This is from FT.Com

[Fair Use: For Educational/Research Purposes Only] Saturday February 12 2000 The long view - The battle over bullion

Conspiracy Theorists have a field day as Gold edges Higher

By Barry Riley

All the attempts over the years to downgrade gold to the status of a routine commodity such as, say, zinc or aluminium have failed. This week, the gold price has again looked quite frisky at above $300 an ounce. The sector was also enlivened by Barrick's refusal to abandon its hedging programme and by the sad plight of Ashanti Goldfields, which is teetering on the edge of collapse after losing a court action in Ghana.

Gold naturally attracts controversy. There is a kind of religious zeal about the gold bugs; they see the yellow metal as nature's own store of value which is far superior to the corrupt paper money churned out on high-speed printing presses controlled by the politicians.

The weakness of the gold price, which tumbled from $400 in 1996 to $250 last summer, has encouraged elaborate conspiracy theories. Now, though, the gold bugs are getting excited. The bullion price, they claim, could be on the edge of a break-out; many years of oppression by the central banks and their collaborators might be about to end. Gold, say the conspiracy theorists, could be about to reclaim its leading position among precious metals. There is, after all, plenty of action in platinum and palladium, which have both risen in price by about two-thirds since last summer.

Should we care about gold? It has moved from the core of the global monetary system to the fringe. All the same, leading central banks continue to hoard 20,000 tonnes of it in their vaults, worth around $200bn.

You might think that they would welcome a higher price as a reward for their investment. But that is the same as saying they would welcome a lower price for their own currencies. That might undermine public confidence when times are tricky. They are forced to grapple with an awful contradiction.

The gold bugs of GATA (it stands for Gold Anti-Trust Action) have an entertaining web site where the conspiracy theory is debated endlessly. GATA blames the US government: it has more or less accepted the Federal Reserve's pleas of innocence but thinks the Treasury has been operating heavily through the Exchange Stabilisation Fund, aided by big bullion traders such as Goldman Sachs.

Top mining companies have tagged along for several years by selling large quantities of gold forward. The price went down and down. Last summer, the affair began to turn into a re-run of the old post-second world war battle over gold between the US and the UK on the one hand, and the continental Europeans on the other.

In May, the UK Treasury announced - unexpectedly - a high profile bullion sale programme of 435 tonnes (in approximately 25-tonne instalments) that looked more calculated to drive the price down further than to realise good value for the British taxpayer, especially as the proceeds were to be largely switched into shrinking euro. By late September, the continentals retaliated and announced curbs on bullion sales. The price spiked up, to the great embarrassment of many of the gold producers.

When mining companies behave more like hedge funds than metal producers, they actually can be bankrupted by a rising price. But, allegedly, the US Treasury then intervened on a bigger scale to limit the damage. The bullion price hovered around $280 an ounce for several months but recently has pushed higher again.

The reasons, as always, are obscure. But some of the mines are changing or abandoning their hedging strategies and one or two might even collapse, while bullion banks are running some very dangerous positions. The market could be vulnerable to a speculative attack.

Certainly, some strange things have been going on in the gold market. What GATA does not really explain, however, is why the US Treasury would go to such lengths to distort the bullion price. A strong gold price might be an embarrassment; but, in this world of rampant technological change and overwhelming American economic power, would it matter very much?

True, gold inspires a kind of religious faith. It provides an alternative to fiat money and, at times of instability, it might prove a disruptive force. That is what happened in the 1970s. But surely the US Treasury is not that scared about the dollar - though it is true that, as the annual current account deficit moves from $300bn towards $400bn, the potential risks of a loss of confidence are becoming more daunting.

Gold is also an alternative to conventional financial assets such as bonds and stocks. Historically, the bullion price has wilted when the stock market has been strong. Then, when the stock market has crashed, gold has prospered, as in the early 1930s and late 1970s.

Time has passed, however. A few people might be frightened out of stocks by a strong gold price which, they think, signals a coming crash, but not many. The howls of outrage from the gold bugs are not very convincing. Most governments believe it is their right (and duty) to intervene secretly in foreign exchange markets, and gold is just a kind of foreign currency. Speculators in currency have to learn to outwit the central bankers, and they cannot expect much sympathy when they keep crying "Foul!"

The gold manipulation might well have started as a minor smoothing operation that got out of control. For central banks to lend out their gold reserves has seemed a promising way to earn modest revenues from an otherwise unrewarding asset. But the speculative institutions that borrowed it realised that, if they could drive down the bullion price, they could make useful profits from short sales.

The miners, meanwhile, decided they could protect their profits by selling forward for future delivery at roughly today's price - although now they are starting to realise that a long-term downtrend in the price cannot possibly be in their interests, quite apart from the dangers of an incompetently-run hedge book vulnerable to enormous margin calls if the gold price takes an unscheduled upturn.

That the US Treasury apparently has helped to mess up the gold market is perhaps not very surprising when it has plunged even its own domestic bond market into near-chaos. Last week, Larry Summers, the Treasury Secretary, effectively lowered long-term bond yields at the same time that the Fed was raising short-term rates. He did this by announcing he would focus buy-back activities on the 30-year bond.

This week, he tried to repair the damage by saying that intervention in bonds would be all along the yield curve rather than just at the long-dated end. But bond experts were not amused. Thursday's Treasury bond auction was a disaster.

Fixed-interest bonds and gold bullion represent two very different asset classes. One depends on faith in the long-term probity of politicians, the second offers a crude defence against their wars, taxes and inflations. Both markets have become huge speculative casinos, and neither seems to be under very good control.

-- Zdude (zdude777@hotmail.com), February 12, 2000

Answers

Here is GATA's Commentary on Barry Rileys article above

Subject: FT's Riley suggests gold manipulation is probable From: gatacom-

2p EST Saturday, February 12, 2000

Dear Friend of GATA and Gold:

Here is some great news.

Barry Riley, columnist for The Financial Times, today wrote at length about the manipulation of the price of gold and about GATA. While perhaps Riley is not as agitated about it all as members of GATA are -- we understand that this takes practice! -- he accepts the probability that the U.S. government has been intervening surreptitiously against gold, which is to accept GATA's premise. Thus maybe we can claim here our greatest recognition yet in the mainstream press.

Forgive my taking advantage in this preface to answer Riley's primary question to GATA:

"What GATA does not really explain, however, is why the U.S. Treasury would go to such lengths to distort the bullion price. A strong gold price might be an embarrassment; but in this world of rampant technological change and overwhelming American economic power, would it matter very much?"

Our answer:

The suppression of the gold price by the U.S. government and its collaborators among the great financial houses sustains the U.S. trade deficit, the export of U.S. inflation, and the U.S. equities markets, and since the financial houses leapt into the gold carry trade and now are vulnerable to its unwinding, ending the suppression of the gold price might threaten the solvency of institutions considered "too big to fail," just as the government considered the Long-Term Capital Management hedge fund "too big to fail" a year and a half ago.

The suppression of the gold price thus may have become a bailout in advance, the biggest in history.

Whether such a scheme is in the interest of the United States may be argued. GATA, whose officers consider themselves patriotic Americans and who are certainly not advocates of returning to a gold standard, maintains that their government's economy should not be based on dishonesty, secrecy, and private advantage. In any case the gold price suppression scheme comes at the cruel expense of one particular industry and one particular class of investors, who are entitled to fair play, and involves public policy that, as a matter of right in a democracy, should be PUBLIC, so that everyone can respond to it, not surreptitious, so that only a few connected people can exploit it.

GATA is thrilled by the thoughtful attention to this issue paid by Riley and The Financial Times. We'd be in heaven if they would join us in trying to obtain from the U.S. Treasury Department candid answers to the questions GATA posed in its advertisement in Roll Call on December 9, 1999 -- questions that the Treasury Department is still avoiding despite the request for answers, on GATA's behalf, from at least two U.S. senators and several U.S. representatives.

Those questions may be read at:

Riley and The Financial Times have our heartfelt thanks.

-- Zdude (zdude777@hotmail.com), February 12, 2000.