Gold Market Manipulation, Syria Attack, and a
Constitutional Question
by The Curmudgeon
Introduction:
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, RT.com
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
ajwdct@sbumail.com
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.