Controlling Gold with Paper

by Jason Hommel, June 10, 2002

On Tuesday, June 4th, the spot price of gold plunged from $329/oz. To $325/oz. during after market hours, and over the course of the next day, declined further to $321/oz. Less than 24 hours later, it was quickly reported by and GATA that this was a result of a large sale of paper futures contracts of a relatively illiquid date in a relatively illiquid market because of the odd time, which pushed down the price.

It’s tricky to see how the price of gold is, and has been, manipulated downward with paper contracts. The question is raised, “How can they knock down the gold price if they are not selling any gold?” I’ll do my best to try and simplify and explain this con game and cover the major factors that are so bullish for the gold market right now and are causing this current bull market in gold. This essay might also help you to convince your friends, relatives and loved ones, who don’t read gold-eagle, of the benefits of gold investing.

If you go to your local coin shop to buy gold and silver (which I strongly recommend doing as soon as you can), the dealer will look up the price of gold in New York. This is the “spot market” or “spot price” that changes throughout the day. Based on this price, he will sell you (at a small mark up) his physical metals if you give him your paper dollars. He is willing to accept your inherently worthless paper (amazingly!) because he has the confidence that he will be able to quickly buy gold and silver with the cash you gave him. Thus, the spot price in New York affects real prices anywhere in the world, because of the confidence people have in the market in New York. They have confidence (key word) that they can wire their money to a metals dealer in New York, and have gold or silver shipped out the next day. If this confidence did not exist, a dealer in a local coin shop would have to find another source of supply that he could rely upon and have confidence in, and the prices set by this other source would then be “the price”.

I would love to go into the precious metals business and start dealing in bullion. This would be an excellent business because as we enter this bull market, more and more people will want to buy metal, and business will be booming. Additionally, I sincerely believe in the moral benefit to owning gold and silver coins, so I would feel very good about getting gold into the hands of people, and out of the clutches of the evil central bankers who stole it in the first place. I believe I would be providing a genuine service to humanity by helping people protect their wealth, and I would be fighting the good fight against central banking, which is a cause of much misery in the world.

Unfortunately, I know default is coming. I know that eventually, the time would come when I would take larger and larger orders, and then, I would try to buy gold and silver in New York, and I would get nothing after having placed the order. I believe the coin dealers in this country are real heroes to continue their business in the face of such danger. Essentially, I know that the situation is like a con game. Confidence keeps the game going, and I do not have confidence in the New York price, unlike our heroic coin dealers. I’ve talked to coin dealers about this, and they shrug it off, saying that’s just the normal risk of doing business, just as there are risks in any business. I think that’s an amazingly heroic attitude to have.

In a similar fashion to the coin dealers who look to the spot price, those in New York who set the spot price have confidence in another market, and this is the futures market. If they see that the price of gold for “December delivery,” or some future month, is at a certain price, there are market makers who are confident enough in the futures market price to sell gold now, and wait all the way until December to replenish their supplies. In this way, the futures market price can affect the prices today. Or, looked at another way, a drop in the price in the futures market gives a so-called valid pretext for dropping the spot price today accordingly.

Thus, to manipulate markets downward, you don’t actually have to have gold to sell. All you need is to be able to create and offer the paper gold futures contracts. Then, after you sell the paper contract and before the delivery date comes, all you need to do is convince some other person to take the short end of your futures contract, and you can walk away, having transferred your obligation (to deliver gold in the future) to someone else.

Of course, that’s all very simplistic, and the players are not anonymous buffoons. Real gold is coming to market from central banks who lend out their gold at 1%, and then continue to act as if they still own gold that is long gone. Thus, nations report as if they still have their gold, but they no longer have it. Many people, such as myself, have called such a practice nothing less than fraud, because first of all, the gold belongs to the people and the people are being lied to. Second, it was “sold” for less than 1% of its value. And third, it is reported as if it never left the vaults, but it has. It is certain that the huge amounts of gold that has been sold this way is utterly lost to the central bankers, because to go into the market to buy up that much gold to pay it back would drive the price to the sky, and bankrupt the institutions who leased it from the central banks in the first place.

A minor debate comes in because the “official” amount of gold that has been admitted to being sold in this way is about 4000-5000 tonnes, while those who have studied this in depth realize the figure is far more likely to be about 15,000 tonnes. I believe the latter number is closer to the true figure.

Either way, this gold is largely owed by the bullion bankers, such as JP Morgan and Goldman Sachs. A small part is owed by the gold miners of the world who have “sold forward” up to 2700 tons of gold all together in total, but who are now increasingly scrambling over themselves to buy this gold back, before the price to pay back these obligations continues to increase. So, unfortunately for the bullion bankers, they have not been able to transfer as much of the risk as they would probably like, and the con game has turned against them as the mines stop hedging.

The con game is ending because gold investors discovered the dangers of hedging and central bank leasing in September 1999. At that time, the Washington Agreement, which was an agreement by the European central bankers (not Washington) to limit gold sales to 400 tons a year for the next 5 years, caused the gold price to quickly rocket to $337/oz, which, in turn, caused the near bankruptcy of two gold miners, Ashanti and Cambior, who had hedged, or sold forward their gold. Thus, the gold world began to wake up to the truth and the danger of gold hedging, and began to learn the truth of central bank gold leasing.

All those figures dwarf the figures at the COMEX, the gold futures market, which has reached figures as high as 200,000 contracts recently. Since a gold contract is for 100 ounces, that’s 20 million ounces. To convert to tons, divide by 32,152 oz./tonne, so that’s about 622 tonnes.

Now the gold mines bring to market 2500 real tons, and the market consumes 4000 real tonnes of gold each year, and the difference is being supplied by the central bankers who lease out gold that is never being reported. Once the central banking leasing stops, a 4000 tonne demand with a 2500 tonne supply is going to raise the price a lot. Additionally, if you were the bullion bankers who owed 5000 or 15000 tonnes, there’s no way you could go into a market and buy up that much gold to repay your gold loans. To repay that much gold over the course of a year, that would be 4000 tonnes plus 15,000 tonnes on the demand side, and only a 2500 tonne supply. Imagine the price rise in that scenario, and imagine the investment demand as the gold price soars and proves overwhelmingly its status as the only safe haven there is.

Obviously, this will end badly for the bankers who will default, and will cause the gold price to skyrocket. These are the essential details that all gold investors need to know.

The next biggest issue for gold investors to digest is that there is a potential demand for gold that is equal to all dollars, and all other fiat currencies that have ever been created. This money creation is the inflation that will drive the gold price to the moon. It’s not future inflation that’s the worry and it’s not future inflation that will be the cause of the gold bull market, it’s the inflation that has already happened. M3 represents the dollar liquid money supply held by U.S. Banks, and has now crossed $8 Trillion. All the gold in the entire world is only about 120,000 to 130,000 tonnes–at $330/oz., that’s only $1.1 Trillion dollars worth. Of course, the Japanese have buying power in excess of $10 Trillion dollars worth as well. All these factors mean great things for gold owners, and for owners of gold and silver mining stocks.

Now, this whole scenario raises a lot of questions. How and why would the bullion bankers engage in such dangerous business practices that threaten their own existence? Well, the bullion bankers are partners with the central banks, and in many cases are even their owners!

Basically, the undisclosed central bank gold loans were the method whereby they have been able to hold the gold price in check for the last 22 years since 1980, which has allowed those governments to get away with massive money-creation inflation during that time. The money creation has gone unnoticed because the gold price was declining or flat. That’s the con.

I believe that Goldman Sachs and JP Morgan no longer represent the real owners of the central banks, but rather, they are empty shells of their former selves. Both are publicly traded companies that have issued Billions worth of stock. Therefore, when they default, and go bankrupt, the shareholders of these doomed banks will suffer, just like the shareholders of Enron, not the people and powers who orchestrated the coming fiasco. It’s no wonder that JP Morgan was Enron’s largest partner.

Quite literally, it has been the greatest con game in the history of the world. Don’t let yourself continue to be conned. There is no sane reason to maintain confidence in such a system. Gold is roaring to life, and will continue its relentless bull market to the moon as people wake up and see through the lies.