On April 5th HuffPost ran a piece by Warren Mosler, an "Economist specializing in monetary policy and running for Senator Dodd's Senate seat," regarding gross misconceptions about gold lending. In his commentary he stated, "GATA (Gold Anti-Trust Action Committee) is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be," which is true. However, Mr. Mosler completely misses what GATA has been "complaining" about for more than a decade.
Of course, gold lending is a normal function of the gold business. What we have been objecting to is that surreptitious gold lending/swap operations which have been conducted by the major US bullion banks, and the US government, for the last 15 years or so ... which they have gone great lengths to cover up.
President Obama has called for greater transparency in both the federal government and the financial markets. In pursuit of such transparency GATA has made Freedom of Information Act requests to the Federal Reserve and Treasury Department for a candid accounting of their involvement in the gold market. In a reply [pdf] to GATA's lawyers dated September 17, 2009, Fed Governor Kevin M. Warsh acknowledged that the Federal Reserve has gold swap agreements with foreign banks but insisted that such documents remain secret.
As a result, last December GATA sued the Federal Reserve in U.S. District Court for the District of Columbia, seeking access to the Federal Reserve's withheld records of gold swaps. GATA is opposed to fraud and lack of transparency, not gold lending.
The Gold Anti-Trust Action Committee (GATA) was formed in January 1999 to expose and oppose the manipulation and suppression of the price of gold.
Initially we thought that the manipulation of the gold market was undertaken as a coordinated profit scheme by certain bullion banks, like JPMorgan, Chase Bank, and Goldman Sachs, and that it violated federal and state anti-trust laws. But we soon discerned that the bullion banks were working closely with the U.S. Treasury Department and Federal Reserve in a gold cartel, part of a broad scheme of manipulation of the currency, precious metals, and bond markets.
As an executive at Goldman Sachs in London, Robert Rubin developed an idea to borrow gold from central banks at minimal interest rates (around 1 percent), sell the bullion for cash, and use the cash to fund Goldman Sachs' operations. Rubin was confident that central banks would control the gold price with ever-more leasing or outright sales of their gold reserves and that consequently the borrowed gold could be bought back without difficulty. This was the beginning of the gold carry trade.
When Rubin became U.S. treasury secretary, he made it government policy to surreptitiously operate an identical gold carry trade but on a much larger scale. This became the principal mechanism of what was called the "strong-dollar policy." Subsequent treasury secretaries have repeated a commitment to a "strong dollar," suggesting that they were continuing to feed official gold into the market more or less clandestinely to support the dollar and suppress interest rates and precious metals prices.
Lawrence Summers, who followed Rubin as treasury secretary and now a key economic advisor to President Obama, was an expert in gold's influence on financial markets. Previously, as a professor at Harvard University, Summers co-authored an academic study titled "Gibson's Paradox and the Gold Standard," which concluded that in a free market gold prices move inversely to real interest rates, and, conversely, if gold prices are "fixed," then interest rates can be maintained at lower levels than would be the case in a free market. Lawrence Summers knows very well what has been going on in the gold market and why.
These secretive gold operations were a significant reason for the real estate bubble and market collapse in the US as interest rates were left too low for too long. GATA understood that the manipulation of the price of gold was profoundly important to all markets and the American public. On January 31, 2008, we placed a $264,000 full-page color advertisement in The Wall Street Journal. GATA's ad warned, "This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world." What GATA warned against has come to pass.
It is not gold lending which GATA is opposed to, it is the gold price suppression scheme. The sooner it ends, the better off America will be in the years ahead.
gold in unlimited quantities the fixed price, much like any fixed fx regime. Anything less would not have that effect.
Nor do I see how any buying or selling of gold by the US gov, legal or illegal, would have any effect on the housing boom/bust, which was driven more by fraudulent credit applications mainly due to loan officers getting paid on gross volumes followed by the discovery that the loan files contained large numbers of fraudulent appraisals and fraudulent borrower income statements. And yes, no doubt there is a lot of fraud in the gold 'business' as has happened many times in the past.
Let me conclude that I sincerely and loudly applaud support your efforts to work to uncover fraud in government!
All the best,
Warren Mosler
The gold carry trade works in two directions. When gold futures are 'expensive' and imply rates higher than short term funding rates, one can buy spot gold and sell it forward for a higher interest rate than the cost of funds for that same period, and profit by that spread. I noticed this was the case during the latest financial crisis for quite some time. The reason could have been some combination of exceptionally large buyers in the futures market, including the possibility there were shorts being forced to cover for any number of reasons, and difficulty in obtaining funding for buyers of gold. Under these conditions little if any gold is lent as, instead, it is a relative surplus spot inventory that creates this condition.
The trade works in the other direction when the futures are cheap to the cash market, and one can sell spot and buy futures and the implied cost of funds from the spot sale for that period of time is lower than reinvestment rates. This generally happens when producers sell in the futures markets due to the lag between mining and their ability deliver as outlined in my previous post.
And this is the condition that makes it profitable to lend.
continued
Bill Murphy and GATA
-OR-
Jim Sinclair and JSMINESET
I simply can't decide. Should I go with Jim for FREEING MY MIND. Or perhaps its Bill for BLOWING THE LID OFF THE WHOLE THING!!!
IMPORTANT TWO WORD LESSON OF THE DAY FOLKS: Take Delivery ;)
Second, I am categorically against fraud and cover ups, as well as illegally withholding information.
Third, (and not to justify any govt. misdoings) all govt. purchases and sales influence price, which means they influence the value of the currency, as the value of the currency is defined by what it can buy.
To your point about Goldman raising cash to fund its operations via short sales, it is my understanding that when a firm like Goldman borrows gold, it has to post either cash or collateral with the lender of the gold. If Goldman then sells the gold (short or otherwise) the funds it receives are roughly equal to or less than the funds it had to use as collateral to borrow the gold, so no net cash is raised by the short sale. If the lender does not demand collateral it would be a different story but I'm not aware that any lender would do that. However, if a firm like Goldman was holding actual gold on behalf of a client, it could be that there is a way it could borrow that gold for a short sale and be able to use the cash in the client's account for corporate purposes.
more to follow