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The following is an email letter sent to the Editor of the Australian Financial Review. The author sent it in response to an ill-informed and obviously biased article entitled "Dear gold! It's a government conspiracy" by AFT journalist Stephen Wyatt.
Dear Editor. I found your article on gold conspiracies lacking in fact but abundant in opinion. I thought you should have put it in your editorial section, not in your Market section. Below I have enclosed a copy of what I wrote on the subject of what appears to be really going on in the gold market, and the pressures that are being applied to it by the various factions. Feel free to publish it.
Steve Hickel -
Major Currency Battle Now Underway Masked by Equity Bubble
Current economic events boil down to two economic forces at work that essentially divide the world into two camps: debt holding countries of the US dollar and countries who are distancing themselves from US debt by way of physical gold possession and the Euro. All current world events seem to be explainable when viewed in this manner. The two camps are the US$/IMF faction (IMF is International Monetary Fund) and the Euro/BIS faction (BIS is Bank of International Settlement). The US$/IMF camp is dollar based paper and debt; the Euro/BIS camp is gold-based currency and gold bullion and oil.
The current run up in the US dollar and equities market is a result of the skewed influence of the US dollar in world economic events. Furthermore, it demonstrates strength when viewed from its existing role as a world reserve currency. It is this role of 'reserve currency' that is the focal point of a currency war now in progress. This currency war is masked, however, by the power and control of the media of the US$/IMF faction, and by the apparent strength of the dollar and the dollar denominated stock markets. It is this apparent strength that blinds all of us to the struggle now waging in world markets. Knowledge that the battle is in progress provides us with a perspective from which current economic events become crystal clear, because the players are Gold, the Euro, and the Dollar.
The strength of the dollar is its Achilles Heel. The equities market in the US has been fueled apparently by two major sources of funds: baby- boomer 401K plans, and the Yen and Gold-carry money. It is this latter source of money that has just now come into question as legitimate and healthy -- just look at Japan's economy and what the YEN carry trade has done there. It is the gold-carry trade that may be the David of the dollar Goliath or the hair of Samson.
Carry-trading in Yen and Gold is simple to understand. It is borrowing Yen or gold at a low interest rate, selling it into the market -- which drives the price down and the dollar up -- then buying US bonds or equities at a higher rate of return. The loan is repaid, the differential interest is pocketed, and the process is repeated -- as long as the price of the YEN and gold drop. Not long ago, the YEN carry trade was essentially stopped. More recently the gold carry trade has been slowed but not quite stopped. In the case of gold-carry, many of the gold-carry players rolled-over their loans and NEVER paid them back. They didn't have to until NOW: gold is currently priced at or below production cost.
Once the Central Banks (mostly European) slowed the leasing of gold, the estimated 14,000 tons of gold that has been involved in the gold-carry trade needs to be paid back. Needless to say, this is about one-half of the entire gold stockpile or above-ground gold of all central banks, so it is impossible to pay back the debt in gold as most of the Central Bank loans apparently demand. Consequently, the financial parties in the gold-carry business need a source of gold to pay back these loans. It appears that only two escape hatches exist for the gold-carry players. Keeping the price of gold down by shorting it on COMEX (this is akin to naked shorting as insufficient gold bullion doesn't appear to exist to cover the 200,000 open interest contracts) or repaying the loans in a medium acceptable to the banks who lent the gold in the first place. Since these are European banks and no large source of gold currently exists, the Euro may become the only accepted means of repayment.
One can see how the carry trades drove the Yen and is now driving gold to all time recent lows. In the case of the YEN more could be printed or made available for repayment. In the case of gold, only 2500 tons of gold are mined each year. To cover the estimated 14,000 ton gold shortage would require more than five years at current production levels and that is if all production was slotted for just that debt.
The remarkable thing about the carry trades is the shear number of financial institutions who have participated in it. In other words, the gold-carry trade is pervasive and to unwind it will affect many world financial institutions.
So back to the war of the Euro/BIS and the US$/IMF. Two anonymous representatives of the Euro/BIS camp have for the past two years come forward with their interpretation of events. They go by the handles or pen names of ANOTHER and Friend of Another. They have used the Internet as their medium of discussion and have provided a tome of information and opinion on this hidden war now unfolding. I believe they came forward after the Euro/BIS cards had been played. Their stated purpose is to ensure that the world knows that the currency war is in progress and that the apparent outcome for title of 'world reserve currency' ends up in the Euro/BIS camp.
Let me explain. They claim that the BIS and the European Central Banks allowed the gold-carry trade to go on for years in order to proliferate gold-based debt and worldwide physical ownership of gold, using Central Bank leasing as leverage. It has become so pervasive that leased-gold debt is part of many modern financial institutional balance sheets. Simply put, gold debt is extensive and there is none to be had to pay that debt. Almost all physical gold is accounted for and these loans continue to be rolled over. To make matters worse, mining production of most major mining companies is hedged (spoken for) up to 10 years. Thus the only way to pay back these loans that would be acceptable to these Central Banks in lieu of gold appears destined to be Euros.
In other words, this is the biggest currency sting in history. Nearly risk-free (or so they thought) low-interest money was available through the carry trades that everyone that knew about it got on board and cashed in. The result? The Central Banks are owed an alleged 14,000 tons of gold (with interest) by a wide-variety of institutions.
Now you can see why A/FOA believe that the US$/IMF faction has lost. They can't pay back their debts without converting to gold or Euro's and that means converting US bonds and equities into Euros or gold. Since there is virtually no physical gold to be had, we see an all out media campaign against gold that discredits gold image as a currency or medium of exchange and that reports large sales-to-be of IMF/Swiss/CB gold. The end result of this campaign (so far) is that gold continues to plummet in price (this in face of the largest demand for physical gold in history).
Now, thanks to A/FOA, light has been shed on the hidden battle for reserve currency. Up until the Euro was introduced, the only possible competitor for world reserve currency status was gold. Gold doesn't lend itself freely for exchange (hard to email it). With the introduction of the Euro that doesn't hold the debt load of the US dollar and has 15% of its reserve in gold bullion, a proxy for gold was born that can now compete with the dollar for the reserve currency status.
Please review these recent world-wide financial events using the above information as a filter:
- -- Gold approaches $292 and the Bank of England announces a sale only available to members of the LBMA (London Bullion Market Association). Price of gold drops to a 20 year low.
- -- The IMF announces a sale of gold to help poor countries (who would have benefited more if the price of gold was higher as most them were countries with producing gold mines). This was announced while the price of gold threatened to pass above $290.
- -- The Swiss vote on a national referendum to delink gold from the Swiss Franc and it passes.
- -- Major news organizations publish countless stories about gold is dead, gold is no longer a modern requirement for currency. (People become confused by this. Gold's popularity falls to an all time low, now rated at 21% popularity per Steve Kaplan).
- -- Gold no longer acts normally during major world crisis. Normally it would rally in the event of war or inflation.
- -- Major rumors of Goldman Sachs and other investment banks heavily shorting gold on COMEX further holds gold down during these major world-crisis. (I even read a rumor that said the Fed has a trading account with a major investment bank and is itself short gold.)
- -- The formation of GATA (Gold Anti-Trust Action) committee to investigate the apparent manipulation in gold markets.
- -- The unrelated yet recent announcements of copper and drug company price fixing.
Steve Hickel
7 June 1999
gold-eagle.com
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