FSO Contributor: "The Gold Cartel is Dead Meat" by Bill Murphy 04/06/2005

THE GOLD CARTEL IS DEAD MEAT
by Bill Murphy, Chairman
Gold Anti-Trust Action Committee
April 6, 2005

I consider the following news, which hit the tape, to be of such importance to do a special recap for you:

Congress, Bush will block IMF gold sales

Washington, DC, Apr. 5 (UPI) -- U.S. Congress and President Bush will stop the International Monetary Fund from selling its gold, the chairman of the Joint Economic Committee said.

The IMF is considering gold sales as a way of covering bad loans it has made to impoverished borrowers now unable or unwilling to repay, but Congressional approval would be required.

JEC Chairman Rep. Jim Saxton, R-N.J., said he favors IMF debt relief through write-offs financed out of the IMF's other resources.

"The potential profits on IMF gold sales rightfully belong to the original donor countries and their taxpayers," he said. "These IMF gold sales would amount to a hidden appropriation from the donor countries that were the original source of the gold."

Saxton said the IMF failed to implement the proper lending safeguards and accounting controls for making such loans.

"Not surprisingly, some of its loans have gone bad, and the consequences should not be papered over," he said. "The IMF's mistaken forays into development lending have proven counterproductive, and should not be repeated." -END-

As long stated by the GATA camp, The Gold Cartel is running out of gold to cap the price. The Swiss are done selling and the cabal had to lean on the ECB for a surprise 47 tonnes. The one hope for the bums was to keep the market subdued, partly via talk of IMF gold sales to keep the market off balance. The psychological ploy was clear - one which they dearly needed to work until they could somehow get the IMF to dump gold, and to play for time to defuse the interest rate derivatives neutron bomb which is now lit.

First the Bundesbank, in a stunning rebuke of Germany’s Finance Minister, came out against the IMF gold sales. Now James Saxton, Chairman of the JEC, has stated Congress will oppose the sales. Last week I covered why GATA may have played some role in the Bundesbank coming out the way they did.

Tonight I lay out GATA’s efforts in the past which may have played a role in Saxton’s riveting comments. I say riveting because I think The Gold Cartel and even the Bush Administration got bagged here. WE KNOW the US is desperately trying to control the price of gold. Thus any public comments against the sales by our US Treasury are a red herring, especially with their apologists like Gordon Brown of England begging for the sales.

I will have more on this in days to come as events unfold. However, this KILLS any potential for IMF gold sales in my book and should give a HUGE lift to the gold price in the days and weeks ahead.

The following is from 1999 MIDAS commentary. It will sound very familiar. Only time will tell what effect GATA has had on James Saxton and the JEC. You can make your own conclusions. However, one thing is clear. It wasn’t the World Gold Council who had any impact here. SUPPORT GOLD RUSH 21!

The following letter was sent to Chairman Saxton to prepare him for GATA's meeting on April 27, 1999:

Honorable James Saxton
Chairman Joint Economic Committee
339 Cannon House Office Building
Washington, D.C. 20515-3003
April 26, 1999

Dear Congressman Saxton,

The purpose of my visit is to try and be of some assistance to you and your committee regarding the issue of the proposed IMF gold sale. It is the opinion of the Gold Anti Trust Action Committee that the real reason for the intense lobbying and orchestrated PR barrage about selling IMF gold by the White House and the Treasury is not being revealed to Congress. We believe that the real reason to promote the IMF sales has to do with a concerted manipulation of the gold market to keep the price down in order to bail out the gold shorts of Wall Street (ie bullion banks, hedge funds, and other financial institutions).

That has been going on for some time but began in earnest when Alan Greenspan made this statement before a Senate Agriculture Committee on July 30, 1998, "central banks stand ready to lease gold in increasing quantities should the price rise." We would like someone in Congress to ask Mr.Greenspan exactly what he meant by that comment when he is testifying again before committee.

It is important to understand that there is a natural supply/demand deficit in the gold market, meaning that demand for gold far outstrips natural mine supply. Our associates figure that deficit is around 1200 to 1600 tonnes and that deficit has been met by gold producer forward selling, some central bank sales, scrap supply, and gold lending. We think that the gold lending is now so large that it has created a potential "systemic risk" problem. Bullion dealers have been lending out central bank gold to financial institutions at 1% interest rates. The gold is sold into the physical market (depressing the price) and the proceeds are then invested elsewhere. This is called the "gold carry trade" which operates under the same principle as the "yen carry trade" which blew up late last summer when the yen rallied strongly against the dollar. The short term demise of the yen carry trade caused great financial consternation.

The "carry trades" only represent cheap sources of capital if the price of the entity borrowed stays the same, or decreases. When the price of the yen suddenly rose sharply late last summer it caused great financial distress as very inexpensive loans became onerous. But, at least they could get out of the loan via liquidating the yen; in essence giving it back.

We believe that the speculative gold loans are now as high as 3,000 tonnes of gold and that the total gold loans (producer forward sales, etc) have reached 8,000 to 10,000 tonnes. If we are correct, and at some future date the price of gold rallies like the yen did, there will be financial turmoil. As yearly mine supply in 1998 was only 2529 tonnes, the borrowers will not be able to lay their hands on that much gold very quickly. Inevitably, there will be defaults and many financial institutions here and abroad will go bust. Many of the banks are getting in this too deeply and are at risk of becoming "Long Term Capital Managements." Panic is definitely not too strong a word to be used here.

This appears to us that the current administration and the NY investment houses are in cahoots and what we may have here is one of the great financial scandals in US history. Financial commentators often point to the muddling, low gold price as to how all is well in the economy and administration officials point to a low gold price with pride, almost using it as a report card on the great job they have done. The bullion banks and investment houses have picked up on this and are making sure that the price does not go up by supplying gold to the market place. They feel they can borrow gold with impunity, even at these low prices, as a result of Mr. Greenspan's comments. And of course there is the connection of Wall Street to Secretary of the Treasury, Robert Rubin. Everywhere we turn in our investigation, we find Goldman Sachs, his former firm, involved in gold bashing efforts.

Our committee (GATA) has retained one of the premier anti-trust firms in the United States, Berger & Montague of Philadelphia, to assist us in our investigation into this matter. If further evidence corroborates what we already have, we intend to sue some New York bullion dealer/investment houses for violation of the Sherman and Clayton acts. These firms are making fortunes (while many associated with the gold industry are being destroyed) through investments, after borrowing gold at 1% interest rates. However, we think that some of them are making these fortunes illegally as a result of collusive activities and in the process have created a "ticking time bomb" that could blow up to be a financial disaster in the future.

It is this cozy arrangement the administration has with these investment houses that we believe is the real reason behind the constant calls to sell the IMF gold. They both benefit from the sale of the IMF gold, but the poor countries in South Africa and West Africa lose as their mining industries deteriorate. I know you have had other experts testify on all of this to you so I will not get into that. But the American public, as well as this country's mining industry, could really lose too. Our last monthly trade deficit was $20 billion. At some point, there will be an attack on our dollar. Our gold resources are one of our greatest assets. Why sell any of them at these very, very low prices? We can point to our gold stocks in defending our dollar in the future. There are many financial analysts that think a financial bubble has been created. That may or may not be the case, but to advocate gold sales at this point in time will be looked on as great folly if there is a bubble, and it bursts.

Yes, the current administration and the greedy Wall Street houses are winning the day today with this gold market manipulation. But, if this charade about gold is not stopped now, someday the American public will be big losers if a financial panic sets in. If someone had stopped the Savings and Loans from their over-extensions a decade ago, we might not have had that big a crisis. The potential gold loan crisis could dwarf the Savings and Loan one if the orchestrated gold selling game is not curtailed now. I have attached some material for your perusal, which elucidates much of what I have brought to your attention. That material is:

1.An April 16 Reuters PRNewswire in which Chris Thompson, the Chairman of one of the world's biggest gold producers, Gold Fields Limited, decries the tactics of the New York based bullion dealers.

2. An essay by John Hathaway, the highly regarded senior portfolio manager of The Tocqueville Fund in New York, entitled, " Bullion Dealer: Spin Meisters of the Gold Market."

3. Commentary from Veneroso Associates entitled, "Gold Zaitech - A Bear Bubble Driven By Cheap Credit". Frank Veneroso wrote the 1998 Gold Book and is one of the leading authorities in the world on the gold market. He has been economic policy advisor to the World Bank, the I.F.C. and the O.A.S. as well as many countries.

Frank Veneroso is also one of the leading authorities on the gold loan issue. I was with Frank when he determined out how large the gold loans are and I saw how he figured it out by learning what the gold loans were at individual bullion banks. In addition to that, I was there when he spoke to Terry Smeeton, who just retired as England's Chancellor of the Exchequer, about the gold loans last year. Five years ago Mr. Smeeton was very chatty with Frank about the loans. Last year, he would say nothing and could not get off the phone fast enough when Frank told him how large he now thought the gold loans had become.

4. Commentary from the highly regarded James Turk, who publishes the Freemarket Gold & Money Report. James is one of the other leading authorities in the world on the gold market and is known by all in the industry. His April 26 piece is very timely and covers the problem of the payback of the gold loans. His work shows that it could take a gold price of $608 to $923 to solve this very sizeable problem.

5. Brief commentary from the well established "International Harry Schultz Letter." Harry Schultz also expounds on the nefarious tactics of the bullion dealers.

I look forward to meeting you on Tuesday at 1:15 and hope that we may of help to you regarding this IMF gold sale issue.

Best regards,
BILL MURPHY
Chairman, Gold Anti Trust Action Committee, Inc.

In September 1999 the price of gold went ballistic after the surprise Washington Agreement announcement on September 26, leading to the infamous comment by the Bank of England’s Eddie George, as stated in Reg Howe's court case against The Gold Cartel to be found at:

http://www.gata.org/howe_complaint.html

"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."

Do you think GATA caught Chairman Saxton's attention when the gold price rise was a worldwide fuss and potential disaster 5 months after our meeting?

4/28 Report on GATA goes to Washington/Deutsche Bank conference call
April 28, 1999 - Spot Gold $282.70 up 70 cents - Spot Silver $5.25 up 8 cents

Feedback to the Café about my trip Washington and meetings with Jim Saxton, Chairman of the Joint Economic Committee, the Staff Director of the Joint Economic Committee, the senior macro economist of the Joint Economic Committee, the Senior Counsel of the House Banking and Financial Services Committee and the Staff Director of the Capital Markets Subcommittee.

Washington is in full bloom this time of year and it is extraordinarily beautiful and bustling with activity. One cannot help but be inspired walking around the Capitol while gazing at its majestic buildings and thinking of what they stand for. It is one great country we have here, with all its flaws, and an awesome, proud feeling came over me as I traversed from the Capitol building to the Rayburn Building, to the O'Neill building, etc. America is special because anybody can do anything here. It is a land of individuals and we are very lucky to be living in such an environment. I thought as such as Mitch McConnell, Barney Frank, and other House of Representative Members sauntered by - all just part of the crowd.

My first meeting was with the Staff Director of the Capital Markets group that is investigating Long Term Capital Management. I cannot get into too much about this one, but I can tell you that I almost fell off my chair when he told me that they were investigating Long Term Capital Management for "anti-trust" violations. It was not my place to probe further. But, now we understand why Long Term Capital Management has reacted so expressively to the Gold Anti Trust Action Committee and is sending our attorney a letter. I am sure that we are just a coincidence that happened to show up at the wrong time for them, but no one I have spoken on Wall Street had heard that anti-trust activity is the reason a Congressional subcommittee is looking into their previous operations.

Later on, the Senior Counsel of the House Banking and Services Committee came by and we had a long session about the "the sizeable gold borrowings." He took copious notes. I stressed to him that it was our opinion that a danger had been created by speculative gold borrowers who had become so greedy that we believe that there are now about 3,000 tonnes of these loans out there. And, that the total gold loans may now be 8,000 to 10.000 tonnes. I stressed that the borrowers were making a fortune with virtually interest free money! But, in doing so, they have created a potential banking disaster. If the price of gold were to unexpectedly shoot up and go sharply higher (like the price of oil did the past two months), the gold borrowers could not find 3,000 tonnes of gold to pay back their loans, even if they wanted to. Panic could ensue. Major banking defaults may occur and they could have 10 Long Term Capital type, systemic risk problems on their hands, all at once!

I told him that I was here today to alert the Banking Committee to this potentially very serious problem and that this situation could be likened to the Savings and Loan crisis. After the Savings and Loan crises erupted, it was queried by many as to why someone did not do something about it before it became a crisis. I told the Staff Director that there is no reason for history to repeat itself. NOW, is the time for the Banking Committee to ask the bullion dealers and major financial institutions what their gold books look like; ask them to reveal the gold books (confidentially) to a banking or economic committee. If they will not do so, ask why? If they do and we are we are right, somebody had better blow the whistle. If we are wrong, then it was a waste of just a little time and a few phone calls.

We discussed the gold loans issue in great detail. You know much of our reasoning and evidence, so there is no point going into all that. What is important is that at the end of the meeting the Senior Counsel got up grinning and said, "Geez, got a small order here, have to save the banking system".

The next meeting was with Jim Saxton, the Staff Director of the Joint Economic Committee and their senior macro economist.

Jim Saxton is one class act. We had some fun talking about my cousin, Bobo Sullivan, who also has been a force in New Jersey Republican politics for many years as he ran the election campaigns for Bush and Reagan in that State. Jim just got back from a fact finding mission in Yugoslavia and now is also preparing legislation to reform the Exchange Stabilization Fund by introducing the, ESF Transparency and Accountability Act.

"This legislation will end the legacy of secrecy and obscurity at the ESF," Saxton said in his press release. The ESF was established in 1934 at a time when the dollar was pegged to gold, but has survived into the current era of flexible exchange rates despite its lack of clear objectives and its secretive operations."

"This legislation will end the legacy of secrecy and obscurity at the ESF," Saxton said. "We need this kind of secrecy in our nuclear weapons programs, not in our international economic policy, but most Americans have never heard of it. The American people have the right to know how billions of their tax dollars are being used. Excessive secrecy is part of an even larger problem: the lack of accountability to congress or the American people."

I told Jim that GATA was concerned about the lack of transparency in the gold market too and that we felt there were many shenanigans occurring in the gold arena. GATA applauds his efforts, and intended legislation, which could cut off another potential source of manipulation of the gold market.

Most of the discussion was about: 1) what GATA felt was the real reason behind all the IMF proposed gold sale PR commotion and 2) GATA's opinion that gold loans had become so large that they had become a danger to the U.S. banking and financial system.

I went on to say how large we felt the gold loans had become and that if something were to happen to cause the price of gold to rise sharply, and the gold borrowers wanted to get out of their gold loans and pay the gold lenders back with physical gold, that it would be impossible for them to do so in a short period of time without the price of gold skyrocketing. With 1998 mine supply at 2529 tonnes in 1998, it just cannot be done. I followed with what I had told the Senior Counsel of the Banking Committee, that I felt the resulting turmoil could produce 10 "systemic risk problems," not just the 1 that our Fed had with Long Term Capital Management. What would the Fed do in that case?

It was stressed by me that almost no one thought there could be a Long Term Capital Management either; that even the Central Bank of Italy invested in Long Term because of the supposed lack of risk in investing with them. The biggest and the best invested in Long Term. "And look what happened," I told Jim. I then pointed out that it is these same "biggest and best" that are borrowing gold at 1% interest rates and are thus, in effect, short gold to a staggering degree. In essence, they are investing all over the place for practically free (as long as the price of gold does not go up). I asked him if he would like to be able to go his bank and take out virtually an interest free loan? Did he think his investment performance would look pretty good if he could do so? That is what I told him I felt was behind all this IMF gold sale talk spewed forth by our administration, the bullion dealers, Wall Street and anyone else who's arm they can twist. I do not think it proper to recant any of his conversation, but I think I can comfortably say that he has a great smile.

All 3 committees want to very much hear whatever more we have to convey on this matter.

THE GOLD PRICE IS GOING MUCH, MUCH HIGHER!!!