Debt and Risk Levels
Using Debt Levels to Predict Market Risks, Part 3
February 3, 2019
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Two Reasons Why Primary Dealers Are Hoarding US Debt
February 10, 2019

GSPros Monthly Subscriber Digest for February 2019

This is going to be our lengthiest member digest so far. It may take you a couple of readings to digest it all.

This Month’s Content

Originally, I promised subscribers that this month’s digest was going to cover what happens to the gold and silver price when the current price scheme goes blows up, which it will. This was on the heels of the January 2019 subscriber digest for gold or the December digest for silver. Those digests cover the current pricing schemes for gold and silver, respectively.

I lay out exactly what the cost factors are in producing the metals, and what drives their current trading price. So if you have not read those subscriber digests yet, and listened to the corresponding monthly member broadcasts, please do that first.

However, to properly lay the foundation for the discussion for what happens next in gold and silver, I decided that we needed to discuss why the metals are not in fact trading at their true, free market price.

Both subjects need their own treatment, else, we would have the makings of a short novel if we tried to cover them in the same place.  Once we cover this subject, we can dive into what happens when this system will inevitably fail as natural market forces take over.

Further, to gain more in-depth background on why the market demand for gold and silver is going to explode, please read my book Drop Shadow: The Truth About the Economy. The book details the case for why the broad markets are completely distorted and the statistics we measure them by are false.

All markets must revert back to their mean valuation, and it is this reset that is going to launch gold and silver to values based upon their real utility and value.

I am going to include a summary which you can use to navigate the content.

Content Summary

  • A summary of the suppression scheme for gold and silver
    • Central Bank Collusion
    • Bullion Bank Collusion
    • Global Bank Price Rigging
  • Central Bank Gold Holdings
    • Central Bank Gold Holdings
    • Sales
    • Leases and Swaps
  • Gold and Silver Derivatives
    • ETFs

Summary of Price Suppression

Central Bank Collusion

The London Gold Pool was a secret agreement by governments to keep the price down at a time when currencies were still on the gold exchange standard.

Fearing a relapse, the international bankers of the BIS and the Fed-US Treasury secretly formed the London Gold Pool. Each member of the Pool would pledge some of their gold to keep the London market suppressed. The Bank of England would dump their gold on the London market whenever necessary, and at the end of each month the other members would reimburse the BoE in accordance with the percentage of the pool they owned. The members were:

  • 50% – United States of America with $135 million, or 120 metric tons
  • 11% – Germany with $30 million, or 27 metric tons
  • 9% – England with $25 million, or 22 metric tons
  • 9% – Italy with $25 million, or 22 metric tons
  • 9% – France with $25 million, or 22 metric tons
  • 4% – Switzerland with $10 million, or 9 metric tons
  • 4% – Netherlands with $10 million, or 9 metric tons
  • 4% – Belgium with $10 million, or 9 metric tons

By acting in secret, the governments hoped to stagnate the [gold] market and keep potential buyers away.

The article notes that excerpts from page 3-4 of the Fed Meeting Minutes (1967) explain the scheme:

The announcement on Thursday, December 7, of a $475 million drop [422 metric tons – auth] in the Treasury’s gold stock seemed to have been accepted by the markets as about in line with prior expectations of the costs of the gold rush following sterling’s devaluation. What the market did not know, of course, was that only a $250 million purchase of gold from the United Kingdom saved the United States from a still larger loss in the face of some foreign central bank buying… The logistical acrobatics of providing sufficient gold in London were performed with a minimum of mishaps, although the accounting niceties were still being ironed out.

Of greater concern, however, was the fact that the drain on the pool was accelerating again… the measures taken by the Swiss commercial banks and by some other continental banks to impede private demand for gold worked quite well, although it was clear from the start that such measures could serve only as a stop-gap until some fundamental change was agreed upon. Persistent newspaper leaks–mainly from Paris–about current discussions on this subject and their reflection in gold market activity Monday and today pointed up the need for speed in reaching a decision.

Further reference to gold market manipulation and the London Gold Pool on page 12 of the Fed Meeting minutes linked above:

Although the German case was the most striking example of central bank operations following the meeting in Frankfurt, the availability of forward cover into guilders and Belgian francs at reasonable rates had also helped to reassure the [gold] market.

Under Secretary [of Treasury] Deming, who had led the U.S. delegation to Frankfurt, made the necessary arrangements, and the group met with him in Basle yesterday. Meanwhile, representatives of the countries in the gold pool met in Washington last week to make a preliminary review of possible additional measures to keep the gold market situation under control. Not unexpectedly, the gold pool also was the main topic of conversation at the regular Basle [Switzerland, the home of the BIS – auth.] meeting on Saturday and Sunday, and it was discussed in detail by the governors on Sunday evening.

Page 15 of the Fed meeting minutes goes on to note that Italy and Belgium may have to leave the pool due to substantial losses, and that the pool would need to divert demand away from London which could not keep up the suppression forever.

The Washington Agreement was signed into place by 11 member central banks. The agreement stipulated that no more than 400 tons of gold per year would be sold for 5 years starting in 1999 through 2004.

Given the sheer amount of gold that is (1/6 of yearly peak production), that’s sort of like Tiger Woods graciously ‘limiting’ his affairs to 15 women at a time from the pool of a hundred.

GATA’s analysis of the Washington Agreement(s) state that the Washington agreement is a fraud because central banks are agreeing to sell gold they have already leased out (and never expected back anyway).

Item 3 in the agreement is the red herring. It is a smokescreen behind which the banks are, as Chris Powell said,

..writing off as sold their leased gold, gold that is long out of the vault and already sold into the market and a dangerous liability for the bullion banks that borrowed it. Such ‘sales’ don’t add to the gold supply in the market; they help avert a short squeeze by expropriating national assets in favor of influential private interests.

Since the Washington Agreement was signed over four years ago, more than 4,000 tonnes of gold have left central bank vaults to fill the gap between mine supply (plus scrap) and physical demand. Another thousand plus tonnes will leave central bank vaults during 2004 as well. The central banks are being bled white.

Note in the above paragraph that demand outpaces supply, and the Washington Agreement is used to cover up the leasing that has taken place to supply that 1400 yearly tons of gold shortage and keep the market price from succumbing to even higher price increases.

How do we know the Central Banks rig the gold market? We know because they tell us so.

On July 24, 1998, Greenspan told the House Banking Committee: “Central banks stand ready to lease gold in increasing quantities should the price rise.”

The Central Bank of Australia commented in their 2003 Annual Report:

Foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market. In investing these assets, priority is therefore given to liquidity and security, in order to ensure that the assets are always available for their intended policy purposes.

And finally, GATA has documented that the head of BIS monetary and economic department, William White, stated in a speech titled Past and Future of Central Bank Cooperation:

The intermediate objectives of central bank cooperation are more varied. First, better joint decisions, in the relatively rare circumstances where such coordinated action is called for.

Second, a clear understanding of the policy issues as they affect central banks. Hopefully this would reflect common beliefs, but even a clear understanding of differences of views can sometimes be useful.

Third, the development of robust and effective networks of contacts.

Fourth, the efficient international dissemination of both ideas and information that can improve national policy making.

And last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.

The amount of fixing had to increase to accommodate the demand for real money as fiat currencies continued to inflate lose purchasing power over time. These central banks schemes to collude on fixing the price of gold began to fail. Therefore, they had to come up with other schemes to influence the market price of gold.

Bullion Bank Collusion:

Gold market analysts have exposed the attempts to collude in suppressing the gold market. The first involves price fixing. The gold market is the only commodity market I know of where the major players get together to overtly fix the price of the commodity. Gold is fixed twice daily by the five members of The London Gold Market Fixing Ltd. Previously the members would meet in private to fix the price of gold.

Adrian Douglas, from GATA.org, had provided a mathematical correlation in 2010 showing that the twice daily gold price fix action could not possibly be random actions of markets, and therefore manipulation must exist. From his report entitled The Gold Market is Not Fixed, it is Rigged which analyzed the market for 10 years.

Gold Up Down Intraday

Gold Up Down Intraday

The table shows the total number of up days and down days for both the intraday and the overnight trading from 2001 to 2010. There is a striking contrast. In fact there is almost a mirror image where the number of up days overnight is very similar to the number of down days intraday. The probability of getting this contrasting result at two different times in the same 24 hour period, in the same commodity market, and over a 9 year period is approximately one in 2.6 x 1031. In other words it is practically impossible for such a divergence of data to occur by chance, let alone for the divergence to have a nearly perfect correlation.

Intraday Percentage Change

Intraday Percentage Change

The inescapable conclusion is that some entity or entities were deliberately suppressing the gold price between the AM Fix and the PM Fix and that this suppression was calculated to proportionately counter the cumulative gains in price achieved in the Asian markets that trade at some time in the period after the prior day PM Fix until the following AM Fix.

Such a consistent manipulative effort would necessarily involve entities with access to large amounts of gold; this implicates central banks as they are the only entities with large hoards of gold and furthermore they have a motive for suppressing the price of gold which is to hide their mismanagement and debasement of their national currencies.

More recently, the Chinese have setup their own gold exchange, the Shanghai gold exchange, so that they can set prices of gold on their own markets and do not have to rely on the US and London exchanges. Further, I have documented how it appears the Chinese have used their own intervention to control gold prices so they can continue to accumulate it ahead of the system crash.

Bank Price Rigging

Deutsche Bank settled litigation related to gold market manipulation in 2016, as reported by Reuters.

Deutsche Bank AG agreed to settle U.S. lawsuits accusing it of conspiring with other banks to manipulate gold and silver prices at investors’ expense, court papers show. Terms were not disclosed, but both settlements will include monetary payments by the German bank. Deutsche Bank also agreed to help the plaintiffs pursue claims against other defendants.

Then there are the recent convictions on gold market rigging by banks such as JP Morgan.

An ex-J.P. Morgan Chase trader has admitted to manipulating the U.S. markets of an array of precious metals for about seven years — and he has implicated his supervisors at the bank.

As part of his plea, Edmonds said that from 2009 through 2015 he conspired with other J.P. Morgan traders to manipulate the prices of gold, silver, platinum and palladium futures contracts on exchanges run by the CME Group. He and others routinely placed orders that were quickly cancelled before the trades were executed, a price-distorting practice known as spoofing.

The article indicates a history of gold market rigging by this trader and his supervisors, who had seemingly perfected a way to control the prices using paper derivatives on the open markets.

Both UBS and HSBC were also named in legal actions by the US CFTC against gold price rigging schemes. That is several mega global banks caught with their pants down in rigging the precious metals markets.

Central Bank Gold Holdings

So do the Central Banks still have gold?

In a book written by Chris Weber and summarized on Lew Rockwell’s site, we noted that in the one audit of Fort Knox:

The shocking admission Ft Knox holds very little good delivery gold was made to Mr. Durell by the chief official of the General Accounting Office (GAO).

By February 1975 Saxbe was Ambassador to India, so Durell communicated his displeasure through his local Virginia congressman.

As a result of this, the GAO sent four men to Durell’s Virginia farm to try to convince him of the validity of their accounting practices. In charge was Hyman Krieger, the GAO’s Washington regional manager.

The one concrete piece of information to emerge from this meeting was a bombshell. Krieger admitted that only a small part – 24.4 million ounces – of the official gold was of a quality of .995 or better. In other words, less than 10% of the 264 million ounce held by the Treasury could be considered good delivery gold.

Krieger confirmed this in a letter to Durell of April 11, 1975:

We analyzed, as agreed, the gold bar schedules for Fort Knox and found that fine gold in good delivery form (.995 or better) at Fort Knox totaled 24,411,140 ounces.

Note that an audit of Fort Knox has not been allowed since. Well, where did all this central bank-owned gold go? There are several ways to dispose of it, including selling, leasing, and swapping it.

Gold Sales

The first example comes from the Bank of England. The BoE, in June 1999, auctioned off gold reserves to the lowest bidder. In the linked announcement you will find the following (note this link has been removed from their website – click here for another):

Under the single price format, valid bids will be ranked in descending order of price, and allotments will be made in multiples of 400 ounces to bidders whose bids are at or above the lowest price at which the Bank of England decides that any bid should be accepted (the “lowest accepted price ”). Applicants whose bids are accepted will be allotted ounces of gold at the lowest accepted price. Bids above the lowest accepted price will be allotted in full at the lowest accepted price.

So, um.. I give you the lowest price for your gold and I win? Man, if only people on Ebay would follow this logic.

It is a matter of historical record that the BoE received a horrible deal, as prices have risen to 6 times those auction sales. I guess the brilliant English politicos didn’t act in the people’s best interest to preserve the country’s wealth. Oops.

So what does Bank of England Governor Eddie George have to say about gold price suppression?

In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999: George said

We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K.

Leases and Swaps

Central banks are engaging in leases and swaps to flood the physical gold markets. Leases and swaps are types of loans for gold. In a lease, the bank gives physical possession to someone in exchange for ‘rent’ noted as a lease rate. In a swap, the bank exchanges the gold for currency as a loan with collateral, and at some point in time is supposed to get the gold back. Supposedly, banks gold-rich and cash-poor may do this to improve ‘liquidity’.

One of the issues with swaps is that they are counted as reserves on the books of the bank even though they do not retain possession of the gold. To wit: an excerpt from the bank of the Philippines on IMF guidelines.

Beginning January 2000, in compliance with the requirements of the IMF’s reserves and foreign currency liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with non-central banks shall be treated as collateralized loan. Thus, gold under the swap arrangement remains to be part of reserves and a liability is deemed incurred corresponding to the proceeds of the swap.

And here:

The European Central Bank (ECB) also made it clear that the IMF policy is to include swaps and loans as reserves. The ECB responded to GATA: “Following the recommendations set out in the IMF operational guidelines of the ‘Data Template on International Reserve and Foreign Currency Liquidity,’ which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralized loans in balance of payments and international investment-position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet.” The Bank of Finland and the Bank of Portugal also confirmed in writing that the swapped gold remains a reserve asset under IMF regulations.

And for a specific example, GATA demonstrates how German and US banks performed a swap of gold and muddled up the reserves count for both banks to the point we cannot tell who owns what.

The German Bundesbank (the secret “swapper” of gold with US) lists “Gold and Gold Receivables (loans)” as a one line item on its balance sheet. This approach is in direct conflict with Generally Accepted Accounting Principles (GAAP), and thus German banking law. So, from their published financial statements there is no way to determine how much gold Germany holds in its vaults. The refusal of the Bundesbank to provide a breakdown between physical gold and gold receivables belies any notion of market transparency.

Clearly deceptive accounting, countenanced by the IMF has allowed official sector gold to hit the market without a corresponding drawdown on the balance sheets of central banks. This has made it impossible for analysts to ascertain the exact size of official sector gold loans, swaps and deposits. The unwillingness of central banks to provide even a minimum level of transparency suggests that total gold receivables are substantially larger than the accepted industry figure of ~5,000 tonnes.

So here’s the accounting. The U.S. government swaps gold with the Bundesbank, which now owns the gold at West Point. “Further, to secure this transaction, the Bundesbank receives SDR Certificates, which solves “The Mystery of the Disappearing SDR Certificates” (Freemarket Gold and Money Report Letter No. 289, August 13, 2001). The ESF gets the gold in the Bundesbank’s vault, which it then lends to the bullion banks in an off-balance sheet transaction.

Gold and Silver Derivatives

It has been well documented that central banks were net sellers of gold until very recently, when the trend reversed in Asia, Russia, India, and others. Now while central banks are buying back gold in fear of paper currency collapse, they use other methods to keep gold’s price down.

In this part, I will quickly talk about gold and silver derivatives. This is where it gets really fun.

Gold Derivatives

Gold Derivatives

The is an old chart, but it shows how much derivative exposure occurs in the gold market. The gold production in 2017 was 3,200 tonnes according to the World Gold Council. So the derivatives exposure is tens of times multiple what actually yearly production is.

The sheer size of the derivatives monster should be enough to show people that whatever piece of paper you are holding that says it is backed by gold, the reality is that you have about a snowball’s chance in hell of getting the gold that the paper is based upon. There just isn’t enough of it.

Or to look at it another way, there is enough gold, but the current price at which people buy these paper options is severely depressed which allows a proliferation of worthless paper options which wouldn’t exist if gold and silver were properly valued.

The major exchange trade funds (ETF) that most people buy to get exposure to gold are derivatives and do not include physical ownership. Per Bullionvault:

Although these products do hold physical gold that backs the respective securities, a primary concern is that they do not, and never will, allow the unit holders to obtain access to the underlying gold.

For example, in ETFS Physical Gold (Ticker PHAU), “each individual security has an effective entitlement to gold”. For Source Physical Gold P-ETC, “each Gold P-ETC is a certificate which is secured by gold bullion”. For the SPDR Gold Trust, the gold shares represent fractional, undivided interests in the Trust” which owns the underlying gold. But in none of these vehicles can the unit holder take delivery of the underlying physical gold that backs the shares or units.

Further, there are no audits allowed of the vaults storing the actual gold. And, the location of the vaults are not even made public so we know which ones hold the gold or silver.

The gold bar holdings underlying these collective investment pools are mostly stored in the London precious metals vaults of HSBC and JP Morgan, and in some cases, similar vaults in New York, Zürich and Frankfurt. Without exception, retail holders of gold-backed ETF units / shares / certificates can never visit these custodian vaults. In the case of the London vaults of HSBC and JP Morgan, the vault locations aren’t even publicly disclosed[6], so even if you wanted to turn up at the vault, you wouldn’t know where to go.

It goes without saying that since retail investors can’t ever visit the vaults in which ETF gold is stored, and since even institutional holders only get a quick vault ‘tour’, these ETF holders can never perform their own independent audits of the stored gold. This would not be practical anyway given that the ETF gold is a pool of undivided interests in the form of large Good Delivery bars, so there are no ear-marked gold bars individually identifiable per holder.

Further, there is some question whether the ETFs have the gold backing they say they do. As Forbes notes:

Skeptics have raised doubts over the trust’s management of its physical gold, with questions over how much is actually held.  HSBC, the custodian, is very secretive regarding its vault.  Earlier this year, CNBC’s Bob Pisani was allowed to see the vault only after surrendering his cell phone and taken in a van with blacked out windows to an undisclosed location.  Once in the vault, Pisani held up a gold bar and explained they were all numbered and registered.  Astutely, ZeroHedge noted the bar Pisani held up was missing from the current bar list, fueling further speculation and skepticism.

Gold and Silver ETFs

Commodity HQ has some really good coverage over what type and how much gold may be in the vaults. The first quote here shows that the funds may not hold gold up to common market standards which may result in a loss for the trust (and for all share holders by extension!).

“Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss.” – GLD Prospectus, page 11.

The next quote shows that the custodian can appoint subcustodians to hold the gold, but they do not monitor them well enough to confirm their holdings and as a result losses would pass to the trust (and those that hold the shares!).

“The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited, which increases the possibility that the Trust may suffer a loss if a subcustodian does not use due care in the safekeeping of the Trust’s gold bars.” – GLD Prospectus, page 12.

Lastly, the custodian has limited ability to sue for losses by a subcustodian.

“The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited, which increases the possibility that the Trust may suffer a loss if a subcustodian does not use due care in the safekeeping of the Trust’s gold bars.” – GLD Prospectus, page 12.

Ok, so let’s break that down. The custodian is super secretive on who can actually look at the gold that is held physically and tends to make the process very opaque. They appoint the storage to sub-custodians that legally they don’t have full control over and may have limited ability to recover damages in case of the loss, whether by theft, sub-quality metal bars, or whether the metals are ‘lost’.

Are we sure they hold the gold they say they do? No. And we have very little recourse, due to the rules of the custodian, for recovering losses. This means when purchasing the gold or silver ETF, the investor is taking all of the risk with almost none of the guarantees that one would have simply by holding the physical metals in their possession.

That sounds like the makings of a scam to me, though formally one has not happened yet.

Conclusion

Now that we have discussed what methods were used to subvert the free price mechanism for gold and silver, you may be wondering why I expect this to suddenly change. That will be covered in detail in this month’s audio broadcast.

To preview:  the world financial system, based upon trillions of debt and quadrillions of derivatives, is beginning to reach its failure point. There are signs all over that the system is going to crash, and authorities around the world are attempting to change the rules of the system so that we can have an ‘orderly’ reset.

However, natural market forces are going to take over and begin to price real things for their true value while devaluing the paper contracts that much of our market is run on. People are already waking up everywhere, meaning the confidence that the paper system needs to function is beginning to wane.

This will not only happen in the West, but in countries across the world. And the chance for world conflict is going to increase exponentially. This is the time to hold real things that have shown to hold their value for centuries. Gold and silver are two of those real things.