In search of a golden fleece By MATHEW INGRAM Globe and Mail August 26, 2004
There are plenty of conspiracy theories out there, from the Kennedy fetishists with their homemade copies of the Zapruder film to the Area 51 geeks with their tales of alien technology kept under wraps by NASA. In the financial arena, the most popular by far is the idea that central banks, the International Monetary Fund, bullion banks and even the Federal Reserve Board are in cahoots to suppress the price of gold.
But is this just a wacky theory promoted by gold bugs and Internet kooks with too much time on their hands, or is there more to it than that? Sprott Asset Management market strategist John Embry believes the latter — that despite the loony-sounding ideas of some conspiracy advocates, there is a core of truth to their claims that gold is being "managed" by central banks and other financial institutions. He laid out those arguments in a recent 66-page research report.
In effect, Mr. Embry says that while he doesn't like the term "conspiracy," he believes there is some evidence that various central banks, including the U.S. Federal Reserve, have acted in concert with the International Monetary Fund and others — even the U.S. government itself — to keep the price of gold depressed. This, Mr. Embry says, has taken advantage of "unsuspecting investors labouring under the illusion that gold is indeed a free market."
This is not the first time Mr. Embry has sided with those who believe the bullion market is being manipulated by powerful forces. Two years ago he wrote a similar report in his capacity as a fund manager at Royal Bank of Canada. The bank seemed to take a dim view of Mr. Embry's thoughts on the subject, however, since the head of Royal Bank's investment management arm made it known that Mr. Embry's report was written for internal use and thus "in no way reflects the views of Royal Bank."
As he did in that earlier report, Mr. Embry relies to a large degree on the "evidence" (as he puts it) collected by a U.S. group called the Gold Anti-Trust Action Committee. Although GATA is dismissed by many as a group of "grassy-knoll"-style conspiracy theorists, Mr. Embry describes their work as "excellent in scope, yet chronically underappreciated." At another point, the Sprott strategist admits he is content to "side with the alleged lunatic fringe on this contentious topic" because "their assertions appear to be essentially correct."
In essence, GATA's gold price-fixing theory goes like this: central banks, including the Fed, have colluded with various other institutions to keep the gold price low. They have done so in a number of ways: central banks have announced large sales of gold, which has put downward pressure on the price, but in many cases they have never actually sold any gold. Others have allegedly engaged in swaps and other trades aimed at profiting from a falling gold price.
Why would central banks and others, such as the U.S. Exchange Stabilization Fund (an arm of the U.S. Treasury) do this? According to Mr. Embry and GATA, there are a number of motivations involved. The U.S., for example, is said to be interested in rigging the price of gold in order to help the U.S. dollar on the assumption that if gold were to rise too quickly, many foreign investors holding dollar-denominated assets might sell in favour of gold. Central banks are said to be concerned that their involvement in the short-selling of gold could come back to haunt them.
This latter part of the theory stems from the gold "carry trade," a strategy that involves borrowing gold from central banks at a low interest rate, and then selling or loaning the gold at a higher rate. Many of those loans, GATA says, have been used as collateral for short sales — short sales that the group says far outweigh the amount of gold available on the market. If the price of gold were to rise sharply, the theory goes, those loans would be "called in" and large banks and other institutions (or even governments) would be hurt by the resulting chaos.
One of the problems with any conspiracy theory is proving that the events in question couldn't have happened for some other reason — by accident, for example. Mr. Embry himself quotes Goethe: "Why blame conspiracy when human stupidity explains so much." He also says the kinds of manipulation described in the report could have "at least initially" been the result of powerful groups acting in their own self-interest. But the weight of evidence, Mr. Embry says, still shows that the gold price is being "actively managed."
Unfortunately for GATA's case, however, which they attempted to bring to court in 2001 by filing a lawsuit against the U.S. Treasurer, Fed chairman Alan Greenspan and several banks, a lot of the evidence they use is questionable. For example, GATA likes to use a quote from Mr. Greenspan's testimony to Congress in 1998 in which he referred to central bank gold being available for sale. But the Fed chairman later wrote a letter saying the comment was taken out of context, and that the Fed has no role in management of the gold price.
Another key piece of GATA evidence is the 1998 bailout of hedge fund Long Term Capital Management, which it says occurred because the fund had a short position in gold of 400 tonnes, the unwinding of which would allegedly have hit too many banks and other institutions. Principals of LTCM, however, have said that they had no short position in gold, even a derivative one. But of course they and Mr. Greenspan are both in on the manipulation, so naturally their responses must be suspect.
There's no question that the workings of the international gold market are murky, and that governments and central banks engage in all kinds of financial machinations that are poorly understood and in many cases poorly disclosed. It's quite a jump from that to a full-blown conspiracy theory, however, and Mr. Embry's latest report does little to help bridge that gap.
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