• Text smaller
  • Text bigger

Several months ago, when Gold Anti-Trust Action committee chairman Bill Murphy warned congressional
leaders that something was amiss in the gold market, few listened. And
throughout the summer months, when Murphy’s best industry minds were sounding the alarm that the market
price of gold was being artificially manipulated downward, not many
industry leaders, central bankers and gold bullion bank CEOs heeded
their warnings.

Today, however, Murphy said it is a different story. The industry is
finally beginning to come around after the price of gold jumped from
around $290 an ounce, where it has been for most of the past year, to
its current level of about $315 an ounce.

And today, he said, there is panic — or, at a minimum, “near-panic
in the gold loan industry.”

At issue is whether some of the world’s most influential central and
bullion bankers have attempted to manipulate the gold market to their
advantage, and the advantage of key investors, by artificially
depressing the price of gold while making short-term loans on millions
of ounces of non-existent gold. For years, this appears to have been
the case, Murphy said, because of the uncharacteristic
“supply-and-demand” behavior of the gold market.

Murphy voiced his suspicions to WorldNetDaily in May,
saying, “I’ve been a trader for 25 years, and I began noticing that the
gold market was just not trading the way it was supposed to.”

Over the past couple of years, said Murphy, when gold reached a
plateau of $295-300 per ounce, “I began noticing that the market price
for gold would always stop (at a certain level), lose, then come right
back” to the previous level — but never higher. That didn’t follow the
established rules of supply and demand, he explained, and caused alarm
bells to go off in his mind, and in the minds of his industry gurus.

Murphy said this led to an enormous short on gold futures — in the
neighborhood of 10 tons — though banking industry specialists continued
to advise banking executives that short positions on gold were only
leveraged “in the 3- to 4-ton neighborhood.”

Now, Murphy said, key banking industry executives are waking up to
the reality that it has become virtually impossible for the gold mining
industry to keep up with “all of the gold futures contracts that are out
there.” Hence, as he and GATA predicted, normal supply-and-demand
forces may now be poised to take over the gold market as European
central banks move to limit gold leasing.

“Gold bullion (in Australian and Asian markets) was quoted at
$324.50/$326.50 per ounce late on Tuesday,” Reuters reported Oct. 5,
“after trading as high as $331.50 — the highest in two years amid a
need by holders of big short positions to cover their bets or face
potentially ruinous financial consequences.”

In a separate story, Reuters also reported that some Australian
central banks might be short to cover gold loans.

“As spot bullion failed to stay above the resistance at around $330
an ounce in late afternoon (yesterday), profit-taking and fresh buying
emerged,” said the report. “A bullion trading source said market talk
that an Australian bank was facing huge losses from recent sharp gains
in bullion prices triggered fresh buying as the bank would be forced to
cover its positions soon.”

“Banking sources in bullion markets in Australia said most Australian
banks running gold books were short ‘to some degree,’” Reuters said.

“All of what has been occurring in the gold market has been the
result of one-way trading,” Murphy told WorldNetDaily. The recent
announcement by the Bank of England to sell most of their gold reserves,
the offer to buy short loan positions by some of the world’s wealthy,
and the announcement by 15 European central banks that they would cut
back on their gold leasing “demonstrates that all the supply was coming
from borrowed gold,” he said.

“All of a sudden, the European central banks were saying, ‘We’re
going to restrict this borrowed gold and it’s going to affect your lease
rates,’” Murphy said. Consequently, “over the summer, the lease rates
for borrowed gold rose from 1 percent to 3 percent (per annum) right
after the Bank of England’s announced sale.”

Most European banks, Murphy believes, were unaware “of what they were
getting into” by shorting so many gold loans, and the move to restrict
further leases of gold was an attempt to stop the bloodletting.

European banks, he said, were fooled by “the published figures that
there were only about 4,500 tons of gold loans, but we’ve been telling
people the loans are actually for something over 10,000 tons.” Once the
realization began to spread, he said, “it led to increased lease rates
now of about 5-6 percent.”

“If you were borrowing leased gold all summer at $258 an ounce with a
3 percent rate,” Murphy said, “and now all of a sudden gold jumps to
$315 an ounce at 5 or 6 percent, what kind of a great loan does that
turn out to be?”

Worse, he said, the “global hedge funds that would be used to cover
these loans are also massively short. The 10 million ounces of gold
still out in these ‘structured loans’ amounts to more than these mining
companies either have in the ground or can produce in a reasonable
amount of time.” Even the Union Bank of Switzerland, Murphy said,
announced yesterday that the hedge funds are “short 20 million ounces of
gold.”

As of June 30, West Africa’s Ashanti Goldfields was hedged 11 million
ounces of production — or roughly 50 percent of its reserves — vs.
8.75 million on March 31, according to a report by John Hathaway of
Tocqueville Asset Management. Using “conservative assumptions,” the
value of the “hedged book,” he wrote, was $290 million.

However, that asset would become worthless “if gold traded at $325;
at $350, the company would begin to face margin calls,” Hathaway wrote.
“The Ashanti hedge book is a bet that the gold market will remain
quiescent and trouble-free. Ashanti’s sanguine view is not unusual. Few
in the industry are prepared for a spike in the gold price, especially
one which does not retrace.”

“Ashanti’s U.S. banker is Goldman Sachs, according to market sources,
perhaps explaining why Goldman was rumored to be a big buyer of gold
options last Wednesday, following gold’s explosive two-day move,” said a
report from TheStreet.com.

Murphy said gold would likely reach a level of “$400 an ounce in the
near term if there is a massive sale or something, but in essence it
will take $600 an ounce to clear the market — meaning to get it to a
proper supply-and-demand equilibrium price.”

“I believe central banks discovered they had collectively a gigantic
short position” in gold, via exposure to gold producers, Donald Coxe,
chairman of Harris Investment Management and Jones Heward Investments of
Chicago, told TheStreet.com.

He said some mining companies increased their so-called hedging
activities in recent years to combat the decline in gold prices.

“The companies essentially took a loan against their future
production and used the cash to maintain current operations,” the report
said. “But had the price of gold continued to weaken, it would have
further depressed the future value of their assets, potentially forcing
some producers into bankruptcy or into the arms of bigger firms, neither
situation being particularly palatable to lenders.”

“If you’re a producer whose cost (of production) is $270, and the
price is $250, you’re trying to make up the difference in interest
income,” Coxe said. “But if gold is at $220, you’re out of business.
Central banks looked into this and said, ‘Are these guys good for it?’”

Additionally, finance officials realized they were putting their own
assets at risk — both in actuality and via their exposure to hedged
producers — because of the uncertainty regarding future gold sales,
Coxe told TheStreet.com.

Related stories:

What’s going on in the gold market?

Trouble in the gold market

  • Text smaller
  • Text bigger
Note: Read our discussion guidelines before commenting.