Some Answers to Doug Casey’s Questions

April 13, 2012 – In the April edition of The Casey Report, Doug Casey tackles the matter of gold price manipulation. He does this in an excellent article comparing gold’s bull market today with the one in the 1970s, which both he and I remember well given that we are about the same age and both were active participants in it.

Doug writes: “The great bull market broke out in earnest on August 15, 1971, when Nixon reneged on the US promise to redeem foreign-owned dollars for gold at $35 an ounce.” Gold then “gradually built momentum until reaching a final peak in 1980 over $800. It was a wonderful time to own gold.”

I wholeheartedly agree with his assessment. He then goes on to complete his comparison of then and now before presenting his view on gold price manipulation, about which he remains skeptical. He concludes by asking some questions he would like answered in order to convince him that the gold price is manipulated. Because Doug is a friend, I have prepared this response to him to provide my perspective on this matter.

Reproduced below in italics are excerpts from Doug’s report, which are followed by my response in normal typeface. I recommend reading Doug’s whole report, and indeed, subscribing to his newsletter. It is always one of my favorite reads.

US government gold holdings reached an all-time high in 1952, at 20,663 metric tonnes, or 665 million ounces…From there, official US holdings fell consistently, to 459 million ounces in 1962 and 276 million by the end of 1971. They have stayed about there ever since.
Or have they? In recent years, there’s been controversy about whether that gold is really sitting in Ft. Knox, in that there hasn’t been an independent audit for many decades. Congressman Ron Paul has been asking for an audit for years and can’t get one. It’s an entirely reasonable request; it’s simply correct and proper business to ascertain the amount and quality of assets from time to time. There are some who allege the gold isn’t there, perhaps because it’s been sold to suppress the market – or to prop up the banks alleged to be doing so.
I severely discount that possibility, simply because if it’s true, it would be, by far, the biggest and most scandalous theft in history

It would indeed be the biggest theft. But is it any more scandalous than the lies surrounding the Gulf of Tonkin incident or the search for weapons of mass destruction in Iraq? My point is that governments are not truth-machines. It took 30+ years for the true Tonkin story to emerge. Isn’t it therefore possible that the truth about the US gold reserve has yet to emerge?

For many years now, a meme has been floating around that the prices of gold and silver are being manipulated, which is to say suppressed, by various powers of darkness. This is not an unreasonable assertion. After all, the last thing the monetary powers-that-be want is to see is the price of gold skyrocketing. That would serve as an alarm bell, possibly panicking people all over the world, telling them to get out of the dollar. It’s assumed, by those who believe in the theory, that the US Treasury is behind the suppression scheme, in complicity with a half-dozen or so large bullion banks that regularly trade in the metals.

Not the US Treasury, but rather, the Secretary of the Treasury. Only he and the President have authority to operate the Exchange Stabilization Fund (ESF), which is an important point. The Secretary of the Treasury can do basically whatever he wants using the ESF as his vehicle, or as an article in Slate puts it: “What's the Exchange Stabilization Fund? A pile of cash that can be used for whatever.”

An article by the New York Federal Reserve confirms this point of essentially unlimited authority. Noting that the ESF was created by the Gold Reserve Act of 1934, which itself dealt with the book ‘profits’ arising from FDR’s gold confiscation and subsequent 69.3% devaluation of the dollar, it states: “The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.” The key word here of course is “exclusive”, which means outside the control of Congress or anyone else.

I recommend reading “Time to Abolish the International Monetary Fund and the Treasury's Exchange Stabilization Fund” by Anna Schwartz, Christopher Whalen, and Walker Todd, which was published by the Committee for Monetary Research and Education, Inc. in 1998.

Also, it is also generally believed that there are only four bullion banks involved. Two are American, with one each from Germany and the UK, which together represent the three countries involved. These banks act as an agent for their respective governments, executing trades on their behalf. By knowing government plans, these banks can profit from them, in a scam normally called “front-running”, which Wikipedia defines as “the illegal practice” of a broker executing orders “for its own account while taking advantage of advance knowledge of pending orders from its customers.” In short, participation in this scheme can be very profitable for the bullion banks, even if illegal because in this case, the government and the bullion banks have the shared interest to keep their intervention secret.

The assertion is bolstered by the fact that governments in general, and the US in particular, are always intervening in all kinds of markets. They try to control the price of wheat and corn with various USDA programs. They manifestly manipulate the price of credit (interest rates), now keeping it as low as possible to stave off financial collapse. And they may well be active, through the so-called Plunge Protection Team, in propping up the stock market. They were largely responsible for the boom in property, through numerous programs and parastatals like Fannie Mae and Freddie Mac. Why, therefore, shouldn’t they also be involved in the monetary metals? Central banks regularly intervene in (i.e., manipulate) each others’ currencies. So it’s not unreasonable to imagine they’d try to manipulate gold as well.

Well, yes. That’s exactly the point isn’t it? The lifeblood of the State is money. It is money, not votes or popular consent that gives the State power, particularly in our present fiat currency system. To put it bluntly, the State needs bullets to stay in power. It cannot create bullets out of thin air. So it has formed an unholy alliance with the banks, to which the State grants monopolistic power to create money out of thin air that the State then borrows to buy bullets. Government actions today – like the 2008 bank bailout that was granted despite popular opinion overwhelmingly against it – are aimed at preserving this relationship. Intervention in the gold market is just one part of it.

In fact, the US and other governments did try to suppress the gold price from 1961 to 1968 through what was known as the London Gold Pool. The US alone persisted in trying to do so until Nixon devalued the dollar and closed the gold window in 1971.
But if it was ever doable, that was the time. Although nobody knows exactly how much gold there is above ground, a reasonable guess might be six billion ounces. There was a possibility of controlling the price, in the days of the London Gold Pool, when there were only three billion ounces in existence and when all the gold in the world was worth only $105 billion ($35 x 3 billion = $105 billion).

I think there is less gold in the world today than you suspect, probably 5 billion ounces. Regardless, the weight of gold in central bank hands, both in relative and absolute terms, is an important point. It is a point that was well-learned in the 1960s price suppression, which you acknowledge existed, when the US government dishoarded over 300 million ounces in a futile attempt to keep the gold price at $35 per ounce. The point is that there is only so much physical gold in existence. It is therefore a valuable resource, to be used in interventions only sparingly, if at all. In contrast, propaganda is cheap and unlimited.

This observation explains why Gordon Brown announced in advance his intention to sell Britain’s gold reserves. Clearly, the propaganda impact was important, and much less costly than allowing physical metal to leave its vault, although over time the gold did go. The importance of propaganda also explains why there were repeated calls earlier this decade for the IMF to sell its gold, ostensibly to help the poor. Propaganda is often wrapped in a noble cause.

Today, however, the value of the world’s gold is around $10 trillion ($1,650 x 6 billion = $10 trillion), nearly 100 times as much. And governments own about a billion ounces, only 16% of it, whereas the last time they tried to control the price they owned about 1.1 billion ounces, which was about 35% of the world supply. And the governments, their central banks and almost all large commercial banks are bankrupt; they have vastly less financial power than they did in the days of the London Gold Pool. Why would they try to do something that’s so obviously a losing game?

Yes, governments have vastly less power today, but they have much greater control of the corporate media. And you are right, it is a losing game for the government, but what is their alternative? Go back to sound money, as required by the Constitution, with the result that the federal government shrinks in size to become the quaint institution it was in the 19th century that did little except operate the Post Office? Ron Paul would like that to happen, as would his army of supporters. But in my view it is not going to happen until the losing game now being played is finally over. When that is going to happen, no one knows, but governments will pull out all the stops to continue playing this losing game to keep the present system going.

Thus, those in charge who know what is happening have one objective. They do not want the ship-of-state to sink on their watch. So they will do whatever they need to keep the ship afloat and preserve their power base – like passing in recent years the various laws that are an affront to the Bill of Rights.

The reality is that the ship-of-state hit an iceberg long ago. More and more people are starting to realize the gravity of the situation.

I’m not at all disinclined to believe tales of manipulation of markets by the state; I expect it, and as a speculator I relish it. But I like to see evidence for everything. And extraordinary claims demand extraordinary evidence. I’ve read the stuff these guys have written for years and have seen nothing but strident assertions and accusations. I’m completely willing to believe central bankers are capable of any kind of nefarious foolishness, but I’d like to see proof. I’m constantly reading assertions of how “the boys” come along at “precisely” 1pm or 2pm or perhaps “precisely” 11:37am or 12:16pm and, on a purely not-for-profit basis, decide to “smack down” the market for gold or silver or both. Meanwhile the market has been hitting new highs for a dozen years.

Yes, it is a bull market, and no one – not even the biggest government the world has ever seen can stop a bull market. But stopping the bull market is not their aim. It is to keep the fiat currency game going.  It is a game where the dollar will continue to be debased, and the price of gold will continue to rise – but in a controlled way until the game ends with a soaring gold price.

Gold has risen 11 years in a row, so it is clearly winning the war. The dollar is staging what I have been calling a “managed retreat”.  In other words, because of government intervention the gold price is only allowed to rise so much each year to more or less reflect the amount of dollar debasement in that year. Thus the gold price is prevented from reaching – at least so far anyway – its fair value. That means that even though the gold price has risen nearly 7-fold since 1999, it remains undervalued.

As you might imagine, I know most of the believers in the precious metals manipulation theories personally and am only a phone call or email away from those I don’t know. And I’m curious. So I ask questions of these folks, who are generally intelligent, well informed and sophisticated. But I don’t get answers that I find make sense. There have been readily identifiable reasons for other government manipulations in the past. It’s obvious why a government wants low interest rates. It’s obvious why they want high real estate and stock markets. But why – in today’s world – would they really want to spend billions keeping gold (or especially silver) down?

Billions matter to you, me and to most folks. But do you really believe that billions or even trillions matter to the people in power? They are spending other people’s money. Remember the Grace Commission? Its report in 1984 “claimed that if its recommendations were followed, $424 billion could be saved in three years, rising to $1.9 trillion per year by the year 2000. Congress ignored the commission's report”. Billions mean nothing when the present system’s existence is at stake.

You’d think they might have tried to control the price of uranium when it ran to $140 a few years ago. Or perhaps the price of sugar when it ran to 28 cents last year; everybody uses sugar.

There is no need to manipulate these markets. First of all, none of these commodities are money, and therefore not a threat to the lifeblood of the State. Second, there is no need to manipulate them because the government just massages the CPI to understate the true rate of inflation. So there is no need to waste limited resources intervening in these other commodity markets.

Despite the fact that gold can act as an alarm bell, few Americans – or anyone, for that matter – among the hoi polloi care or even know the stuff exists except as an academic matter. Suppressing the gold price is not only vastly harder but much less important than it was during the last market.

I think most people intuitively understand that something is wrong when the gold price rises, particularly if it rises rapidly. Look at what happened in the 1970s. Those who understood gold, got in early. As the gold price rose, more people started to investigate what was happening and jumped on board. Then by the end of that decade, and the top of that bull market, everybody was watching the gold price and jumped on the bandwagon. The same thing is happening this time around, but because of market intervention that has prevented any rapid rises in the gold price, it is still the early stage of this bull market. It is not just a coincidence that a jump in the gold price stops at 1% from the previous day’s close. It is a statistical anomaly found only in gold, not other commodities or other markets.

There is another important point to make about how people view gold. What may be true in the US or the West more generally is not necessarily true in Asia, where there exists a much wider recognition that gold is money.

Here are some questions I’d like answered:
Q: Why do these banks ( JPMorgan, etc.) even give a damn, in the first place, what the price of the metals might be?
The only reason that makes any sense is that they are acting as proxies for the US Treasury; the Treasury doesn’t go into the markets itself. But does it direct a commercial bank to act for it to buy or sell gold? It might. But there’s zero proof of any sort it’s doing that.

There is proof. Let’s start with Congressional testimony by Alan Greenspan in 1998, who said: “Central banks stand ready to lease gold in increasing quantities should the price rise.”

I want to explain this quote, but I do not use the term “leasing”, which became the popular politically correct term in the 1980’s with the growth of gold lending to mining companies. Because gold was supposedly demonetized by President Nixon in 1971, to achieve proper political correctness it had to be ‘leased’ instead of ‘loaned”.

When gold is loaned, at maturity of the promissory note the borrower returns the weight of gold with interest paid in gold. Thus, the lender is indifferent to the price of gold.  He lends gold and gets gold principle returned with interest paid in gold at maturity. So when Mr. Greenspan says central banks are lending “in increasing quantities” if the price rises, there can be no aim by central banks other than to cap the gold price. This objective is achieved because the borrower sells the gold he borrows from a central bank, thereby adding supply over and above new mine production, which depresses the price. The borrower then uses the newly acquired dollar proceeds to purchase dollar assets, earning a spread.

This practice goes back to the early 1990s when Citibank and most of the other big US banks were insolvent, at the tail-end of the S&L crisis. Having just bailed out the S&L’s, a bailout of the big banks by the federal government was deemed to be politically impossible. So Greenspan engineered a steep yield curve. Banks borrowed from every cheap source they could in order to buy US government paper yielding 5%-6% and other even higher yielding dollar assets. Banks could borrow gold at 0.5%, thus making a huge spread, which helped earnings and replenished their depleted capital base, enabling them to work through their insolvency.

This back-door bailout strategy works only if gold prices are stable or decline, which was the case in the first half of the 1990s. If the gold price rises greater than the amount of the spread, the banks will take a loss. When gold broke above $400 in early 1996, a price that hadn’t been seen in years, the banks realized they had a problem. But each individual bank pursuing this strategy did not realize the extent of the collective problem. The banks in the aggregate had borrowed a weight of gold so large, they could not cover their positions without driving the gold price much higher, forcing them to take losses on their gold liabilities. The banks appealed to the Fed, which turned to the ESF. So the ESF stepped in to begin what has now become a multi-year effort to keep a lid on the gold price.

For evidence that the ESF is active in the gold market, I recommend reading two of my articles: “The Smoking Gun” and “Smoking Gun Follow-Up”. I also recommend a third article, “What Is Happening to America's Gold?”, which explains how the Federal Reserve stopped reporting the ESF’s gold activity after my discovery of the smoking-gun.

I also recommend reading “The Federal Reserve's Blueprint for Market Intervention”. This document provides primary, original source supporting evidence making the case for intervention in the gold market.

And if you really want to read the whole treasure trove of material assembled over the years by the Gold Anti-Trust Action Committee (, I suggest beginning with this presentation that Chris Powell, Secretary & Treasurer of GATA, gave at the Vancouver Resource Investment Conference this past January. For more in-depth reading and research, GATA has compiled an extensive database.

To conclude, the banks’ interest and that of the US government conflated. Neither wanted to see a higher gold price, albeit for different reasons. The banks did not want to take losses on their gold liabilities, while the government did not want a higher gold price signaling dollar debasement. So the US government joined forces with the biggest of the bullion banks to intervene in the gold market, forming what is loosely called the “gold cartel”, to cap the gold price. When viewed from a broader perspective that recognizes the importance of money to the State, intervention in the gold market is an essential step to keep the present system afloat.

It might be worth asking here, what is this system and who runs it? It is what President Eisenhower warned of in his Farewell Address to the nation? Here is what he said: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

Or has that force Ike identified been supplanted by a new “military-financial complex”? I don’t have the answer to these questions, but I agree with the polls that say most Americans believe their country is heading in the wrong direction.

These banks have no dog in the fight; they couldn’t care less what the metals prices are and have no reason to try manipulating the market.

The banks care about three things. First, they borrowed gold to fund assets and do not want to take a loss on a rising gold price. Second, their protector and monopoly grantor (the US government) cares about a rising gold price, so the banks need to care. Third, the banks can make a lot of profit by knowing in advance what the government will do with its interventions in various markets.

Q: Why has there been zero word from their traders about how stupid their bosses are for fighting a gigantic 10-year bull market? These guys all know each other, and they gossip with the same delight as teenage girls.
It’s hard to keep a long-term illegal collusion a secret. Two parties might possibly be able to keep a secret. But six or eight commercial banks acting in broad daylight? It’s said that three individuals can keep a secret, but only if two of them are dead. But for a half-dozen trading operations to do so? Wall Street is the world’s greatest rumor mill. But there’s never been a rumor (outside of those created in conspiracy circles, who offer no sources) that the bullion banks are acting, in concert or individually, as agents of Timmy Geithner.

Take the case of whistleblower Andrew Maguire, who was aware of one bank’s plan to manipulate the silver market. In a telephone call with a CFTC official, he explained how the silver price was about to move because of manipulation. The price moved exactly as he forecast. Andrew Maguire was subsequently the victim of a hit-and-run accident that threatened his life, an event that has probably discouraged other whistleblowers. In any case, many of the 20-something traders that banks employ don’t have a clue about the big picture. They just do what they are told, and enjoy the profits paid to them in their year-end bonus.

Q: If, as alleged, these banks have been short gold from the bottom of the gold bear market at $255 in 2001 and the silver bear market at $4.25, also in 2001, how can they possibly absorb tens or hundreds of billions of losses? Did they expect to take the metals to a fraction of their 1971 lows?
Trading desks make mistakes. But they don’t stay short in one of history’s great bull markets – it’s not the way traders earn bonuses. How stupid are the supposed “not for profit” sellers of gold supposed to be?

The banks are being backstopped by the government. They always have been, and always will be. That is why the banks always get bailed out.

As noted above, the interests of the banks and the US government conflated. Neither one wants to see a higher gold price. So the government intervention is designed to accomplish two objectives.

First, the government aims to cap the gold price to let the banks trade out of their predicament over time. The objective is to avoid any losses. So as the banks unwind their gold position, they use the government’s unlimited capacity to create paper-gold to move the market to their advantage. I wrote about this phenomenon in “Picking the Market's Pocket Again” and also in “Picking the Market's Pocket, Part Two”.

Second, by keeping the gold price under control, the US government makes the dollar look worthy of being the world’s reserve currency when we all know that it is not. On a related point, a capped gold price also has the added advantage of containing inflationary expectations, an objective often stated by Federal Reserve officials.

Q: Exactly where and how do they supposedly get the capital to cover these losses? Haven’t they ever heard the old saw, “He who sells what isn’t his’n must give it back or go to prison”? No bank can tie up billions in capital fighting the market for a decade.

The banks don’t tie up capital because they operate in the paper-gold and paper-silver markets, creating various financial derivatives that are not regulated and carried off their balance sheet. They are contingent liabilities and do not require bank capital.

Q: Exactly who originated this idea of trying to suppress prices using the futures markets? Here a well-known writer on this subject suggested the following to me, via an email, when I asked: “The big commercials, starting some 25 years ago, discovered they could dominate the market and force technical traders in and out of the market when they wished at great profits to the commercials. But they miscalculated and stayed in too long, and now they are trapped.”…But one thing is for certain: nobody (certainly not commercials) allows himself to get in so deep he’s trapped for 12 years in one of history’s greatest bull markets.

I agree that the writer you quote misses the point. The banks are trapped only to the extent that they owe physical gold that was borrowed to fund dollar assets, as explained above. But the gold market intervention gives them time to unwind these positions and control losses that would otherwise occur if gold prices were not capped.

One aspect of the quote though is correct. In my two articles I mention above, “Picking the Market's Pocket Again” and “Picking the Market's Pocket, Part Two”, the banks trade around the technical traders and trend followers, both big and small. They do this to make profits to offset the losses accrued on their gold liabilities as the gold price rises. But in the end if the banks fail to repay or hedge the physical gold they borrowed from central banks, the central banks will let the banks off-the-hook and take the loss, rather than forcing the banks to take it. Governments (meaning taxpayers) and anyone holding the currency that is depreciating because of these policies favorable to banks will take any losses incurred – not the banks.

Q: Why fight the market, and get trapped, in just gold and silver? Why aren’t they trying to suppress copper, platinum and palladium as well? For that matter, every commodity?

These other markets don’t matter, as I explain above. Only gold and silver are money. Only gold and silver have an interest rate and always therefore trade in contango (except in extremis, meaning when the currency in which their price is being quoted is near collapse). Gold and silver have unique attributes not shared with any other commodities.

Q: Why would the US Treasury (if it’s behind a gold suppression scheme) make things easier for the Chinese, the Russians, the Indians and numerous other developing countries by suppressing the gold price? They simply take advantage of the lower price to buy more.

Was the US government acting in the country’s best interests back in the 1960s when it allowed over 300 million ounces of gold to be withdrawn from Fort Knox and exchanged for $35 per ounce? Do you really think that the people intervening in the gold market care about acting in the country’s best interests? They care about keeping the system going.

If anyone could answer these questions, I’d appreciate it. I advise readers to buy gold – even at current levels – but I’d like to see them do it for the right reasons. And it seems to me the arguments about gold manipulation are more redolent of religious belief than economic reasoning.

I wouldn’t say that there is any religious belief involved, but I have replied to a lot of Doug’s questions with questions of my own. So I haven’t really “answered” all of his issues, which highlights an important point.

The investigation into the inner workings of the gold market that are out of public view and decided behind closed doors in central banks is an ongoing effort. It has been that way for years, and fortunately, the Gold Anti-Trust Action Committee has been there relentlessly compiling the mounting evidence that something is amiss, that gold trading is influenced by government intervention aimed at keeping the price from rising to its fair value. Or to put it another way, by allowing the gold price to climb higher year after year in what I have dubbed a “managed retreat”, governments hope that people will not notice what is happening to the ongoing debasement of the US dollar, which Doug and I can both remember was once “as good as gold”.

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