Gold: Could the last person to get their coat please turn the lights off?

Tuesday, Mar 30 2010 by

“The rise in Gold and Silver is purely a monetary phenomenon and is the early stage of an endeavour to move away from paper currencies,” Alan Greenspan 2009:

The below chart from Bank of Montreal (BM0) shows in simple terms why investors turn to Gold in times of Monetary excess/debasement – expressly here in terms of US Dollars. Those who believe that somehow it is ‘different this time’ (ie that in the context of 3500 years of the use of Gold & Silver as money, 21st Century investors will not seek out real money as a hedge against debasement or extreme deflationary/inflationary episodes), are, let’s be generous, not students of monetary history.Could the last person to get their coat please turn the lights off news story image The excellent chart reflects that as government debt builds, investors (and foreign Central Banks such as China) turn to Gold. That the Chinese government are catalysing (through television adverts and their own sovereign purchases) their public to go and buy physical Gold and Silver at their local bank (see photo below) further reflects the fact that Asians see Gold as money. Bear in mind that the Chinese word for ‘Bank’ also means ‘Silver Movement’. Whether it is SDRs that end up being backed by Precious Metals or some new currency unit, Asian creditors are pushing for formal commodity-backing for the new world currency order. Monetary history dictates that collapsed paper currency systems are always replaced by fully or partially-backed currency systems, demanded by the creditors left holding either depreciated or totally worthless paper.

The crux of Gold’s historical role relates to it’s status as the very unit on top of which the fractional reserve model blossoms (see the quote later from JPMorgan himself). Gold, almost uniquely custodied for nearly a century in New York and London, is the asset of last resort against which governments can borrow. Central Banks and Sovereign Wealth Funds alike are presently trying to remove Gold from the UK and US fractional reserve custodial centres (LBMA, NY Fed and COMEX), where many times the underlying have been sold on into the market. Hong Kong has recently built a large Bullion facility in HK airport to mop up the Custodial business for their neighbours in the future. Testimony from last week at the CFTC highlighted that the LBMA (the OTC market) operates an astonishing 100:1 game of Golden musical chairs. This means that the ‘hedging’ that the bullion banks claim is in truth the sham that many suspected it to be. They, at best, hold (assuming they even have offsetting long positions on the LBMA) an unsecured and unbacked paper claim to Gold on the long side. It is now clearer than ever that a run on physical would have devastating consequences for the spot price of both primary Precious Metals. So long as this ridiculous game of ‘paper Gold’ musical chairs keeps going, the fractional reserve model is underpinned by the managed Gold price. Once the music finally stops, however, you do not want to be short.... Bear in mind that one US commercial bank alone is ten times shorter of Silver than Bunker Hunt ever was long, and the US Mint are now a buyer of physical Silver (where in 1980 they had a stockpile of around 3billion ounces to throw at the market).

The fact that Gold is manipulated and managed by Banks is a matter (repeatedly) of public record. I am not going into extensive detail here, but suffice to say that on many occasions in Fed testimony the likes of Alan Greenspan admitted that the Fed was ready to lease/sell increasing quantities of Gold (whether it was actually there or not) into the market ‘should the price rise’. For a better understanding of this, the diligent reader will dig out Larry Summers infamous note ‘Gibson’s Paradox and the Gold Standard’, widely available on the internet to read. In the context of the UK, Gordon Brown sold our Gold is a series of pre-announced auctions – thereby guaranteeing the lowest possible price. He was warned against this by many market experts at the time. This shocking fact is the real reason why the Conservatives are insisting on a refreshed appraisal of ‘Brown’s Bottom’ now, just before the election. Realise that Gold ‘sales’ and unbacked leasing to commercials by Central Banks is not something that is driven by the profit motive. The true motive is far grander and more critical than that. Once the genie gets out of the bottle properly and people do the research into the Gold market and come to understand that (as JPMorgan said) “Gold is Money. That’s it.” – the inflation- adjusted high from 1980 of $7500/oz will be the next important target. If and when Central Banks also enter the open market (rather than just participating in off-market IMF sales) - to add to their reserve base (China is still lingering around 0.5% of overall F/X reserves) all bets will be off and the EXIT FIAT sign will be flashing. At that point if you still don’t own Gold, you can be the cloakroom attendant handing out the coats, just be sure to turn the lights out afterwards.


Bears of Gold also miss the fact that there is a long-standing game of paper gold (shorted by the commercial banks) versus physical gold (held by Central Banks and the public). This last week there was a 6 hour public hearing at the CFTC into Metals futures. Translated into English this means: ‘How the Banks go about manipulating the price of physical through the use of large and concentrated naked short sales on COMEX’.
When it came to the 5 minute GATA testimony, (the Goldbugs who have carefully documented all the facts over a 10 year period, just like Harry Markopolous) – the CFTC internet feed that had been working perfectly, conveniently gave up the ghost. A coincidence of course.

A week before this historic hearing, the whole of the CFTC had to move out of their New York offices for a week - due to ‘a fire in the basement’. Also a coincidence. Don’t be surprised if their historical records in due course go the way of the dodo. GATA read out, in response to a question, explosive testimony from Andrew Maguire, ex metals trader with Goldman Sachs in London. Mr Maguire was whistle-blowing the open manipulation of Silver by JPMorgan and their cohorts. Maguire’s testimony was absolute dynamite, replete with specific information and predictions, all of which were proven accurate after the event. Yet again the CFTC internet feed stopped working during the reading of the whistleblower’s testimony. Yet more coincidence. The day after the hearing, in London, Mr Maguire and his wife were hospitalised following a serious car accident where an unnamed individual came out of a side-street at full speed and rammed the side of their car before taking off. Coincidence abounds.

Ned Naylor-Leyland March 2010

Cheviot Asset Management Limited is authorised and regulated by the Financial Services Authority. This report is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. It is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it. This report is based upon public information that Cheviot considers reliable but Cheviot does not represent that the information contained herein is accurate or complete. The price and value of investments mentioned in this report and income arising from them may fluctuate. Past performance is not a guide to future performance and future returns are not guaranteed. This report is not for distribution outside the European Economic Area.

Filed Under: Gold, CFTC, GATA, Forex,

About the Author's Fund Management


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

Do you like this Post?
9 thumbs up
0 thumbs down
Share this post with friends

1 Comment on this Article show/hide all

Edward Croft 1st Apr '10 1 of 1

Nice to see this article was picked up by GATA themselves.

For anyone who's interested in the worldwide fiat monetary system's flaws I highly recommend watching this 45 minute video by Paul Grignon Money as Debt. - it's animated and has a very strange soundtrack, but there's no better way to get a quick grasp on some of the fundamental issues facing the financial system. My pick for some Easter weekend viewing.

"We are absolutely without a permanent money system...  It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."

Robert H. Hemphill, Credit Manager
Federal Reserve Bank of Atlanta, Georgia (1935)
In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

Blog: Follow @edcroft on Twitter
| Link | Share

What's your view on this article? Log In to Comment Now

You can track all @StockoChat comments via Twitter

About Ned Naylor Leyland

Ned Naylor Leyland

Ned graduated with a BA (Hons) degree from the University of Bristol in 1998. He began his career in 2001 at Neilson Management, later moving to Smith & Williamson (formerly NCL Investments) in 2003 where he was an Investment Manager. Ned joined Cheviot in July 2008 and is Advising a specialist Precious Metals fund. more »

Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis