The Raging Gold Info-War
Adam Hamilton March 2, 2001 3861 Words
Throughout history, the power of raw information has been stupendous. Today, information is so omnipresent, so seemingly routine. After all, in this curious moment in time, anyone can sit down at a computer, hammer out some text, hit a button, and seconds later the information is halfway around the world. At the dawn of the Information Age, information is so pervasive that virtually all of us in the first world take it for granted. However, from a historical perspective information can rock the most powerful organizations imaginable to their very cores.
In the first and second century, the most powerful empire the world has ever seen was based in a city on the Tyber River in Italy. This empire, the mighty Rome, is revered to this day. Although in absolute terms (weapons of mass destruction, raw explosive power) our large nation states today are for more powerful, the case can be made that in relative terms the might of the Romans has never been exceeded to this day. The Roman armies ruled the known world, and EVERYONE within its long reach feared the power of Rome for centuries.
Yet, this unfathomable power quaked at the mere act of a few people getting together, of information spreading. After the execution of Jesus Christ in the Roman province of Judea, early believers in the resurrection of this man quietly spread the new faith of Christianity. The early Christians had little money, no power, and should have been inconsequential to mighty Rome. Yet, the powerful emperors of Rome feared the spread of Christianity. Why? The Christians were certainly not a military threat to the empire. They did not even advocate internal violence to overthrow the emperor, as their teachings stressed submitting to earthly authority and loving their neighbors.
The teachings of Christianity threatened the Roman government’s stranglehold on information. It realized that people can only be controlled and subjugated if information can be carefully metered. After all, if common Roman citizens began believing en masse that the Roman emperor was not a god but only a fellow human, the whole basis of the absolute power of the emperor would be irreparably undermined. The spread of seemingly innocuous information, unchecked, was perceived to be life-threatening by the rulers of Rome and they responded accordingly and mercilessly tried to eliminate the young Christian faith.
Over a millennium later in 1215, the great Magna Carta was signed by King John under duress, guaranteeing barons and freemen legal rights and protections from the previously absolute power of a hereditary monarchy. The mere act of association and the spread of information led to the Great Charter which became an important basis for constitutional law. Seemingly innocuous information gutted the dynastical power of the English monarchy.
A few hundred years later a devout Catholic monk named Martin Luther grew tired of the monopoly the medieval Catholic church claimed on the Christian faith, as well as its endless efforts to keep the common man ignorant of the actual contents of the Bible. In 1517 Luther published his thoughts and research, the famous “95 Theses”, on the “Internet” of the day, tacking them to the church door in Wittenberg Germany. His simple concepts of Christ alone, faith alone, the Bible alone, and grace alone would eventually rock the world and still reverberate around this globe to this day. Luther’s mere act of spreading information led to the Reformation and altered Western Civilization forever.
A couple centuries later, some brave men and women set out from England in rickety boats for the New World, taking huge risks and attempting to escape persecution from British authorities. After they survived the brutal trials of the endeavor and became established in the brave new land, the British government claimed the “right” to tax them relentlessly, to steal the hard-earned fruits of their labors. Through association and the spread of information, the young Americans decided to cast off the yoke of British oppression forever, and live as free men under God. They ended up creating the greatest and freest nation in the history of humanity.
Can you imagine what the world would be like today if Rome had stamped out Christianity, or if King John had executed the nobles spearheading the Magna Carta, or if Martin Luther’s important dissent had been snuffed out, or if the US Declaration of Independence and Constitution never saw the light of day and the United States remained a British colony? I can’t.
The spread of information is one of the most basic foundations of freedom. Mere thoughts, later articulated as words, can eviscerate the most mighty organizations in world history as thoroughly as machine gun bullets ripping through thin paper. There is nothing authoritarian entities fear more than the unfettered spread of information. This is why the immutable freedoms of assembly, speech, and press are so important and enshrined in the laws of the United States of America.
Today, in the world gold markets, another important information war is being aggressively waged. The two sides, as in all the past mega-infowars, are the elite few, who believe they are above common laws and decency and can control markets and people for their own enrichment, and lovers of freedom everywhere, who believe that no one is above the law and that free markets should not be manipulated to benefit the few.
The stakes in this new information war are very high, and no one alive today can comprehend the ultimate impact the outcome of this battle will have on world history. After all, 500 years ago when Gutenberg was toiling in his German workshop on the fabulous new technology of the printing press, odds are that none of his neighbors, let alone the rest of the world unaware of his work, could even begin to grip the impact the printing press would ultimately have on humanity.
This new information war on gold has been raging for years, and the results are evident everyday in the world gold markets. Interestingly, the general base information is not disputed by either side, the gold oppressors or the gold liberators. Both camps acknowledge that the price of gold languishes near 25 year lows in real terms. Both sides agree that gold demanded around the world is roughly 3,500 metric tonnes per year. The oppressors and liberators do not dispute the fact that gold mined annually is on the order of 2,500 tonnes. No one is willing to argue that there is not at least a 1,000 tonne shortfall between gold we humans struggle to scratch out of the earth each year and gold demanded by the insatiable world markets. All these numbers are conservative and are not in question.
The stakes in the new gold infowar are breathtakingly mammoth. Estimates of total gold mined in the history of humanity are around 120,000 tonnes. Most of this gold is still around, as for six thousand years men have eagerly pursued the timeless value and store of wealth that gold provides, always shining through the perpetual speculative boom and bust cycles inevitably bred by greed and fear in the hearts of men. Doing some quick “back of the napkin” math, 120,000 tonnes of gold at $260 per ounce is worth a little over one trillion dollars (there are about 32,151 troy ounces in a metric tonne).
Obviously, a trillion dollars is a lot of money. If the gold price rises a small 10%, one hundred billion dollars in wealth is created in aggregate for global owners of gold. If the price of gold were to double, a trillion dollars in gains would appear on the books of gold owners. From a rationalistic capitalist perspective, one would assume that all gold holders would be excited about a rise in the price of gold, as their holdings would see tremendous new capital gains…
Unfortunately, 30,000 tonnes of the total gold supply are held by the most irrational of entities, governments. Roughly one quarter of the total estimated gold supply is listed as an asset on the books of various central banks around the world. Central banks virtually always work for the best interests of those with money and power, usually not the citizens of the country they are chartered to serve. Even though their gold assets would grow dramatically if gold was allowed to rise in price, they fear other factors and have a strong interest in attempting to keep gold dropping in price forever.
Many central banks that own gold have been living in a fantasyland since 1971, when the United States defaulted on its promises to back the US dollar with gold. At the time, gold was around $42 per ounce, and central banks had gold listed on their books at that price. As gold exploded throughout the 1970s in response to massive currency inflation in the US economy, central banks still thought of gold as being worth $42 per ounce, regardless of the price at which it was trading in global markets.
By the early 1990s, the socialist welfare states of the western world began to get into trouble. Governments had printed vast amounts of paper fiat currency, backed by nothing, and the ever-present fear grew stronger that all this new money created out of thin air would begin chasing goods and services, creating tremendous inflation problems. Central banks, the ones printing all this new money the politicians constantly demanded, begin to fear that the most sensitive barometer to inflation in world history, the price of gold, would begin to rise and expose the inherent instability of rapidly growing fiat currencies proliferating to finance cradle to grave socialism.
The central banks began to loan out their gold to large money center bullion banks. The central banks knew the bullions banks would immediately sell the gold in the open market and use the proceeds to invest elsewhere. This strategy had a number of benefits for the central banks. First, by slowly dumping their citizens’ gold on the global markets, constant oversupply pressure could be placed on the yellow metal, driving down its price over time and short-circuiting the inflation warning siren provided by gold.
Second, these “lease” sales would help bolster the perceived international value of the US dollar, as the purchasing power of the dollar is measured internationally in the terms of how many dollars it takes to buy an ounce of gold. Cheap gold is interpreted as a strong dollar in world markets. Also, the central banks probably knew that the entities to which they leased the gold would use the funds to speculate in equity markets, potentially increasing demand for stocks and driving up equity prices. As long as additional fiat currency created could be enticed into the equity markets by ever-rising stock prices, the dangers of monetary inflation spilling over into goods and services could be greatly reduced.
Finally, as the central banks had gold on their books at $42 an ounce, they could use some accounting wizardry to justify very low below market lease rates for gold, virtually assuring there would be high demand for leased gold. The gold was loaned out at low interest rates, often 1%. This was incredibly cheap capital for the entities borrowing the money, a far better deal than borrowing money in any other financial market. With gold at $300, a central bank might charge 1% interest on a gold loan. When the loan came due, the bullion bank that borrowed the gold would have to pay 101% of the original gold leased, or $3 extra in the case of $300 gold.
Although $3 on an ounce of gold worth $300 is only 1%, the central banks were recognizing that $3 of lease income on gold booked at only $42 per ounce. This creates a fictional return of 7% ($3 interest divided by $42 gold) for the banks, even though the borrowers realized the true cost of the gold was 1% per year.
Naturally, the few elite money center bullion banks that were allowed a piece of this action borrowed all the gold they could at 1%. After taking delivery of the physical gold from the central banks, the leased gold was immediately sold in the open market by the borrower. This drove the price of gold lower, as additional supply was being injected into the global markets. The borrower then took the cash from the sale and invested it in other assets. The profits were the spread, or the difference between the market return of the invested proceeds and the 1% cost of the gold capital borrowed.
Of course, this scheme seems prudent when the price of gold is stable or falling. But what happens if a money center bullion bank borrows gold at $300, the gold price rises $100 during the year, and it has to pay the gold back at $400 per ounce? The original 1% cost of capital of the borrowed gold balloons into 33% ($100 rise divided by $300 gold), a terrible deal. When the gold loans become due, the bullion banks have to buy gold in the open market to repay the central banks. A bank that has borrowed large amounts of gold risks massive losses or even bankruptcy if it cannot afford to buy back gold at market prices to pay back its gold loans.
In the mid 1990s central banks and governments began to realize that some of their flagship financial institutions would be destroyed if the price of gold rose and gold loans could not be paid back. The central banks also realized there was virtually no hope of ever getting their gold back which they had leased out, so they began to roll over and renew the gold loans rather than take payments in gold. The central banks also faced the embarrassing situation of explaining to their constituencies how much of the gold listed as “assets” on their books was already loaned out and really should be a gold receivable. Currencies were also at risk, as international FOREX traders would likely punish a country’s currency mercilessly if the announcement was made that its gold was disappearing or gone entirely.
The central banks and the gold shorts had to keep the scheme alive at all costs, suppressing the global gold price regardless of the consequences.
Fast forward five or six years to the present. Central banks have loaned out vast amounts of gold to be sold in the open market, but very few people know exactly how much. Estimates of the total amount of physical gold owed to central banks range from 5,000 tonnes to 15,000 tonnes.
As we discussed above, only 2,500 tonnes of new gold is mined each year, and 3,500 tonnes is demanded by the world market. There is a “current account” 1,000 tonne physical gold deficit. Every year, by necessity, at least 1,000 tonnes of gold must be sold into the market by central banks out of their rapidly dwindling hoards if the gold price is to be held in place artificially.
Assuming a 10,000 tonne short position that is growing by at least 1,000 tonnes per year, the odds of procuring gold to repay the gold loans from central banks are exceedingly miniscule. The only way to entice more gold out of the ground is through much higher gold prices. At $260 today, the majority of gold mines are limping by right on the verge of their production costs for the exceptionally rare yellow metal.
There are educated estimates floating around that total known underground gold reserves in the world are only on the order of 12,500 tonnes. At today’s gold price and today’s rate of mining, 2,500 tonnes per year, the world could run out of economically extractable gold within five years!
At this moment in history, we are all witnessing an extraordinary convergence of leviathan forces that are about to collide. 10,000 tonnes of gold is owed to central banks, which must be paid back or written off. 1,000 tonnes more gold is demanded each year than is produced. And known global reserves recoverable at current prices may be nearing depletion.
These issues are at the very heart of the current information war. Lovers of free markets and freedom claim governments, central banks, and large bullion banks have conspired to delay the inevitable explosion in the price of gold by artificially injecting central bank gold supplies into the free markets. Free-gold advocates believe that this conspiracy by an elite few has wreaked untold harm on poor gold producing nations, artificially understated first world fiat currency inflation rates, caused grievous harm to gold mine shareholders and owners of physical gold, and has made a mockery out of the virtues of free market capitalism.
The oppressors and their ilk, on the other hand, claim that gold is dead. They say that gold is a “barbaric relic” that should be forever banished from the world financial system.
Leading the free-gold charge is the Gold Anti-Trust Action Committee (GATA). GATA (www.gata.org) has spent over two years painstakingly researching the world gold markets, and carefully documenting the huge short position, major players and their motives, and the probable outcome of this anti-free market outrage.
Attorney Reginald Howe and GATA have amassed so much conclusive evidence of what has really transpired in the gold markets since 1995 that they launched an unprecedented legal action against some of the key anti-gold players. On March 15, the defendants in Howe vs BIS et al must appear before a judge of the US District Court in Boston. This monumental event, although largely ignored by the US media, could lead to the release of information of gold market manipulation that could alter the course of financial history.
The list of defendants in the Howe case is mind-boggling. It includes the highly secretive “central bank’s central bank”, the Switzerland-based Bank for International Settlements, US Federal Reserve Chairman Alan Greenspan, the President of the New York Federal Reserve Bank William McDonough, JP Morgan, Chase Manhattan, Citigroup, Goldman Sachs, Deutsche Bank, and Clinton’s Secretary of the Treasury Larry Summers.
If you are an investor, and have not yet read Howe’s complaint, you owe it to yourself to check it out. It beautifully outlines the gold price suppression scheme since 1995, and contains potentially market-shattering information. When the evidence and allegations go mainstream, the potential effects on gold and other world markets could be incredible. The full text of the lawsuit is available at GATA’s website.
The information war rages on between GATA and advocates of free markets and the elite that claim gold is dead. In history, the outcome of major information wars could often be predicted by observing which side was attempting to spread information and which side was suppressing. In the examples we opened with, the information suppressors, the Romans, the English monarchy, the medieval Catholic Church, and the British all lost. In this modern war, which side is attempting to suppress information? Odds are the suppression side, the anti-gold forces, will once again prove to be the vanquished in this war…
The majority of the world physical gold trade occurs behind locked doors in smoke filled rooms in London. The light of day is never seen by these old, incestuous, and imperialistic trading arrangements. What are they trying to hide?
The Bank of England is dumping half of England’s gold treasury, and British citizens overwhelming disapprove of the liquidation of the collective wealth of the once great British Empire at firesale prices. Why are the BoE gold sales so secretive and why were they rammed through stealthily by the Socialist Prime Minister’s office and not carefully and openly debated in the House of Lords and House of Commons?
Why do the large US bullion banks aggressively oppose proposed derivatives reporting laws that would make potentially dangerous derivatives books more transparent and open to the banks’ shareholders?
Why are the gold markets a taboo subject in the mainstream media? Why are positive comments on gold censored and not dispersed while “gold is dead” folks are paraded on the screen whenever gold moves even a paltry 1% in a single trading day? Why do bubblevision personalities always apologize when they are “forced” to announce that the precious metals sector is leading the markets on a particular day?
The more you study the gold markets, the more you will come to a realization that something is terribly wrong and active efforts are being made to suppress the truth. A massive information war on gold rages all around us.
Unfortunately for the elite suppressing the gold price, they are at a terrible disadvantage in this new information war. At the dawn of the Information Age, truth spreads like wildfire around the globe and is impossible to combat. Every time another investor somewhere on the planet learns of what is happening in the gold market, the nails in the coffins of the gold price suppressors are pounded in a little further. It is only a matter of time before the forces of freedom and free markets overwhelm the current anti-gold offensive, and the profits that will be reaped by those who discern the writing on the wall will be staggering.
If the early Christians, the English nobles, Martin Luther, and American colonists could decisively win early information wars with ancient technology, imagine how much faster and more forcefully the truth on the gold markets is spreading today via the Internet and modern communications networks!
In Tom Clancy’s fantastic recent book, The Bear and The Dragon, China marches north into Russia to steal newly discovered monstrous deposits of oil and gold. The Chinese Politburo, ruling their country with an iron fist, believes they have a monopoly on information flows. As America mobilizes to help the Russians fend off the Chinese invasion, secret American reconnaissance technology allows the allies to utterly annihilate the endless Chinese armored columns. The elite rulers of China ignore the truth and ensure their “press” tells stories of how successful the Chinese campaign is proving. They foolishly believe their “spin” can overcome rock solid reality.
The Americans, tired of the communist cabal ruling and oppressing China, decide to release live video feeds from reconnaissance drones circling over the battlefields. Within minutes, Chinese students discover the CIA website and are shown the truth in living color, that the Chinese invasion of Siberia is being savaged by the Americans and Russians and the Chinese leadership had made a terrible mistake.
Initially, only a few Chinese citizens realized what was happening, but the truth has a way of spreading like a wildfire through a parched forest in the Information Age. Soon, much of the Chinese populace was aware they were being lied to and marched on the Politburo to kick the old Communist leaders out of office. The amazing mind of Tom Clancy crafted a perfect example of the power and effectiveness of information and truth in our modern world!
The information war on gold is rapidly approaching its endgame. The time available to research the pro-gold and anti-gold positions and strategically place capital to ride the likely outcome is drawing short…
Adam Hamilton, CPA March 2, 2001 Subscribe at www.zealllc.com/subscribe.htm