made the world safe for the introduction of the euro and underpinned the Strong Dollar Policy of Rubin and Clinton. Because gold is the watchdog that barks at the first sign of inflation, controlling the gold price in effect drugged the watchdog that should have been barking at Greenspan's and Clinton's hot money splurge of the Nineties, a "false prosperity" if I ever saw one.
The bullion banks were told up front by the central banks that they would never have to repay the gold, and I'm sure they were told they would never be held accountable for the derivatives written on gold. During the price run-up in 1999, Greenspan told the bullion banks to tear up their gold derivatives via gentleman's agreement or at least pay off in cash rather than gold.
The Gold Holding Act of 1974, that permitted Americans to hold gold again, contained a provision that prohibited the Fed from selling off American gold reserves without the permission of Congress. Congress has never authorized the Fed to do what it has been doing. The Economic Stabilization Fund, created by FDR from the profits of the gold confiscation, has been the entity playing this gold game because it is accountable to no one but the Secretary of the Treasury, and the Fed is only "following orders" from the ESF.
I now think I know why Greenspan has recently hinted that he's ready to retire. If the coming tsunami takes out the dollar, it will take out the Fed too. I'd be interested in seeing if Greenspan owns vacation property in countries without an extradition treaty.
People who own gold and mining stocks as part of their of their overall portfolio have a grain of faith the the entire world won't come unhinged.
I've learned that you need to specify dimes if you want dimes. Not that quarters are bad, but if people are asking for junk dimes and you have quarters, you might be paying more than necessary for your goods.
Au contraire, mon amie. When one uses "Danger" as a post name, it may be for a reason.
Well, get ready to see silver finally crash thru that $10 and head on up. Especially considering Iraq, North Korea, Iran, Syria...etc.
Silver topped out at closer $50/oz. I had previously bought one oz. silver rounds at $20/oz. I still have them.
Tonight at 6pm on RadioFR! Interviews with Grover Norquist, John Hager and Michael Zak! Plus, Doug from Upland interviews Ted Hayes, homeless advocate and strong supporter of military action in Iraq!
I'd like to see them in jail for rigging the POG. I'm talking about J.P. Morgan, Goldman Sachs, the IMF(private corporation), the Federal Reserve (private corporation). When you talk about scandals, the first thing that comes to my mind are are these entities. Those who own real money own the world. And those people are the ones named as mentioned. They fund wars, and they hoard by price fixing gold making us believe we'll never see the light of day for gold to head back up to $800/troy oz. This funny money we carry around used to be redeemable in gold. But that public notice has been taken off the dollars but I happen to have an original 1963 $2 bill that has such a notice stated on it.
Gotcha!!!! BTTT for all to review!!!
The value of the US dollar vs other currencies is declining, and therefore isn't the safe haven it one was
High levels of corporate debt are putting a drag on earnings thus making equities a less attractive investment
The economy is being drven by consumer spending which is being financed by people pulling cash out of their houses creating a risky bubble that will explode when interest rates move up again
These factors have created a climate of uncertainty that bodes well for gold. I think the war in Iraq is not the primamry reason for the rise in gold. It affects it in the short run but the primary trend for the metal is bullish. The price of gold is being manipulated by players in the market with large short positions. My personal opinion is that you can't fight the market forever and gold has a lot more upside (in the longer term) than downside.
Oops! I guess this makes me one of the lunatic fringe!