Beyond a Reasonable Doubt

By Adrian Douglas

GATA has accumulated mountains of evidence over the years that indicate that the Gold Market has been suppressed in order to maintain or boost the buying power of an over-issued dollar and to maintain low interest rates. A 1961 memo to McChesney –Martin Jr. , who was Chairman of the Federal Reserve from 1951 to 1970, was recently unearthed that explained exactly how to manipulate the gold market.

The body of evidence is nearly all circumstantial but when viewed together it makes a very strong case that the gold market has been suppressed. My intention in this article is to present an analysis that takes the case against the Gold Cartel “Beyond a Reasonable Doubt”. I first presented this analysis at the “GATA Goes to Washington Conference” in April 2008 but it has not been published until now.

Exhibit 1: Price of Gold 1979- 2008

We will start with Exhibit 1 which is a chart of the gold price in US dollars from 1979 to 2008. The red circle denotes the period that GATA claims was an intense period of gold price suppression from 1996 to 2001. During this period the gold price fell from $400/oz to a low of $253/oz. This is in and of itself suspicious considering the money supply expanded dramatically during this period and the exchange value of the US Dollar increased as shown by the highlighted box in Exhibit 2. But while this is highly suspicious and certainly counter-intuitive it is by no means proof of gold price suppression on its own.

Exhibit 2: Money Supply & USDX

What is required is “forensic” evidence. The financial market equivalent of fingerprints or DNA. I would like to introduce into evidence my proprietary analysis technique of “Market Force Analysis”. The analysis applied to the COMEX Gold futures market from 1979 to 2008 is shown in Exhibit 3. There are three outputs from the analysis the supply (blue line), the demand (green line) and the arithmetic difference between demand and supply called the “Force” (red line). As we will see this is a stunning piece of forensic science. But before we get into this we need to first of all prove the validity of the science. Just like when finger print matching or DNA technology were first introduced the reliability of the techniques had to be first established before they could be accepted as evidence in a court of law. So let’s do this for MFA.

Exhibit 3: Gold Price & Market Force Analysis Outputs 1979-2008

Market Force Analysis uses published market data from the futures exchange to derive the underlying supply and demand for the futures instrument. This is at the heart of economic theory. The imbalance of supply and demand drives price. If a market moves into increasing oversupply the price will go down and if it moves into increasing undersupply the price will go up.

If the force is truly measuring the difference between supply and demand that is driving the price, then the force must be highly correlated to price. For example, if I deduce that the rotation of a windmill is only a result of the speed of the wind passing through it I could make measurements of the rotations per minute (RPM) of the windmill for many different wind speeds and if I were to chart RPM versus wind speed I would expect to find a correlation between the two measures. In Exhibit 4 a chart of a crossplot of force and gold price is shown using all the data from 1979 to 2008. It can be seen that a very strong correlation exists. The correlating equation is shown on the chart and it has an R-squared of 0.88. When this value is close to 1.0 it means the correlation is very good. What is notable is that the SAME correlation is valid over 29 years of data. This is what we would expect if it truly is the difference between supply and demand that determines price. I could go into more details to support the fact that the Market Force Analysis is measuring what it purports to and that it is reliable but in the interests of keeping the article brief this will suffice for now.

Exhibit 4: Crossplot of Force & Gold Price 1979-2008

So let’s return to Exhibit 3. What stands out on the chart is the huge “V” which started in 1996 and has its bottom in 2001. We will see that this is the forensic evidence of market manipulation. The blue line shows supply which has been fairly well contained in a channel that is slightly declining over most of the 29 years of the chart data. However, starting in 1996 and continuing until 2001 supply was massively increased. It should be noted that the main purpose of a futures market is for buyers and sellers to lock in prices for FUTURE delivery. So how were futures traders able to be so confident of a massive increase in available gold supply to deliver in the future? Did they anticipate a massive increase in gold mine production?

Exhibit 5 shows a chart of World Gold Mine Production from 1980 to 2006. It can be seen that output was rising until about 1997 when it started to plateau followed by decline starting in 2001. So based on the most reliable source of gold supply, the gold mines, futures traders should have been anticipating a contraction in gold supply not a massive increase.

Exhibit 5: World Gold Mine production 1980-2006

There are some more things of note in Exhibit 3. The demand (green line) has been higher than supply for most of the last 29 years. This is what one would expect for a precious metal….it is what keeps it precious! However, the massive increase in supply seen from 1996-2001 depressed prices and so as result stifled demand such that for a 2 year period supply exceeded demand! The result of the massive supply-demand imbalance is seen in the force (red line) which turned extraordinarily negative and created the left side of the massive “V” formation.

If futures traders were able to so confidently lock in sales for a massive future supply of gold at a time when gold mine output was reaching a peak where was the supply going to come from? There is only one other possibility and that is from above ground stockpiles. GATA has amassed lots of evidence showing how the Central Banks increased their loans, leases and outright sales of gold starting around 1995. A knowledge that such large hoards of gold would be available to come on to the market would be all that was needed for the short sellers to have a field day. The continuous and linear negative force on the market for 5 years is not someone wanting to sell gold. This is the forensic evidence of criminal action. This is the trace evidence of some entity or entities wantonly bludgeoning the gold market for a very long time. This signature of the MFA unambiguously demonstrates that a crime was being committed in the gold market.

To convince a Jury in a criminal investigation one usually needs to show the alleged perpetrators had the means, opportunity and motive. GATA has for a long time fingered the culprits of gold price suppression as an unholy alliance of the Western Central Banks and the major bullion bankers. There is no question that with initially large stashes of gold bullion the Gold Cartel had the “means” to suppress the gold market in this way. The “opportunity” to put this into high gear came with the Robert Rubin “Strong Dollar” policy. How to manipulate the gold market to make the dollar look strong was the central theme of the previously referenced memo to William McChesney-Martin Jr. There are only two ways to have a strong currency, one is to increase money supply only in line with economic growth or the second is to manipulate the currency. From 1996 to 2001 money supply far exceeded GDP growth yet the exchange value of the US dollar rose as measured by the USDX AND as measured against gold. This leads us to conclude the dollar was being manipulated as the cornerstone of the “Strong Dollar” policy. Our MFA forensic evidence shows that the “theatre of operations” was the gold market.

What about “motive”? This is the interesting piece. Gold price manipulation and suppression is nothing new. This after all was the overt policy of the London Gold Pool, to try to suppress the price of gold to only $35 to one ounce. The motive behind the “Strong Dollar” policy was, in my opinion, altogether more sinister than just gold price suppression. The motive was not to merely suppress gold but to bludgeon it and its investors to financial death and oblivion. Forcing the price of gold to incredibly low levels would have caused such misery and ruin among gold investors that they would probably have sworn never to touch such an investment ever again. For thousands of years gold has represented wealth; it has been the subject of countless stories of buried treasure and rags to riches miracles. What about if such an enduring affinity for gold could be burned out of the human psyche with a shocking market collapse? After all no one since the 17th century has considered tulips as a financial asset class! If the age old arch enemy of Central Bankers and their fiat currency regimes could be sentenced to death and summarily executed then the US Dollar as the reserve currency of the world would be the unquestioned favored store of wealth and ultimate money, not “as good as gold” but better than gold! A far-fetched motive? Read on….

This theory of the motive of the “Strong Dollar Policy” is well substantiated by other evidence. Andy Smith, who for a long time was the perma- bear Mitsui Global Precious Metals analyst, famously said in 2002 "Gold in the digital age -- two digits! Gold will trade between $50 to $100 in the next 5 to 10 years". That would seem an absurd prediction in a year when gold traded between $243 and $346/oz unless you happen to be familiar with the intentions of the Gold Cartel.

This also explains why some very well connected miners hedged large amounts of production at $300/oz because they were given the tacit “nod” that gold was going much, much lower. Already $300/oz was below the cost of production which is an implicit hedge against lower prices. If they had been told that gold was going to $50/oz then hedging gold would have seemed a more profitable business pursuit than mining the stuff, as Barrick Gold led many to believe!

By 1999 the Gold Cartel was well on its way to success. The price was driven to a low of $253 in that year by the announcement of the BOE that it would dump half its gold hoard. The timing of the BOE gold sales together with the type of auction were probably designed to be the finishing death blow for gold as an asset, which, had it been successful, would have made Gordon Brown look like an investment guru instead of a buffoon!

The “Strong Dollar Policy” was like the opposite of the James Bond Goldfinger plot…a sort of “Dollarfinger”! A scheme designed to end the millennia of Gold Wars, a scheme to banish gold from intelligent financial investment options.

Exhibit 3 also reveals that the scheme failed. In 2001 supply started to decline, the price started to rise and demand picked up sharply. The Gold Cartel miscalculated just how much gold it would take to get the job done. They had gold on the ropes, they had gold investors in a state of depression and throwing in the towel, they had mines closing down, they could smell victory…. but the Central Banks were running low on gold…and to add to their woes, an upstart organization called the Gold Anti- Trust Action Committee (GATA) suddenly put their operation in the spot light and started publicizing their manipulative actions, even going as far as to sue them for their actions in Federal Court. Due to GATA’s actions investment demand for gold picked up just as the Cartel was running low on ammunition and this foiled the master plan of the Gold Cartel.

Since gold’s near death experience it has gone from strength to strength while the Cartel has now a seriously depleted store of ammunition. The demand for gold and, as a consequence, the force are both rising at faster rates than they have ever done in the last 29 years. The Gold Cartel is still trying to suppress gold’s rise but it will soon be defeated on this front too.

In closing arguments I would say that the Market Force Analysis, through revealing the underlying supply and demand dynamics, has identified that criminal activity has been taking place in the gold market. This is not circumstantial evidence. This method uses data from the COMEX exchange. The facts place this conclusion Beyond a Reasonable Doubt.

The alleged perpetrators who had the means, opportunity and motive are the Western central banks acting in concert with the major bullion banks.

When this scam is finally defeated and exposed it will make the Madoff Affair look like chump change.

Many investors have already made considerable gains by knowing the facts that GATA has uncovered but the really big gains are still ahead as investors re-discover that there is only one thing that is “as good as gold” and that is gold bullion.

Adrian Douglas

February 8, 2009

www.marketforcea nalysis.com

Market Force Analysis is a unique analysis method which provides reliable indications of market turning points and when is a good time to enter, take some profits or exit a market. Subscribers receive bi- weekly bulletins on the markets to which they subscribe.