Open Letter to GATA

Dear GATA and Mr. Chris Powell:

I am writing this in response to your article Monetary Metals’ Weiner refuses to see anything wrong in the gold market.

There is a certain irony for me to read that I refuse to see. I have spent eight years studying the mechanics of the market, building a model, developing software to run the model through several generations, and licensing nearly three terabytes of data giving ever bid and offer in both the spot and futures markets with sub-millisecond resolution, going back to 1996.

In my previous company, I architected a massively scalable 3D voice server. In a normal world, I would be working on another Internet software company. Instead, I made a huge investment in drilling deeper into the gold market. The reason is that I am driven by a powerful need to see.

Two theories compete to explain the gold and silver markets. One, the conspiracy theory, holds that the big banks are naked short futures in a long-term effort to keep the gold price far below what it should be. The other, my theory, is that the banks are primarily market makers and they do not hold a massive and perpetual short position.

I proposed a way to test whose theory is right: to look at the behavior of the gold basis as each futures contract heads into expiration. In my recent article, Thoughtful Disagreement with Ted Butler, I published the experiment and the data. The results are conclusive. Whatever else may be going on in the markets, the alleged massive, chronic naked short position in futures does not exist.

In that article I encouraged—and still do—anyone to criticize either my method or my data. So far, no one has come forth with any serious criticism. At the time, you dismissed it as mere “technical analysis. It is not.

In your latest, you say that I “would need to know the details of every gold-related transaction…” No, I would not need to know that. Just as if someone stands on a scale, I do not need to know the details of everything he ate, or the name of his personal fitness trainer. I can read the needle.

You continue that “…leasing gold is not really ‘carrying’ the gold for the duration. He is carrying the liability.” Let’s drill down. The market maker simultaneously enters into a set of transactions:

  1. Borrow dollars
  2. Buy gold bar
  3. Sell gold future for a fixed duration (e.g. 6 months)
  4. Lease gold out for same duration

The market maker does this to earn a profit, which is basis + lease rate – borrowing cost. In other words, the market maker is carrying the gold position. It does not own the gold. It has sold the economic ownership, i.e. price exposure, to the buyer of the future. It is carrying the metal.

Now let me address the second part of your headline, that I deny that anything is wrong in the gold market. Actually, everything is wrong in the gold market, starting with the very use of fiat money, and the fact that we buy and sell gold in the first place.

Aside from that, there should not even be a gold futures market. There should be a gold interest rate market—i.e. a gold bond market. There should not be propaganda in every government school, teaching that money means Federal Reserve Notes and that gold is a volatile commodity. There should not be investment regulation that forces advisors to treat gold as risky, or an investment (it is neither).

There should not be a Fed-induced perpetually-falling interest rate which fuels endless asset market speculations including gold. There should not be a general belief that investing means seeking capital gains provided by the next investor who hands over his capital as your profits. There should not be capital gains taxes on gold, and taxpayer should not be forced to keep their books in dollars, which show a phantom profit if their gold holding increases in price.

One of the consequences of this lust for capital gains combined with the belief that gold is just another chip in the casino, to bet on the price action, is the gold futures market. Futures markets developed as the way for people to coordination storage and later consumption of commodities which are produced seasonally. Gold is not produced seasonally (or consumed).

I could go on.

Let me clarify one other point. You ask, “If central bankers do not think about gold, why is their agent, the Bank for International Settlements, constantly swapping and leasing gold…?” I will clarify my point. The central banks do not care about the price of gold. They have no motive to conduct a long-term suppression scheme. If gold is $200, $2,000, or $20,000 it makes no difference to them. Gold did not circulate as money when it was trading in the $200 range. There was no sign of circulation when it traded at nearly $2,000 in 2011, and it will not circulate when the gold price reaches $20,000.

The central banks are in the gold market to make money—which all agree means dollars. They seek to earn fees on what would otherwise be an asset with a negative-yield.

The irredeemable currencies will continue to do what they are doing—which is be used for every kind of transaction in trade and finance, while they gradually fail. That failure is not the thermonuclear blast of hyperinflation expected by the gold bugs. It is the slow sinking under the water line of drowning in debt.

And at the end, when America collapses as Rome did, and there is blood in the streets—look to Caracas Venezuela for as small preview of what this will look like—gold will be far too precious for anyone to want to show his neighbors that he has it. Which pretty much describes the Dark Age that followed the collapse of 476AD.

In other words, the central bankers should be afraid that their system is failing, but they are not. One thing is for sure, gold is no more a threat to them than a 1955 Ferrari. Both are just chips people use to bet for dollars.

You make one other remark, “Weiner is in the gold arbitrage business and complaints of manipulation of the gold market by governments and central banks may be bad for that business…” The second part is simple, so I will address it first. Monetary Metals is not affected by the price of gold. Monetary Metals is not a bullion dealer and does not buy or sell gold. We do not promise clients that gold will go up. We have long argued that gold does not go up or down, but that it is the dollar which goes down or up.

As to our business, Monetary Metals has two products but they are not based on gold arbitrage. I write about arbitrage, which is the basis (pun intended) of my weekly writings on the gold basis. That is for insight into the likely direction of the price of the metal. The gold basis is the basis for the only true fundamental analysis of the metals.

Our flagship product is gold fixed income. We pay interest on gold. We do that by providing the gold to jewelers, manufacturers, and others who use gold working inventory or as work-in-progress. They need to finance this physical gold, and are happy to pay interest. Investors want interest, and are happy to provide the gold. It’s a win-win deal. It is honest finance, unlike much of what passes for gold “lending” in bullion markets today.

We are doing this for a simple reason. I believe—and I’ve written a lot about this over the years—that interest is the regulator of flows of gold. If the interest rate is zero, gold cannot circulate. It disappears into private hoards. It may be traded for the price action, but it is not used in finance or as a medium of exchange.

We believe that paying interest on gold paves the pathway for the world to move forward to the gold standard, “creating good conditions for the gold business and restoring free and transparent markets”.

11 replies
  1. Frank says:

    If centra banks don’t care about the price of gold, why did Alan Greenspan and Eddie George say the contrary?

    “central banks stand ready to lease gold in increasing quantities should the price rise” Alan Greenspan 1998

    “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.” – Eddie George, then Governor of the Bank of England, 1999

    • Dave H says:

      Fascinating debate, and that’s a question that I have also. I think part of the answer may be that the FED and other CB’s are banking cartels concerned mainly with protecting the banking system, and don’t care nearly as much about the problems of governments, their debts, and their fiat currencies. They’re not worried at all that people might abandon fiat currencies and flock to gold. They care about the current fiat price of gold only insofar as a price move would adversely affect the stability of the “trading houses” (as Greenspan put it) that are part of the cartel. So I think GATA is right that manipulation occurs, but wrong in implying that the manipulation is ongoing, always down, and intended primarily to protect the dollar. I think it’s short-term, ad-hoc meddling as needed to assist banks when they get caught on the wrong side of a trade. It’s heads, the banks win, tails, the CB’s bail out the banks with a little meddling in the gold market. But the gold available to them to do this does seem to be gradually slipping away. It will be interesting to see how it all plays out.

  2. madmax1939 says:

    I usually side with Keith on the whole manipulation thing although there was some stuff published by bullionstar a while back showing correspondence between central bankers during the early 80s on managing the gold price. Some of it was quite comical actually with mention of Italy having a fit every time it was asked to lease out even 1 ounce of gold and how certain countries like Japan and Sweden should be exempt from having to give a percentage up of their gold for leasing operations since they did not have much to begin with. Interesting stuff how accurate though I couldn’t say.

    • Frank says:

      Being a long time follower of both Monetary Metals and GATA I can only say read this
      Says ‘expose, oppose, and litigate against collusion to control the price and supply of gold and related financial instruments’. They keep a handy record of facts but sorry not predictions!

  3. mp40nut says:

    I have been in the precious metals sector, primarily as a savings medium, since 1969 (though I did have a youthful folly phase of speculating in the futures markets for some years, with the intent of taking delivery, rather than obtaining dollars). So, I have been around for some decades observing the ins and outs of exchanges, markets, bullion dealers (worked for a couple during this time), and government. All the players in this “game” are out to make money (as Keith indicated this “money” is dollars).

    First off, both the folks at GATA and Keith have approached this “fiat money” analysis from a moral perspective. Keith, more so than GATA seems to me to “blame” the departure from the gold standard, on the American people; who have sold their birthright for a mess of porridge, by falling for the lure of “something for nothing” of the fiat money system being offered by the bankers (sanctioned by said government). GATA does blame government corruption for failing to support an honest money system; thereby indirectly sitting said blame on the people who vote.

    (I will admit that the fiat money system is most convenient, if I need money for some reason or other, to borrow the fiat (created out of this air) and repay it with decreasing interest rates. If I had to borrow gold or silver my repayment efforts would have cost me far more over the past fifty years.)

    GATA is attempting to reason with people to leave the fiat money “Casino” before the 476 A.D. events Keith mentioned. GATA asks for donations to their cause of alerting the masses, that trading precious metals (in the hopes of acquiring more dollars) is futile (as the “game is rigged”); while Keith (issuing the same warning on precious metals trading as GATA) is providing a gold return on gold alternative as his approach. I see value in both; however I don’t see either method really preventing said 476 A.D. consequences.

    I do appreciate the government’s efforts at market manipulation (all varities thereof) for this has allowed me to gather the necessary knowledge, materials, as well as accumulating precious metals; so in a way I am taking advantage of all the
    “dumb as a bag of hammers” folks out there in our “great nation”, who haven’t comprehended the economic, financial, monetary, and political reality. In my defense, I have spent great efforts to “preach” the “gospel of precious metals” over the past decades, but to date I feel that I have only really reached a handfull, out of the thousands of people I have attempted to enlighten.

    I especially appreciate Chris Powel and Keith Weiner for taking the time and effort to exchange (clarify) their thoughts and concepts. They have both kept the emphasis on the topic and not indulged in “mud slinging” (as is now so common in the current public discourse).

  4. Melvyn says:

    I write as a long term follower who stands in awe of the power of your original thinking and analysis, indeed you can count me as an ardent disciple of your teachings – I try not to miss a single word of what you have to say.

    With gold being the only contender for the dollar’s crown, even after 50 years of anti gold propaganda, it seems to me that only by orchestrating sharp drops in the gold price can the central banks hope to prevent it becoming regarded as a safe haven.

    Best regards and more power to your elbow

  5. tbombadil says:

    With respect to Keith’s recent ‘argument’ with GATA, I may be mistaken but the salient fact here is that the ‘price’ of gold never changes. Gold is and always has been worth its weight. The fact that one can even buy gold is nothing more than a construct used to reinforce the common perception of mismanaged currency as money to ensure that the issuers of said currency can continue to mismanage it, enabling them to use worthless paper to acquire real wealth. Keith, you probably don’t care but I sincerely hope that you are not engaging in this ‘dispute’ with GATA just for kicks. I’ve spent a bit of time attempting to point out that you hold a similar position to Chris but you are merely looking at the issue from a different perspective, given that the notion of buying money is a bit preposterous on its face.

  6. Frank says:

    Even the Russian’s know that LBMA un-allocated gold accounts and Comex futures markets don’t drive demand for physical gold.
    Also if you read, on page 37 Un allocated accounts, they tell you clearly that ‘in excess of 90% of all pm traded on the inter bank/wholesale/OTC market clear over Loco London accounts, reflecting debit or credit exposure to the institution where the account is held, which is analogous to a current account held with a bank’. in other words they trade credit and debit obligations and not the metal it self. There is no denying that Paper gold is created into existence, just as ‘banks create 97% of the money supply out of thin air’ .

  7. Mish says:

    “I think it’s short-term, ad-hoc meddling” correct
    But not by central banks
    Rather by market makers if there is some arb possibility that presents itself, especially at illiquid times
    They do not give a damn about direction, only profit

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