A Reply to Eric Townsend:
You Contradict Yourself
by Chris Powell, Secretary/Treasurer, Gold Anti-Trust Action Committee Inc.
April 20, 2010

If one reads closely his April 19 essay, "Debunking the Post-CFTC Precious Metals Fear-Mongering Campaign," Erik Townsend seems to concur with the Gold Anti-Trust Action Committee more than he disputes it.

Townsend acknowledges, just as CPM Group founder Jeffrey Christian did at the March 25 hearing of the U.S. Commodity Futures Trading Commission, that the so-called "physical" gold market in London really isn't very physical at all but rather is largely a matter of derivatives trading. Townsend quotes Christian's testimony to the CFTC that, in calling the London market a "physical" market, the experts in that market -- Christian specifically included himself -- "don't help" public understanding. That's a polite way of saying that there is something deceptive about that market.

But then Townsend contradicts himself and Christian, writing that what Christian told the CFTC "should come as no surprise."

Well, that "physical" means "paper" and that the supposed experts really "don't help" public understanding just may surprise people who think words carry their ordinary meaning and that experts are aids to understanding.

And if Townsend really thinks that the unphysical nature of the London "physical" market is so obvious, why does he urge gold investors, as GATA does, to get real metal rather than gold paper from London Bullion Market Association or from other gold derivative dealers? Townsend's recommendation is an acknowledgement that gold investors could well be deceived by the gold paper market.

Townsend is right that derivatives have been debated for a long time. But he is wrong in suggesting that the issue is old hat. Indeed, the regulatory and legislative hearings of the last year, including the CFTC's hearing last month, have suggested that even the people whose very responsibility is to know about derivatives don't know much about them as they should.

Townsend is also wrong in suggesting that GATA has no idea about derivatives. In fact, GATA long has had a pretty good idea about how derivatives work -- ever since in 2000 we published our Gold Derivatives Banking Crisis report (see http://www.gata.org/files/GDBC_Report.pdf) and began calling attention to Federal Reserve Chairman Alan Greenspan's testimony to Congress in July 1998, where he made his famous comment that central banks were ready to lease gold in increasing quantities to suppress its price.

GATA often has noted that Greenspan's testimony was about far more than gold -- that Greenspan's main purpose was to dissuade Congress from regulating derivatives generally, derivatives generally being the mechanism of commodity price suppression and market rigging. (See http://www.gata.org/node/8052.) We construed Greenspan to be telling Congress not to worry about derivatives because central banks themselves had derivatives under control and were even using them to manipulate strategic markets. Ordinary regulation by other government agencies might have exposed this.

In regard to gold, derivatives -- from ordinary futures and options to more elaborate instruments, including the paper contract trading in the "physical" gold market that really isn't very physical at all -- have been the mechanism for creating the illusion of infinite supply of what is really finite, thus cheating ordinary investors looking for a hedge against monetary debasement. This illusion has cheated commodity-producing developing nations as well. The British economist Peter Warburton explained this in 2001 in his essay "The Debasement of World Currency -- It Is Inflation, But Not as We Know It." (See http://www.gata.org/node/8303.) But markets generally do not yet understand this. If they did, investors long ago would have fled markets so much manipulated by derivatives trading.

Instead investors are still getting fleeced there.

Townsend tries to distinguish between the paper gold and real gold markets, as if what happens in the former shouldn't bother players in the latter.

But GATA insists on showing the connection of the two markets, since the paper market is the mechanism of manipulating the market for real gold.

Many people buy paper gold under the misimpression that they are buying real gold rather than a liability of the paper gold seller.

Indeed, after insisting that everybody already really knew what Christian told the CFTC -- that the "physical" market is mostly paper -- Townsend writes that "many investors are confused about the various investment vehicles available to them, and/or don’t understand the real risks inherent to the instruments they’ve already invested through."

As GATA has done for years, Townsend urges gold investors to get their hands on their gold and not rely on others to hold it for them. But if gold sellers, like those who operate in the London "physical" market, who purport to hold your gold for you are really so reliable, as Townsend suggests, why does he urge people to take delivery?

The official documentation of Western central bank interest and policy in suppressing the gold price is so overwhelming -- see http://www.gata.org/taxonomy/term/21 -- that it should prompt a little more curiosity in those who, like Townsend, seem to think that a paper market that misleadingly calls itself "physical" is just fine and couldn't possibly have other misleading purposes.

© 2010 Chris Powell