GATA is the Gold Anti-Trust Action committee. GATA alleges that the gold market is subject to systematic rigging by a series of US and global institutions, in contravention of the USA’s Anti-Trust laws and the Constitution of the USA. The goal of GATA is to bring a case to trial.

It is said that if you owe a million dollars you have a big problem, but if you owe 100 million dollars the bank has a big problem. Add on a couple of zeros and you have the basis of the gold conspiracy which if you start investigating gold you will quickly come across.

The basis of the conspiracy theory is that huge amounts of gold have been sold and borrowed on the carry trade, and that the central banks have realised a little late that their economists might be wrong. As, like the Yen before, the gold price rises, a whole raft of LTCM types will fall out of the derivatives markets, unable to return the gold they have borrowed because they can't afford to buy it back at these rising prices. The resulting default could bring down the international financial system, so the world's financial institutions have conspired to hold down the price of gold.

The conspiracy theorists are gold 'bugs'. Their core belief is that gold is the king of monetary assets. Their additional belief is that institutions like the Fed, the IMF, the BIS, the Exchange Stabilisation Fund, the Bundesbank, the European Central Bank, the National Bank of Switzerland, and the Bank of England are conspiring to hold down the price of gold in order to prevent the circumstances where constituents of the international financial scene - particularly the customers of JP Morgan Chase, Goldman Sachs, Deutsche Bank and Credit Suisse - implode under losses arising from 8,000 to 20,000 tonnes of gold carry trades. Were such an implosion to start it is clear the gold price would go into the stratosphere.

The evidence is disturbingly persuasive in some senses. There seems to have been collusion in the manipulation of some German and US gold reserve accounts. There is hearsay 'evidence' which suggests a private confession by the Governor of the Bank of England, and there are extraordinarily well timed interventions by bearish comment which suggests an official desire that gold does not shoot upwards.

But in the end the full blown conspiracy theory seems to fall over because, like all good conspiracies, it requires too much collusion between many parties unlikely to sustain the necessary secrecy. It is difficult to believe that those who would have to be involved are really prepared to conduct a deception on the scale alleged by the GATA committee, and still keep it quiet. If the conspiracy theorists are right it is impossible to reconcile it with the US Treasury's flat statement of its gold position which seems to state quite unequivocally that the US bullion reserve is still US owned and is still in the Treasury's vaults.

Another key weakness of the gold bug case is that the full blown financial catastrophe has not already occurred. The significant $ price rise in gold through 2002/3 should have initiated the crisis expected if - indeed - the scale of the short positions were as anticipated by GATA.

In the cold light of day the apparently persuasive strength of GATA’s case needs to be measured against the enormous amount written daily about gold and financial markets. Given the tens of thousands of official sentences coming out of quasi-governmental institutions there are going to be ambiguous passages and inferences available to support any conspiracy theorist who looks for them for long enough. On this basis what looks like a clear case of fiddling the accounts can possibly be explained by wishful thinking and selective use of official statements, numbers and gossip.

On the other hand GATA is probably right that the outside world does not know the whole truth - which is to be expected. If the BIS and the Fed believed that they could save a major banking player by a measured intervention in the gold market, conducted secretly, cleverly and legally - just - through the Exchange Stabilisation Fund, then they would do it, and possibly rightly so. They certainly ought to keep it quiet if they want it to work.

The truth is almost certainly somewhere in the middle. It is likely that some modern economists believed gold was in long term oversupply, and was fundamentally useless in productive terms, and would therefore decline in price. It is likely they persuaded some central bankers - and/or unallocated custodians - to sell or lend their gold. It is likely they persuaded some willing investment bankers to believe in a gold carry trade, and it is likely that some money managers were prepared to believe their investment bankers. It is certain that some investment banks made a lot of money through the gold carry trade - either as principals or facilitators. It is even possible that some of their customers have too. Equally it is possible that the Washington Agreement (explained below) was a nasty shock to the carry traders and that the central banks intervened with urgency. It may even be the case that gold swaps have left large stores of gold in the custody of countries who don't own it.

But surely there cannot be 8,000 tonnes of exposed Gold shorts out there, can there? That's the entire US gold reserve.

Well maybe there could, it's only 100 billion dollars worth. LTCM could have shorted that before lunch, and come back for more in the afternoon - on leveraged capital of only $5 billion! There were banks then which were dumb enough to let them do it on the derivatives markets, so who knows?

The Washington Agreement
The Washington Agreement - mentioned above - is an interesting bit of state sponsored market manipulation. The following is a quote from the website of USA Gold

[The Washington Agreement] began with a statement released jointly by European central banks from Washington, D.C. on Sunday, 26 September 1999 under support of the following signatories---

The European Central Bank and the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England.

Mr. Wim Duisenberg, President of the European Central Bank, announced the joint Statement on Gold:

"In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The above institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years."

The gold bulls were ecstatic and chased the price dramatically upwards from $260 to $325. They were later devastated when the temporary rally ran out of steam and the price fell back to $278 within a couple of months. The conspiracy theorists thought something was afoot. The following extract comes from http://www.gata.org/bofi.html

"According to reliable reports received by the plaintiff, this effort was later described by Edward A. J. George, Governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, Chief Executive of Lonmin Plc:

'We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.'"

Lonmin, incidentally, had lost a huge amount of money in Ashanti - a hedging miner - which had been whiplashed by the price spike. But even if it's true that Mr George sunk the rally with his US allies it could reasonably be argued that it was the least they could do. After all it was the central banks which were behind the intervention which caused the rally in the first place, and this could easily be seen as the immediate cause of financial instability.

Everything can easily be turned completely upside down. The Washington Agreement to which the market reacted in such a bullish way now hangs over the gold market with its implication of future oversupply. Had there really been a mutual European central bank desire to defend the value of their gold reserves they would have done immeasurably better by stating that all the parties intended to treat gold as a long term monetary reserve for the foreseeable future, but retained their strict independence of action. The attaching to the agreement of a firm commitment for a 5 year period laced the whole arrangement with bearish possibilities. For all the market now knows there are four or five willing central bank sellers of gold within the signatories, and their bullion will flood onto the market in 2004. It's hard to envisage a more effective mechanism for capping enthusiasm for gold, especially when you realise that points 2, 3, 4 and 5 of the statement were busily reminding the market how actively bearish the signatories had recently been.

Sometimes it looks almost as if it was a package designed by an investment bank which had sold five year call options (and, if it was clever enough, had bought one month call options as a hedge for the announcement). An equally amusing conspiracy theory is that the Washington Agreement was designed by central banks themselves to depress the gold price to ensure they didn’t look too stupid as they continued to dump. After all, unlike all other gold investors, governments are far more concerned about possible electoral damage than the financial damage of being shown to have got it wrong. Perhaps they were simply temporarily embarrassed when the price went bananas.

Courtesy: www.galmarley.com

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