The London Gold Pool 2012
The LIBOR scandal and gold bullion. Not something many people would put together. But over the past two weeks as news broke of the LIBOR manipulation scandal some of us in the gold investment world thought it sounded like an all too familiar story. However the story of gold price manipulation was never juicy enough for the press, although it seems this may slowly be on its way to changing.
Ned Naylor-Leyland appeared on CNBC earlier this week and mentioned his thoughts on the LIBOR saga and his belief gold prices have been manipulated in a similar way over a long-time frame. CNBC picked up on it and soon ran a story on his remarks.
Also on Monday Mr Paul Tucker, Deputy Governor of the Bank of England, told the Treasury Select Committee that other ‘self-certifying markets’ may well be open to manipulation. As a result, those gold investment market participants are wondering if they won’t be left out in the cold for much longer.
Dirty business in the gold investment market
The Telegraph reports:
The Libor scandal could be repeated in a number of other “self-certifying” markets where prices are determined, he [Tucker] said…“Self-certification is clearly open to abuse, so this could occur elsewhere…A Financial Services Authority inquiry into Libor should be extended to other self-certifying market”.
The author of the article kindly points out that those self-certifying markets include gold and oil. Of course everyone acknowledges the manipulation, i.e. collusive behaviour that goes on in the oil markets. So does this mean the deputy governor is also aware of the actions being taken in the gold markets?
Grant Williams’ TTMYGH newsletter included a brilliant analysis of the LIBOR scandal and simply explained why it could not just be Barclay’s who were involved in the rate fixing. Rather, the whole charade must have involved at least 13 of the 16 banks who submit rates.
This was not just manipulation, this is a cartel and it is fraud. Seemingly, similar practices are on-going in the gold market; many banks, central and otherwise, engage in such practices to ‘manage’ the gold price.
The idea of gold manipulation should not be all that surprising, particularly when there is such significant evidence of it in the past.
When struggling to open other peoples’ minds to potential gold price manipulation, I refer people to the London Gold Pool which ran from 1961 to 1968. In November of 1961 eight central banks met to agree a system by which, through cooperation, the Bretton Woods arrangement could be maintained and the gold price could be managed and suppressed at, or below, £35.20
As James Dines describes (quoted in Gold Wars), ‘The Gold Pool was designed to dump gold on the gold market whenever it began to rise.’ This was a blatant and open attempt to rig the gold market. Since the London Gold Pool collapsed, manipulation has become less acknowledged but still just as obvious.
Recent ‘management’ of gold prices
In more recent times we have seen repeated examples of such behaviour from central bankers, in both the US and the UK.
In official remarks in 1998, Alan Greenspan, Fed chairman at the time, stated ‘…central banks stand ready to lease gold in increasing quantities should the price rise.’
GATA explains the surreptitious ways in which countries, their central banks and investment houses conspire to rig the price of gold, ‘with the so-called leasing of gold; the issuance of gold derivatives, including futures and options; and, more recently, high-frequency trading undertaken through investment houses that were happy to serve as government’s intermediaries in the gold market as they could front-run government trades. When the rigging is done surreptitiously like this, much less central bank gold has to be dishoarded and the dishoarding that is done has far more suppressive influence on the price.’
This type of manipulation is so easy to carry out thanks to larger size of the paper gold market compared to the physical bullion market. The ratio is believed to be about 100:1, as a result we have a fractional reserve system in the gold market. Because of the vast supply of this paper gold, the true price has not kept up to its potential, or inflation. There should almost be two prices; one for paper gold, one for allocated bullion.
A slightly different way to rig the market price is one event which is close to the hearts of The Real Asset Company; the gold sales enforced by Chancellor Gordon Brown between 1997 and 1999. Yet another example of gold price manipulation it seems. The Telegraph’s Thomas Pascoe reignited this debate in an interesting blog post on the broadsheet’s website. In an attempt to explain the process of the gold sales Pascoe writes ‘It seems almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was.’
Pascoe goes onto explain that the gold sales happened in order to enable banks to meet their borrowing obligations. Pete Hambro, chairman of Petroplavosk, is quoted ‘He was facing a problem where a number of financial institutions had become voluntarily short of gold to the extent that it was threatening the stability of the financial system and it was obvious that something had to be done.’
Of course, this does not just happen in the gold markets. Just this week Ned Naylor-Leyland reminded CNBC viewers that the manipulation of silver is under formal investigation. The CFTC are currently investigating JP Morgan’s role in the manipulation of the sliver markets for over four years. Whilst nothing has happened just yet a huge amount of evidence has come out during the investigation.
Why fiddle gold and silver prices?
In regard to gold manipulation Naylor-Leyland explained “It is effectively an intervention in two ways; one would be the fact that for central banks gold and silver going up doesn’t make their currency look any good and secondly a number of the big commercial banks have very large short positions which they like to manage and make easy money from”.
The rational for manipulating the price of gold can be easily described. Gold is simply the reciprocal of the faith in national currencies. Central banks hold far higher levels of cash than they do gold, therefore they are far more interests in maintaining government bonds and supressing interest rates.
As Chris Powell, of GATA, said last month, ‘as central banks are interested in supporting government bonds and the dollar in keeping interest rates low, they continue to manipulate the gold market.’
What are gold investors to do?
So, what does this mean for gold investors? Have we just shot ourselves in the foot by making it sound as though gold is just as manipulated as our money supply?
No, not if you understand why you originally bought gold.
The key to owning gold, particularly when such manipulative behaviour is yet to be investigated and chastised to the levels seen with LIBOR, is to remember the very fact that gold is the source of much secrecy and official concern shows its undeniable role in our economic system.
Whilst the gold price continues to be manipulated we have benefited, and not just as individuals, those powers manipulating the markets are growing less powerful by the day as countries such as Russia and China continue to accumulate and hoard physical gold. The manipulators are running out of bullets. New buyers of physical gold now pose a significant threat to the US Dollar, one which the money men are not sure how to deal with.
Since 2008, central banks have added a net 1,290 tonnes to their coffers. In Q1 of 2012 central bank gold buying accounted for 7% of total gold demand. This is despite manipulation on the part of other central banks.
The way the majority of gold investors look upon this tricky situation is that it provides brilliant buying opportunities for us. Each time the gold price takes a drop other (buying) central banks are seen to come in and take advantage, something we should all take note of.
Ultimately the good news about gold price manipulation is that the short-sighted fools, who are doing it, are doing a crap job. The price of gold has risen every year for 12 years, whilst the value of fiat money continues to be obliterated. But ultimately gold remains as valuable as ever and the fundamentals remain unchanged.
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