NEW YORK (
manipulation is the most controversial theory that has circulated among gold bugs for 20 years.
Conspiracy theorists think that gold prices have been illegally suppressed over the last two decades by central banks and governments. GATA or Gold Anti-Trust Action Committee is the biggest complainant.
Central banks reportedly have 32,000 tons of gold, with the International Monetary Fund accounting for 2,800 tons. Under the Washington Agreement on Gold, its members can only sell a maximum of 400 tons a year thereby restricting the amount of gold in the open market place.
GATA argues that central banks in actuality have less than 15,000 tons of gold and that the missing gold has been secretly sold into the market preventing gold prices from rising to their actual price, which helps the country's paper currency, bonds and interest rates. The suppression theory means that global economies are in worse financial shape than investors think and that gold should be bought as the ultimate safe haven.
The New York Post
recently reported that the
trading in the silver market to determine if the investment bank depressed the silver price for their advantage. There are also rumors circulating that a major New York law firm will launch a similar lawsuit against the investment bank.
I interviewed Chris Powell, secretary and treasurer of GATA to get the facts of this alleged manipulation.
Can you explain the basics of silver/gold manipulation
Powell : Gold, and to a lesser extent, silver are currencies. Governments have intervened in the gold market in the open throughout history. Our complaint is that more often now they're doing it surreptitiously as a mechanism of supporting their currencies, supporting government bonds and suppressing interest rates.
So can you break it down, how the government is doing it on the sly as you said
Powell: Yes, the manipulation of the gold market now is achieved through two mechanisms mainly. One is the outright sale or leasing of central bank gold reserves to add gold to the market. The other is the sale of futures and options, gold derivatives by the big investment banks that have special relationships with the central banks, particularly with the Federal Reserve. These are essentially naked short positions in the gold and silver markets.
We believe they are pretty much backed up by the central banks, which will, at least in the gold market, provide whatever gold is necessary when somebody actually wants to remove gold from the system to really liquidate a position. The problem is the gold supply has been inflated in the futures market so there's so much more gold paper out there than there really is gold.
For someone who has no idea what this means, how do the central banks lease to the bullion banks?
Powell: It basically began as a carry trade. It was in the interest of most central banks and the investment banks. The central banks would lend gold at a very low interest rate, perhaps 1% to an investment bank. The investment bank in turn would sell the gold for cash and use the cash to fund its operations.
And this worked very well for the investment houses as long as they had some confidence that the gold price would not rise and destroy the carry trades. Central banks liked it because it kept the price of gold, the competitive currency down. It kept interest rates down. It supported the government bonds and the government currencies. Now this carry trade is breaking up a bit. We think because central banks are running out of gold that they can distort.
So that doesn't seem so bad. You lease gold, it goes into the markets. So what's the problem
Powell: Well the problem is it's surreptitious. It's a matter of deceiving the gold market and more importantly, the currency and government bond markets as to what the government is doing. It also gives inside information to the investment houses that are working the trades that the government wants done. It's a grand deceit. If it was done in the open, people would understand what the government policy was. But open policy would not have the effect of deceiving the markets. If you remove the deceit from the gold pricing scheme, the scheme is of very little use.
How long do the investment banks get to lease the gold for, from central banks
Powell: The leases may be written in limited periods of a year or two years or three years. We believe that most of the central bank gold sales, or supposed gold sales in recent years, were not really gold sales at all. They were cash settlement of lease gold that could not be recovered and returned to the central bank without causing a huge spike in gold prices.
Break it down how much gold central banks say they have versus how much you think they really do have
Powell: Well, the official records suggest that western central banks have something more than 30,000 tons. However, their accounting is very nebulous and it allows them to count leased gold as if it is still in the vault. Some of our consultants have done some work to suggest that central banks probably have in the vault less than half of the gold that they claim to have.
Gold has still more than tripled in the last 20 years as you guys have been bringing this to the forefront, so how do you explain that
Powell: It's what we call a controlled retreat. The central banks I think realized that they cannot keep the gold price down below the cost of production without drying up mine production and putting even more strain on their reserves, so I think they are managing a retreat with the gold price so that the markets don't get spooked. People don't notice what's going on, so the currency values are maintained.
You do see this language turn up in central banker comments occasionally. They want orderly changes in the markets. They don't want any sudden explosions or collapses but they try to manage the markets so that things go up slowly or go down slowly. I think that's basically what's going on with gold here.
How high should gold then be right now
Powell: That's a wonderful question. I myself think that we don't have any clue what the market value of gold is because the gold price has been suppressed so long. We've probably not, in anyone's lifetime, had a free market in gold. And central bank interventions in the markets now are so pervasive that I don't think we really know what the free market price of anything is.
Couple thousand? Can you give me some kind of range: $3,000 to $6,000
Powell: You know, analysts today often note that gold has not kept pace with inflation over the last 20 years. There's a reason for that. Central bank has suppressed the price disproportionally. The whole depression scheme has done that. Some people estimate that if gold kept pace with inflation over the last 20-30 years, it would be in the 2-3-4 thousand dollar range. I suspect if the central banks were ever out of the market entirely, the gold price very well might be multiples of that, if gold came to reflect the old ratio between metal and the amount of currency floating around the world.
This is the most contentious debate in the precious metals world. Both sides get very angry with the other side. So what's your end goal? And who are you funded by
Powell: Our goal really is a free market in gold and precious metals and really by extension, free markets in all financial instruments because the gold price rigging is a matter of rigging the currency, bonds and commodity markets generally.
We are funded by all sorts of people. We're funded by individual investors. We have some mining industries support, mostly smaller exploration companies. I think there's only one real company, mining company in production that has supported us. We're supported by some investment houses. Sprout Asset Management in Toronto has been very supportive of us over the years and we're supported by people who just have ideological interests in a free gold market. Somebody credit carded us $5 from London the other day.
Did you find that companies that buy and sell gold support you
Powell: I wouldn't say gold retailers so much, but to some extent yes, there are some gold dealers who have supported us. It's not like large contributions, but we might get a $500 contribution every once in a while from a coin and bullion dealer and we're grateful for that.
Do you recommend retail investors to buy gold then
Powell: Well, you know, Gada is not an investment advisor but I do know that everybody who's involved with our organization has certainly heavily invested in the precious metals and we are talking about gold.
So why is this debate so contentious
Powell: Well, two reasons perhaps ...There's a lot of people on the gold side who believe fervently in certain ideologies. I think some of them believe that there shouldn't be any money in gold and silver. There are very strong ideological disagreements between people who think gold is a good currency and people who think the government ought to be in charge of currency. We have plenty of paper currency.
I think maybe the other part of it is you've got two competing livelihoods here. If the gold side prevails, that's going to be very bad for the livelihood of certain people in the financial industry. And by the same token, the success of certain people in the financial industry, certain institutions, has been very bad for people who mine gold or precious metals or commodities. But this is the ancient struggle between the producing interests and the financial interests in the world and particularly in the U.S.
Written by Alix Steel in New York
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.