England Bombs Gold
Adam Hamilton March 16, 2001 4444 Words
On March 14, 2001, the Bank of England continued its long and bloody war of attrition against gold. Royal Air Force Harrier jump jets and Panavia Tornadoes roared through the blue skies, leaving terror and destruction in their wake. Not armed with the usual laser or Global Positioning System guided 500lb and 1000lb high explosive bombs, they were equipped with highly specialized munitions for this particular crucial combat mission. The RAF fighters, under Bank of England command and control, carried gold bullion bombs. The amount of pure gold bullion in each bomb remains classified, but the total bullion delivered under the mighty wings of the Harriers and Tornadoes is well known, exactly 25 metric tonnes.
Like the legendary Babe Ruth brazenly standing at home plate and pointing his bat to the exact spot on the outfield fence over which he intended to launch the pitched baseball, the Bank of England (BoE) also “called the wall” prior to the actual gold bombing. As in the past, this latest gold bombing was scheduled in advance and crafty public relations folk ensured that there would be maximum knowledge of the aggressive raid about to be launched. Timeless principles of information warfare handed down from the legendary Chinese strategist Sun Tsu were fully employed pre-raid to create the maximum amount of confusion and fear for the BoE’s old enemy, the free gold market.
On mission day, the BoE launched the raid and the contract RAF pilots delivered the 25 tonnes of bullion bombs with spectacular precision. The target was a recent rally in the gold price caused by unrelenting rumors that the BoE was having trouble settling its gold obligations with physical gold. Spiraling short-term gold lease rates, which led to the gold rally, helped confirm the odd physical tightness in the global gold markets. The nemesis of BoE, gold, was rearing its ugly head and had to be destroyed before the gold price action opened the floodgates of worldwide gold investment demand.
As the British ground attack fighters screamed towards their target at treetop level, laser designators on the bellies of the jets were switched on, and the gold rally was painted with innumerable laser dots invisible to the human eye. The computerized seeker heads on the gold bullion bombs were uncaged and immediately locked on the bright laser lights dancing on the target. Soon swarms of bombs were unleashed, their computer heads flying them in a kamikaze trajectory directly to their destruction into the laser-designated gold rally.
As bullion bomb after bullion bomb found its mark, the resulting destruction in the gold market was spectacular, and the dangerous gold rally was shredded by the state-of-the-art munitions. The contract RAF pilots returned home, and reports claimed that no casualties were received during the gold bombing raid by the BoE and its cohorts. All in all it looked like a successful mission in the government of Great Britain’s undeclared war on gold.
But how successful really was the mission? Is the BoE employing subterfuge and intentionally misleading the gold markets? In this essay, we explore the BoE’s war on gold, the latest gold auction, and the possibility that the BoE is publishing dis-information to continue to wage the gold info-war long after the booming of the gold bullion bombs has finished echoing through the formerly peaceful free-market countryside.
As in any financial analysis, it is prudent to begin with a proper perspective on the BoE gold auctions…
The Bank of England, on May 7, 1999, announced “a restructuring of the UK’s reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currency. This will involve a programme of auctions of gold from the Exchange Equalisation Account, which holds the UK’s official reserves of foreign currency and gold, with the proceeds being invested instead in foreign currency assets and retained in the reserves.”
In the first place, the idea of selling something with 6,000 years of unassailable worth, gold, and buying fiat currency is by itself pretty ridiculous. What did the BoE intend to buy to replace gold in its FOREX reserves? A currency that has only been around since WW2, like the fiat Japanese yen, which has performed as well as a blind duck migrating in recent years? The vastly overpriced US dollar, perhaps, which defaulted on its gold backing in 1971, and is from the largest debtor nation in world history? Or, God forbid, that bastard step-child of fiat currencies the Euro, for which not even a single sovereign nation is accountable? Selling gold to buy fiat currencies ANYTIME before Y2k until today is just a wacky and “out there” idea devoid of common sense. The BoE auctions were suspect right from the original stated goal!
In order to execute the “portfolio rebalancing”, the BoE stated its intentions of auctioning off gold in 25 tonne lots, in a series of auctions. At the time of the announcement, the Bank of England reported that the United Kingdom had official holdings of gold reserves of 715 tonnes. Her Majesty’s Treasury would be using the BoE to liquidate 415 tonnes of gold, with a target gold foreign exchange balance of 300 tonnes. So far, including the March 14, 2001 sale, the Bank of England has sold 275 tonnes of gold into the open market since July 1999.
415 tonnes is a healthy amount of gold! Global gold demand is estimated to be between 3,500 to 4,000 tonnes per year. All the gold mines in the world are believed to dig up, process, and refine about 2,500 shiny new tonnes per year. By comparison, 1 million ounces of gold, roughly equivalent to the annual production of a mine on the scale of South Africa’s Durban Roodepoort Deep, is approximately 31 tonnes. (one metric tonne equals 32,150.743 troy ounces) The United States of America has long reported official gold reserves of 8,139 tonnes, although the US gold reserves have not been independently audited.
On the initial announcement date, the BoE also outlined the terms of the gold auctions. The following is verbatim from the Bank of England’s press release, “The first auction will be conducted on a single, or uniform, price basis. Under this format, the bidding process will be competitive: bars will be allotted to the highest bidders, but all successful bidders will pay a single price that is equal to the lowest accepted bid. It is intended that subsequent auctions will also follow this single price format, but the pricing method will be subject to review in the light of experience.”
Hmmmm… Any of you capitalists out there catch that? The auctions of gold would accept competitive bidding, BUT the gold would be sold to the highest bidders not at the price they bid, but at the price equal to the LOWEST accepted bid. As the Bank of England is acting as a fiduciary for Her Majesty’s Treasury, which is presumably holding the public gold collectively owned by the citizens of Great Britain, one would expect the BoE to MAXIMIZE the sales price for the gold it was commissioned to sell. Why not, for instance, if the spot gold price was $275 and an entity bid $300 for 5 tonnes of gold, allow the bidding entity to pay the full price it bid? After all, a bidding entity would be happy with its bid price otherwise it would not have submitted the bid.
This goofy Dutch Auction process is fine for bidding on beanie babies and other fungible junk on E-Bay, but is it proper when liquidating 58% of the public gold of one of the greatest western nations in history? Why use an auction process that ensures that Her Majesty’s Treasury receives the lowest price possible for valuable gold? It is analogous to being cheated out of a percentage of every trade, which adds up to real money over time. This is just ONE small anomaly of MANY in the BoE gold sales. The House of Lords and House of Commons could have a field day investigating the many failings of this illogical auction program!
While we are discussing the illogical, it is interesting to mull over the implications of announcing the whole series of auctions in advance to great fanfare. If HM Treasury was interested in obtaining the highest price for its citizens’ (or the Queen’s, if the British government still considers its people merely peasant subjects and not citizens) gold, why pre-announce the sales? Any large trader knows that the quickest way to eviscerate a trade is to publicly herald one’s intentions. If other players know that a large trade will be made, prices will be bid up or sold down in order to ensure that the big trader receives the worst possible deal.
Imagine for instance, if Warren Buffet held a press conference and told the world that he was planning on selling 58% of Berkshire Hathaway’s holdings in XYZ Inc. Astute traders would IMMEDIATELY sell-off XYZ on Buffet’s announcement, and the price of the stock would plummet in the open market. Pre-announcing large trades if one is a big player is absolutely foolish at best, and downright dumb at the worst. Pre-announcing a huge gold sale, which is virtually guaranteed to bomb prices, only makes sense if HM Treasury and the Bank of England had full intentions going into the auctions of depressing the world gold price.
This allegation, while serious and ominous, is certainly not baseless. American Attorney and Bank for International Settlements shareholder Reginald Howe, in his landmark lawsuit against the BIS and large money-center bullion banks allegedly engaged in a global conspiracy to suppress the gold price, includes stunning comments about the original intentions of the British government. The following is from Howe vs. BIS et al, paragraph 55. It is extraordinary!
Quoted literally from Mr. Howe’s complaint, paragraph 55, “According to reliable reports received by the plaintiff, this effort was later described by Edward A. J. George, Governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, Chief Executive of Lonmin PLC: “We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.””
Wow! Amazing information, and it further paints the British government’s strange series of gold firesales in a much more menacing light. Howe v. BIS et al is one of the most important documents in the long and distinguished history of gold. It is an absolutely MUST read for advocates of free markets and anyone interested in learning why the behavior of gold in the last six years has utterly defied all laws of economics and all historical precedent.
Do the stated goals of HM Treasury and the BoE make sense in light of the effects of the gold auctions? In the markets and in life, when dealing with any entity or person, it is always useful to not only listen to the words they speak but to carefully analyze the fruits of their labors. Often men of little honor and integrity will say one thing but their actions will betray something else entirely. By carefully observing the fruits of their actions, the true driving forces and motivations behind a decision often become MUCH more apparent. This principle is ancient and was immortalized in the New Testament of the Bible. In the popular vernacular of today, “talk is cheap”. The real goals of HM Treasury in flooding the world market with marginal physical gold supply are much easier to discern by their fruit than from the sterile press releases and soundbytes.
We began by discussing the latest BoE gold bombing of March 14, 2001. The chart below highlights the fledgling gold rally, which had to be contained, and the results of the latest mission in the long BoE gold bombing campaign… (Disclaimer for all you military purists out there … we are well aware that British Harriers and Tornadoes look nothing like the F-18s in the graph below, and that a precision guided bomb does not look like an AGM-65 Maverick air to surface missile … please forgive us.)
This graph is relatively short-term, only since last July. We use it because we employed it last week in our essay “Gold/XAU Breakouts?” where we pointed out that the Philadelphia Stock Exchange Gold and Silver Index HAD broken out short-term and that gold just breached the top technical resistance line shown in the graph above (the temporary breakout is marked by the green dotted circle). In this newest incarnation, the latest BoE gold auction has transpired and gold has been SLAMMED back down into the channel as if it ran into a 20 foot thick reinforced concrete blast wall at 100mph on a motorcycle. The turn one eight executed by gold in the day before the latest BoE auction is striking in its violence. This amplitude and frequency of the recent up and down move is greater than anything else on the graph. The trading days between March 8 and March 15 witnessed EXTREME daily volatility for the usually staid and calm gold world! Those six trading days had average interday volatility of 1.4%, compared to an average of roughly a third of that, or 0.50%, for the entire time period encompassed by this chart.
The Bank of England gold auctions are marked with the bomb silhouettes above. In each of the last five gold auctions of 25 tonnes, the market ALWAYS dropped on the BoE gold auction. As we discussed above, if one is a big player, telling the whole world in advance before they buy or sell a large position is the financial equivalent of shooting oneself in the foot! By telegraphing large gold sales, the Bank of England guaranteed that HM Treasury would receive the lowest possible price for its gold as arbitrageurs traded on the news and sold gold into each auction. Unbelievable!
Of all the research we have seen on the Bank of England gold auctions, our favorite graphs by far analyzing the situation were constructed by the renowned Donald Lindley, the highly esteemed member of the Gold Eagle Gold Forum (www.gold-eagle.com/cgi-bin/gn/get/forum.html). Mr. Lindley has been carefully watching and analyzing the gold markets for many years, and his contributions to the Forum and the gold market have been invaluable. Last year, when gold was at $290, Mr. Lindley was one of the few steadfast gold bulls who believed that gold would be pushed lower by derivatives games being played. His “Option Cube” indicated a slide in prices from $290, and he was right on the money.
Mr. Lindley has constructed a gorgeous graph for www.GoldenSextant.com, Reginald Howe’s company’s website, and it is available at www.goldensextant.com/commentary16.html#anchor10789. On his superb graph, Mr. Lindley has indicated when BoE gold bombing runs were announced and when the dirty deeds were actually perpetrated. It is really interesting to note that EVERY single time a BoE auction was held, gold fell fairly aggressively, with the notable exception of the landmark Washington Agreement of September 1999, where European central bankers suddenly had light bulbs popping on over their heads and came to the stunning realization that central bank sales were destroying the world gold markets. And who says central bankers are clueless? They are just SLOOOOOOW to grasp the patently obvious! They announced they were capping their gold sales and entities that owed gold that they didn’t have scrambled to buy gold in the open markets like men possessed. The resulting rally rocketed gold from $255 to over $320 in days.
Armed with the perspective provided by Mr. Lindley’s excellent graph, it is quite obvious to ANYONE that the BoE gold sales are very damaging to the price of gold. As more information on the BoE gold sales accumulates, it is more and more difficult to accept that all is on the up and up and there are no ulterior motives from HM Treasury or the BoE. If it looks like an intentional gold suppression scheme, feels like an intentional gold suppression scheme, smells like an intentional gold suppression scheme, and tastes like an intentional gold suppression scheme, chances are it is… drumroll… AN INTENTIONAL GOLD SUPPRESSION SCHEME!
As if what we have discussed so far is not bad enough, there is seriously damning evidence emerging that the whole BoE gold firesale has NOTHING to do with foreign exchange and is deliberately designed to artificially augment gold supply and dampen investor enthusiasm through information warfare principles in order to quasi-covertly suppress the global gold price.
The table below lists all the BoE gold bombing sorties to date. The left column is the date of the auction. Light blue shaded dates represent the traunches of the first series of gold auctions, and the light green the traunches of the second series of gold auctions, which just finished on March 14. Boldfaced dates represent auctions covered by the period of time in the chart we discussed above. The next column is the number of troy ounces of gold the BoE offered at each auction. The first yellow column shows the number of troy ounces of gold the market bid for (tried to buy) from the BoE, followed by the final gold price of the auction. The second yellow column contains the “times covered”, or the number of times that the BoE gold offered was overbid for by entities wishing to buy gold at a particular auction. The rest of the columns are explained below, after you have reviewed the table…
After a brief perusal of this raw auction data direct from the BoE, it becomes obvious that the market wanted to buy a LOT more gold than the BoE was prepared to sell at any one time. Now, if the BoE was rational and it really intended to minimize its disruption to the world gold markets, why not sell whatever the market demands at each auction until the total 415 tonnes of unloved and unwanted gold is liquidated? For instance, in the first auction on July 6, 1999, why didn’t the BoE sell the whole 4,174,400 troy ounces of gold that the gold buyers bid for? If the purpose of the auctions was simply a FOREX reserve “portfolio rebalancing” as the BoE claims, why drag the sales out for years when the market could have easily absorbed the gold much more rapidly? These are tough and very important questions.
We subtracted the “BoE Offer” column from the “Market Bid For” column to obtain the “Wasted” column. This is wasted gold demand. Since the BoE could have sold almost 4.2m ounces of gold at its original auction, why did it hold back, deny its bidders their sought after gold, and only sell 0.8m ounces at the LOWEST bid? Very odd indeed!
The next column is the Cumulative Wasted Ounces, representing the total gold demand that was spurned and ignored by the wizards at the BoE. The final column converts these Cumulative Wasted Ounces into metric tonnes for easy comparison to the BoE’s original stated goal of jettisoning 58% of the total gold reserves of the United Kingdom, or 415 tonnes.
Provocatively, by the fourth traunche of the first series of five auctions, enough bidders (serious high quality entities, as only members in good standing of the secretive London Bullion Market Association were allowed to bid on England’s gold) placed bids that in total amounted to 489 tonnes of gold! This number is derived from four sales of 25 tonnes each (that’s 100 tonnes for all you CSCO shareholders out there) PLUS the cumulative wasted demand of 389 tonnes… net 489 tonnes of gold demanded in the first four sales of HM Treasury gold. The Bank of England could have easily sold the entire 415 tonnes commissioned by HM Treasury by January 2000!
If the BoE simply wanted to sell gold to buy currency without disrupting or overhanging the gold market, why not do the sales A) quietly, B) to the highest bidder at the individual bid prices, and C) in the SHORTEST amount of time in which the market could absorb the physical gold offered? The fact that the BoE could easily have sold the entire lot in four sales with a greatly limited disruption to the gold market but chose to draw it out lends great support to the theory that the BoE is being used by the socialist British government to actively intercede to suppress a global free market.
Granted, over time cumulative
wasted demand MAY be overstated, as a bidder whose lots were not filled in a
given auction may have bid again at the successive auction, but still, even
adjusting for that possibility, the general principle stands strong. Per the
BoE’s own records, MUCH more gold was demanded in each individual auction, EVERY
SINGLE TIME, than the stingy BoE would offer. The sales have been drug out LONG
after the market demanded the 415 tonnes of gold to be sold. The plot thickens…
The second critically important bit of information in this table is the latest auction results, direct from the BoE. In recent weeks, rumors have abounded that the BoE was having trouble finding physical gold to settle its gold obligations. These rumors would not be a big deal, EXCEPT for the undisputable fact that short-term gold lease rates have rocketed to new interim highs, zooming from 1% in early January to 7% intraday in recent weeks. The current gold lease rate action indicates EXTREME pressure in the gold market. This is analogous to the US Federal Funds interest rate rocketing from 5% to 35% in a little over two months. Serious disruptions in gold lease rates of this magnitude are extremely rare, and the last episode preceded the monstrous September 1999 Washington Agreement rally.
Against the backdrop of trouble in the gold world, US equity markets were being torn to shreds by the awakening bear in the days leading up to the auction. Reginald Howe and the Gold Anti-Trust Action Committee (GATA … www.gata.org) were making serious inroads in the legal fight to free gold, and the whole gold world was very nervous and jittery. The last few weeks have truly witnessed extraordinary uneasiness in the gold world. With this in mind, please scroll back up and examine the numbers highlighted in red, which cover the latest March 14 gold auction.
First, note the “Market Bid For”. In the tightest gold environment in the entire BoE strategic gold bombing campaign, the 1.8m ounces bid for was over 1m ounces below the AVERAGE for all the auctions. The times covered (X Cov) was only 2.2x, the THIRD lowest out of all eleven auctions. Anyone else have a funny feeling about the data the BoE provided?
Even worse, note that EXACTLY 1.8m ounces was bid for. Now review previous auctions. NEVER has there been an auction that just “happened” to have a perfectly round number of ounces asked for. There was only one other auction even remotely close to this, the third one. What are the odds of a perfectly round bid number in a chaotic gold market? It is kind of like witnessing the DJIA close at EXACTLY 10,000.00. It is possible, but statistically improbable.
As a Big-Six trained Certified Public Accountant and auditor who has witnessed financial fraud situations first-hand, the latest auction results, when viewed in context of the whole auction series and the tight gold environment of 2001, throws off a cacophony of shrill warning sirens careening through my skull. Something IS odd here, and we believe there is greater than 50% probability that the latest 1.8m ounce and 2.2x covered numbers are nothing more than hastily fabricated accounting plugs. They stick out of the series, they make no sense in reference to the current gold market environment, and it certainly appears that the BoE is “cooking the books” in their latest press release. One would have to be gullible enough to believe the NASDAQ has bottomed already if their suspicions fail to be aroused by the latest BoE reported auction results.
Motive? Simple. IF the latest BoE auction had been reported as massively oversubscribed (a high times covered ratio), HUGE amounts of physical gold buying would have sloshed into the gold market from all over the world and launched gold into a rapid ascent north. This would have disemboweled large money center banks which owe physical gold they don’t have. If the BoE did indeed shank its reported gold auction results, a massive short-covering rally in gold was averted… for now.
Of course, if the BoE REALLY wanted to maximize the proceeds of the gold sales for HM Treasury and the citizens of the great nation of Great Britain, then it would be really happy about rising gold prices for future auctions. But, as we have explored in this essay, virtually everything about the BoE gold sales stinks to high heaven and reeks of blatant market manipulation.
As American citizens, we can do nothing about this, but our British friends can. We encourage all our readers from the United Kingdom to contact their representatives in the House of Commons or House of Lords and demand an investigation into the BoE activities in the gold market. If everything proves to be legitimate, it will cause no harm for the legislative bodies of Great Britain to independently look into the gold sales. If, however, the BoE is squandering HM Treasury’s gold to save the bacon of a handful of elite bankers who made stupid bets, the citizens of Britain and the Queen certainly have every right to know about it immediately.
After this latest gold bombing run, the BoE announced yet ANOTHER long, drawn-out series of six 20 tonne auctions beginning in May. The more the fruits of the BoE gold bombing raids are analyzed, the more it appears that the Bank of England is intentionally damaging the world gold markets and knowingly destroying the African nations that rely on gold for much of their private and government revenues.
As the gold info-war rages on, there is little doubt that the BoE has chosen to side with the gold shorts desperate to save their own crooked hides by attempting to perpetually suppress the global gold market.
Adam Hamilton, CPA March 16, 2001 Subscribe at www.zealllc.com/subscribe.htm