Gold Market Manipulation, Syria Attack, and a
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 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.”
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.
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
"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.
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.
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
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.
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?
that one of them was JP Morgan.
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."
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
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:
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
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.
ever suspected gold prices are being manipulated, you're not alone - and you're
right, they are," said Money Morning Chief Investment Strategist
3. What impact would a U.S. military strike
on Syria have on the gold price?
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
it's a constitutional question and submits the following documentation from our
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.....................
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.