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In part oneof our two part series on Gold and Silver Manipulation, we covered a long list of suspected silver and gold manipulations. We covered the circumstantial evidence of gold manipulation on the Comex and LBMA markets, discussed the probing of the London Gold and Silver Fixing Companies, reported on the JP Morgan silver fixing case and CFTC and U.K. Financial Conduct Authority investigations.
All came up inconclusive with no clear manipulation found.
Those outcomes do not mean, however, that manipulation of the price of gold and silver does not take place.
Indeed, gold and silver price manipulation by governments and central banks is well documented and often necessary. Central economic planning is based on orchestrating outcomes. We have seen the insatiable desire of central banks to control/fix the price of money through the setting of interest rates.
Precisely because gold and silver have long histories as monetary metals – gold most recently as a backing to the U.S. dollar from 1944 until 1971 and silver as the basis for coinage in the western word until the mid 1960’s – central banks need to control the prices of both precious metals.
When gold and silver were legally recognized as money, central banks needed to fix or substantially control their prices. Today that need is even more necessary as gold and silver are seen, not as anchors to government currencies, but rather as competition. As such, central banks will go to great pains to control their prices and to explain that gold and silver are NOT money. If gold and silver were only used as industrial metals or for jewelry, central banks would have little interest in them.
Is Gold Money?
In this exchange with Congressman Ron Paul, former Federal Reserve Chairman Ben Bernanke denies gold is money but can’t give a clear reason that central banks hold it other than “tradition”:
Central banks realize that there is no intrinsic value in U.S. dollars or any other fiat government issued currencies. Gold and silver remain a threat as they have intrinsic value. In order for the dollar or any fiat currency to remain widely used and valued, the intrinsic values of gold and silver must be undermined.
This part two gives examples of how it has been done.
We will examine concrete examples of silver and gold manipulation by United States Presidents, the U.S. Congress, the U.S. Federal Reserve, the U.S. Treasury, central banks and private banks (sometimes solely or often in conjunction with each other).
In April 1933 with a stroke of the pen, FDR issued Executive Order 6102, requiring U.S. citizens to turn in their gold coins, gold bullion and gold certificates to the government. At the time gold coins were circulating in the United States and gold was considered money. The dollar’s value was tied to gold rate of $20.67 an ounce. Under Roosevelt’s order the government honored the $20.67 an ounce price in exchange for its citizens gold.
After issuing executive order 6102, Roosevelt began stockpiling gold from mining companies and from foreigners. In the month following the issuance of the EO6201 Roosevelt himself, in consultation with his future Secretary of the Treasury Henry Morgenthau, would set the gold price nudging it ever higher. An interesting account of how Roosevelt and Morgenthau fixed the price of gold can be found in “New Deal or Raw Deal” by Burton Folsom, Jr. In one instance, Morgenthau suggested a price rise of 19 to 22 cents per ounce. Roosevelt thought 21 cents was the appropriate amount for gold to rise because 21 “was a lucky number”.
In January 1934 Congress passed the Gold Reserve Act which, among other things, changed the nominal price of gold from $20.67 an ounce to $35 an ounce providing Roosevelt’s government with a tidy 69% gain on their confiscated gold and a loss of 41% in purchasing power of the dollars people received in exchange for their gold.
The fixed price of gold of $35 an ounce remained in place until 1971 when Nixon unilaterally took the United States off the gold standard and closed the gold window.
Silver Price Fixing By Lyndon Johnson
In 1965, the United States decided that its dimes, quarters and half dollars would no longer be minted of 90% pure silver. Going forward, these coins would be minted from base metals copper and nickel, but the U.S. would insist they were worth just as much as their silver counterparts.
Indeed, President Johnson explicitly warned Americans not to hoard the silver coins coupled with a threat the United States with the assistance of the U.S. Treasury would flood the market with silver to ensure the price of silver would not rise.
“If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.”
Until 1965, the United States used hundred of millions of ounces of silver to mint coins for everyday use.
President Richard Nixon’s Unilateral Removal of the United States from the Gold Standard
In August of 1971 Richard Nixon announced that the United States would no longer allow foreign central banks to redeem their U.S. dollars for gold in accordance with the Bretton Woods Agreements of 1944. Nixon was reacting to a run on gold at the U.S. Treasury. In the 1960’s as it became apparent to many countries that the United States was spending far in excess of its gold reserves (deficit spending on the Vietnam War, Lyndon Johnson’s Great Society, the space race and the Cold War). Many countries, notably France and Switzerland became increasingly concerned and upped their gold redemption requests. These increased requests were rapidly depleting the United States’ gold reserves.
Nixon coupled his closing of the gold window announcement with an order instituting wage and price controls (another form of price fixing).
Post Bretton Woods, the dollar was no longer tied to gold and its artificial price of $35 an ounce set back in 1934. Some believed that if gold was no longer part of the global monetary system, the demand and price for gold would plunge. Adding credibility to that theory was the remaining fact that U.S. citizens in 1971 were still not legally able to ‘hoard” gold. Gold it was argued, would be relegated to trinkets, dentistry and jewelry. The restriction on U.S. citizens’ gold ownership wasn’t removed by the U.S. Congress until the end of 1974.
Richard Nixon’s act was monumental because it purported to substitute the value of a dollar backed by gold with a dollar backed by nothing. Nixon’s tearing up of the Bretton Woods Agreements attempted to revalue the dollar higher and devalue gold. The mental trick was to accept that dollars, not gold was what people wanted and needed.
That mental trick in and of itself probably would not have worked and Nixon and Secretary of State Henry Kissenger soon established agreements with Saudi Arabia and other OPEC Nations to price their oil in U.S. dollars and accept only U.S. dollars as payment for their oil. These agreements, dubbed the Petro Dollar agreements, created a continued international demand for U.S. dollar. Under the Bretton Woods Agreements, the dollar was trusted because it was backed by gold. Post Bretton Woods, the dollar wasn’t necessarily trusted, but required, in order to buy oil and to conduct international trade.
For more on the Bretton Woods Agreements that established the international gold standard from 1944-1971 click here. For more on the Petro Dollar Arrangements click here.
Here is how the gold market reacted to Nixon’s 1971 announcement.
The closing of the gold window drove gold prices higher
Gold Manipulation By Central Banks
Gold Leasing by Central Banks
In part one of “Gold and Silver Manipulation – Suspected” we noted that Doctor Paul Craig Roberts suspected that some of the delivery of physical gold on the LBMA is done via “borrowing” other clients’ gold held by the Fed, the bullion banks and/or looting the gold trusts such as the ETF GLD for which HSBC acts as custodian.
The allegation that the Federal Reserve would be involved in a scheme whereby it would lease or sell gold that it held in custody for others in order to suppress the price, or would work with JPMorgan with whom the Fed has an adjacent vault in New York to lease or sell gold that HSBC holds in custody for the ETF GLD would appear to be a conspiracy theory suitable for the supermarket tabloids.
The Federal Reserve, after all, has a dual mandate in conducting monetary policy-maximum employment and stable prices. Manipulating the gold market seems to be far removed from achieving these objectives.
Indeed, in 1966, Alan Greenspan, prior to becoming the Chairman of the Federal Reserve, had this to sayregarding sound fiscal policies and gold: “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.”
Fast forward to July 24, 1998 when Alan Greenspan Chairman of the Federal Reserve actually admitted in sworn testimony that central banks can and will manipulate the gold market, if necessary.
“Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”
This was not an admission that the Fed itself would engage in any such gold leasing, but rather a statement of fact that other central banks certainly would if required and it’s not a stretch to imagine the Fed participating.
The Federal Reserve, however, does not own gold – they hold certificates for the gold they once owned that they turned over to the U.S. Treasury as required under The Gold Reserve Act of 1934. For the Fed to participate in gold leasing they would need to use the gold that the Federal Reserve Bank of New York holds as custodian for the U.S. government (only approximately 5% of the United States gold is held at the NY Fed), foreign governments, other central banks, and/or official international organizations.
The German government is one such entity that supposedly holds gold on deposit at the NY Fed. Germany’s failed repatriation request as covered in part one of this series raises the question whether the Fed did indeed lease or sell Germany’s gold.
In his 1998 Congressional testimony, Mr. Greenspan admitted two things – the Fed and other central banks have an interest in lower gold prices and they are in a position to do something about it, or at least they could try.
The price of gold in July 1998 was about $295 an ounce and practically no one was paying attention to it. The price of gold, however, rose from that price to a high of over $1900 an ounce in 2011 to over $1100 an ounce today.
Manipulation or not, gold has risen dramatically the past sixteen years.
Central Bank Coordination of the Price of Gold
Other examples of central bank coordination of the price of gold:
The London Gold Pool The London Gold Pool was established in 1961 by eight central banks who agreed that they would pool their gold reserves and coordinate efforts in order to maintain the absurdly low gold price of $35 an ounce as contemplated by the Bretton Woods Agreements of 1944. The scheme eventually proved unworkable and collapsed in 1968. For more on the London Gold Pool, click here.
Bank of England Sells 400 tons of its Gold From 1999-2002 at the Bottom the Market. In a seemingly odd and boneheaded move, future U.K. Prime Minister and then U.K. Chancellor of the Exchequer, Gordon Brown, sold most all of England’s gold at prices between $250-$300 an ounce. For more on “Brown’s Bottom” and the theories why this was done, click here.
•Gold remains an important element of global monetary reserves;
•The signatories will continue to coordinate their gold transactions so as to avoid market disturbances;
•The signatories note that, currently, they do not have any plans to sell significant amounts of gold;and
•This agreement, which applies as of 27 September 2014, following the expiry of the current agreement, will be reviewed after five years.
Silver and Gold Price Fixing By Acts of Congress
We saw how Congress passed the 1934 Gold Reserve Act which changed the nominal price of gold from $20.67 an ounce to $35 an ounce.
Congress also acted in 1918 to effect the price of silver.
The Pittman Act of 1918
In 1918 Congress ordered the destruction of over 270 million silver dollars to support the price of silver.
The Pittman Act of 1918, provided that 270,232,722 Morgan Silver Dollars would be rendered into bullion as “An act to conserve the gold supply of the United States; to permit the settlement in silver of trade balances adverse to the United States; to provide silver for subsidiary coinage and for commercial use; to assist foreign governments at war with the enemies of the United States; and for the above purposes to stabilize the price and encourage the production of silver.”
The primary purpose of the Pittman Act was to help Great Britain whose money, the pound sterling was backed by silver. England was facing a silver shortage for minting rupee coins in its colony, India and had serious war debts from the Great War (World War I). The Act provided for the sale of about 260 million ounces of silver to Great Britain at $1 an ounce. The Pittman Act helped Great Britain avoid a collapse of India’s and possibly Britain’s economy.
Destroying 270 million silver dollars and selling the recast silver bullion to England helped a U.S. ally, and it also boosted the price of silver by supporting the U.S. mining industry by providing that the 270 million silver dollars destroyed would be reminted using silver from U.S. mines to be purchased at $1 an ounce.
Under the Pittman Act between 1920 and 1933, silver required to mint another 270 million Morgan Silver Dollars and Peace Silver Dollars was purchased from U.S. mines at a fixed price of $1 per ounce.
The fixed price of $1 per ounce was above the market rate of $.86 an ounce, or 16.3% higher.
The Pittman Act was named after its sponsor, Key Pittman a Senator from the State of Nevada which at the time had a large number of silver mines.
Manipulation By The U.S. Treasury
The Exchange Stabilization Fund Was Established by the Gold Reserve Act of 1934
The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and to counter disorderly conditions in the foreign exchange market. Getting Congress to agree or act quickly then and now was often difficult so the ESF was set up to give the Treasury to the power to manipulate markets, subject to the President’s approval.
The United States Treasury is authorized to use The Exchange Stabilization Fund (ESF) to manipulate whatever market it deems necessary in the interest or the nation.
The Gold Reserve Act authorizes the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.
The Gold Reserve Act of 1934 initially funded the ESF with resources resulting from the devaluation of the dollar, in terms of gold when Congress voted to raise the price of gold from $20.67 an ounce to $35 an ounce.
The Treasury and the Fed have never publically admitted to interfering in the gold markets, although it would seem reasonable since authorization exists, should the need arise, they would.
James Turk of Gold Money, however, uncovered evidence from a Federal Open Market Committee transcript from 1995 regarding using the ESF to intervene in the gold market. Mr. Turk wrote in 2001:
“A transcript of the Federal Reserve Open Market Committee has been released for which somebody forgot to get his or her red pen out. Someone forgot to redact some very revealing words about the ESF and its activity with gold. Here’s what was said.
<http://www.federalreserve.gov/fomc/Transcripts/transcripts_199 5.htm> [See the transcript from the January 31 st 1995 meeting.] (This link now leads to a “Page Not Found” page on the Fed’s web site – Smaulgld edit)
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. [Emphasis added]
Please read the above statement again, and maybe even a third and fourth time. This statement, which I can only assume was inadvertently not redacted by the FOMC Secretariat, confirms what we already know, but the US government has all along refused to admit that the ESF is involved in the gold market. In fact, the authority of the ESF is so broad that “it has covered things like the gold swaps”. In other words, the authority of the ESF is so broad it has even been used to authorize “gold swaps”.”
The Plunge Protection Team
After the stock market crash of 1987, President Reagan signed an executive order establishing the President’s Working Group on Financial Markets. The task of this group, also known as the Plunge Protection Team (PPT) is to enhance “the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintain investor confidence.”
The “Working Group” of the PPT is comprised of Secretary of the Treasury,the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Securities and Exchange Commission and the Chairman of the Commodity Futures Trading Commission. The Working Group has broad discretion to intervene in markets and “shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.”
Private sector solutions could mean using private banks or companies to buy or sell any security or financial instrument necessary to achieve the Working Group’s objectives.
Manipulation Using Gold Held By ETFS
Gold ETF GLD Suspected of Being Used to Lease Gold
Exchange Traded Gold funds provide a convenient way for investors to gain exposure to the price of gold. They have the advantage of being traded on stock exchanges so that investors can buy “gold” without having to take delivery, insure and store it. Selling can be done with a mouse click.
These advantages also work to the ETF’s custodians who store the gold on behalf of the ETF share holders. ETF shareholders generally can not (and usually do not want to) take delivery of the gold that represents their portion of their ETF holdings unless certain conditions are met – usually requiring a large number of shares to be held in the ETF. Since the vast majority of investors can not demand delivery of the gold their shares in the ETF supposedly represent, the potential for undetected leasing of the ETF’s gold exists.
Gold and silver ETFs put physical gold under the control of the banks where they can theoretically lease or sell it.
The largest Gold ETF in the world is SPDR Gold Trust GLD. HSBC acts as custodian for the gold held by GLD.
JPMorgan is the custodian of the largest silver ETF – the iShares Silver Trust SLV.
Paul Craig Roberts and others have suspected that the world’s largest gold EFT, GLD has been used as a source to satisfy the physical delivery requirements of the bullion banks. They suggest that GLD was raided for physical bullion often in 2013 based on the massive outflows that occurred in 2013 when the price dropped that also corresponded to massive physical buying.
Jim Rickards notes that the outflows of physical gold from GLD (which he suspects went to China) have put a strain on the supply of deliverable gold.
It’s possible there are multiple counterparty claims on the same bullion held in gold and silver ETFs, but this is, of course speculation.
Indian Gold ETF run by Goldman Sachs Changes Rules to Allow it to Lease its Gold
Goldman Sachs, who runs India’s largest physical gold ETF, GS Gold BeES, has re written the rules that apply to it. The new rules explicitly allow it to lease out the gold deposits that back shares owned by the ETF’s shareholders.
Goldman Sachs Asset Management explained in a note to shareholders: “A situation could arise where the issuer is unable to return the principal physical gold to GS Gold BeES upon maturity or in case of an early redemption. Such inability to return physical gold could arise on account of liquidity problems or general financial health of the issuer”
The new rules mean Goldman Sachs can lease the gold in GS Gold BeES as it sees fit and investors in the ETF no longer have a claim on Gold, just shares that supposedly represent a claim on gold subject to Goldman’s Sach’s leasing arrangements and the risks posed thereby.
Precious Metals Price Fixing & Shenanigans By Private Banks
Barclay’s Fixes the Price of Gold
On the day after Barclay’s, one of LBMA banks was fined for manipulating LIBOR, one of its traders fixed the price of gold.
Barclay’s is a member of the London Gold Fixing Company, a group of six banks that meets twice a day to fix the gold price. This price fixing process, critics say, is easily subject to abuse as the bullion banks setting the price gain inside information on the price of gold that, as we noted in part one, could give their traders an unfair advantage.
Barclay’s trader, Daniel Plunkett apparently took advantage of the inside information gained through his bank’s participation in the London Gold Fix.
Daniel Plunkett settled with the U.K.’s Financial Conduct Authority for a £95,600 fine and an industry ban.
If a trader could achieve this type of gold manipulation, it’s conceivable it wasn’t the only time.
Morgan Stanley “Sells” Precious Metals to Customers, Charges Storage Fees But Has No Precious Metals When Customers Request Delivery
In a law suit filed in 2005, Morgan Stanley was accused of selling clients precious metals that they would own in full and that Morgan Stanley would store for them.
The complaint alleged that Morgan Stanley either “made no investment in precious metals on behalf of its customers or it made entirely different investments of lesser value and security”.
Morgan Stanley argued there were no violations of law and no default or failure to perform or deliver precious metals and stated. “While we deny the allegations, we settled the case to avoid the cost and distraction of continued litigation.”
Morgan Stanley argued there was no failure to perform even though no precious metals were delivered to customers requesting them.
Negative Research Reports on Gold From the Bullion Banks
Words can also manipulate the price of precious metals. The price of gold is also subject to the impact of research reports from the bullion banks who themselves participate in the gold market and fix its price.
Bank of America, Goldman Sachs and Societe General have set low 2014 gold price targets.
In 12 Ways Silver is Different than Gold we noted that silver does not conjure up the same visceral ill feelings among some that does gold, so silver bashing is not a popular media sport.
Gold Bashing by Berkshire Hathaway’s Warren Buffett and Charlie Munger
Warren Buffett and Charlie Munger of the stock investment fund Berkshire Hathaway have never liked gold and often provide the anti gold crowd with memorable quotes for endless republication re the yellow metal:
Charlie Munger has this to say re gold: “I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk.” and this: “Gold is a great thing to sow in to your garments if you’re a Jewish family in Vienna in 1939.”
“Gold gets dug out of the ground in Africa, or some place,” said Buffett in 1998. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head”
“If you take the gold you own, melt it down into a cube, and check back years later, he observes that the cube “…will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond”
Mr. Buffett is confusing the definition between an asset and an investment. Gold is not an investment, it is an asset. An investment, in contrast has the potential to grow (or shrink) and pay income in the form of dividends based on whether the owner/managers of the company can create value. Assets like gold are non income producing passive lumps with intrinsic value while investments are active vehicles that require skillful management. The reasons to hold stocks are distinctly different that the reasons to hold gold.
Manipulation of the gold and silver markets happens because central banks deem it necessary and their shareholder banks find it profitable. Manipulation works best when central banks and the private bullion banks have access to physical metals to sell or lease. Absent that, they must resort to naked short selling.
Manipulation of precious metals will end only when the banks do not have enough gold or silver to meet physical delivery requirements. At that point perhaps the gold and silver markets will be driven by actual supply and demand dynamics.
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Special thanks to Nick Laird of Sharelynx, “The Gold Standard In Precious Metals Charts”, who provided the silver and gold data and charts for this series.
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