Our Response to Warren Mosler on Gold Lending

06/07/2010 05:12 am ET | Updated May 25, 2011
  • Bill Murphy Chairman, Gold Anti-Trust Action Committee

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.