Goldman and the Gold Cartel

Bill Murphy, whom I interviewed on Tuesday, has a piece in the HufPost that's very helpful in explaining GATA's thesis on the manipulation of the gold price, and what might turn out to be a financial scandal that drawfs the Madoff affair.

Initially we [the Gold Anti-Trust Action committe] thought that the manipulation of the gold market was undertaken as a coordinated profit scheme by certain bullion banks, like JPMorgan, Chase Bank, and Goldman Sachs, and that it violated federal and state anti-trust laws. But we soon discerned that the bullion banks were working closely with the U.S. Treasury Department and Federal Reserve in a gold cartel, part of a broad scheme of manipulation of the currency, precious metals, and bond markets.

As an executive at Goldman Sachs in London, Robert Rubin developed an idea to borrow gold from central banks at minimal interest rates (around 1 percent), sell the bullion for cash, and use the cash to fund Goldman Sachs' operations. Rubin was confident that central banks would control the gold price with ever-more leasing or outright sales of their gold reserves and that consequently the borrowed gold could be bought back without difficulty. This was the beginning of the gold carry trade.

When Rubin became U.S. treasury secretary, he made it government policy to surreptitiously operate an identical gold carry trade but on a much larger scale. This became the principal mechanism of what was called the "strong-dollar policy." Subsequent treasury secretaries have repeated a commitment to a "strong dollar," suggesting that they were continuing to feed official gold into the market more or less clandestinely to support the dollar and suppress interest rates and precious metals prices.

Lawrence Summers, who followed Rubin as treasury secretary and now a key economic advisor to President Obama, was an expert in gold's influence on financial markets. Previously, as a professor at Harvard University, Summers co-authored an academic study titled "Gibson's Paradox and the Gold Standard," which concluded that in a free market gold prices move inversely to real interest rates, and, conversely, if gold prices are "fixed," then interest rates can be maintained at lower levels than would be the case in a free market. Lawrence Summers knows very well what has been going on in the gold market and why.

These secretive gold operations were a significant reason for the real estate bubble and market collapse in the US as interest rates were left too low for too long. GATA understood that the manipulation of the price of gold was profoundly important to all markets and the American public. On January 31, 2008, we placed a $264,000 full-page color advertisement in The Wall Street Journal. GATA's ad warned, "This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world." What GATA warned against has come to pass.