Global manipulation suppressing gold prices, study concludes

(August 24, 2004) The price of gold has been spending a lot of time lately over the $400 US an ounce mark as a result of international tensions, but it is still grossly undervalued, according to John Embry, chief investment strategist at Sprott Asset Management.

“We believe gold is well launched into a multi-year bull market for a number of strong fundamental reasons,” Embry said in a report entitled “Not Free, Not Fair: The Long-Term Manipulation of the Gold Price” published today on the Sprott Web site.

Then came his bombshell accusation: “We certainly do not look upon ourselves as crusaders, but the more we investigated the gold market, the more readily apparent it became that the gold price appeared, in the politest of terms, to be managed.”

In less polite terms, Embry — a long-standing bull on gold — says the price of gold has been “manipulated” by government agencies around the world.

Embry points out that central banks have been openly manipulating economies for years, yet many people still scoff at the idea of controlled gold prices, deriding those who believe in it as conspiracy theorists.

“We avoid the word ‘conspiracy’ and prefer to instead believe that at least initially, powerful groups (central banks, bullion banks, hedge funds, etc) were operating in their own self-interests and not necessarily in concert with one another,” Embry says.

Simply put, Embry believes the demand for gold has been maintained at an artificially low level.

“Central banks intervened in the late 1990s to prevent a gold derivatives crisis that threatened the stability of the global financial system,” Embry states. “At the root of this crisis was the speculative gold carry-trade. Investment banks, both on their own behalf and for others, borrowed gold from central banks at very low rates of interest (e.g. 1% per annum), sold it into the physical market, and invested the proceeds in higher interest-bearing instruments.”

As evidence he sites the massive sale of gold bullion by the Bank of England in 1999.

“The British government did not get the best deal for the country. The current gold price of approximately $400 US an ounce proves this,” the report says. “The fact is that many people believed the surprise gold sales announcement was timed to bail out banks that were heavily short gold.”

According to Embry’s research, there is far too little gold available in the world to cover these short positions. “The accumulated gold loans, far in excess of annual mine production, constituted a large physical short position that could not be covered.”

He also questions the figures most commonly cited in estimating supply and demand in the bullion market, suggesting that total gold loans are likely much higher than official estimates.

Perhaps the most powerful players in the gold bullion market are the U.S. Federal Reserve and the U.S. Exchange Stabilization Fund (ESF), which Embry accuses of being “active in a scheme to depress gold prices.”

Citing public domain material, he says these agencies began manipulating the price of gold between 1994 and 1996.

The most frightening thought, however, may be that the global economy relies on the supposed artificially low gold price. Embry says central banks are maintaining this policy to cover up the mistakes of their monetary policies.

“Excessive gold lending, unexplained trading anomalies, documented U.S. government gold market activity, and blatant interventions are but some of the signs that the visible hand of government has temporarily overtaken the invisible one of Adam Smith,” Embry concludes. “The manipulation of the gold price continues to this day. It appears that central banks are unwilling to allow the gold price to repudiate their excessively loose monetary policies.”

The full report is available in pdf format on the Sprott website.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(08/24/04)

Steven Lamb