Doug Casey: GATA is right

From Doug Casey's International Speculator
May 2007
(Available only by subscription)

Q: In several publications, I have read of suspected collusion among several foreign banks to control the price of gold. Would you address this in a future issue of International Speculator?

A: The thesis is the main hobbyhorse ridden by my friends at GATA (www.gata.org), and I've discussed an aspect of it in the past (International Speculator for September 2005).

In essence, it is said that a number of central banks (such as the Fed and the Bank of England) have lent or are lending a substantial part of their gold reserves to bullion banks (very large commercial banks with AAA credit that deal in gold) at very low interest rates (allegedly 0.2 percent to 1 percent). These bullion banks then sell the gold in the open market for delivery some months, or years, forward, at higher prices. They take the cash and earn market rates. Then, when they have to deliver, they do so by buying the gold back at lower prices, because their continuing sales have themselves depressed the price.

It seems like a win-win deal.

The central banks like it because they earn a few bucks on something (gold) they see as a dead asset. And they're happy to see its price go down because that gives a signal that inflation of their currencies isn't very severe.

The bullion banks like it because they make the spread between what they pay to borrow the gold and what they earn on the money they get from selling it forward, plus the gain from buying it back at presumably lower prices.

I don't doubt that this has gone on for years, during the great gold bear market of 1980-2001, to the great profit of all concerned. That would include some mining companies like Barrick that were, and are, massively short the metal. It was a superb bear-market strategy.

But now, with gold going back up, after 20 years of super profits it has been a disaster. The bullion banks are massively under water in their gold operations, as are companies like Barrick. And the central banks have reason to wonder if they're ever going to get their gold back -- it has been sold and turned into jewelry and dental fillings, stashed in a million safe-deposit boxes and a scads of high-tech applications.

How much gold is short that needs to be covered?

I'm sure the amount has dropped substantially as miners and bullion banks have been covering their shorts with ever-increasing fear. But GATA estimates that the central banks have lent or sold into the market half or more of their reported 32,000 tonnes of gold reserves. At a conservative price of $675 an ounce, that's a value of about $762 billion. That's big money. And as the gold bull market goes much, much higher, these once-geniuses, now-morons are going to have to cover. It could be the short squeeze of the century.

Or maybe not. GATA believes that a lot of central bank gold sales are a way to make the missing gold go away.

Either way, you don't hear about this in the financial news, partly because the parties concerned absolutely don't want to talk about it and create a panic. And partly because in the larger scheme of things, nobody cares about gold. Yet.

I think it's potentially a very big deal, and the GATA guys have this right.

* * *