Gold Market Manipulation, Syria Attack, and a Constitutional Question

by The Curmudgeon


Last week's CURMUDGEON post, we answered critical questions that directly impact the gold market.  In this promised follow up piece, we focus on what many believe has been market manipulation of the gold price.  We also shed light on how a potential U.S. military strike on Syria might affect gold and other markets.  Finally, we examine whether the President or Congress has the authority to approve such an attack (for humanitarian or other reasons).

But first, a quote from Ayn Rand on gold as real money - that can't be destroyed like paper money can: 


“Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence.  Destroyers seize gold and leave to its owners a counterfeit pile of paper.  Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it.  This kills all objective standards and delivers men into the arbitrary setter of values.  Gold was an objective value, an equivalent of wealth produced.  Paper is a check drawn by legal looters upon an account which is not theirs:  Watch for the day when it bounces, marked “account overdrawn.”


Q & A:

1.   Was the gold market manipulated by the Fed to drive the price down and protect the US $ from a QE/ZIRP instigated fall?

We and several others think so.  The motivation was primarily to prevent a fall in the U.S. dollar’s exchange rate, which would push up import prices and, thereby, domestic inflation.  That would imply that the Fed's QE and ZIRP were not working.  Bond vigilantes would wake up, sell U.S. bonds and the Fed would lose control over long term interest rates. The bond market might collapse and with it the values of debt-related derivatives on the “banks too big to fail” balance sheets. The financial system would be in turmoil, and panic would reign.

Let's look at the evidence. 

Paul Craig Roberts wrote:

"The sudden appearance of an unprecedented 400 ton short sale of gold on the COMEX in April was a manipulation designed to protect the dollar from the Federal Reserve’s quantitative easing policy has found acceptance among gold investors and hedge fund managers.   The sale was a naked short. The seller had no gold to sell. COMEX reported having gold only equal to about half of the short sale in its vaults, and not all of that was available for delivery. No one but the Federal Reserve could have placed such an order, and the order came from one of the Fed’s bullion banks, one of the entities too big to fail.”


Roberts notes that the price of gold bullion is set in the futures market, where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market (including the SPDR Gold ETF-GLD) is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.

"When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. Investors who were not in on the manipulation lost a lot of money."

"The sales of GLD (ETF) shares are accumulated by the banksters in 100,000 lots and presented to GLD for redemption in gold acquired at the driven down price. The short sale is leveraged by the stop-loss triggers and margin calls, and results in a profit for the banksters who placed the short sell order."


Victor Sperandeo maintains that the Fed caused gold lease rates to rise in order to curb the demand for physical gold.


Victor wrote:  "The trade can be done in several ways.  As a hypothetical example, the Fed simultaneously shorts $2 worth of gold futures and borrows $1 worth of gold.  It then pays a higher lease rate for the gold then the prevailing market lease rate, e.g. if 3 month lease rate was 25 bps before, the Fed would drive it to 50 bps.  The Fed then sells the gold it borrowed driving the gold price down further.  The profit expands as the selling continues, because the gold shorts are not covered until the margin calls hit them.  Only then does the Fed (and investment banks it's in cahoots with) buy back the shorts and close out their positions.

Sperandeo cites yet another method of driving gold lease rates higher:  "Gold held by the Fed is sold for cash and it is used for whatever ir wishes .  Futures are shorted in size and the price goes down and the Fed buys back the gold it sold and the futures." 

According to Victor, the Fed sees gold as a commodity bellwether.  If gold is declining and trending lower, investors and speculators then become reluctant to buy other commodities (independent of supply/demand factors on individual commodities).  Stable commodity prices keep inflation in check, which was certainly a Fed objective, Sperandeo said.

Finally, showed a very provocative TV segment which implied that the Fed doesn't actually have the gold it has stored on behalf of foreign central banks, like Germany.   "The Fed has possibly sold the gold, lent it out or used it as collateral for borrowing," says the RT reporter in the video clip entitled:  Gold Gone? Germany baffled as Fed bars access to bullion [YouTube video]

2.  Who are the "banksters" that colluded with the Fed to cause the gold price to fall? 

Theodore Butler writes that one of them was JP Morgan.

"Based upon COT and Bank Participation Reports data, on December 4, 2012 JPMorgan had a net short position in COMEX gold futures of approximately 75,000 contracts. This position represented 20.5% of the true net open interest on that date (once 68,648 spread contracts were removed from total open interest of 434,416 contracts). On that date, the price of gold was $1700. While it is difficult for many (including the CFTC) to grasp the concept that a corner could exist on the short side of the market, surely no one would argue against a 20.5% concentrated share of a major regulated futures market by a single entity would constitute manipulation and a corner."

"It was this corner on the short side of COMEX gold futures by JPMorgan that provided the incentive and led to the subsequent $500 decline in the price of gold into the end of June. On the historic price decline in gold over the first half of 2013, JPMorgan booked profits on their short side gold market corner (of over $2 billion in my estimate) and continued to rig prices lower in order to establish their current long side corner of 85,000 contracts, or 25% of the true net open interest in COMEX gold futures (minus spreads)."

David Zeiler claims that "Goldman Sachs Is Manipulating Gold Prices Right Before Your Eyes."

The thesis is that Goldman used its gold price forecasts to manipulate the price and thereby make a profit in its proprietary trading unit.  In February 2013, a Goldman report to clients stated: 

"The decline in prices since last fall and our updated forecast suggests that the turn in the gold price cycle is likely already underway. As a result, although our U.S. economic forecasts point to modest near-term upside to gold prices, we believe that a sharp recovery in prices to our previous price forecast is unlikely."

Isn't this a bit rhetorical? Or phony? Goldman brazenly cites its own forecast as part of the evidence that the downward move in gold prices is happening.  It's like the firm is bragging that their manipulation of the gold market was successful.

"If you've ever suspected gold prices are being manipulated, you're not alone - and you're right, they are," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

3.   What impact would a U.S. military strike on Syria have on the gold price?

Sperandeo: "In the event of war gold rises, because of the unknown consequences which could lead to other countries joining the fray and escalating the risks of geopolitical uncertainty.  In the case of an attack on Syria, Iran and Russia might retaliate. The holders of the Syrian Pound would sell it for gold and other currencies, as the holders would not be sure if their money would still be in existence later.  Also, war always causes inflation to accelerate as countries print money to cover the additional military costs."

In their latest (password protected) commentary for clients, Citi's Mark Shofield writes: "The uncertainty potentially raises the risk of action from other actors as nervousness within the region rises. While there is uncertainty we may continue to see risk assets drift lower, bond yields fall a little and gold pushing higher."


4.  When authorizing a military strike against ANY country that the U.S. is NOT officially at war with (e.g. Syria), why should U.S. Congress have to approve it? Why can't the President do so without Congressional legislation?

Sperandeo says it's a constitutional question and submits the following documentation from our Founding Father's: 

James Madison:  ". . . The power to declare war, including the power of judging the causes of war, is fully and exclusively vested in the legislature . . . the executive has no right, in any case, to decide the question, whether there is or is not cause for declaring war." (1793.)


"The constitution supposes, what the History of all Governments demonstrates, that the Executive is the branch of power most interested in war, and most prone to it.  It has accordingly with studied care vested the question of war to the Legislature." (Letter to Jefferson, c. 1798.)"


Victor continues: "Advocates of congressional power contend that the President cannot initiate hostilities, because the Constitution expressly vests the power to "declare War" with Congress. In support of that view, they note that James Madison successfully advocated that Congress be given the power, not to "make" war but to "declare" war, to "leave to the Executive the power to repel sudden attacks." In 1862, the Supreme Court opined that the President "has no power to initiate or declare a war," but if there were an invasion, "the President is not only authorized but bound to resist force by force...without waiting for any special legislative authority." Prize Cases (1863)."


Several political pundits cite the War Powers "act" to justify a President's legal authority to order a military strike without consulting Congress. They argue that the War Powers Resolution of 1973 clarifies the Constitution and actually gives the president broader authority to engage in "limited" military action overseas. In such circumstances, they say, Obama doesn't need to get formal authorization from Capitol Hill.


Harvard Professor Jack Goldsmith disagrees.  He recently wrote on Lawfare (a national security blog):  "The White House is mistaken to think that informal briefings to congressional leaders are a substitute, even a near-substitute, for formal public congressional debate and authorization.  Such secret ex ante deliberations lack constitutional significance, and they won't help one bit politically once things go contrary to plan, as they always do."


Sperandeo closes the debate by saying:  "Like the Patriot act, the War Powers act and other legislation (that seemingly grant the President unilateral power) are clearly unconstitutional in my layman's view!"


Wow!!! The CURMUDGEON is at a loss for words....


Till next time.....................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.