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[bob ford <bobford79 AT yahoo.com>]

James; if you have the time and inclination; I'm interested in your analysis 
of this man's commentary.  Part is about gold trading which I know will not 
interest you ; but, part is about the future of the economy, the central 
banks, the bail-out, etc.  I am not just reading hyper-ventilating gold-bugs. 
 Some of these writers, inlcuding this man , at least 'appear' very 
thoughtful, knowledgeable, and intelligent.  Thanks

p.s. there is a paragraph toward the bottom that begins: "The federal reserve 
..."  That paragraph made, I thought an interesting speculation

------------

His credntials are thus:


PhD Economist and Dean of Business School: Gold Prices Manipulated
 

James Conrad is a PhD economist, professor emeritus of economics and former 
Dean of the University of Indianapolis School of Business.

----------------------------------------------------------------------------




 The Manipulation of Gold Prices

by: James Conrad December 04, 2008     

 There is no other leveraged commodity market where short sellers increase 
their positions, materially, as the price rises, and increase them even more 
when prices are exploding, except gold and silver. The reason traders don’t 
normally do that is that it exposes short sellers to unlimited liability and 
risk. Yet, in both March and July 2008, and on countless occasions over the 
past 21 years, vast numbers of new gold and silver short positions were 
temporarily opened up, with the position holders seemingly unconcerned about 
the fact that precious metals had just risen exponentially, and that there 
was a very real potential they would bankrupt themselves with unlimited 
upside potential. Normal traders would not expose themselves to such 
unlimited risks.

I conclude, therefore, that over the last 21 years or so, “fake” precious 
metals supply in the form of promises of future delivery have habitually been 
increased when prices increase until increased “supply” managed to overwhelm 
increased demand, leading to a temporary price collapse. This is compounded 
by the fact that the futures prices on COMEX tend to dictate the “official” 
report price for the precious metals elsewhere.

After the market is broken, shell-shocked leveraged long market participants 
have always been thrown out of their positions by margin calls, and/or have 
been happy to sell contracts back to the short sellers at much lower prices. 
This process has always allowed short sellers to cover short positions at a 
profit. 

If for some reason naked shorts needed to deliver, they could always count on 
various European central banks (and some say the Fed basement repository) to 
backstop them, releasing tons of physical gold into the market. It seemed 
that there were always another 34 tons or so of gold dumped at strategic 
times to bring down fast rising prices. Meanwhile, huge physical market 
demand in Asia and severe shortages buffered the downside. Because of the 
physical demand, prices steadily increased but, perhaps, at a much slower 
pace than would have been the case in the absence of market manipulation.

Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday 
of last week when the deliveries demanded by non-leveraged long buyers 
reached record levels. In spite of an avalanche of complaints from gold and 
silver investors, the CFTC (Commodity Futures Trading Commission) has never 
bothered to audit even one vault to see if the short sellers really have the 
alleged gold and silver they claim to have.

 There is a legal requirement that, in every futures contract that promises 
to deliver a physical commodity, the short seller must be 90% covered by 
either a stockpile of the commodity or appropriate forward contracts with 
primary producers (such as miners). Inaction by CFTC, in the face of obvious 
market manipulation, implies a historical government endorsed price 
management.

Things, however, are changing fast. As previously stated, the first major 
mini-panic among COMEX gold short sellers happened last Friday. As of 
Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were 
made at COMEX, which represents about 5% of the previous open interest. 
Another 2,000 contracts are still open, and a large percentage of those will 
probably demand delivery. These demands compare to the usual ½ to 1% of all 
contracts.

The U.S. economy is in shambles. Both commercial and investment banks are 
insolvent. European central banks no longer want to sell gold. China wants to 
buy 360 tons of it as soon as humanly possible, and as soon as it can be done 
without sending the price into the stratosphere. A close look at the Federal 
Reserve balance sheet tells us that Ben Bernanke eventually intends to 
devalue the U.S. dollar against gold. There has been a vast expansion of Fed 
credit, which has risen from $932 billion to $2.25 trillion in the last two 
and a half months. The Fed has bought nearly all toxic bank assets that were 
supposed to be purchased pursuant by the $700 billion Congressional bank 
bailout.

Official bailout funds have been used to buy equity interests in the various 
banks instead. By avoiding the use of monitored Congressional funds, the Fed 
has embarked on a secretive campaign to buy toxic assets. They have refused 
to give any accounting of their activities, even though they are using 
taxpayer money to do this. The Fed has refused, for example, to comply with a 
“freedom of information act” request from Bloomberg News. That refusal is now 
the subject of a major lawsuit.

The Federal Reserve has embarked on the biggest money printing surge in 
history, though the world economy has yet to feel its effect. To prevent 
newly printed dollars from causing immediate hyperinflation, these newly 
printed dollars have been temporarily sequestered into the banking industry’s 
reserves, rather than being released for general use. This was done in a 
number of creative ways.

First, the number of “reverse repurchase agreements” has been increased to 
$97 billion. A “repurchase agreement” is a non-recourse method by which the 
Fed increases the money supply by paying dollars for collateral. The 
collateral, in this case, are toxic defaulting mortgage bonds that banks want 
to be rid of. The cash enters the system and theoretically stimulates the 
economy because it supplies banks with money to make loans with.

A “reverse repurchase agreement” is the exact opposite. It is a method of 
reducing the money supply by selling bonds to the banks, and taking the cash 
back out of the system. In this case, the Fed gave banks cash for toxic 
defaulting mortgage bonds. 

Then, it took the same cash back by selling the banks new treasury bills just 
received from the U.S. Treasury. The Fed, in turn, bought these T-bills with 
the newly printed dollars. The banks, having gotten rid of toxic assets, were 
allowed to transfer private risk to the taxpayers. This process bolsters bank 
balance sheets by privatizing bank profits, and socializing bank losses.

At the same time, the U.S. Treasury has been very busy selling newly printed 
Treasury bills to anyone foolish enough to buy them. To a large extent, the 
fools reside overseas, but some reside inside this country, and the sale of 
these U.S. bonds has resulted in a substantial inflow of foreign reserves to 
the Treasury. Banks have also been offered favorable interest rates on both 
reserve and non-reserve deposits held at the Fed.

This was combined with what is probably a tacit agreement by which the banks 
were given the money and led to redeposit most newly printed cash back into 
the Fed, in a category known as “Reserve balances with Federal Reserve 
Banks”. This category has ballooned from $8 billion in September to $578 
billion on November 28th.

On October 9, 2008, the Federal Reserve began paying interest on deposits at 
Federal Reserve Banks. The overnight rate happens to have dropped way below 
the “official” federal funds rate. Meanwhile, rates paid by the Fed on 
required deposits are only .1% less than the federal funds rate, and on 
voluntary deposits only .35% less than the federal funds rate. Accordingly, 
U.S. banks can engage in a dollar based one-nation carry trade, which further 
sequesters the newly printed dollars.

Banks are borrowing from the Fed, then taking the same money, redepositing 
it, and earning a spread on the interest rate differential. Banks can also 
deposit newly printed dollars into a category known as “Deposits with Federal 
Reserve Banks, other than reserve balances.” This category also earns 
interest in a similar way, and has risen from $12 billion to $554 billion in 
the same time period. 

The funds will eventually be used for direct lending from the Fed to open 
market borrowers, at huge levels of risk that even the free-wheeling cowboys 
who run things at America’s private banks are not willing to accept.

That being said, most money center banks in America are certainly NOT risk 
averse, even now. People who are bailed out of foolish decisions never become 
risk averse. They are, however, very insolvent, and, aside from the 
non-recourse provisions of Fed repurchase agreements, they would prefer, for 
bad publicity reasons, not to default on their obligations to the Fed. 

Aside from the newly printed dollars given to them by the Fed and the recent 
transfer of all risk to the taxpayers, they have no liquidity of their own 
with which to make new loans. That is why they aren’t making any. The Fed 
will eventually make the loans itself and take all the risk, while using the 
private banking system as merely a means for delivery.

Right now, however, the Fed wants to sequester the new dollars, until the 
U.S. Treasury has finished the major part of its funding activities. That 
will allow the Treasury to borrow money at very low rates. The Fed intends to 
feed money into the system, but at the minimum rate needed to prevent the DOW 
index from staying under 8,000 for any significant period of time. Right now, 
most measures are designed simply to stop U.S. banking laws from 
automatically requiring the closure of most big banks.

The extent of manipulations engaged in by this Federal Reserve is mind 
numbing. The total number of sequestered dollars has now reached well in 
excess of $1.2 trillion dollars. That means that Fed credit, so far, has been 
effectively increased only by about 10%, over the last 2.5 months, rather 
than 150% that appears on the surface of the Fed balance sheet. The rest is 
temporarily sequestered.

Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization 
Fund), sold billions of euros and, I believe, established a dollar 
sequestering “derivative” by paying interest, perhaps in Euros, to foreign 
money center banks. This was designed to keep dollars out of circulation, 
overseas. It was the beginning of the dollar bull back on July 15th.

I had thought, at the time, with good reason, that the U.S. would run out of 
foreign exchange and would be forced to close down the operation within a few 
months. I underestimated Ben Bernanke.

Instead, the Fed managed to establish currency swap lines with various 
foreign nations, under the guise of supplying them with dollars. This need 
for dollars arose partly as a result of the actions of the Fed, in 
sequestering Eurodollars in July, and partly as a result of the multiple 
credit default events which triggered over $2.5 trillion worth of selling in 
the stock and commodities markets, as 50 to 1 leveraged players were forced 
to cover about $50 billion worth of credit default insurance obligations.

In truth, the Fed needs the foreign currency more than the foreign central 
banks need dollars. The Fed is using its new foreign currency resources, in 
part, to control the value of the dollar, and to ensure that U.S. bailout 
bonds are sold for the highest possible prices at the lowest possible long 
term costs. Anyone who buys long term Treasury bills is going to lose a 
fortune of money in the long term.

The Fed has also taken a number of steps beyond those already discussed to 
restrict aspects of the normal money supply which most strongly affect 
exchange rates. For example, they only allowed “currency in circulation” to 
rise by $33 billion in aggregate, while at the same time increasing foreign 
reverse repurchase agreements to reduce foreign availability of dollars by 
$30 billion, and reducing the “other liabilities” category dollar 
availability by another $7 billion. Since it is likely that “other 
liabilities” involve foreign held dollars, this resulted in a net deficit of 
$4 billion on foreign exchange markets, as compared to September, 2008.

All these actions, taken together, have supported the dollar overseas, and 
led to a breakdown of the commodities markets. The adverse effect of a 
paradoxically rising dollar has been especially severe in dollar dependent 
commodity producing nations, such as Ukraine.

The net effect is that the U.S. dollar, in spite of terrible fundamentals, is 
now King of the Currencies once again, at least temporarily. The rising value 
of the dollar happens also to support naked short sellers of gold and silver, 
on COMEX, and these are old friends of the Federal Reserve. Supply and demand 
ultimately determine the price of gold but, in the shorter term, it is 
inversely tethered to the dollar. When the dollar is artificially high, gold 
prices will often plunge artificially low.

But, in short, the Fed currently has gained complete control over the value 
of the dollar. It can now adjust and micromange the dollar on a day-to-day 
basis. All it needs to do is open and close the “dollar spigot.” When they 
want the dollar to rise, the Fed can reduce the number of sequestered 
dollars. When they want it to fall, they simply ease up, releasing dollars 
into the financial markets. There is only one problem. Real investors are 
fleeing the stock market, and stock indexes are becoming more and more 
dependent upon government cash in order to avoid collapse.

People are liquidating holdings in mutual funds, and redeeming against hedge 
funds at a fantastic rate. This has created heavy downward pressure on stock 
prices. If the DOW falls below 8,000 for any significant amount of time, most 
big American insurance companies will be forced to recognize huge losses on 
their portfolios, and will become insolvent. Insolvent insurers, like 
insolvent banks, must be closed by their regulators as a matter of law. 
Obviously, mass insurer bankruptcies would be yet another major destabilizing 
slap in the face to an increasingly unstable economy.

The Fed now has only two ways to stop this. One is by brute force. It can buy 
securities directly, through its primary dealers, thereby supporting and 
pumping up stock prices. It has done a lot of that in the past few weeks, but 
this method is highly inefficient and costly. It is better to catalyze upward 
market movement rather than force it. 

Catalysis of markets involves opening up the money spigot a bit, allowing 
some of the sequestered funds to bleed back into the system. This allows the 
stock market to rise or stabilize naturally, as the equivalent of inflation 
is created mostly in the stock market without substantial bleed through. At 
the same time, however, opening the money spigot reduces the value of the 
dollar and causes gold prices to rise. Rising gold price adversely affects 
COMEX short sellers who are, as previously stated, old friends of the Federal 
Reserve.

Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, 
whereas stock market investing appetite is low. For this reason, when the Fed 
tried to constrict the money supply on Monday, it caused more damage to the 
stock market than to the price of gold. Gold declined by over 5%, but the S&P 
500 collapsed by over 9%. The next day, the Fed eased up on the money supply 
spigot, allowing the dollar to fall and the stock market to reflate. If the 
Fed repeats this performance over and over again, stock investor psychology 
will be seriously harmed.

 Withdrawals from mutual and hedge funds will accelerate. The stock market 
will sink at an uncontrollable rate, and the world will surge onward toward 
Great Depression II, much worse than the first. At some point, there will be 
nothing the Fed can do about it, no matter what manipulations it attempts. 
Hopefully Ben Bernanke is aware of the dangerous nature of the game he is 
playing.

The Federal Reserve must now make a tough choice. In the past, Federal 
Reserve Chairmen may have felt it necessary to support regular attacks on 
gold prices to dissuade conservative people from putting a majority of their 
capital into gold. Now, however, the world economy needs much higher gold 
prices in order to devalue paper money, not against other currencies in a 
"beggar thy neighbor" policy, but against itself. This can jump start the 
system. If the Fed continued to support gold price suppression, that would 
collapse the stock market far deeper than they can afford, most insurers will 
end up bankrupt, and there will be no hope of avoiding Great Depression II.

I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to 
avoid financial catastrophe. In commenting, I take a practical view, 
accepting what appears to be so, without passing judgment on the acts and 
omissions of the last 21 years.

Anyone who reads the written works of our Fed Chairman knows that Bernanke’s 
long term plan involves devaluing the dollar against gold. This is the exact 
opposite of most prior Fed Chairmen. He has overtly stated his intentions 
toward gold, many times, in various articles, speeches and treatises written 
before he became Fed Chairman. He often extols the virtues of former 
President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 
1934, and credits it with saving the nation from the Great Depression. 
According to Bernanke, devaluation of the dollar against gold was so 
effective in stimulating economic activity that the stock market rose sharply 
in 1934, immediately thereafter. That is something that the Fed wants to see 
happen again.

It is only a matter of time before gold is allowed to rise to its natural 
level. Assuming that about half of the current increase in Fed credit is 
eventually neutralized, the monetized value of gold should be allowed to rise 
to between $7,500 and $9,000 per ounce as the world goes back to some type of 
gold standard. In the nearer term, gold will rise to about $2,000 per ounce, 
as the Fed abandons a hopeless campaign to support COMEX short sellers, in 
favor of saving the other, more productive, functions of the various banks 
and insurers.

Revaluation of gold, and a return to the gold standard, is the only way that 
hyperinflation can be avoided while large numbers of paper currency units are 
released into the economy. This is because most of the rise in prices can be 
filtered into gold. As the asset value of gold rises, it will soak up excess 
dollars, euros, pounds, etc., while the appearance of an increased number of 
currency units will stimulate investor psychology, and lending and economic 
output will increase, all over the world. Ben Bernanke and the other members 
of the FOMC Committee must know this, because it is basic economics.

Many venerable names in banking agree, although none have gone so far as to 
take their thoughts to the natural conclusion. Both JP Morgan Chase's and 
Citibank’s analysts, for example, are predicting a huge rise in the price of 
gold. That is interesting because GATA has come up with fairly compelling 
evidence that JP Morgan Chase (JPM) and HSBC (HBC) may have been big COMEX 
naked short sellers in the past.

Goldman Sachs (GS) is also a huge bullion bank, which allegedly is heavily 
involved in downward gold price manipulation. However, this month, both HSBC 
and GS took lots of deliveries of gold from COMEX. Given the size and 
bureaucracy at such firms, it is certainly possible for the majority of 
traders to be entirely honest, while others, at the same firm, may be totally 
corrupt.

More important, however, than dwelling on the accuracy of conspiracy theories 
is the fact that huge international banking firms normally do not take metal 
deliveries from futures markets. They normally buy on the London spot market. 
The fact that they are demanding delivery from COMEX means one of two things. 
Either the London bullion exchanges have run out of gold, or these firms are 
finding it cheaper to buy gold as a “future” than as a spot exchange.

Smart traders at big firms may be buying on COMEX to sell into the spot 
market, for a profit. This pricing condition is known as “backwardation”. 
Backwardation is always the first sign that a huge price rise is about to 
happen. In the absence of backwardation, there is no rational explanation as 
to why HSBC, Bank of Nova Scotia (BNS), Goldman Sachs, and others are forcing 
COMEX to make large deliveries.

The fact that this backwardation is hidden from the public eye is not 
surprising. In spite of the ostensible existence of a so-called “London fix”, 
96% of all OTC transactions are secret and unreported. The transactions 
happen solely between two parties, and are done opaquely, in complete 
darkness. The current London fix may well be just as fake as the bank 
interest rate reports that comprised LIBOR proved to be, just a few months 
ago.

It won’t matter much if you purchase gold at $750, $800, $850, $900 per 
ounce, or even much higher. All of these prices will be looking 
extraordinarily cheap in a few months. The price of our pretty yellow metal 
is about to explode, and it is probably going to soar, eventually, to levels 
that not even most gold bugs imagine. COMEX gold shorts will be playing the 
price a bit longer, in an attempt to shake out some remaining independent 
leveraged longs. Once that is finished, however, and it will be finished 
soon, the price will start to rise very quickly.