Hey Bill, nice to see you back and happy new year. Found this interesting article on Gold manipulation, Midas included.......
Is Alan Greenspan Manipulating the Gold Market?
Almost to the day, the second great manipulation of the gold market began 132 years after the first.
On September 24, 1869, a pair of rascals named Jim Fisk and Jay Gould cornered the New York gold market, forcing short sellers to cover at any price. Around the same week of 1998, a man named Alan Greenspan began controlling the price of gold by lending the metal to investment bankers who sold it short each day to keep the market price from rising above $300 a share.
Fisk and Gould were out to make millions squeezing the short sellers. Greenspan's objective is to protect our economy. When the Fed head organized the bailout of the Long Term Capital Management hedge fund, a part of the problem was the fund's surprisingly big short position in gold.
Then it turned out that other hedge funds and institutional speculators were--and many still are--short of 8,000 to as much as 14,000 metric tons of gold, many times annual production. If even a few of these shorts were forced to cover their frantic buying, it would send gold skyrocketing by hundreds of dollars an ounce.
Can we prove this? No. But Fed Chairman Greenspan said that he would control the gold market if he had to. He spelled it out on July 24 in little-noticed testimony before the House Banking Committee. The chairman was trying to downplay the risk that some derivative contracts might produce a squeeze on short sellers.
He explained that there was no danger that the supply of oil to fulfill derivative contracts could be restricted. Then, he added, 'Nor can private counterparts restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.'
You can hardly get clearer than that. We should never have wondered why gold couldn't seem to break through the 300 level. The answer was right there in the Banking Committee hearings. It was buried in pages of boring testimony, but we have missed it. In other words, Greenspan told us two months in advance what the Federal Reserve would do to keep gold from going to the moon.
The market performance of the yellow metal shows clearly that it was controlled in a narrow band from 300 to about 305 from the last week of September--the 132nd anniversary of the 1869 gold corner--to the third week of October. Since then, control has kept gold bouncing from 292 to 300 and back again. And in the last three weeks the selling pressure has created a slight downtrend.
The possibility of manipulation of the gold market first hit us in the spring. We'd been predicting that gold would eventually recover from its long bear market, but every time it rallied the rally was aborted by sales of central bank gold.
It wasn't just the sales themselves that kept gold down, it was the way the central banks sold. Instead of carefully metering out their sales to get the best price and not disturb the market, they carelessly dumped their bullion and usually denied they were doing it.
At first we thought this was deliberate. Eventually we realized it simply reflected the attitude of the present generation of central bank bureaucrats. They hate markets, don't know how to deal with them and don't want to know.
As gold waterfalled down, producers continued to hedge the price of their future output and put further pressure on the market. Gloom reigned. It seemed to some of us that with inflation dead the naysayers might be right and gold was just another commodity. And then, in a move that rarely happens in any market all of the negative factors keeping the yellow metal down seemed to evaporate so abruptly that gold gained an amazing $20-an-ounce in only a couple of trading sessions, a $35 jump from the lows.
It rocketed straight up in a way not seen since the great gold bubble of the early 1980s. Gold rose as far as $315 and then settled back around $308. To traders and portfolio managers the question was: is the move for real or only another fake out?
The spring rally wound up going nowhere. It spent the summer trending down, down, down--until September, when it came back to life again with a sudden runup from its 18-year low of 277.90 to 300 in 10 days of heavy trading.
The buying was enthusiastic enough to shrug off the Czech central bank sale of 31 metric tons of gold thrown at the market right in the face of its upward surge. At the same time, the central bank of Luxembourg said it had sold most of its reserve, perhaps 10 metric tons.
The market ignored both sales. The problem for gold bears was that world currencies and its stock markets were all tanking, banks were reporting huge trading losses and Russia was coming apart.
Why was the barbarous relic moving up? Because people all over the world were beginning to worry whether the money in their pockets and purses was really as sound as all the central bankers claimed.
Without admitting any danger, the European Parliament backed calls for the creation of a 100-Euro gold coin as legal tender once the European Union's single currency becomes widely circulated. Sales of gold coins around the world were surging. U.S. bullion coin demand reached an 11-year high.
There were rumors that an Asian-type International Monetary Fund might be launched based on a gold-backed Japanese Yen. Indian gold demand was 19% higher for the first three quarters of the year over the same period of 1997. Demand for gold was up in Southeast Asia and in South Korea.
None of these factors was crucial; but they indicated that gold was sneaking its way back into fashion. And this was bad news for Greenspan & Company. So, it's reported that Washington got on the horn and asked Asian governments not to be aggressive buyers of the yellow metal while the Fed was trying to engineer a soft landing for the short sellers.
The Swiss government cooperated by asking its Parliament to approve sale of 1,300 metric tons of gold. The lawmakers cooperated but the people will get to vote on it in 2000.
It's reported that the countryside Swiss are not in favor of lessening the strength of the world's hardest currency. Even worse for the Fed, it's rumored that the gold backing of the Euro may be raised from the currently planned 15% to 30-35%. France has strongly pushed for this to make sure that the Euro will be strong enough to rival the dollar.
It's intriguing that half a dozen of the biggest investment banks have issued reports on gold in the past couple of weeks. Bear Stearns weighed in with a handsomely printed 86-pager announcing that precious metals are 'back on the radar screen,' and gold is a 'disappointing metal showing signs of life.'
Chief among the reasons given for this is that there has been less exploration and development, which has reduced supply, mining company costs have been cut, and gold is underowned and underrepresented in investment portfolios. The report also suggests that it may no longer be easy for speculators to lease gold and sell it.
Prudential Securities' study says 'we are warming up to gold' because there is more upside than downside in the next year. It forecasts an average price of $320 an ounce for 1999 compared with $297 this year. The Pru will not be surprised to see short covering rallies as hedge funds unwind their positions. It also notes the possibility that the European Central Bank will increase the percentage of gold in its foreign reserves.
Salomon Smith Barney says it's positive toward the gold sector and expects the metal will breech the $300 an ounce resistance level and average $350 next year as fears of central bank sales subside and short pressure eases.
Morgan Stanley Dean Witter's gold analyst, Douglas M. Cohen, comes down on the bear side of the fence. No crisis seems able to trigger a rise in gold and continued central bank lending are his principal negatives. Indeed, he says that Venezuela, Germany, Portugal, Austria, and Switzerland are new entrants into the gold lending market.
Old friend Bill Murphy, a veteran gold trader, who writes on the metal under the name 'Midas' [www.lemetropolecafe.com] says there's a cabal of investment banks who are leasing and shorting in cooperation with the Fed and others to cap gold at $300 an ounce. e believes that Goldman Sachs is a leader of the group which includes J.P. Morgan. Perhaps that's the reason, says Bill, that Morgan issued a report predicting that the price of gold will fall in early 1999 before steadying up later in the year.
If being negative on gold is an indication of membership in the short selling gang, then Lehman Brothers must be a suspect. A week ago, Lehman issued a flash meeting report titled 'Reiterating our Bearish View of Gold Equities.' In somewhat snotty tones, the report says, 'gold equities continue to discount a significant and sustainable rise in gold prices as if it were inevitable. It isn't.' Lehman maintains its long-term average gold price forecast of $290 an ounce, ending the note by pointing out proudly that this price forecast is 'the lowest on the Street.'
Though there's a ceiling on the price of gold created by Fed-facilitated borrowing and short selling, there appears to be a floor under the metal that keeps its price from collapsing below the $295 area. Each time gold hits the floor, it bounces just a little and then hits the ceiling. We assume that the floor consists of official buying by central banks. Poland and Russia have bought openly; China and Japan are believed to be buying and it's likely there are others. In addition there's growing private demand for gold in Asia as a shield against currency devaluation.
With gold unable to climb, it may seem strange that the gold-oriented mutual funds have recently performed so well. According to CDA/Wiesenberger Editor Stephanie Kendall, the month of September was truly golden for these funds with eight of the top 10 jumping over 50% in total return for the month. The reason: bullion did relatively well during the month and gold equities historically move three times as much as the price of gold. The move can be up or down. For September, Fidelity Select Gold posted a hefty return of 54.93%. But its year-to-date return is a minus 9.1%.
No one knows when gold will trade in a free market. The amount of the metal sold short by speculators is huge and the Fed and its associates may work at the unwinding for some time. And even when all shorts have been covered, the Fed may find itself riding a tiger wondering how to get off without being eaten.
The gold corner in 1869 only lasted days. Fisk and Gould had bribed the brother-in-law of President Grant to use his influence to keep the Treasury from releasing any of its reserves. But, the game was lost when Washington changed its mind and overwhelmed the corner with Federal gold.
We don't see a quick and easy end to the present control.
John Tompkins, a frequent contributor to Reader's Digest and former regional business correspondent for Time
Money Talks, talks.com
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