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Saturday, August 15, 2009

How Gold is debased by counting Gold stores and Gold Recievables as the same event

© 2003 by The Freemarket Gold & Money Report.
One of the statistics complied by the International Monetary Fund is the quantity of gold owned by the world's central banks. That weight is reported to be 32,291 tonnes of gold. Most people accept this number at face value and without questioning its accuracy. However, central banks actually own less gold.

In reality central banks own 32,291 tonnes of gold AND gold receivables. This distinction is important. From both a legal and an accounting point of view, gold in the vault is clearly very different from gold owed to you. The reason is that gold in the vault is much less risky than someone's promise to pay you gold.

This distinction between these two unlike assets is one of the most basic principles of accounting, namely, that cash is different from a receivable. For this reason, cash and accounts receivable appear as two different line items on balance sheets prepared according to generally accepted accounting principles. But some central banks do not report their gold assets using these sound and well-established accounting standards.

For example, the Bundesbank discloses in its 2002 annual report that it has €36,208 million of "Gold and gold receivables". It further sustains the fiction that these two different assets are one asset by stating in the footnotes to its financial statements: "At the end of 2002 the Bank's holdings of fine gold amounted to 111 million ounces." The Bundesbank does not, however, state anywhere in its annual report what portion of its gold is stored in vaults and what portion has been removed from the vault and placed at risk by being loaned.

Another central bank with a large gold asset is the Banca d'Italia. According to its 2001 annual report, which is the latest report available: "Monetary gold reserves were 48.1 trillion lire (EUR 24.8 billion, or $21.9 billion)." One would think from this statement that this "gold reserve" is sitting safely in secure vaults, as a reserve. But this central bank too has been withdrawing gold from the vault and placing it at risk. Its balance sheet also records "Gold and gold receivables", and like the Bundesbank, it fails to disclose how much of its gold has been loaned.

In contrast to these reports by the German and Italian central banks, the annual report of the Banque de France shows that none of its gold has been loaned. There is no gold receivable reported by it, so none of its gold has been placed at risk by being loaned.

There is also a third category of reporting. The Swiss National Bank, for example, uses generally accepted accounting principles to prepare its financial statements. Not only does it disclose that 254.7 tonnes of its 1,661.9 tonnes have been loaned, it provides information to assess the level of risk. For example, 158.7 tonnes were loaned on an unsecured basis.

Another central bank that discloses its gold lending is Banco de Portugal. According to its latest annual report, it has removed from the vault and placed at risk 434.1 tonnes of its 606.7 tonnes, or 71.6%, which is relatively much greater than the percentage of gold placed at risk by the Swiss National Bank, which is 15.3%.

Accordingly, there is no question that some central bank gold has been removed from vaults and loaned into the market. But because the level of reporting by the central banks is inadequate, it has been impossible to precisely determine the exact weight of gold removed from central bank vaults. This unknown weight of gold has become one of the most contentious issues within the gold industry. And the debate that has arisen as a result is well warranted.

If gold is removed from a vault and sold into the market, this dishoarding obviously will have an impact on gold's rate of exchange to the dollar and other currencies. This result from dishoarding is a basic principle of economics, but with a twist. An adaptation is necessary in a post-Gold Standard world to account for the fact that national currencies are no longer directly tied to gold.

Economic models prove that the extension of credit debases a currency, which is a principle that is true for any money, whether dollars, euros or gold. However, because goods and services are today priced in terms of national currencies - all of which are fiat and are only exchangeable for but not redeemable into gold - the impact of credit extensions in gold is different than the impact of credit extensions in national currencies.

When credit is pumped up using a national currency, it's a process that usually results in inflation; the prices of goods and services rise. The new extensions of credit increase the supply of the national currency, and if this growth in supply is greater than the demand for the currency (which has always been the case since the abandonment of the last remnants of the Gold Standard in 1971), the currency loses purchasing power. In other words, it is debased, and that debasement is reflected by rising prices. Each unit of currency purchases less and less. However, goods and services are no longer priced in terms of gold, so gold credit extensions have a different result on gold's purchasing power.

If gold credit extensions are greater than the demand for gold, it is debased, and like national currencies, it's purchasing power declines. But because goods and services are priced in national currencies, gold's debasement is manifested by a decrease in its exchange rate, or to put it in the terms commonly used, the ‘gold price' falls. In other words, gold when debased in this way purchases less national-currency-denominated goods and services. Thus, it is clear from this analysis that it is important to know how much central bank gold has been loaned, so that these credit extensions can be analyzed to assess their impact on gold's rate of exchange - the so-called ‘gold price' - compared to the many national currencies.

In recent years several efforts have been made to overcome the inadequate reporting of central banks in order to determine the weight of gold dishoarded from their vaults. Many people continue to accept the results prepared by Gold Fields Mineral Services, which have generally stated that around 5,000 tonnes have been removed from central bank vaults. However, I dismiss this number because GFMS surveys do not capture the weight of gold borrowed by commercial banks to fund their national currency assets, and my assessment is that this weight of gold represents the largest portion of gold loaned out by central banks.
Continued at Source

James Turk is the founder of Goldmoney.com and a supporter of Goldmoneybill.org

Silver is your means of preserving your wealth. Monex is the low-cost Silver retailer. Jump on the 500% rise in Silver over the next two years. 800-949-4653 x2172
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James Turk on the Gold Cartel

By James Turk, Editor
Freemarket Gold & Money Report
Sunday, May 3, 2009
Copyright 2009 by James Turk. All rights reserved.

This week Bill Murphy and Chris Powell, co-founders of the Gold Anti-Trust Action Committee Inc. (www.gata.org), will be in London, England. Their trip is part of GATA's ongoing effort to raise awareness of the gold cartel and its surreptitious intervention in the gold market.

Bill and Chris will meet with the British news media to explain GATA's findings. They will also attend an important fund-raising event being held in support of GATA's work. Their trip is another important step by GATA aimed at creating a free market in gold, one which is unfettered by government intervention.

Governments want a low gold price to make national currencies look good. Gold is recognizable the world over as the "canary in the coal mine" when it comes to money. A rising gold price blurts the unpleasant truth that a national currency is being poorly managed and that its purchasing power is being inflated.

This reality is made clear by former Federal Reserve Chairman Paul Volcker. Commenting in his memoirs about the soaring gold price in the years immediately following the end of the gold standard in 1971, he notes: "Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake." It was a "mistake" because a rising gold price undermines the thin reed upon which all fiat currency rests -- confidence. But it was a mistake only from the perspective of a central banker, which is of course at odds with anyone who believes in free markets.

The U.S. government has learned from experience and has taken Volcker's advice. Given the U.S. dollar's role as the world's reserve currency, the U.S. government has the most to lose if the market chooses gold over fiat currency and erodes the government's stranglehold on the monopolistic privilege it has awarded to itself of creating "money."

So the U.S. government intervenes in the gold market to make the dollar look worthy of being the world's reserve currency when of course it is not equal to the demands of that esteemed role. The U.S. government does this by trying to keep the gold price low, but this is an impossible task. In the end, gold always wins -- that is, its price inevitably climbs higher as fiat currency is debased, which is a reality understood and recognized by government policymakers.

So recognizing the futility of capping the gold price, they instead compromise by letting the gold price rise somewhat, say, 15 percent per year. In fact, against the dollar, gold is actually up 16.3 percent per year on average for the last eight years. In battlefield terms, the U.S. government is conducting a managed retreat for fiat currency in an attempt to control gold's advance.

Though it has let the gold price rise, gold has risen by less than it would in a free market because the purchasing power of the dollar continues to be inflated and because gold remains so undervalued notwithstanding its annual appreciation this decade.

These gains started from gold's historic low valuation in 1999. Gold may not be as good a value as it was in 1999 but it nevertheless remains extremely undervalued.

For example, until the end of the 19th century, approximately 40 percent of the world's money supply consisted of gold, and the remaining 60 percent was national currency. As governments began to usurp the money-issuing privilege and intentionally diminish gold's role, fiat currency's role expanded by the mid-20th century to approximately 90 percent. The inflationary policies of the 1960s, particularly in the United States, further eroded gold's role to 2 percent by the time the last remnants of the gold standard were abandoned in 1971.

Gold's importance rebounded in the 1970s, which caused Volcker to lament the so-called mistakes of policymakers. Its percentage rose to nearly 10 percent by 1980. But gold's share of the world money supply thereafter declined, reaching about 1 percent in 1999. Today it still remains below 2 percent.

From this analysis it is reasonable to conclude that gold should comprise at least 10 percent of the world's money supply. Because it is nowhere near that level, gold is undervalued.

So given the ongoing dollar debasement being pursued by U.S. policymakers, keeping gold from exploding upward to a true free-market price is the first thing they gain from their interventions in the gold market. The other thing they gain is time. The time they gain enables them to keep their fiat scheme afloat so they can benefit from it, delaying until some future administration the scheme's inevitable collapse.

So how does the U.S. government manage the gold price?

They recruit Goldman Sachs, JP Morgan Chase, and Deutsche Bank to do it, by executing trades to pursue the U.S. government's aims. These banks are the gold cartel. I don't believe that there are any other members of the cartel, with the possible exception of Citibank as a junior member.

The cartel acts with the implicit backing of the U.S. government, which absorbs all losses that may be taken by the cartel members as they manage the gold price and which further provides whatever physical metal is required to execute the cartel's trading strategy.

How did the gold cartel come about?

There was an abrupt change in government policy around 1990. It was introduced by then-Federal Reserve Chairman Alan Greenspan to bail out the banks back then, which, as now, were insolvent. Taxpayers were already on the hook for hundreds of billions of dollars to bail out the collapsed "savings and loan" industry, so adding to this tax burden was untenable. Greenspan therefore came up with an alternative.

Greenspan saw the free market as a golden goose with essentially unlimited deep pockets, and more to the point, saw that these pockets could be picked by the U.S. government using its tremendous weight, namely, its financial resources for timed interventions in the free market, combined with its propaganda power by using the news media. In short, it was easier to bail out the insolvent banks back then by gouging ill-gained profits from the free markets instead of raising taxes.

Banks generated these profits through the Federal Reserve's steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990 and the Bank of Japan was pursuing a zero-interest-rate policy to try reviving the Japanese economy. A U.S. bank could borrow Japanese yen for 0.2 percent and buy U.S. T-notes yielding more than 8 percent, pocketing the spread, which did wonders for bank profits and rebuilding the bank capital base.

Gold also became a favorite vehicle to borrow because of its low interest rate. This gold came from central bank coffers, but central banks refused to disclose how much gold they were lending, making the gold market opaque and ripe for intervention by central bankers making decisions behind closed doors. The amount lent by central banks has been reliably estimated in various analyses published by GATA as between 12,000 and 15,000 tonnes, nearly half of total central bank gold holdings and four to six times annual gold mine production of 2,500 tonnes. The banks clearly jumped feet first into the gold carry trade.

The carry trade was a gift to the banks from the Federal Reserve, and all was well provided that the yen and gold did not rise against the dollar, because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which, if allowed to rise high enough, would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell half of its gold holdings. Gold was driven to historic lows, as noted above, but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered and demand for physical gold began to climb.

As demand rose, another more intractable and unforeseen problem arose for the gold cartel.

The gold borrowed from the central banks had been melted down and turned into coins, small bars, and monetary jewelry that were acquired by countless individuals around the world. This gold was now in "strong hands," and these gold owners would part with it only at a much higher price. So where would the gold come from to repay the central banks?

While the yen is a fiat currency and can be created out of thin air by the Bank of Japan, gold is a tangible asset. How could the banks repay all the gold they borrowed without causing the gold price to soar, worsening the marked-to-market losses on their remaining positions?

In short, the banks were in a predicament. The Federal Reserve's policies were debasing the dollar, and the "canary in the coal mine" was warning of the loss of purchasing power. So Greenspan's policy of using interventions in the market to bail out banks morphed yet again.

The gold borrowed from central banks would not be repaid after all, because obtaining the physical gold to repay the loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government's managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn't notice. Given gold's "canary in a coal mine" function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel.
Continued at Source
ames Turk is founder and chairman of GoldMoney.com, editor of the Freemarket Gold & Money Report, co-author of "The Coming Collapse of the Dollar," which was recently updated in a new edition as "The Collapse of the Dollar" (www.dollarcollapse.com), and a consultant to the Gold Anti-Trust Action

Goldmoneybill.org is the original state gold currency bill currently being proposed in 6 state legislatures nationwide.

Silver is your means of preserving your wealth. Monex is the low-cost Silver retailer. Jump on the 500% rise in Silver over the next two years. 800-949-4653 x2172
use Kevin from Goldmoneybill as referral to help support this site.

Sunday, August 9, 2009

An Explanation of the Federal Reserve Leviathan

A excellent video explaining the deception of the Federal reserve. Support Ron Paul's Audit the Fed bill.

James Turk and the NH Gold Currency Bill

James Turk, the founder of Goldmoney.com was instrumental in the formulation of the original New Hampshire Gold currency bill. His system is to be the backbone of the e-currency part of the parallel currency, if it ever passes.

Silver is your means of preserving your wealth. Monex is the low-cost Silver retailer. Jump on the 500% rise in Silver over the next two years. 800-949-4653 x2172
use Kevin from Goldmoneybill as referral to help support this site.

Saturday, August 1, 2009

Why I would manipulate Silver? If...

By Jason Hommel SilverStockReport.com

Goldman Sachs has admitted that they have a computer program that can be used to manipulate markets.

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,”

For over ten years,GATA has gathered information and admissions from central bankers and major bullion banks that the price of gold on the world market is manipulated lower than it should be. Well, one more admission is close enough for me to be counted as one more proof.

Many people are paid to deny such manipulation of course, because the people who are doing the manipulating are earning a lot of money from their ability to print money at will, without it showing up in a rising gold price.

One of the more preposterous denials of manipulation is that keeping silver down in a rising market would simply cost too much, as nobody could afford the losses.

That's just propaganda, of course. Losses on bad trades, such as being short the silver market, must be taken by somebody.

But my strength lies in running the numbers, using estimates, and exaggerations, to prove the point.

At the most, I've seen the silver market with a total open interest of up to 800 million ounces. This is a rare top, of course, but it can be used to determine a hypothetical maximum of "total losses" for being short silver during the entire bull market.

Silver has moved from a low of about $4.15/oz. in early 2003. Since then, silver topped out at about $21/oz. in the spring of 2008.

Using those three figures can give us a maximum total estimate of COMEX paper silver losses, assuming 5 unreasonable and exaggerated things.

1. That the short position was all put on, and initiated, entirely, at $4.15 -- which it wasn't, it was put on starting at the former top in 1980 of $50/oz, and major bullion banks have always been short, ever since.

2. That the short position was completely covered at the top of $21 -- which it wasn't, and it got much bigger at the top, and again, after that top, around $16/oz, as the banks sold 41 times more paper silver as was purchased by physical silver investors in a month, which helped to push the price down to $8/oz, which was very profitable for part of their position.

See: A Tribute to 7th Grade Math August 31, 2008

3. That the short position was one size, and held the entire time with no trading -- which it wasn't.

4. That the short position was always held by entirely one entity -- which it wasn't.

5. That the short position was always a maximum of 800 million oz. -- which it wasn't.

So, given the real facts, the losses on the short position would have been much smaller, but we are not interested in the smallest possible cost, but the largest possible cost, to utterly refute and ridicule the notion that it would be "too expensive" to manipulate the silver market in a rising market.

So, the difference between $21 and $4.15 = $16.85

The loss of $16.85 x 800 million oz. = $13.48 billion

Even with all the exaggerated figures, exaggerated in 5 ways, still brings the total losses in silver manipulation to a theoretical maximum of $13.5 billion. Clearly, the real loss, being short on silver at the COMEX, must have been much less.

But I would guess that they might even have profited along the way, instead of taking losses, for several reasons.

First, they have those "manipulation trading programs" admitted by Goldman Sachs at the start of this article.

Second, their positions are so large, that those who are short, ARE the market, and I'm sure they use their computer programs to only sell "just enough" to move the market price nearly at will.

Third, they know their own clients' books, and stop losses, and can run the price of silver to trigger those stop losses to take over client long positions, so their clients lose money.

Fourth, the COMEX positions are smaller than their OTC positions, which are a much bigger liability.

Fifth, rigging the silver price aids the rigging of the gold price, and both allow the continued existence of a falsely strong U.S. dollar, which they have printed up over $1 trillion of this year, with no new "inflation" showing up in the prices of gold and silver.

And that fifth reason is so profitable, that a $13 billion loss in COMEX trading is just "the cost of doing business", and anyone who can't see that, is either blind, or paid off, and you don't need a sophisticated computer program to realize that, but only the willingness to perform 7th grade math on 3 numbers, as I just went over.

The reason for me doing this simple math exercise is to show by comparison how that maximum figure of $13 billion, is so very miniscule, so very tiny, compared to that other figure listed as my fourth reason above, a very important figure, the BIS OTC silver numbers.

The BIS (Bank of International Settlements) publishes a list of the notional value of outstanding OTC (Over the Counter) commodity derivatives. The category of interest is "Other precious metals", which is mostly all silver. The amount in Jan. 2008, was $190 billion.

That consisted of $86 billion in forwards and swaps, and $104 billion in options.


In Jan. 2008, the silver price was about $16/oz. Thus, we can see that the number of ounces short in that "OTC" market was $190 billion / $16 = 11,875 million ounces.

This comparison is extremely important, because the OTC market is much bigger than the COMEX, which had reported short positions of a maximum of only about 800 million ounces of silver.

Currently, COMEX silver open interest is 133,000 contracts for 5000 oz. each, which is 665 million oz.


Clearly, a loss of $16.85/oz., during the entire bull market in silver from 2003, over 11,875 million ounces in the OTC market, would be a much bigger loss, as it would be $200 billion!

Yes, in "OTC Bullion Accounts", world bankers have a potential loss of about $200 billion, if they could even deliver 11,875 million ounces that clearly doesn't exist in their vaults, and doesn't exist in the world even to buy!

It is also extremely important to note at this point that the world's silver mines only produce about 600 million ounces, and world physical investment demand is only about 100 million ounces, or about $1.3 billion at the current $13/oz.!

So, if you were one of those bankers, and you had a potential loss of $200 billion wouldn't you rather lose $13 billion trading at the COMEX to save the $200 billion loss in the OTC market? I would.

That must be very near to how they rationalize it.

After all, if you can control the reported price on the open markets, then your losses in the "over the counter" market is much smaller.

And it's a great scam, as long as people continue to be convinced to hold paper silver other than real silver, which they are, as the numbers prove it.

With only $1.5 billion going towards the purchase of actual physical silver in a year, while $200 billion is sitting in OTC "other precious metal" accounts, it goes to show that the vast majority of people who own silver, or about 99% of assets in "silver" are really paper silver, most of which could not possibly exist as real silver.

And that still does not include all the other paper markets!

For example, another paper market is the silver certificates issued by Canadian banks, that the Banks are no longer redeeming. The refusal and inability to redeem Canadian silver certificates has continued without much notice, and no official reports or admission. It's like a silent bankruptcy, not even getting any press or much blog coverage, because, still, so few people even attempt to redeem them. But my point is that I have no idea of the size of that paper market, it could be in the billions, too.

And those BIS numbers also don't include the LBMA accounts that trade up to 30 billion ounces of silver per year, which is about 120 million ounces of silver per day, on a base of 75 million ounces of physical silver, which is another absurdity, of course! Those numbers were reported in the CPM Group's annual silver book for 2008.

And those BIS numbers don't include the ETFs either, since the ETFs are not an "over the counter" market, but a transparent one, and also don't likely have any silver, since the custodian is JP Morgan, who has also been identified as the key bank that is short in the silver market on the COMEX.

So, perhaps much less than 1% of people who think they have silver, actually have any physical silver.

Furthermore, those people who are blissfully happy to let their assets sit in "paper silver" accounts are nearly guaranteed to not make any significant money in silver, if only because when silver does soar past $100/oz., there's no way that those bankers would pay out $100 x 11,875 million ounces = $1,187 billion dollars to those paper silver holders.

And of course, 11,875 million ounces of silver does not exist in the world for them to buy, cover, and pay out, in any event!

Instead, the banks will do as they always do, and merely change the rules, or force a cash settlement (which is a quasi-"bankruptcy") at much lower silver prices. They will simply default, which means that they will fail to deliver silver that they don't have, of course.

Their danger, of course, in doing even that, is that people might begin to wake up, and demand real silver if they can't have paper silver.

After all, paper silver serves its purpose to manipulate silver prices downwards, only if it serves as an alternative to prevent people from buying real silver.

Here's an additional cost of the manipulation. Manipulation only works if they can actually deliver real silver, at lower than market prices. I have heard of offers to miners of up to 4% over spot for access to all of their silver. Isn't that kind of offer evidence that the "spot" price is manipulated lower than the real cost of real silver?

So, let's calculate the maximum potential cost of that. Suppose the world bankers bought 100% of world production this way, at 4% over spot, from the miners and refiners, and then turned it around, to sell it at what becomes "spot", for 4% less, at a manipulated "loss", a loss to manipulate the markets. With 600 million oz. of world mining production, at $13/oz., x 4% is a mere $312 million, a tiny cost of "doing business" to keep manipulation going, and to continue the COMEX rigging, and to prevent the bankruptcy and loss of $200 billion in the OTC markets!

And even that $312 million "loss" could be mitigated, by moving the price of silver lower, at will, on the "spot" futures market, precisely on those days that miners or refiners sell to the bankers "at 4% spot". I've always wondered why miners always seem to report sales prices lower than average for the quarter, while often claiming to be using some sort of price protecting hedges to get "above market" prices. That must explain it, in part.

And so, that's why I would manipulate silver, and gold, if I were a blood-sucking vampire of a central banker, who had no conscience, and no knowledge of the importance of honest dealings.

One of my goals is to fight such wickedness in high places, as I strive to expose those evil ones to the light of truth to end their evil oppression.

I believe the manipulation can end suddenly, at virtually any time, as any one of nearly 1000 billionaires, funds, or nations, could decide to buy silver at any time, causing delivery defaults, and market failures, and major price dislocations.

I believe the manipulation usually ends when they run out of silver to deliver, and then, people begin to stop trusting in paper promises, such as happened to gold in 1933 and 1971. If the failure to redeem Canadian silver certificates is any indication, the world is scraping the bottom of barrel for silver.

I believe that when the manipulation ends, with delivery defaults, precious metals prices will rise with shocking speed, and even my own re-supply sources will likely dry up, and you might not be able to buy silver at any price, for an extended time, until the market price is much, much higher.