Presentation to James Saxton, Chairman of the Joint Economic Committee
Honorable James Saxton
Chairman Joint Economic Committee
339 Cannon House Office Building
Washington, D.C. 20515-3003
April 26, 1999
Dear Congressman Saxton,
The purpose of my visit is to try and be of some assistance to you and your committee regarding the issue of the proposed IMF gold sale. It is the opinion of the Gold Anti Trust Action Committee that the real reason for the intense lobbying and orchestrated PR barrage about selling IMF gold by the White House and the Treasury is not being revealed to Congress. We believe that the real reason to promote the IMF sales has to do with a concerted manipulation of the gold market to keep the price down in order to bail
out the gold shorts of Wall Street ( ie bullion banks, hedge funds, and other financial institutions).
That has been going on for some time but began in earnest when Alan Greenspan made this statement before a Senate Agriculture Committee on July 30, 1998, " central banks stand ready to lease gold in increasing quantities should the price rise". We would like someone in Congress to ask Mr.Greenspan exactly what he meant by that comment when he is testifying again before committee.
It is important to understand that there is a natural supply/demand deficit in the gold market, meaning that demand for gold far outstrips natural mine supply. Our associates figure that deficit is around 1200 to 1600 tonnes and that deficit has been met by gold producer forward selling, some central bank sales, scrap supply, and gold lending. We think that the gold lending is now so large that it has created a potential "systemic risk" problem. Bullion dealers have been lending out central bank gold to financial institutions at 1% interest rates. The gold is sold into the physical market ( depressing the price ) and the proceeds are then invested elsewhere. This is called the "gold carry trade" which operates under the same principle as the "yen carry trade" which blew up late last summer when the yen rallied strongly against the dollar. The short term demise of the yen carry trade caused great financial consternation.
The "carry trades" only represent cheap sources of capital if the price of the entity borrowed stays the same, or decreases. When the price of the yen suddenly rose sharply late last summer it caused great financial distress as very inexpensive loans became onerous. But, at least they could get out of the loan via liquidating the yen; in essence giving it back.
We believe that the speculative gold loans are now as high as 3,000 tonnes of gold and that the total gold loans ( producer forward sales, etc ) have reached 8,000 to 10,000 tonnes. If we are correct, and at some future date the price of gold rallies like the yen did, there will be financial turmoil. As yearly mine supply in 1998 was only 2529 tonnes, the borrowers will not be able to lay their hands on that much gold very quickly. Inevitably, there will be defaults and many financial institutions here and abroad will go bust. Many of the banks are getting in this too deeply and are at risk of becoming "Long Term Capital Managements". Panic is definitely not too strong a word to be used here.
This appears to us that the current administration and the NY investment houses are in cahoots and what we may have here is one of the great financial scandals in US history. Financial commentators often point to the muddling, low gold price as to how all is well in the economy and administration officials point to a low gold price with pride, almost using it as a report card on the great job they have done. The bullion banks and investment houses have picked up on this and are making sure that the price does not go up by supplying gold to the market place. They feel they can borrow gold with impunity, even at these low prices, as a result of Mr. Greenspan's comments. And of course there is the connection of Wall Street to Secretary of the Treasury, Robert Rubin. Everywhere we turn in our investigation, we find Goldman Sachs, his former firm, involved in gold bashing efforts.
Our committee ( GATA ) has retained one of the premier anti-trust firms in the United States, Berger & Montague of Philadelphia, to assist us in our investigation into this matter. If further evidence corroborates what we already have, we intend to sue some New York bullion dealer/investment houses for violation of the Sherman and Clayton acts. These firms are making fortunes ( while many associated with the gold industry are being destroyed ) through investments, after borrowing gold at 1% interest rates. However, we think that some of them are making these fortunes illegally as a result of collusive activities and in the process have created a "ticking time bomb" that could blow up to be a financial disaster in the future.
It is this cozy arrangement the administration has with these investment houses that we believe is the real reason behind the constant calls to sell the IMF gold. They both benefit from the sale of the IMF gold, but the poor countries in South Africa and West Africa lose as their mining industries deteriorate. I know you have had other experts testify on all of this to you so I will not get into that. But the American public, as well as this country's mining industry, could really lose too. Our last monthly trade deficit was $20 billion. At some point, there will be an attack on our dollar. Our gold resources are one of our greatest assets. Why sell any of them at these very, very low prices? We can point to our gold stocks in defending our dollar in the future. There are many financial analysts that think a financial bubble has been created. That may or may not be the case, but to advocate gold sales at this point in time will be looked on as great folly if there is a bubble, and it bursts.
Yes, the current administration and the greedy Wall Street houses are winning the day today with this gold market manipulation. But, if this charade about gold is not stopped now, someday the American public will be big losers if a financial panic sets in. If someone had stopped the Savings and Loans from their over-extensions a decade ago, we might not have had that big a crisis. The potential gold loan crisis could dwarf the Savings and Loan one if the orchestrated gold selling game is not curtailed now.
I have attached some material for your perusal, which elucidates much of what I have brought to your attention. That material is:
1. An April 16 Reuters PRNewswire in which Chris Thompson, the Chairman of one of the world's biggest gold producers, Gold Fields Limited, decries the tactics of the New York based bullion dealers.
2. An essay by John Hathaway, the highly regarded senior portfolio manager of The Tocqueville Fund in New York, entitled, " Bullion Dealer: Spin Meisters of the Gold Market"
3. Commentary from Veneroso Associates entitled, "Gold Zaitech - A Bear Bubble Driven By Cheap Credit". Frank Veneroso wrote the 1998 Gold Book and is one of the leading authorities in the world on the gold market. He has been economic policy advisor to the World Bank, the I.F.C. and the O.A.S. as well as many countries.
Frank Veneroso is also one of the leading authorities on the gold loan issue. I was with Frank when he determined out how large the gold loans are and I saw how he figured it out by learning what the gold loans were at individual bullion banks. In addition to that, I was there when he spoke to Terry Smeeton, who just retired as England's Chancellor of the Exchequer, about the gold loans last year. Five years ago Mr. Smeeton was very chatty with Frank about the loans. Last year, he would say nothing and could not get off the phone fast enough when Frank told him how large he now thought the gold loans had become.
4. Commentary from the highly regarded James Turk, who publishes the Freemarket Gold & Money Report. James is one of the other leading authorities in the world on the gold market and is known by all in the industry. His April 26 piece is very timely and covers the problem of the payback of the gold loans. His work shows that it could take a gold price of $608 to $923 to solve this very sizeable problem.
5. Brief commentary from the well established "International Harry Schultz Letter".
Harry Schultz also expounds on the nefarious tactics of the bullion dealers.
I look forward to meeting you on Tuesday at 1:15 and hope that we may of help to you regarding this IMF gold sale issue.
Best regards,
BILL MURPHY
Chairman, Gold Anti Trust Action Committee, Inc.
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