-- Posted Tuesday, 16 April 2013 | | Disqus
By The Goodman Letter
Leveraged gold speculators panic whenever someone decides to sell large numbers of transient short positions into the market. That isn't anything unusual. It is because they are gamblers who, like their soul-mates in Las Vegas, ignore common sense and think they can win against the House. But, the House always wins. It is no different with the world's derivative players who play at derivatives casinos. The only difference is that while casinos in Las Vegas admit that the odds are rigged in their favor, derivatives casinos are more deceitful, and don't.
The derivatives casino gamblers always set automatic points, where their positions will be automatically sold if the price dips low enough. This is supposed to show that they are "investing" rather than gambling. But, the stop positions are well known, because they cluster around technical "resistance" and "support" levels. The gamblers virtually all believe that they can foresee the future through non-living psychics, known as "charts". Coordinated short selling, therefore, will ALWAYS be devastating. It will be targeted to trip those automatic stop-loss orders, to result in the dominoes falling, and a deep decline in paper prices.
The short selling on Friday, April 12th, was bigger, but essentially no different from all other price takedowns from 2001 until now. These events often, if not always, cluster around big economic announcements. Bad economic news should ordinarily increase the attractiveness of gold-related investments. Yet, because of the short sellers, gold habitually moves in a counter-intuitive manner. Suffice it to say that futures market short selling tends to be at its most intense at the moment that economic news is at its worst. Thus, "up becomes down" and "down becomes up".
New data, out of the USA, shows that the hopes and dreams of the economic optimists are unjustified. We now have much higher real unemployment, reflecting huge rolls of discouraged workers, collapsing retail sales, collapsing home builder confidence than the so-called "experts" ever thought possible. It is a reversal of all the trends that the gold bears at Societe Generale and Goldman Sachs, for example, cited as justification for a prediction that gold prices would decline. Yet, gold still went down, in spite of heavy increased buying reflected in a vastly larger open interest. All that increased buying was absorbed by multiple waves of paper short selling.
But, most people buying physical gold, as opposed to the paper traded on derivatives markets, are not overleveraged get-rich-quick schemers. The fear-mongerers at Societe Generale, Goldman Sachs and other Fed primary dealers hold no weight with them. They don't care about the movement of the stock market. According to Forbes magazine, sales of physical investment gold skyrocketed when the spot prices were reduced by the futures markets. Over the coming days, no doubt, we will learn that the same phenomenon has occurred everywhere in the world.
The "Waterloo" of gold price management is the physical market. That is what makes gold different from purely paper products like Facebook. That's why it is not possible to control the price in the long term without a ready source of physical gold to meet this demand. Physical buyers can and do terminate events such as the ones we've just seen. They've been doing it for at least the last 12 years, every time. The reason for that is the "ready supplier" is running out of gold.
The "FT900" is a little known document published by the US Census, which details the exports and imports of the United States. It is published every month, and is known as the "international trade report". Eric Sprott, a well known investment advisor from Canada, scrutinized all the FT900 reports published since 1991, added up the numbers, compared them against production and consumption statistics from the CPM yearbooks, and discovered that a minimum of 4,500 tons of gold, above and beyond what the USA can produce, both from mining and recycling, have been exported since 1991!
The exported gold cannot come from American gold investors. No one is selling gold coins. The gold exports are listed as "non-monetary", meaning they are in the "commodity" format of large banker's bars. Simple-minded folks do turn in a lot of old jewelry to pawn shops and "cash-for-gold" outlets, but that is accounted for. It is part of the recycling supply. Even if American consumers and financial firms wanted to sell 4,500 tons of privately owned gold, they don't have it to sell. Most American-owned gold is in the hands of the government, or is held outside the borders of the USA, in the form of ETFs like (GLD) and (SGOL), which store gold in London or Zurich vaults.
There is no possible source for thousands of tons of commodity-like gold bars, EXCEPT the basement vault of the New York branch of the Federal Reserve. It has a huge gold vault, 80 feet underground, resting on the bedrock of Manhattan, at 33 Liberty Street. According to the Federal Reserve:
"None of the gold stored in the vault belongs to the New York Fed or the Federal Reserve System. The New York Fed acts as the guardian and custodian of the gold on behalf of account holders...
"...As of 2012, the vault housed approximately 530,000 gold bars, with a combined weight of approximately 6,700 tons..."
In fact, not only does most of that gold not belong to the Federal Reserve, but only a tiny part even belongs to the USA. About 98% is the property of foreign nations. Foreigners leave gold at the NY Fed for alleged "safekeeping". Based upon what we will show here, it isn't very safe.
There is a transcript of the December 22, 1992 FOMC meeting, which catches former Federal Reserve Chairman, Alan Greenspan and a staff economist, Edwin (Ted) Truman, discussing exports of gold from the Federal Reserve basement. Somehow, this discussion survived the redaction process. The discussion, in pertinent part, was as follows:
"CHAIRMAN GREENSPAN. Did I hear you correctly when you said that the gold exports in October appear to have come from the coffers of the Federal Reserve Bank of New York? Has anyone looked lately?
MR. TRUMAN. Well, I didn't want to tell too many secrets in this temple!
VICE CHAIRMAN CORRIGAN. Obviously, we knew what happened to the gold, but I don't think we knew what it did to exports.
MR. TRUMAN. What happens in the Census data is that the Federal Reserve Bank of New York is treated as a foreign country. [Laughter] And when a real foreign country takes some of the gold out of New York and ships it abroad, it counts first as imports and then as exports. However, the import side is not picked up in the Census data. So there you get the export side of it."
In other words, the US Census Bureau dutifully records the gold that leaves the Federal Reserve's NY vault. But no nation, or collection of nations, has ever requested 4,500 tons of gold during the period of time in question. They exported gold that belongs to other nations. They sold this gold into the market to meet a multi-decade long perceived need by US policy-makers to flood the gold market with metal. That gold is gone forever. Given the current unavailability of physical gold, there is no feasible way bullion bankers, who probably facilitated the transactions, can ever replace it.
Wars have been fought on lesser grounds. If the Fed is someday unable to produce foreign owned physical gold that was supposed to be in safekeeping, there will be hell to pay To forestall that possibility, I believe the US Treasury agreed to replace the missing gold with "location swap liens" upon gold bars of equal weight and value. Such equal value bars could be stored, untouched, in sealed US gold reserves, such as those at Fort Knox. No swapped gold ever needs to be physically moved unless the repatriation demand by foreign governments gets higher than the number of remaining bars in the NY Fed vault.
Of course, as with most things, this works better in theory than practice. If and when foreign repatriation demand exceeds remaining gold at the Fed, the US Treasury must physically open up Fort Knox or West Point and deliver the bars. That would require consent of Congress. At minimum, the details of what was done would quickly become public knowledge. But, apparently, no one was worrying about that. Until very recently, nations never demanded their physical gold. But, the world is now a different place. It has woken up, and the Fed is faced with an increasing number of repatriation requests.
In a transcript of the February 1, 1995 meeting of the FOMC Virgil Mattingly, General Legal Counsel for the FOMC, stated:
MR. MATTINGLY. It's pretty clear that these ESF operations are authorized. I don't think there is a legal problem in terms of the authority. The [ESF] statute is very broadly worded in terms of words like "credit" it has covered things like the gold swaps and it confers broad authority.
In spite of that, the Fed and US Treasury have repeatedly denied being involved in putting the US gold reserve into play. Mattingly claims the transcript is a result of a transcription error. But, Fed transcripts are taken from audiotapes. Neither he nor the Fed ever presented any original tape to prove the denial. The words are his. And, as we will now discuss, a top Fed official, no less than a governor of the Fed finally confirmed the gold swaps. First, it is important to understand what the "Exchange Stabilization Fund" (ESF) is. Mattingly is talking about a government organization that was originally created during the Great Depression of the 1930s. It was and is charged with the duty to stabilize the value of the US dollar.
The ESF has much wider latitude for action than most other government agencies, but it still must act only within the limits of its stated assets. It holds over $100 billion in assets, including about $53 billion in SDRs from the IMF. It can legally engage in secret operations without consulting Congress, solely on the orders of the President or the Secretary of the Treasury. Mattingly noted that he thinks it has full authority to enter into the gold swaps. But, the ESF does not own the entire US gold reserve, nor does it own 4,500 tons of gold.
Assuming that such swaps are the method by which Fed basement gold makes its way to the outside world, we can now understand why the US Treasury, in its "US International Reserve Position" document, now describes America's gold as:
"(4) gold (including gold deposits and, if appropriate, gold swapped)"
Why include the term "gold swaps" if none of the bars are subject to third party liens? Obviously, there are gold swaps and the US gold reserve is encumbered. But, what possible legitimate purpose can such encumbrances serve? Remember, both the Federal Reserve and US Treasury claim that gold is not money, that we are no longer on any kind of gold standard, that there is a free market for gold, that they don't really care how the price of gold moves, and that gold is irrelevant to the value of the US dollar.
Obviously, since the gold standard is dead, such swaps cannot arise out of the ordinary course of business in supplying liquidity to US banks. If gold is irrelevant to the value of the US dollar, why is the Exchange Stabilization Fund involved? Remember, the purpose of the ESF is to stabilize the US dollar. And, the Treasury's description of our national gold reserve as gold and gold swaps tells us, without equivocation, that the swapped gold is a part of our national stockpile, and NOT an exchange of US dollars for foreign gold.
According to the Bank of England:
"Under a gold location swap, gold stored in a particular physical location is swapped with a market counterparty for a specified period with gold stored in another physical location..."
The otherwise perplexing language of the "US International Reserve Positions" document now makes perfect sense. Part of the official US Gold Reserve is the subject of a "location swap". The gold reserve is the subject of liens imposed by the New York Federal Reserve. The Census Bureau export numbers tell us that no less than 4,500 tons of US-owned gold is no longer part of our national legacy. That gold now belongs to others.
In 2009, Kevin Warsh, a former governor on the Federal Reserve Board, responded to a formal freedom of information act request. He admitted that the Federal Reserve has hundreds of pages of documents detailing gold swaps. But, the Fed refuses to deliver any of them. A mountain of essential information, about the legacy available to future generations, has been withheld from the American people.
If gold, contrary to what the Fed and Treasury would have us believe, is the standard against which all currencies are measured, rather than the other way around, it would make sense for the Treasury to enter swaps in order to influence prices. It makes no sense otherwise. Recent economic news shows that central planners have little to show for the trillions they've printed. Most western nations continue to be essentially bankrupt. Officially reported GDP growth is slow if not negative once the real rate of inflation is considered. The USA spends over $1 trillion more than it takes in taxes, and has no other option but devaluation in order to pay its bills. Even supposedly "sober" nations like Germany have historically high debt to GDP ratios.
Gold prices cannot be reduced solely by paper market manipulation when there are so many physical gold buyers in North America and the emerging world. Heavy price reduction in gold cause heavy physical buying. A large and ready supply of physical gold is essential for a successful price control operation that will last more than one day. The demand by physical buyers must be met, at least for a while, once prices fall. That means that no matter how severely gold bugs curse certain investment banks (ie: Goldman Sachs and Merrill Lynch are being blamed for this episode), they do not have the ability to do this alone.
Gold bankers actually hold very limited little real metal. They sell OTC derivatives with reputed leverage of almost 100 to 1. They even earn extra money by storing imaginary metal in "unallocated storage", and run a fractional banking scheme. They just hope that not too many unallocated customers demand delivery of real gold at the same time. The gold market, unlike silver and platinum, is simply too big to manipulate solely with pieces of paper.
Gold bankers must have access to large amounts of physical gold to carry out an operation of the type we've seen over the last few days. The central bankers own that physical gold, especially the US Treasury. By supplying it in quantity, at strategic moments, they can temporarily offset the effect that increased physical selling will have. Otherwise, any bid to control prices will fail. Remember, gold is not Facebook or another purely paper product.
The NY Fed says it holds 6700 tons of gold on behalf of foreign nations. It doesn't. Most of that "gold" must now consist of paper IOUs against physical bars stored, elsewhere. The US Census Bureau trade statistics shows 4,500 tons of otherwise mysterious gold was sold. That means the NY Fed has a maximum of only 2,200 tons of physical gold left, and possibly less. Andrew McGuire, the famous gold trader in London, says that China has absorbed 800 tons of gold in 3 months.
If there are 2200 tons of gold left at the NY Fed, even if the gold "window" is still open, remaining supplies are insufficient to meet demand. Meanwhile, demand for physical gold is soaring again. Bill Haynes, a proprietor of a large gold coin operation in Arizona, says that, in the wake of the gold takedown, buyers are now outnumbering sellers 50 to 1. If that is happening in the gold-skeptical USA, you can imagine for yourself what is happening in places like India and China.
I doubt that the Fed will agree to sell the last ounce of available gold just to prove a point. If they did that, they'd be forced to open sealed repositories as soon as the next big repatriation demand arrives. Can you imagine the negative reaction? It might cause Congress to take serious action to shut down the Federal Reserve. Indeed, it is remotely possible that the NY Fed's gold window has already been closed.
COMEX warehouses saw a huge drawdown of physical metal immediately before the initiation of this manipulation event for no apparent reason. Some think it reflects a "run" on physical gold supplies at the LBMA. But, it may simply be an effort to deploy all available physical assets to take down gold in one last spectacular “shock and awe” effort to shell-shock long investors, and help mega-banks extricate themselves from hundreds of billions of dollars worth of short position losses.
Even if the Fed and Treasury are going to sell that last ounce of gold, by taking in 800 tons every three months or so, and, in doing so, still not deploying much of their $2 trillion or so US dollar reserves, China, alone, could buy up every ounce of it. If prices are kept even steady, at these low price levels that will happen. Remember, the Chinese central bank has already stated that the main restraint on its gold buying activity is the fear that sharply higher gold prices will result from heavy buying. If prices are prevented from rising in sync with demand, the sky is the limit as far as how much physical gold they will demand.
The bottom line is that, although this was a spectacular manipulation episode, it is doomed to failure. It can last for a few days longer on margin call selling and sudden increases in the COMEX margin requirements. Perhaps, it will cause buyers to wait until they see the precious metals languish, at low price levels, for a little bit. But, the process of artificial price control is inherently self-limited. The physical gold, needed to suppress gold prices, appears to have been supplied exclusively by the Federal Reserve for several years. They cannot supply it anymore, because they are nearly out of available supply.
Where else will the banksters get a new supply of physical gold except from their favorite slush fund? Europeans have a long history of wars, instability and destruction, and are not naïve enough to sell off sovereign gold assets. Indeed, right now, there is a high likelihood that they will need that gold to back new currencies. Portugal, Italy and France will never agree to sell their gold reserves. Even Greece won’t agree to sell. They've already sold what they want to sell. None of those nations are in the position of powerless little Cyprus. The Italians and Spanish would reinstate the Lira and Peseta, rather than give up their gold. Portugal is one of the few nations, honest about gold, which admits that it already leased most of its gold to the bullion banks. The Greek administration might cooperate, but its legislature will never approve such a sale either.
When the source of America's gold exports runs dry, the game will be over. So, we know where all this is headed. What to do? In the absence of inside information, no one is able to predict the exact bottom of a manipulation event. But, prices have gone down a lot, already, the USA continues to print money at ever-increasing rates, Japan will soon print exponentially more money per capita than even the USA, a myriad of governments all over the world remain insolvent, and the economy continues to deteriorate.
The reason for buying gold is exactly the same today as it was when gold was selling for $1,900 per ounce in August 2011. Russia and China know this, and so do individuals all over the world. Meanwhile, speculative short positions at COMEX have reached record levels. Speculators at COMEX are considered "dumb money". In the short term, and, sometimes, even in the medium term, their mass movement in and out of markets can change prices dramatically. But, only a handful of speculators all betting in one direction will ever coin a profit, because only those who exit fastest win. That benefits the smart money which knows when to exit.
The CFTC bank participation report shows that the smartest money, which are the big American banks with deep connections to the Federal Reserve and Treasury, with the exception of the transient short positions they may have used to cause this price reduction, have been exiting at an average rate of about 20,000 short contracts every month. That means that this is a great time for long term investors to buy. It is especially a good time to buy gold mining shares, some of which, like Newmont Mining, offer very high dividend yields. Prices could temporarily fall a bit more, or they could rise sharply right away. But, it doesn’t matter. We are inside what I believe is the final act of the gold manipulation playbook.
This episode has nothing to do with the natural ebb and flow of human sentiment. It is purely the result of a "shock and awe" campaign designed to lower prices. Charting and technical analysis are essentially worthless here, because, when the market is being papered over so thoroughly, sentiment means nothing. Most important, there is not enough physical gold left at the NY Fed to support price management operations for more than a short time. This operation is designed to shell-shock markets. Maybe, key players will escape from short positions. They won’t be able to terminate the bull market in precious metals.
The key players are almost certainly trying to switch from being short to being long gold. That's what this take-down was about. That is evident from the CFTC bank participation reports and the Commitment of Traders reports. So, the idea that you should be afraid to "catch a falling knife" is nonsense. CNT, Inc., an $8 billion per year business, the largest wholesaler of gold in the USA, and the biggest single supplier of gold and silver to the US Mint, is sold out of silver. Amark, another one of the biggest precious metals wholesalers, is also sold out. SD Silver, a retail gold/silver store, has been forced to stop taking orders, because it cannot obtain any inventory. COMEX/NYMEX warehouse stocks of physical gold/silver have been decimated as huge quantities of physical metal leave their vaults.
Like a physical terrorist attack, financial terrorism is also targeted toward the goal of frightening people. Those who choose not to follow the crowd know that this is a time to buy gold, silver, platinum and/or gold/silver mining stocks. You can now buy at an artificially discounted price level which won't exist for very long. And, the price is going to be many multiples of the current price within 3-5 years.
-- Posted Tuesday, 16 April 2013 | Digg This Article | Source: GoldSeek.com