A Useful Discussion of GATA and Gold
October 10, 2010
– Comments (22) |
RELATED TICKERS: CEF
, GLD
, SLV
After watching with dismay as a recent post regarding GATA deteriorated into a decidedly useless waste of time, I will set out here to discuss the precise topics in question in an open-minded and carefully reasoned fashion.
At the outset, it is imperative to state for the record that I can report on portions of GATA's enormous body of evidence without granting the right of any reader to presume that I therefore must agree with everything stated or claimed by the group. As with any topic, I approach the subject of gold and silver price suppression with a critical eye and an open-minded search for truth. The faulty logic that leads to presumptions of 100% subscription based upon findings of merit on particular segments of a body of evidence is indeed an unfortunate one, and is precisely what permits a discussion of GATA to deteriorate in the way that it did in the offending thread. The primary casualty, in such instances, is none other than rational discourse.
Secondly, I feel it crucial at this stage to clarify that no portion of my own conservative price targets for $2,000 gold and $50 silver hinge in any way, shape, or form upon the existence, discovery, or disruption of any scheme to suppress metal prices. Those projections are purely the result of fundamental macroeconomic analysis without any consideration whatsoever of the suppression topic. Therefore, the conclusions one draws with respect to GATA's claims have no reason whatsoever to intersect with one's consideration of my commentary and outlook on the sector.
When you're dealing with markets as systemically opaque as are those for gold and silver, it goes without saying that acquiring slam-dunk blockbusters of irrefutable evidence represents a highly unlikely outcome of a citizen-led investigation. Although GATA has unearthed many eyebrow-raising excerpts of quotes from the public record, I have never opined that the evidence constitutes irrefutable proof of price suppression activity on the part of the central banks. Rather, I have characterized the body of evidence as something of a jigsaw puzzle ... once you piece enough of them together, a compelling (though still ultimately circumstantial) case emerges. What I can state is my own opinion on the matter, and I consider it highly ulikely that Western central banks would resist the opportunity and incentive that they clearly have to intervene in the currency markets using gold and silver as two among several tools at their disposal.
There are, however, portions of GATA's body of evidence that do constitute, in my opinion, proof of foul play in the precious metals market. Adrian Douglas' 2009 report "Pirates of the COMEX" is one particularly laudable effort within GATA's evidentiary record, and one which I believe utilized a sound methodology to deduce the identity of the two principle bullion banks that were maintaining market-dominating net short positions on COMEX gold and silver. The identity of those two bullion banks is extremely relevant to any due diligence conducted with respect to common bullion proxies like GLD and SLV ... which list as bullion "custodians" HSBC and JPM, respectively. There is much confusion about what is and what is not claimed about those investment vehicles by GATA, and I will seek to clarify some of that below. Having spoken at length with both of GATA's co-founders on the topic, I am qualified to offer some clarity where little presently exists.
The next most solid piece of evidence that I have encountered of foul play in the gold market is a more recent report from Adiran Douglas from his August report: "Gold Market is not Fixed; it's Rigged". In it, he offers a empirical statistical analysis of a phenomenon that longstanding observers of the market like myself have long-observed: the uncanny consitency of the relationship between am and pm spot prices, day in and day out, in such a way that the net daily price action actually moves counter to the massive prevailing bull market trend. Those who appreciate the scale of this bull market move to date may be surprised to learn that a trader who purchased gold at every successive am fix and sold it at each successive pm fix since April 2001 would have lost a cumulative $500 per ounce over the 9-year period!. Daily movements can diverge substantially from a prevailing trend, but a disparity of this magnitude (and consistency) constitutes extremely compelling evidence of foul play. Also in August, Douglas published a follow-up piece entitled "The Failure of the Second London Gold Pool", in which he discusses his interpretation of the data as indicating an emerging failure (breakdown) of the ability of strategic suppressive gold sales to have the desired effect and thus contain or diminish the scope of gold's ascent. Although speculation creeps into that discussion, I find his interpretation an entirely reasonable hypothesis on which to base further investigation.
Speaking of investigations, the CFTC has been conducting an investigation into alleged foul play in the silver market for two years. Clearly bothered by the snail's pace of the agency's response, CFTC commissioner Bart Chilton himself has come out and said that if the agency does not release its findings in a timely manner, that he himself will speak out in the topic.
Now, with respect to the original post that spawned the present discussion, I wish to offer some specific retorts.
The allegation he makes that GATA's credibility is compromised by its members' long exposure to gold is beyond ridiculous. First of all, the man on the other side of the debate (Jeffrey Christian of CPM) could similarly be ascribed with an equal or greater interest in preserving the status quo functioning of the metals markets so that a market for his consultation on bullion derivatives persists. Although the same reasoning could be used to render that allegation, I would not issue such a claim because I do not know Mr. Christian nor his true agenda. I do, however, know Bill Murphy and Adrian Douglas. I find them to be well-intentioned individuals who have willingly subjected themselves to a decade of personal attacks and public ridicule solely because they feel confident that the markets they study are frought with fraud. Believe me, there are easier ways to make money. It is ludicrous and illogical to suggest that this entire decade-long GATA campaign is an exercise in self-enrichment. GATA is a non-profit organization. They spent $264,000 on a full-page ad in the Wall Street Journal. If that were intended solely for financial gain, then that constitutes the most roundabout path to riches that I've ever encountered. It's a baseless, empty accusation that lowers the tenor of discussion from one of debating the facts to one of malicious character assassination. For a blog post claiming to reveal truth, I find it interesting that it employed such an unsavory tactic.
With respect to the allegation that TMF members have claimed that the bullion vaults at ScotiaMoccata are empty, I have encountered no such claims being made here at TMF. Perhaps the member in question would like to provide a link to a post where such a claim is made? Now, if he happens to be referring to my own writings on the topic, perhaps I can use this opportunity to set him straight on the facts. The claim in question refers to a specific day: September 3, 2008. On that day, during the height of a supply shortage that I and other precious metal observers were documenting at the time, Lenny Organ reports that he and his family's broker were granted access to the bullion vault. First, there are two sections of that vault, and the observations made refer only to the portion of the vault reserved for unallocated storage. Secondly, it is incorrect to state that anyone claimed the vault was empty. In point of fact, Lenny reports having seen a quantity of bullion: just that it was a very small quantity as compared with the scale of unallocated gold and silver certificates outstanding from the bank. He reports having counted up the bullion he saw, and estimates that it carried a market value of less than $100 million. The author of the blog post in question conveys considerable confidence in alleging that "this is a lie", and yet it is he that has imprecisely characterized the claim being made on several counts. Even the article he cites as supposedly debunking the story misrepresents the claim, stating it was Harvey himself who claimed to have visited the vault. Now that is a lie, or at best a careless falsehood. I wonder what other exhaustive research Mr. Deepfryer conducted to arrive at this bold conclusion. I wonder if he spent an hour on the phone with Harvey Organ discussing in detail what his son reported seeing and the nature of his resulting testimony to (by invitation of the CFTC) the March 2010 CFTC hearing. Can I state with absolute certainty that the unallocated portion of the bullion vault was indeed holding less that $100 million in bullion on September 3, 2008? Of course I can not -- I was not there -- but I certainly conducted plentiful research into the claims and reported them accurately and faithfully ... far more than I can say for the content of the challenging post. When Deepfryer claims "this is a lie", he fails to concede the impossibility that he could know that to be the case.
As to the question of the paper gold to physical gold relationship within the structure of the precious metals market, here again the blogger in question conveys a surprising degree of confidence in his understanding of the matter despite offering no meaningful evidence to support his contention. He states that it is a "false, fear-mongering claim" to suggest that a problem exists when huge numbers of investors may not hold what they think they hold. Holders of unallocated gold certificates, for example, may have had no reason to suspect that a fractional reserve structure exists in the bullion markets such that widespread claims for physical delivery could easily and abruptly overwhelm the available physical supply. Mr Christian contends that mechanisms exist to handle such situations (with respect to the LBMA) ... of course they do, and they involve cash settlement. If holders of unallocated bullion certificates would be happy to receive cash settlement in lieu of bullion in the event of a widespread physical demand, then indeed there would be no problem. Holders of such certificates, on the contrary, have every right to expect that they can receive upon redemption: precisely what the contract states.
By the same token, the quantity of bullion traded on the LBMA is indeed indicative of leverage. If a quantity of financial instruments tied to a particular good exceeds the global supply by many multiples, then the result is a leveraged market ... pure and simple. It is beside the point that in practice most of those financial instruments (OTC derivatives) are settled in cash. Structurally speaking, they remain tethered to an underlying asset, and to the extent that net volume exceeds available supply, then those instruments represent competing claims against individual bars of gold. There is no magic in OTC derivatives (far from it, as we now know!). You can't magically divorce them from the physical market by stating that the underlying asset has somehow evolved into a theoretical abstract that is unconnected to the actual physical supply. Settlement for cash under conditions of market duress is, by any reasonable definition, a default when the presumption of an interest in physical gold lies behind the contract in question. Under the present structure of the bullion markets, bullion banks like those mentioned abive do indeed have the ability to leverage their underlying supply while building those market-making positions on various exchanges. If the blogger wishes to discuss conflicts of interest as he did in his original post, perhaps he would like to examine that which would appear to exist between the custodianship role that the major bullion banks play within the bullion ETFs, and the persistent net short commercial positions on the COMEX that have been documented for those very metals.
Before I close, I need to help set the record straight with respect to the ETF issue. This is a very complex topic, and one that has been repeatedly misconstrued and misrepresented through multiple iterations. The well-informed voices on the topic are not making a claim that the metal to back the ETFs is not there. Short of being a fly on the wall for a vault audit, there is simply no way to discern that with confidence. There are, however, ample red flags for investors within the structure of the markets and the prospectus documents of these ETFs that are worthy of long and careful consideration. Most investors, unfortunately, lack the breadth of knowledge in these markets to adequately comprehend the implications of these red flags.
Fools may wish to ponder some of these excerpts from the GLD prospectus:
The Trustee may, in its discretion, and will when directed by the Sponsor, suspend the right of redemption or
postpone the redemption settlement date, (1) for any period during which the NYSE Arca is closed other than
customary weekend or holiday closings, or trading on the NYSE Arca is suspended or restricted, (2) for any
period during which an emergency exists as a result of which the delivery, disposal or evaluation of gold is not reasonably practicable, or (3) for such other period as the Sponsor determines to be necessary for the protection of Shareholders.
There is a risk that some or all of the Trust’s gold bars held by the Custodian or any subcustodian on behalf of
the Trust could be lost, damaged or stolen. Access to the Trust’s gold bars could also be restricted by natural
events (such as an earthquake) or human actions (such as a terrorist attack). Any of these events may adversely affect the operations of the Trust and, consequently, an investment in the Shares.
The Trust may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed and recovery may be limited, even in the event of fraud, to the market value of the gold at the time the fraud is discovered.
Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian,
under English law, and any subcustodians under the law governing their custody operations is limited. The
Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms
and conditions as it considers appropriate. The Trust is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, the Custodian may not
maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the
Trust. In addition, the Custodian and the Trustee do not require any direct or indirect subcustodians to be nsured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of he Trust. Consequently, a loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages.
Still think GLD is as good as gold??
I would need many pages to spell out in detail the full nature of these red flags, and that's a topic for another day. Since simplistic notions of "the gold is not there" is commonly ascribed as being the GATA position in this topic, however, I find it necessary to set the record straight. That is not even close to describing the nature of their aversion to instruments like the GLD. Here again, I have spoken at length with both Adrian Douglas and Bill Murphy on the topic, and therefore I am in a position to speak to this.
..........
To be sure, these topics are inherently complex in nature, and do not lend themselves to cursory treatments based upon empty conjecture. I have labored for countless thousands of hours to help Fools understand these markets for gold and silver in a comprehensive way on the basis of exhaustive and disciplined research. Although I am not personally affiliated with GATA -- and I certainly do not patently endorse every claim they make without forming my own independent opinions and conclusions from the verifiable portions of the evidence they present -- I have respect for what I maintain is a selfless and courageous effort to shed some much needed light upon one of the most oddly opaque markets in the world. They may not get everything 100% right in the process, and it would probably be my style to refrain from the more speculative segments of their claims, but they have contributed significant and valuable perspective on the market through their various avenues of inquiry.
RSS Headlines
Fool UK