Fact: For the two weeks ended April 6, noncommercial short interest in gold totaled 88,363 contracts, according to the Commodity Futures Trading Commission in Chicago. That was the largest short position in history (and just a fraction of total worldwide short interest). Short interest has declined in subsequent weeks but still remains at extremely high levels, equal to about 10% of total production last year.

The Gold Conspiracy
Gold Bugs Light Up as They Forecast a Short Squeeze
Fact: Michel Camdessus, managing director of the International Monetary Fund, has extolled the virtue of using gold-sale proceeds to pay for debt relief for "heavily indebted poor countries," in the IMF parlance. President Clinton has expressed support for the sale of up to 10 million ounces of the approximately 103 million ounces of gold committed to the fund. To varying degrees, the notion has been seconded by financial and political luminaries such as Vice President Al Gore, Treasury Secretary Robert Rubin, U.K. Chancellor of the Exchequer Gordon Brown and Switzerland National Bank President Hans Meyer. Even German Finance Minister Hans Eicherl says Germany has "relaxed" its once-staunch anti-gold-sale stance.

Fact: Last month, Switzerland voted to begin decoupling the Swiss franc from its gold backing. The Swiss central bank could begin selling gold as early as next year, The New York Times reported.

Fact: The Gold Antitrust Action Committee, known as GATA, has retained securities law specialist Berger & Montague to assist in the "investigation of the alleged manipulation of the gold market," according to a press release from the organization. Bill Murphy, chairman of GATA, believes so-called bullion banks, which include many of Wall Street's biggest firms, have violated the Sherman Antitrust Act by colluding to keep the price of gold down. A senior partner at Berger & Montague confirms the firm has been retained by GATA but says "no decision to file a case has been made at this time." He declined to comment further.

Fact: Last Tuesday, Murphy met with Rep. Jim Saxton (R., N.J.), vice chairman of the Joint Economic Committee. Congress must approve the proposed IMF gold sale, and Saxton has "taken a strong position of skepticism on the gold-sale issue," according to Christopher Frenze, chief economist to the committee vice chairman. Neither Saxton nor the committee has any position or comment on the allegations made by GATA, Frenze says. "Our focus is directed more at the IMF as an institution and how gold sales would relate to IMF finances and lending." (Those interested in more about Saxton's position should visit www.house.gov/jec.)

Fact: Most market players deny there is any cabal corrupting the gold market. And despite Murphy's 25 years as a precious-metals trader, broker and analyst with firms such as the defunct Drexel Burnham Lambert, the former Shearson Lehman and Veneroso Associates, many believe his charge is, to be polite, meritless.

An English Surprise Knocks Prices

"I do not think his views hold much water," says Philip Klapwijk, managing director at Gold Fields Mineral Services in London. "The U.S. Treasury and Fed are happier with gold at a certain level, but it's equally wrong to suggest they are in favor of excessively low gold, which sends a deflationary signal. It's a big leap to say there is intervention or a systematic campaign."

Indeed, without Oliver Stone, it is a huge (and ultimately unprovable) leap to say IMF gold-sale proposals are part of some vast, multiwinged conspiracy involving the top levels of government and so-called bullion banks (among others).

Yet today, the price of gold tumbled $7.60 an ounce to $283.10 after the Bank of England, much to the gold community's surprise, announced its plans to sell up to 125 tons, or almost 60% of its reserves, between now and March 2000. Before the announcement, gold had crept up to the high end of its several-monthlong trading range of $275 to $290 an ounce.

Already unmoved by the critics, the Bank of England's announcement today stiffened Murphy's resolve.

"This is right on cue," he says. "Yesterday, the bonds got clobbered and the gold market was surging and getting close to the point where gold borrowings could go under water. Then out of nowhere, right on cue, the BOE comes out. It's unbelievable."

And other gold market participants are becoming increasingly outspoken about the action (or lack thereof) in the once-precious metal.

Barrick Gold ( ABX) Chairman Peter Munk railed against central banks and the IMF for generating "enormous negativism" in the market at the company's annual meeting Tuesday. Munk also criticized hedge funds and other speculators for using rumors and the opaqueness of the gold market to exaggerate weakness in gold prices.

Previously, Nicky Oppenheimer and Bobby Godsell, chairman and CEO, respectively, of AngloGold ( AU) of South Africa, and Chris Thompson, chairman of Gold Fields ( GLDFY) of South Africa, made separate but similar comments.

Murphy cites these public comments as evidence "the tide is turning about what we're talking about." (More on Murphy and GATA can be found at www.lemetropolecafe.com.)

Ghosts of Greenwich

What Murphy is talking about has its origins (where else?) in Long Term Capital Management.

Murphy, among others, speculates Long Term Capital had a large short position in gold -- he estimates 300 tons. "They borrowed gold from bullion dealers at 1% as part of the leverage process," he says, then proceeded to engage in a "gold carry trade" through which the infamous fund shorted gold while simultaneously taking a long position on U.S. Treasuries.

However, Murphy has no proof such a trade exists (or ever existed), and Peter Rosenthal of Rubenstein Associates, the hedge fund's public relations firm, says, "Long Term never has and doesn't participate in the gold market, either in the metal itself or any derivative."

Still, Murphy is not alone.

"It has been our observation that Long Term Capital was involved in virtually every carry trade that was out there -- yen carry trade, interest-rate convergence, etc.," says Ronny Kraft, CEO of Gotham Capital Management in New York, who is long various gold stocks. "What makes it interesting is that the gold trade is the only one with a physical commodity as the underlying, which would make it the most difficult to cover."

Kraft, Murphy and others believe that when Federal Reserve officials brokered together a consortium to rescue Long Term Capital last August, they were aghast at the extent of the firm's gold short (among other trades). Moreover, if Long Term's Wall Street clients were mimicking the once-legendary hedge fund's strategies, as some contend, many of the same firms given the task of saving the hedge fund (and thus, "the system") were also short gold. Thus, a rise in the metal would not only add to the misery at Long Term Capital, but many of the same institutions responsible for its rescue.

Richard Torrenzano, spokesman for the consortium, says this is "not a consortium issue" and defers to Long Term Capital.

Greenspan's Golden Jawbone?

Meanwhile, Murphy believes the gold jig was up before that meeting in August at the Federal Reserve Bank of New York (which merely supplied a facility).

"Central banks stand ready to lease gold in increasing quantities should the price rise," Fed Chairman Alan Greenspan said July 24 during testimony before the House Banking Committee regarding regulation of over-the-counter derivatives.

"It was a comment not many people paid attention to," Murphy says. "Only in retrospect are people starting focus on that. We know Long Term Capital didn't happen overnight. Because the Central Bank of Italy and Fed officials were invested in Long Term Capital, it's hard to believe he just happened to come out with this comment."

Fed officials deferred calls regarding gold sales to the IMF. IMF officials declined to comment on the GATA.

A Treasury spokesman referred to the Treasury Web site for the department's position regarding gold sales, particularly Deputy Secretary Lawrence Summers' April 21 House testimony. The spokesman declined to comment on the GATA.

Looking back, Murphy and his supporters say Greenspan's largely overlooked comment was the first of a series from global banking and political officials designed to keep the price of gold suppressed.

"All of a sudden, you saw the market was stopped dead as it would get anywhere near $300 an ounce," Murphy recalls. "Bullion dealers were offering unheard-of credit terms to producers to sell forward gold."

Because bullion banks are gold producers' main creditors, Murphy declined to reveal the names of producers he claims have come forward to discuss potential gold price manipulation. The relationship between the banks and producers is why many view the comments from Barrick, Gold Fields and AngloGold as being so extraordinary.

Murphy Not a Lone Wolf

While not espousing the same conclusion, Donald Coxe, chairman of Harris Investment Management of Chicago and chairman of Jones Heward Investments, also questions recent trends in gold.

"The same political leaders who got the West into a war that promises to be costly, messy and long -- after promising us it would be cheap, civilized and short -- have announced that the IMF should sell bullion from its gold hoard to pay off debts from bankrupt nations," Coxe wrote in a May 1 op-ed piece in The Globe and Mail. "This strategy is being pushed piously, with the backing of the Pope. It may also be motivated cynically, with the backing of a shrewd ex-trader, U.S. Treasury Secretary Robert Rubin. Announcements of monster pending sales naturally drive down prices of the merchandise that will soon be dumped."

Keeping the price of gold weak is "politically smart," Coxe added. "It will help convince economists and central bankers that disinflation or even deflation is still at work, despite rapid money-supply growth and some of the lowest interest rates the world has seen."

Finally, one Nasdaq dealer who specializes in precious-metals stocks recalls that when "every credit market in the world was traumatized" last fall by Russia's debt default, gold remained "incredibly placid."

The trader, who supports Murphy's efforts but requested anonymity, acknowledges "no one knows for a fact if Long Term Capital was a borrower. But it'd be surprising if they hadn't considered the gold market."

As for the "outrageousness" of Murphy's claim, the source notes John Meriwether, founder of Long Term Capital, was "forced out of Salomon Brothers because his subordinates were caught rigging the U.S. bond market auctions." Furthermore, one rogue trader at Sumitomo "clearly distorted" the copper market a few years prior, he observes. "Is it so outrageous? I don't know of any hypothesis more plausible. The market is behaving in a strange way."