William Jennings Bryan Reborn: Bimetallism Today

JUPITER, Fla. (HedgeWorld.com)-Recent allegations of long-term manipulation of the price of gold and its derivatives bear striking similarities to somewhat older theories about manipulation of the price of silver and its derivatives, and both sets of theorists have noticed.

James Cook publishes the James Cook Market Update and maintains a web site, Investment Rarities-both of which are vehicles for the analyses of Theodore Butler. Messrs. Cook and Butler believe that a group of commercial silver traders have used short positions at the New York Mercantile Exchange's COMEX to hold the price of that commodity downward despite a drawdown of the supply that ought to have increased the commodity's value.

The public effect of Mr. Butler's views induced the Commodity Futures Trading Commission to issue a statement this May asserting that its division of market oversight has no evidence of silver or silver futures market manipulation Previous HedgeWorld Story.

Three months later, Sprott Asset Management Inc. issued a report on the price of gold. The authors of this report, John Embry and Andrew Hepburn, likewise, maintained that on the basis of the relation of supply to demand the price of that commodity ought to be substantially higher than it is and that it has been driven down by collusive selling and leasing. The culprits, in their scenario, are chiefly central banks, although perhaps with the assistance of private sector bullion dealers and hedge funds.

Mr. Cook certainly noticed the analogy. He said that Sprott's report failed to give Mr. Butler proper credit as "the first guy who came up with the idea of leasing as a depressant upon the price." He also said that the two markets have some differences. "One of the biggest differences is that the amount of silver is diminished every year," by industrial uses, "but the gold is all still there." But in general, Mr. Cook praised Sprott's report, saying that it is unusual for so mainstream a financial institution to take so controversial a stance.

Asked whether Mr. Butler should have received such credit, though, Mr. Embry of Sprott said, "His view on silver did not enter into our analysis of the gold market."

Still, Mr. Embry was conscious of the analogy between the two markets and the two theories. He said he considers Mr. Butler very knowledgeable, although he added that at times he is a little more aggressive in making his claims than he (Mr. Embry) would be. In general, "it wouldn't make sense if silver were shooting up dramatically, and gold was suppressed," so any combination seeking to keep the price of gold low must also concern itself with the price of silver.

As to the CFTC's rejoinder to Mr. Butler, Mr. Embry said that it was "disingenuous at best and most probably some form of cover up. We back this view up with our clients and our own money because we own huge physical positions in silver bullion," which is in a vault in Ottawa.

The price of gold was heading downward in the opening days of September, getting beneath US$399 oz before rebounding. (It closed at US$405 Sept. 14.) "These enormous shorts are far out of whack," Mr. Embry said in a conversation during that downdraft. He thought that the disappointing jobs report ought to have triggered an increase in the price of gold, a traditionally counter-cyclical commodity.

Some Highlights from Sprott's Report

The gold report, "Not Free, Not Fair: The Long-Term Manipulation of the Gold Price," makes the following claims:

1. Gold was involved in the Long-Term Capital Management debacle in 1998. LTCM was short between 300 and 400 tons. "A few large bullion dealers" sold into promising gold rallies that summer, stopping the rallies "dead in their tracks" to spare LTCM a gold short squeeze.

2. The following year, there was a split between the Bank of England and the U.K. Treasury over the sale of almost half of that country's gold. Terry Smeeton, who was in charge of gold operations for the Bank of England in that period, apparently told Reuters in May that the sale is "clearly a Treasury decision in which our bank has had to acquiesce." Sprott considers it an ominous sign that the Bank was pushed into this sale, as if Smeeton and colleagues understood they were entering into a combination that would end badly.

3. Fifteen European central banks agreed to limit gold sales in September 1999. This caused a price spike-that much is public knowledge. What Embry and Hepburn add is that because of the price spike, the "official sector" intervened, in effect reversing course and assuming the short positions of some of the largest financial institutions.

4. Accounting regulations designed by the International Monetary Fund obscure the quantity of borrowed gold on the market.

5. The speculative carry trade dwarfs producer hedging as a source of rising gold derivatives figures.

Michael Gorham, who wrote the CFTC report on the silver-manipulation theory in May, when asked about the gold theory this month said that he wasn't familiar with it. He has left the government and now holds an academic position at the Illinois Institute of Technology. After hearing a summary of the above points, Mr. Gorham agreed that, "a number of central banks all over the world have been getting out of gold over a long period of time, and the sales have been lumpy," but he didn't think that amounted to price manipulation.

A Nymex spokeswoman expressed skepticism about either theory. "Our job is to monitor the market and make sure manipulation doesn't occur. We work diligently to ensure that there is no manipulation of any of our markets." She referred to the CFTC's commitment of traders figures, which indicate that commercial participants make up 62% of the market on the short side, which may indicate that producer hedging does outweigh speculation on that side of the market.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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