GOLD MARKET MANIPULATION
An interview with GATA's Bill Murphy

by Philip Judge
2000
(c) copyright 2003
www.anglofareast.com

"I think it will be a very interesting year in the markets. We come from the camp that there is a giant bubble out there, while gold could double in price in just weeks or months, its that explosive."

A graduate of Cornell University, Bill Murphy has traded and been involved in financial and commodity markets for over 20 years, having owned and operated a Futures Trading firm in New York. Bill is Chairman of the Gold Anti- Trust Action committee in the United States and is editor of lemetropolecafe.com

PHILIP: Bill, this year to even the casual observer the gold market has been going through a lot of change. This is seen in the lowest gold price in 20 years, in our press we are being told that gold is dead, we’ve been seeing more central bank selling, they say, so as not to be stuck with "barbarous relic". But when we start to dig under the service one discovers massive supply deficits, record demand, hedge funds and financial institutions with huge short positions, producers selling forward and in trouble and again we are seeing a concerted effort by our press to discredit gold and the gold market. Can you explain the dynamics we are seeing here?

BILL MURPHY: In essence, we believe there is a very big deficit between what is coming out of the mines, the supply, and the demand for gold, which contrary to what the media tells you, is absolutely booming. The World Gold Council will tell you that the demand for gold in the 2nd quarter of 1999 was 4% greater than any other quarter in all of history, the 3rd quarter figures will come in even greater than that. Asia with the recovery there, one of the (gold) demand engines of the world is absolutely booming, in India it is up 32%.

We think right now the demand for gold might be around 4500 tons a year while the supply coming out of the mines is about 2500 ton.

PHILIP: Yes and the cheaper the price goes the less new supply come out of the mines.

BILL MURPHY: That’s right, we believe the deficit on a monthly basis, and this is what you don’t here about, is about 160 – 180 tons a month, that’s every single month. So the shorts(1), or the bears, that are trying to keep the price down, must find that amount of supply to keep the price down. Contrary to what people would say that gold is dead, it is absolutely booming.

We believe there is a faction out there, the bullion banks and some of the big hedge funds and financial institutions, as well as the producers and fabricators, that are now short 10,000 ton of gold worldwide.

PHILIP: Some have estimated that as high as 14,000 ton, it’s a lot of gold to be short.

BILL MURPHY: Yes, it could be that high. And remember an entire years new mine supply is only 2500 ton. The bullion dealers and the bear camp will tell you that all the loans are only 4,000 or 5,000 ton, we say it is a minimum of double that.

What you have here is a situation that if the price starts to go up, these people just cannot get out in an orderly manner.

PHILIP: You’ve called this the largest financial scandal in one hundred years, and of-course you are referring to this manipulation within the gold market. You are saying that the price of gold is being held down, it can’t be allowed to rise. Is this because gold is no longer relevant in our modern economy, or are there other motivations here?

BILL MURPHY: Well the irony is, because of what the shorts are doing, the bullion dealers, its in-fact showing the importance of gold, in the sense that people look at it as a barometer of the health of economies, how the central bankers are doing and so on. What has happened here, in our opinion, is that these New York based bullion dealers along with some officialdoms in the world, like the United Sates and England, have been loaning gold at 1% interest rates. Bullion bankers have been borrowing the gold from central banks for 1% and sell it into the markets. I mean Philip, how would your listeners like to go to their bank and get a loan for 1%?

The risk is if the price goes up, you have to pay it back with expensive gold, so the only way this thing works is if the price goes sideways or down. This has been going on now for a couple of years but it really stood up to the plate, to what I would say "to manipulate the market", in this past year. They had to take a concerted action to keep the price down because this deficit is getting so big, and if all of a sudden the price starts to go up, and people start looking at gold, then all of a sudden these loans they’ve got, that are getting bigger and bigger and bigger, simply how are they going to pay them back?

PHILIP: We saw this with the "Yen Carry Trade", where people and funds would go in and borrow Yen a very low rate, ½%, and then take that Yen into the market and loan it out at much higher rates.

BILL MURPHY: They were borrowing money in the Yen for years and then all of a sudden it blew up and helped cause a mini financial crisis last year (2). With these gold loans we could be getting close to these blowing up too(3), and I’ll explain to your listeners why.

The lease rates which is the interest the bullion banks and producers pay the central banks when they borrow the gold, has gone from 1% to 4 %. That means everybody that needs to think about rolling over these massive gold loans, will now have to pay 4% instead of 1%. All of a sudden you can start to see a squeeze developing here. We have been told from our sources that the physical gold market is on fire and is very tight here in New York.

PHILIP: So again you are saying the physical supply is so short. Is that what is driving up these lease rates?

BILL MURPHY: Everybody will have a different opinion on that. In our opinion, we reported on our website months ago that going into the 2nd half of 1999, the big central banks that have been leasing out the gold, would start pulling back the loans and the supply would start to be restricted. They are very nervous about liquidity. You see the gold markets are no different to any other liquidity markets.

"Central bankers hate gold because it is something they cannot control. They can change markets and numbers and do a lot of things, but the gold market is something that has a life of its own."

PHILIP: Last year (1998) Alan Greenspan said "central banks stood ready to more gold into the market should the price start to rise". Is this now the start of a reversal in this policy?

BILL MURPHY: He made that statement twice to 2 separate committees and we felt it was a signal to the bullion dealers and the world that "don’t worry about borrowing gold because we will be making sure that the price doesn’t go up." Sure enough the trading patterns show, whenever the price has threatened to rally, it doesn’t end up going up.

Of most interest I have what I call the $2 Rule. Gold is never allowed to rise more than $2 in a given day. If it runs up quickly during any day they sell it off. By doing this what these manipulators are trying to do, is to make sure gold never attracts any excitement and to discourage any people from going into it. They know that if the gold market ever gets going, if something sparks it, it could easily get out of control, and when the shorts try to cover, it could cause incredible financial turmoil.

PHILIP: There is a huge upside potential for the price of gold if or when this short squeeze should start to happen?

BILL MURPHY: Having been in markets most of my life, I think that now is the best risk/reward I have ever seen, in other words what the downside is compared to what the upside could be. This is fundamentals, its not a hope trade, its based in many facts that are getting more bullish by the day. As soon as these people lose control of what I have called this "gold market manipulation", and the shorts try to cover, it could cause a buying panic.

PHILIP: Many of these larger gold producers, like Barrick Gold and others, have very large hedge books and forward positions(4). If this short squeeze was to happen, would that put shareholders stakes within those companies at risk?

BILL MURPHY: It’s a good question, you see every company is different. What many of these companies have done to get their higher hedge prices and forward sale prices, is to write all different kinds of calls.

We believe there is many naked calls(5) out there that would create tremendous upside exposure should the price rally. A company, to achieve a higher hedge or forward sale price, may have this call exposure, meaning they may have to deliver gold if the price were to rally beyond a certain point. That could put them at risk, because they have to deliver as part of their schedules with the bullion banks, and if they don’t have the gold to deliver and the bullion bank wants the gold; what would then happen if we got this buying panic?

One needs to look at the individual hedge books of all the companies and it gets a little complicated.

PHILIP: So shareholders in gold companies should be reducing their investments in companies with larger hedging exposure and looking instead to companies with the lowest possible hedge books?

BILL MURPHY: I couldn’t suggest that any more strongly, that is something someone can do with out getting into the very complicated derivative issues. They can be looking now for companies that have been able to survive this very low gold price, but have very small hedge books, because they are the ones that will participate in this big move up when it happens.

If a company has over-hedged, or cant make delivery, if there is counter party risk with the bullion banks, there could be some real problems with some of the companies that have done so well hedging, to use an expression from your country, it could boomerang on them.

". . . it would make the internet move look like nothing. The thrust of where we are coming from is that the markets are in for a big correction down and just the opposite with the gold and silver markets, so we are looking for giant moves in the years to come."

PHILIP: You’ve spoken about the financial institutions and the bullion banks. We’ve seen central banks available to lend their gold back into the market to satisfy immediate demand, then there is the treasuries and the press. Is there almost an alliance and is it a direct alliance or a little more subtle than that?

BILL MURPHY: Well people talk about all sorts of things, manipulation and conspiracies. This is not just a bunch of guys sitting around a room smoking cigars, although it might be a little of everything, some of it overt, some of it covert. You can see that from the price patterns and the way it trades.

Let me give you a very good example of the way it’s all tied together. On May 6th (1999) gold was starting to surge, the Australian gold shares had their biggest move in 6 years, an I reported that Thursday night that quote "Deushe Bank are telling their clients that gold will not go above $290." At the time gold was $289 and threatening to go through $290. On Friday morning the Bank of England announced their gold sale in an unprecedented fashion, announced in advance of the sale. No central bank had done that in 20 years and the price collapsed $38. Now how could they (Deushe Bank) announce this unless they knew what was coming in advance.

PHILIP: It’s as though they were privy to some inside information.

BILL MURPHY: Exactly, its something we’ve reported extensively on. Take the former Treasury Secretary of the United States, Robert Rubin, who is the former CEO of Goldman Sachs. Goldman Sachs are everywhere we turn regarding this issue. Their Chief International Economist, Gavin Davies, is based out of London. His wife works in the British exchequers office in London, so you have this connection between our Treasury, Goldman Sachs and the Bank of England.

With the Bank of England gold sale they all contradicted each other as to authorized the sale. The Bank of England said it wasn’t them, the treasury officials said it was someone else, others said it had been planned for a year and so it went around in circles.

PHILIP: Would part of this Bank of England decision be just to get more physical gold into the market?

BILL MURPHY: What was happening was the IMF gold sale was not going to go through as intended. I knew this because I had been to the Congress of the United States, so the bullion banks were not going to get this new supply on to the market to keep the price down. They were starting to lose control, gold was about to go through $290, everyone was excited about gold finally. They were desperate for some sort of supply, or a way to psychologically bash the market, so they called what I call the English Poodles to release their gold and gold collapsed.

PHILIP: If we believe what we are being told in the financial press, then we would indeed believe that gold is dead, but as we’ve spoken about today, there is record demand in the world right now, well as massive potential for the price of gold and gold stocks. In more specific terms, where do you see the market in the heading in the future?

BILL MURPHY: We felt before all this erupted (BoE gold sales), the fair price of gold from a supply/demand standpoint was around $600 an oz. Because of what they have been doing, they have suppressed it so much longer and increased demand for gold much more than if they had let it go naturally, we now feel somewhere north of $600 is a fair price for gold.

PHILIP: You would see the value of gold shares also growing terrifically in that sought of move up in the market?

BILL MURPHY: Oh yes, it would make the internet move look like nothing. The thrust of where we are coming from is that the markets are in for a big correction down and just the opposite with the gold and silver markets, so we are looking for giant moves in the years to come.

PHILIP: Bill, I guess this is a question that is asked all the time; a collapse in the Wall Street internets and industrials, how would that effect gold producer’s stocks?

BILL MURPHY: In the past stock market hits have hurt gold demand, so it hasn’t been a positive as you would have thought. In this case I feel it is totally different, we are now looking for a big investment demand to show up when all this becomes apparent.

PHILIP: Do you see demand from the private investor driving up margins on gold coins and investments?

BILL MURPHY: Oh yes, its already occurring now, the premiums on coins are going through the roof, allot of coins are disappearing, there has been a boom going on in the United States, and Australia too, I know the Perth Mint have been working overtime getting coins out.

PHILIP: Yes and this is where the 2 Tier Market comes in; where you have an official price for a commodity, and then the actual price that people will pay on the street, and these 2 prices are often very different.

BILL MURPHY: That’s right, in this case they are desperate to keep the price down, the lease rates keep going up, and yet the physical gold market is on fire. We believe they have made a mistake. The mistake is they did not understand how big the natural supply/demand deficit actually is. They have been going with their numbers and may have been looking at a deficit of 30 – 40 tons a month, while we believe that our numbers from our economists are right and we say its 160 – 180 tons a month, and so they have been blindsided.

PHILIP: That’s over 2000 ton a year!

BILL MURPHY: To understand how big that is for your listeners, the Bank of England sale is only 415 tons in total and they are selling 12.5 tons a month (25 tons every 2 months) and we are saying the deficit is 160 – 180 tons each and every month, That will give you an impression of what the bears are up against.

PHILIP: Do you think part of this suppression of the gold price comes back to this age old struggle of government decreed or fiat money, and the natural "free market money" of gold?

BILL MURPHY: While its not my specialty the answer is yes. Central bankers hate gold because it is something they cannot control. They can change markets and numbers and do a lot of things, but the gold market is something that has a life of its own. The irony is it’s the central banks that give all the meaning to gold

PHILIP: Bill, what is the Anti Trust Action Committee?

BILL MURPHY: Well I had been writing about this and a newspaper managing editor said "if what you are saying is true it’s a violation of the Anti-Trust Laws of the United States – lets do something about it." So a few of us formed a volunteer committee, we’ve been on CNBC and attracted worldwide attention. We are out there trying to let the world know the gold market is manipulated, giving evidence and conducting investigations. We’ve retained the services of the No. 1 Anti-Trust Firm in the United States to help us with this investigation.

PHILIP: What has been the reaction to GATA to this point?

BILL MURPHY: Well gold shareholders and the small miners love us. The gold companies don’t pay to much attention to us. The bullion dealers give the gold companies credit lines. We are saying that some of the bullion dealers are manipulating the market (downwards). The gold companies are afraid of their own bankers, particularly in this terribly weak time, they are very vulnerable, so they don’t want to talk to us, because they are afraid of us looking into the people that are choking them to death. It’s a vicious circle.

We have had a lot of press all around the world, in South Africa, Australia, England and Canada, but in the United States no mainstream press will write about us as yet. Of-course the big money institutions in New York feed a lot of the press their money, and if its not the part line here, you don’t get heard.

PHILIP: Bill thanks for your time today

BILL MURPHY: Its been my pleasure Philip.

1. A derivative short position is where paper contracts (options and futures contracts) are held in the expectation that the price of the underlining commodity will fall. A physical short position is where the commodity itself is sold "short" meaning it is sold by a party that doesn’t own it.
2. Federal Reserve Bank bail out of Long Term Capital Management Fund 1998.
3. This nearly happened 3 weeks after this interview when EU central banks announced they would suspend further gold loans (Washington Agreement - September 1999). Lease rates soared to nearly 10% and price of gold rallied 25% in 10 days. This short squeeze was temporarily averted by US, UK and Kuwait central banks adding gold liquidity back into the market.
4. In the low price of gold environment of recent years, many mining companies have made larger profits from the management of their hedge books than they have from their mining operations.
5. A naked position is a derivative position that could not be covered should the market move against it.

by Philip Judge
2000
(c) copyright 2003
www.anglofareast.com