Controlling Gold with Paper
by Jason Hommel, June 10, 2002
On Tuesday, June 4th, the spot price of gold plunged
from $329/oz. To $325/oz. during after market hours, and over the
course of the next day, declined further to $321/oz. Less than 24 hours
later, it was quickly reported by www.theminingweb.com and GATA that
this was a result of a large sale of paper futures contracts of a
relatively illiquid date in a relatively illiquid market because of the
odd time, which pushed down the price.
It's tricky to see how the price of gold is, and has
been, manipulated downward with paper contracts. The question is
raised, "How can they knock down the gold price if they are not selling
any gold?" I'll do my best to try and simplify and explain this con
game and cover the major factors that are so bullish for the gold
market right now and are causing this current bull market in gold. This
essay might also help you to convince your friends, relatives and loved
ones, who don't read gold-eagle, of the benefits of gold investing.
If you go to your local coin shop to buy gold and
silver (which I strongly recommend doing as soon as you can), the
dealer will look up the price of gold in New York. This is the "spot
market" or "spot price" that changes throughout the day. Based on this
price, he will sell you (at a small mark up) his physical metals if you
give him your paper dollars. He is willing to accept your inherently
worthless paper (amazingly!) because he has the confidence that he will
be able to quickly buy gold and silver with the cash you gave him.
Thus, the spot price in New York affects real prices anywhere in the
world, because of the confidence people have in the market in New York.
They have confidence (key word) that they can wire their money to a
metals dealer in New York, and have gold or silver shipped out the next
day. If this confidence did not exist, a dealer in a local coin shop
would have to find another source of supply that he could rely upon and
have confidence in, and the prices set by this other source would then
be "the price".
I would love to go into the precious metals business
and start dealing in bullion. This would be an excellent business
because as we enter this bull market, more and more people will want to
buy metal, and business will be booming. Additionally, I sincerely
believe in the moral benefit to owning gold and silver coins, so I
would feel very good about getting gold into the hands of people, and
out of the clutches of the evil central bankers who stole it in the
first place. I believe I would be providing a genuine service to
humanity by helping people protect their wealth, and I would be
fighting the good fight against central banking, which is a cause of
much misery in the world.
Unfortunately, I know default is coming. I know that
eventually, the time would come when I would take larger and larger
orders, and then, I would try to buy gold and silver in New York, and I
would get nothing after having placed the order. I believe the coin
dealers in this country are real heroes to continue their business in
the face of such danger. Essentially, I know that the situation is like
a con game. Confidence keeps the game going, and I do not have
confidence in the New York price, unlike our heroic coin dealers. I've
talked to coin dealers about this, and they shrug it off, saying that's
just the normal risk of doing business, just as there are risks in any
business. I think that's an amazingly heroic attitude to have.
In a similar fashion to the coin dealers who look to
the spot price, those in New York who set the spot price have
confidence in another market, and this is the futures market. If they
see that the price of gold for "December delivery," or some future
month, is at a certain price, there are market makers who are confident
enough in the futures market price to sell gold now, and wait all the
way until December to replenish their supplies. In this way, the
futures market price can affect the prices today. Or, looked at another
way, a drop in the price in the futures market gives a so-called valid
pretext for dropping the spot price today accordingly.
Thus, to manipulate markets downward, you don't
actually have to have gold to sell. All you need is to be able to
create and offer the paper gold futures contracts. Then, after you sell
the paper contract and before the delivery date comes, all you need to
do is convince some other person to take the short end of your futures
contract, and you can walk away, having transferred your obligation (to
deliver gold in the future) to someone else.
Of course, that's all very simplistic, and the
players are not anonymous buffoons. Real gold is coming to market from
central banks who lend out their gold at 1%, and then continue to act
as if they still own gold that is long gone. Thus, nations report as if
they still have their gold, but they no longer have it. Many people,
such as myself, have called such a practice nothing less than fraud,
because first of all, the gold belongs to the people and the people are
being lied to. Second, it was "sold" for less than 1% of its value. And
third, it is reported as if it never left the vaults, but it has. It is
certain that the huge amounts of gold that has been sold this way is
utterly lost to the central bankers, because to go into the market to
buy up that much gold to pay it back would drive the price to the sky,
and bankrupt the institutions who leased it from the central banks in
the first place.
A minor debate comes in because the "official"
amount of gold that has been admitted to being sold in this way is
about 4000-5000 tonnes, while those who have studied this in depth
realize the figure is far more likely to be about 15,000 tonnes. I
believe the latter number is closer to the true figure.
Either way, this gold is largely owed by the bullion
bankers, such as JP Morgan and Goldman Sachs. A small part is owed by
the gold miners of the world who have "sold forward" up to 2700 tons of
gold all together in total, but who are now increasingly scrambling
over themselves to buy this gold back, before the price to pay back
these obligations continues to increase. So, unfortunately for the
bullion bankers, they have not been able to transfer as much of the
risk as they would probably like, and the con game has turned against
them as the mines stop hedging.
The con game is ending because gold investors
discovered the dangers of hedging and central bank leasing in September
1999. At that time, the Washington Agreement, which was an agreement by
the European central bankers (not Washington) to limit gold sales to
400 tons a year for the next 5 years, caused the gold price to quickly
rocket to $337/oz, which, in turn, caused the near bankruptcy of two
gold miners, Ashanti and Cambior, who had hedged, or sold forward their
gold. Thus, the gold world began to wake up to the truth and the danger
of gold hedging, and began to learn the truth of central bank gold
All those figures dwarf the figures at the COMEX,
the gold futures market, which has reached figures as high as 200,000
contracts recently. Since a gold contract is for 100 ounces, that's 20
million ounces. To convert to tons, divide by 32,152 oz./tonne, so
that's about 622 tonnes.
Now the gold mines bring to market 2500 real tons,
and the market consumes 4000 real tonnes of gold each year, and the
difference is being supplied by the central bankers who lease out gold
that is never being reported. Once the central banking leasing stops, a
4000 tonne demand with a 2500 tonne supply is going to raise the price
a lot. Additionally, if you were the bullion bankers who owed 5000 or
15000 tonnes, there's no way you could go into a market and buy up that
much gold to repay your gold loans. To repay that much gold over the
course of a year, that would be 4000 tonnes plus 15,000 tonnes on the
demand side, and only a 2500 tonne supply. Imagine the price rise in
that scenario, and imagine the investment demand as the gold price
soars and proves overwhelmingly its status as the only safe haven there
Obviously, this will end badly for the bankers who
will default, and will cause the gold price to skyrocket. These are the
essential details that all gold investors need to know.
The next biggest issue for gold investors to digest
is that there is a potential demand for gold that is equal to all
dollars, and all other fiat currencies that have ever been created.
This money creation is the inflation that will drive the gold price to
the moon. It's not future inflation that's the worry and it's not
future inflation that will be the cause of the gold bull market, it's
the inflation that has already happened. M3 represents the dollar
liquid money supply held by U.S. Banks, and has now crossed $8
Trillion. All the gold in the entire world is only about 120,000 to
130,000 tonnes--at $330/oz., that's only $1.1 Trillion dollars worth.
Of course, the Japanese have buying power in excess of $10 Trillion
dollars worth as well. All these factors mean great things for gold
owners, and for owners of gold and silver mining stocks.
Now, this whole scenario raises a lot of questions.
How and why would the bullion bankers engage in such dangerous business
practices that threaten their own existence? Well, the bullion bankers
are partners with the central banks, and in many cases are even their
Basically, the undisclosed central bank gold loans
were the method whereby they have been able to hold the gold price in
check for the last 22 years since 1980, which has allowed those
governments to get away with massive money-creation inflation during
that time. The money creation has gone unnoticed because the gold price
was declining or flat. That's the con.
I believe that Goldman Sachs and JP Morgan no longer
represent the real owners of the central banks, but rather, they are
empty shells of their former selves. Both are publicly traded companies
that have issued Billions worth of stock. Therefore, when they default,
and go bankrupt, the shareholders of these doomed banks will suffer,
just like the shareholders of Enron, not the people and powers who
orchestrated the coming fiasco. It's no wonder that JP Morgan was
Enron's largest partner.
Quite literally, it has been the greatest con game
in the history of the world. Don't let yourself continue to be conned.
There is no sane reason to maintain confidence in such a system. Gold
is roaring to life, and will continue its relentless bull market to the
moon as people wake up and see through the lies.
Disclaimer: I am not a licensed investment advisor.
I am not a broker. I hold positions in precious metals and mining
stocks, which are subject to change without notice. I am biased against
what I consider to be the fraud of fiat money, which are false weights
and measures, and an abomination. I am biased against the fraudulent
practice of creating money out of nothing. I am biased against debt,
particularly when money is lent at any interest rate whatsoever, a
practice called usury.
For a list of many reasons why I believe now is a
good time to buy gold and silver, see my web site at silverstockreport.com
I will do my best to reply to all questions and
comments on this essay or the subject matter, and I would love to hear
from those who thought this piece was helpful to their understanding of
the gold market.