manipulation in the gold market?

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    7:53p ET Sunday, October 5, 2003

    Dear Friend of GATA and Gold:

    GATA consultant James Turk, proprietor of GoldMoney
    and editor of The Freemarket Gold & Money Report, has
    written a detailed description of how the U.S. government
    ran the stops in the gold market on Friday and how it
    intervenes in the gold market generally. Turk also has
    discovered new discrepancies in the gold accounting by
    the U.S. Federal Reserve and Treasury Department that
    constitute evidence of that manipulation.

    Turk has put this information in the issue of his
    newsletter that will be distributed tomorrow and but
    has generously allowed GATA to distribute it tonight.
    We do so in the hope that it will prevent gold investors
    and investors generally from being scammed again,
    and we share Turk's confidence that the government
    interventions against gold are becoming so brazen
    and frequent that even mainstream financial observers
    will start to notice.

    Remember the remark of Allianz Dresdner's Frank
    Veneroso to CBSMarketWatch Editor Thom Calandra
    last week: The manipulation of the gold market is now
    acknowledged in many European financial circles and
    understood as another form of currency intervention.
    GATA aims to make it acknowledged and understood
    around the world -- even in the United States itself.

    Note most of all Turk's admonition that the manipulation
    of the gold price by the U.S. government is cause to buy
    gold, not to sell it. It signifies that gold always has
    been and remains the supreme money and store of wealth
    and value and that it is far scarcer than those who are
    frantically debasing government currencies want the world
    to know. Otherwise there wouldn't be such efforts to
    suppress gold's price.

    Get it while you can and cling to it.

    GATA urges its friends to post links to this article at
    gold and financial bulletin boards around the Internet
    and to send it to news organizations.

    CHRIS POWELL, Secretary/Treasurer
    Gold Anti-Trust Action Committee Inc.

    * * *

    How Governments Manipulate the Gold Market ­ A Primer

    By James Turk
    Copyright 2003 by The Freemarket Gold & Money Report
    Letter No. 332, October 6, 2003
    Reprinted by permission

    After gold trading closed in New York on Friday $13.70 lower
    from the previous day, a Reuters article gave the following
    reason for gold's rout:

    "Gold tumbled 3.5 percent in New York on Friday as the first
    rise in U.S. payrolls in eight months lifted anxiety about
    economic growth and undermined the safe-haven case for
    bullion days after it had hit seven-year highs."

    Their point of view sounds plausible, I suppose, though I
    think the recent "seven-year highs" in gold are far more telling
    about gold's prospects than any one month's economic data.
    But regardless of whether Reuters' conclusion makes
    economic sense, the payrolls data was released at 8.30 a.m.
    and gold's selloff didn't start until 12.10 p.m, almost fours
    hours later.

    So did we see a delayed knee-jerk reaction to the data?

    Or was some other factor at work?

    In my view, it was clearly the latter. It is becoming a well-known
    "secret" that governments are trying to manage the gold price
    by intervening in the gold market, and Friday's trading was a
    good example of their fiddling with the free-market process.

    Here are some pointers for everyone interested in learning how
    governments intervene in the gold market.

    1) Work with a proxy. The U.S. Exchange Stabilization Fund is
    the ringleader of the government manipulation efforts, but it
    never enters the market directly itself, regardless whether it is
    intervening in the currency or the gold market. It works with
    proxies in order to cover its tracks. The secretive ESF places
    its orders to intervene with the Federal Reserve Bank of New
    York, which carries out all intervention for the U.S. government
    as well as all orders from foreign central banks placed for
    execution during U.S. market hours.

    When asked about its activity, the New York Fed never
    discloses for whom it is acting, claiming that its account
    agreements bind it to respect the confidentiality of its
    customers. But this approach is still not enough to hide the
    tracks of the ESF and the various governments who intervene
    to distort normal market forces.

    They want more cover, so the New York Fed places these
    government-instigated trading orders with the big New York
    banks. Because these banks have such huge trading volume,
    the logic is that government-instigated trading will be hidden
    amid the huge order flow handled by these banks.

    This line of attack to hide the government's trades works,
    except when the government's orders are so huge and
    one-sided that they overwhelm normal market forces. So it
    stands to reason that the repetitive and continuing entry by
    banks like Morgan Chase and Morgan Stanley on the sell
    side of the gold market at particularly critical market
    junctures and at unusual times smacks of government

    This unholy alliance, also known to some as the
    Washington/Wall Street axis, demonstrates that these two
    forces are in bed with each other to serve their mutual
    benefit. The banks that act as government agents aim to
    make money any way they can, even if it means taking
    despicable steps that are unfair and harmful to those
    unaware when the government intervenes.

    For its part, the government aims to distort markets from
    operating normally.

    Why does the government do this?

    Because market prices communicate information, and
    sometimes that information runs counter to what governments
    would like us to hear and believe.

    So governments intervene in a market by preventing it from
    alerting us of the market message governments don't want us
    to hear.

    For example, we all know that the message of a rising gold price
    means that the dollar is headed for rough times, which is useful
    and important knowledge. But the government is more concerned
    about protecting its own interests and those of the banks that
    help it manipulate markets, rather than letting us receive a useful
    market message to help protect our wealth.

    2) Wait until after the London market closes, which, because of
    the time change, is noon in New York. The London market is
    basically a market for physical gold, while New York trades paper,
    which represents only promises to pay gold. There's a big
    difference between these two markets.

    It is easy to manipulate paper because all a government has to
    do is to create these paper promises out of thin air, as
    government does all the time when it intervenes in the foreign
    exchange markets. But governments cannot create physical
    gold out of thin air.

    So they tend to stay away from the London market, and put
    physical gold into their market interventions only sparingly
    because once they are out of physical (or unwilling to use
    what they have left, which was the case with President Nixon
    in 1971), their intervention game is over.

    On Friday gold closed in London at $382.75, $13.35 above the
    New York close only 90 minutes later. So, clearly, the
    government through its compliant bank agents bombed only
    the paper market.

    3) Intervene on a Friday afternoon in order to have the maximum
    impact from your intervention. After noon New York time, not
    only is London closed but the rest of the world is closed as well.
    This afternoon period in New York represents the moment when
    the least amount of liquidity is in the market. So if government
    interveners want "more bang for their buck," they can get it when
    the rest of the world is asleep or already enjoying the weekend.

    The limited liquidity that is the dominant characteristic of the
    New York market on Friday afternoon makes it easier for the
    interveners to get bigger price moves, which then gives them
    a corollary benefit. A big price move can scare people,
    particularly when they have the whole weekend to think and
    worry about what the next week will bring. That result gives
    governments even more "bang for their buck."

    4) Just keep selling and selling. When you intervene in the
    market on a Friday afternoon with the intention of forcing the
    market lower, you begin selling short. Because you are the
    government and you are creating promises only to pay gold
    "out of thin air," you just keep selling and selling until you
    hit key sell-stops resting in the market. After all, who is
    going to give the government a margin call? Consequently,
    there is no practical limit as to how many paper promises
    the government can sell.

    So how much do they sell? Simple -- they sell enough until
    they complete their task, which is to drive the market lower.

    But they also use the market itself to help them accomplish
    their objective of lowering the gold price. Here is how they do

    It was no secret that $378 had become an important support
    point, and consequently it was obvious that a large number of
    longs had placed sell-stops under that level or intended to sell
    if that level was broken.

    So let's assume that the government starts selling and selling
    and that it takes the government 20,000 contracts in thin
    Friday afternoon trading to force the market down to the point
    where the $378 level is broken. The government's selling is now
    complete. Its mission is accomplished because of the new
    selling that is generated when support at $378 is broken.

    The market is now being driven lower by the longs who begin
    selling to cut losses or protect profits.

    As the market heads further below $378 support, more and
    more sell-stops are generated because the snowball started
    by the government is now rolling downhill on its own
    momentum. Then the government interveners step back in
    and slowly begin buying back their 20,000 contract short
    "paper gold" position as the gold price heads down. They
    buy what the longs themselves are now selling, enabling the
    government to cover its short position.

    The result is that the government ends the day with no
    position, and assuming the government made $8 per ounce
    on average (which is not an unreasonable assumption given
    Friday's $13 drubbing), the government walks away with
    $160 million picked from the pocket of the longs -- loot
    that the government splits with the banks that acted as
    their agents.

    More importantly to the government, it achieved its primary
    objective, which is to distort the free-market process by
    forcing a lower gold price, thus hindering yet again the
    market message that the dollar is in trouble and that people
    should be stocking up with gold for the tough times ahead.

    And the government did it without using one ounce of physical

    So that's how they do it. Further proof will emerge Monday when
    Comex reports Friday's drop in open interest. It may not be
    20,000 contracts, but I would be surprised if it is less than
    12,000. But if the drop turns out to be less than 8,000 contracts,
    given Friday's estimated volume of 165,000 contracts (of which
    125,000 apparently occurred after 12:10 p.m., when the
    government started intervening), then the shorts are in real

    A small drop in open interest would mean that too few longs
    were scared out of the market in Friday's price plunge, and
    that, as a consequence, the longs are tenacious in looking
    for higher prices.

    In that case, the shorts with their huge position have become
    even more vulnerable.

    Further, if open interest drops by less than 8,000 contracts,
    look for gold to rally back quickly into the $375-$385 range
    seen the past four weeks.

    Do I have documents proving the government intervention I
    discuss above?

    No, but the body of evidence developed over the past few
    years by me (see,, Reg
    Howe (see, Frank Veneroso
    as well as many others is not only huge and compelling but
    also growing.

    What's more, I've just made a new discovery, but let me start
    with a little background information.

    Back in December 2000 I wrote "The Smoking Gun"
    ( and noted the
    discrepancy between the size of the U.S. gold stock
    as published by the Federal Reserve in its monthly Bulletin,
    which included "gold held by the ESF" in its report, and the
    size of the gold stock published by the U.S. Treasury in its
    monthly Bulletin.

    The two reports were different, establishing that the ESF held
    gold or owed gold (because in some months the discrepancy
    was a negative balance) at the month-end record dates in
    which there was a discrepancy, which was virtually every
    month from the end of 1996 to my December 2000 publication

    Then, less than two months after the publication of my
    discovery, the Federal Reserve in February 2001 inexplicably
    changed its reporting of the gold stock to delete any reference
    to the ESF, thus making its record of the size of the U.S. gold
    stock equal to the Treasury's report.

    This hasty change by the Fed is reported here:

    This after-the-fact "adjustment" to U.S. government reports was
    revealing, given that the government felt sufficiently compelled
    to hide further the tracks of the ESF to make this embarrassing
    change to its reports. That appeared to be the end of this little
    window into the operation of the shadowy ESF, because the
    Fed was no longer reporting the U.S. gold reserve plus the ESF's
    gold balance.

    Or so I thought.

    Recently I was analyzing the Fed's audited balance sheet
    released in its 2002 annual report and I noticed that the
    discrepancy has reappeared.

    As of December 31, 2002, the Federal Reserve reports
    $11,039 million in its Gold Certificate Account, but as of the
    same day the U.S. Treasury Bulletin reported the U.S. gold
    reserve to be $11,043 million. At the $42.22 book value used
    to record these entries, there is a discrepancy of 94,741
    ounces of gold on that one day.

    What is the reason for this divergence in these two reports?

    It seems obvious that this difference is the weight of gold held
    by the ESF, which used to be reported by the Federal Reserve
    in its monthly Bulletin.

    The divergence between the two reports has reappeared because
    the Fed can report in its monthly Bulletin whatever it wants to
    include, or in this case, exclude. But it cannot exclude the impact
    of the ESF on its year-end financial statement because if it did, its
    auditors, KPMG, would not give an unqualified opinion in the audit.

    So even though the Fed, presumably under the direction of the
    ESF, tried to rewrite history by changing its monthly unaudited
    reports, in the end the Fed failed because its manipulation of the
    gold market has now been exposed in the Fed's audited financial
    statements, which raises an interesting question.

    Does this blatant management of the gold market by the U.S.
    government mean that we should not buy gold?

    Definitely not, unless you would rather rely upon the hollow
    promises of politicians instead of the proven and reliable
    trustworthiness of gold.

    And regardless of any short-term considerations such as
    Friday's trading action in the paper market for gold, consider
    instead the important long-term case for gold.

    The case recently was summarized wonderfully by fund
    manager John Embry. His essay -- "15 Fundamental Reasons
    to Own Gold" -- has been posted to the GoldMoney Internet
    site, so there is no need to get into it here, except to say that
    the long-term potential for gold is truly outstanding. See:

    Each of John's 15 reasons offers sufficient incentive in itself
    to continue buying and accumulating gold each month as your
    cash flow allows.

    In summary, government manipulators and their bank agents
    won another battle on Friday to keep the gold price under
    control. But they are losing the war.

    Since touching $252 four years ago, gold has been in a primary
    bull market. There is a steady and resilient worldwide
    movement out of national currencies into gold, and given all the
    fundamental reasons to own gold in preference to any national
    currency, I expect that gold's primary bull market will continue.

    Consequently, Friday's setback will soon be forgotten, and while
    it hurts to see any market trashed in this way by the government,
    there is a bright side to it.

    Friday's late-day selloff has no doubt converted many more who
    had been skeptical about government manipulation of the gold

    Yes, even though the government seemingly intervenes in every
    market, there still are some who believe that the government
    doesn't intervene in the gold market. But that group is rapidly
    declining in number, and not only because of blatant
    manipulations like the one that occurred on Friday.

    Another factor is at work.

    All one has to do is look at the dollar and its bleak prospects.

    Given that sorry future, it is no wonder that people are moving
    into gold, which explains the recent "seven-year highs" in gold
    noted in the Reuters article. When one sees what is happening
    to the dollar, they opt for gold regardless of the government
    manipulation. The ongoing destruction of the purchasing power
    of the dollar and the relative undervaluation of gold increasingly
    makes gold the prudent choice.

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