Patrick A. Heller: Why didn't gold rise $100?

By Patrick A. Heller
Numismaster.com, Iola, Wisconsin
Tuesday, April 28, 2009

http://www.numismaster.com/ta/numis/...

Several major news stories broke last week that all should have sent the price of gold soaring. Gold did rise 5.3 percent, which did not reflect the importance of the developments.

There is a theme to the eight news items cited here. China has been buying large amounts of gold, it wants even more and the U.S. banking system is still in dire straits.

What this means is obvious, but if you are willing to dive in with me here, the details follow.

Let's look at these news items, then discuss why the price of gold, in my judgment, did not fully react.

Story 1: About 10 days ago, the Gold Anti-Trust Action Committee filed a new set of Freedom of Information Act requests with the U.S. Treasury and Federal Reserve to seek information on the U.S. government's gold swap activities. The first attempt to dislodge this information was filed in December 2007, with dismal results. After carefully analyzing the loopholes used by the Treasury and Federal Reserve to avoid disclosing the requested information, these revised FOIA requests include detailed instructions to overcome the government's obstacles. For example, one FOIA request noted that the agency was unable to uncover where its own public Web site discussed gold swaps.

Story 2: The federal government has conducted "stress tests" of individual banks to help find out which were financially strong, or average, or in serious trouble. It was reported that these tests were completed a few weeks ago, but the government was slow to release the results.

On April 19, the Turner Radio network reported that it had obtained a copy of the results of the stress tests and passed along a summary of more than 10 points. Among these summaries were statements that 16 of the nation's largest banks were already technically insolvent and that the failure of any two of these institutions would wipe out the current assets of the Federal Deposit Insurance Corporation.

On April 20, the Treasury Department issued a statement claiming that it was not possible for Turner to have had the information as the Treasury Department itself had not yet seen the information. Release of the information was promised for April 24.

Meanwhile, the Federal Reserve prohibited any banks from discussing the results of their stress test.

In mid-week the Associated Press reported that it also had obtained a copy of the bank stress test report and confirmed the information reported by Turner Radio. It also said that the Treasury Department was lying when it claimed on the 20th to have not yet seen the test results.

On April 24, the official unveiling of the stress test results only included the bare minimum information, stating that large banks should beef up their capital to strengthen the entire financial system. The reports neglected to cover the specific points listed by the Turner Radio network. The mainstream media dutifully picked up the government's spoon-fed version of the stress test results without any serious questioning.

Story 3: On April 24, Bloomberg reported an analysis released by Washington Service of Bethesda, Md., stating that insiders at New York Stock Exchange-listed companies in the first 20 days of April had sold more than eight times the amount of stock that they had purchased.

According to William Stone, the Chief Investment Strategist for PNC Financial Services Group Inc., "They should know more than outsiders would, so you could take it as a signal that there is something wrong if they're selling."

This was the fastest rate of insider selling since stocks hit a major peak in October 2007. The rate of insider purchases was on track to be the lowest for any month since July 1992. In the past, such lopsided insider selling versus buying has been followed by stock market declines.

Story 4: Bank of America CEO Ken Lewis testified under oath for New York Attorney General Andrew Cuomo that last December he had notified the federal government that the bank had discovered huge new losses ("material adverse changes") at Merrill Lynch and was going to exercise an escape clause to cancel the bank's takeover of the brokerage firm. Upon hearing this, then-Treasury Secretary Henry Paulson blatantly told Lewis, at the behest of Federal Reserve Chair Ben Bernanke, that Bank of America had to go through with the takeover or all of the bank's directors and senior management would be fired. The federal government did not want the public to become aware of the weakness of Merrill Lynch and the U.S. banking system that the cancellation of the transaction might expose. Bank of America then closed the Merrill Lynch purchase deal.

Paulson's testimony to Cuomo largely confirms the details of Lewis' testimony.

In effect, Lewis labeled Paulson and Bernanke as blackmailers. Their actions in this matter also show them as liars in repeatedly stating that the U.S. banking system is sound and solid.

The letter with these details released by Cuomo's office puts the Bank of America and possibly the federal government at risk of being sued by bank shareholders for actions taken against the best interest of the bank's owners. Note: Bernanke has denied making any of the statements in the letter that are attributed to him.

Story 5: At the G20 meeting, the International Monetary Fund was pressed to sell 403 tons of its gold reserves to be used to ease the global financial crisis. China has since gone on record as advocating that the IMF sell its entire 3,217 tons of gold holdings. The Chinese central bank may be looking to purchase another 4,000 tons of gold, which is a larger amount than all the gold reserves reported by the IMF, and is also larger than those held by all but a handful of the world's central banks. At a price of $1,000 per ounce, China would need barely five percent of its central bank reserves to buy this much gold.

In effect, if the IMF does not sell a lot of gold, and sell it soon, that supply shortage could help drive up the price of gold.

A reason that China may be pressing the IMF to sell gold and why the Chinese central bank may want to add gold reserves is a long-term plan to revalue gold, similar to what U.S. President Franklin Roosevelt did in 1933.

Story 6: In 2008, 1.7 million American homes were lost to foreclosure. In 2009 Lazard Asset Management forecasts 2.1 million U.S. home losses. Despite regular news reports trying to portray positive news about the real estate market, the truth is that foreclosure rates should continue rising at least until early summer. It doesn't take a genius to figure this out. All you have to do is look at delinquency rates and foreclosure notices. How will the U.S. financial system react to this surge in bad debts?

Story 7: After so much fuss was made at the G20 meeting about the IMF possibly selling gold, the subject has either been dropped or been reclassified as a very low priority task. In the last few days, the IMF has said instead that it plans to sell bonds to finance its activities. Several years ago, these fund-raising activities were supposedly being done to help the world's poor people. Now the IMF is raising funds to support central banks and governments. This shift in emphasis at the IMF adds credence to the assertions by several analysts, including me, that the IMF gold sale will never occur.

Story 8: On April 24, the Xinhua News Agency reported that China's gold reserves had increased from 600 tons at the end of 2002 to 1,054 tons, a rise of 76 percent. Until this announcement, the Chinese central bank had continued to report only the 600 tons in reserves. The spokesman claimed that all gold had been purchased from domestic mine sources.

This 14.6 million ounce increase in reserves has been almost precisely reported by GATA ever since September 2003. GATA has a confidential source that was told in 2003 by a man, who insisted on speaking behind a screen to avoid disclosing his identity, that there was a large buyer of gold entering the market. This source was able to identify the agent acting on behalf of the buyer and quickly deduced that the buyer was from the Far East and almost certainly Chinese.

Over the years, this confidential source was able to learn the price levels at which the buyer was planning to make purchases, and the approximate size of purchases being planned. With the revelations by the Chinese central bank, the information reported by GATA (some on GATA's Web site and some on GATA chairman Bill Murphy's LeMetropoleCafe.com subscription Web site ) has largely been confirmed.

The impact of this announcement has ramifications far beyond that fact that China has been buying gold without reporting it. The World Gold Council and major precious metals consultancies such at GFMS regularly report gold supply and demand statistics that are widely quoted in the financial press. None of their reports include the Chinese central bank gold purchases as part of gold demand. Even more damaging to their reputations, these reports do not show any gold supply to cover what the Chinese have purchased.

Let me make this explicit. The gold purchased by the Chinese could not have come from mine production, recycling, investor liquidation, or announced government sales. Almost certainly the gold bought by the Chinese had to come from other central banks that secretly sneaked these supplies on the market.

In other words, the supply-and-demand statistics used by the mainstream financial press have been wrong for years. The question is how large are the errors. GATA researchers assert that the annual supply and demand statistics reported by the World Gold Council and GFMS could easily be off by 50 percent. With GATA's enhanced credibility confirmed by China's admission of their gold purchases, the mainstream financial press should seriously examine their data.

By the way, the way the Chinese government operates is not open and direct. Changes in policy are signaled by speeches or papers by lesser officials. And has been shown repeatedly, when the Chinese government issues a statement that it is considering something such as purchasing gold, they really mean they have already been actively doing it. It is entirely possible that China's central bank gold reserves are much higher than they now confirm. (GATA has documented higher purchases than the Chinese have admitted.)

Another note: GATA's special source says that the Chinese are looking to remain a buyer of gold as long as the price is under the $940-$960 range.

One last note on this subject: All the implications of the increase in Chinese gold reserves are positive for higher gold prices and negative for the U.S. dollar. So naturally the U.S. government has a huge interest in seeing this story get as little coverage as possible. In the weekend edition of the Financial Times of London, this story was front-page news. At the same time, The Wall Street Journal buried this news on Page B-6. My local newspaper, issued in Michigan's capital, did not even include this news.

So with all this positive news for the price of gold, why did the price only rise 5.3 percent last week? I think the answer is obvious. The U.S. government is trying to hold off further financial crises as long as possible. One way to accomplish this is to suppress the price of gold. Gold serves as a report card on the value of the U.S. dollar. As long as the price of gold can be held in check, then it is easier to prop up the dollar. If the dollar starts to drop significantly, interest rates will soar, and foreign central banks will become more aggressive in dumping their dollar reserves.

U.S. Rep. Paul Kanjorski, D-Pa., already revealed that the U.S. financial system was perilously close to collapse at 2 p.m. last Sept. 18, 2008. With all the above news hitting in such a short time, it is entirely possible that the U.S. economy could have crashed last week.

If you still don't think it's time to consider owning gold or silver, you probably never will.