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January 09, 2005

Moscow On the Hudson
by Rob Kirby

From the outset of this essay, I would first like to point out the notable selfless effort and time that some good people before me have invested in this most noble pursuit for the truth. This essay would not be possible without the yeoman's work of Mr. Ed Steer of Edmonton, Alberta, Canada. I have always been most impressed with Mr. Steer's diligent treatment and articulation of the factual [and I believe irrefutable] case being put forward as proof that the price of gold has indeed been surreptitiously rigged or fixed. Ed Steer might be described as a lieutenant in Midas Bill Murphy's GATA army - whose indefatigable efforts to expose corrupt practices in clear contravention of anti trust laws have gone virtually and irresponsibly unreported by the main stream financial press.

Have any of you ever read the essay by Dana Allen titled, How the Soviet Empire's Fall was Engineered? If you haven't, I [like Steer] would suggest to you that it's a must read - which I've hyperlinked for your reading enjoyment. It is alleged to be a true story - as told by first hand accounts by participants - outlining how the Soviet Bear was slain leading to the conclusion of the Cold War at the end of the 1980's. Ed Steer 'turned me on' to this piece through an essay of his entitled, When Irish Eyes Are Smiling: The Story of Canada's Gold? In this piece, Steer builds on factual insights gleaned from the Dana Allen piece to opine what happened to or at least what were the likely circumstances surrounding and associated with the dis-hoarding of Canada's 660 metric tonnes of sovereign gold. For illustration purposes, I've borrowed Steer's graphic that unequivocally illustrates that this process began around 1985 [as table 1 illustrates] and was largely concluded by 1993/94.

Instead of framing this essay as a simple story about gold and price fixing, I would like to expand on Steer's efforts with a few telling observations of my own that dovetail quite nicely, at least in a geopolitical sense, with Ed's already credible thesis woven around the disappearance of Canada's sovereign gold. This essay will also serve to add more context to a prior piece I penned entitled, To GSE or Not to GSE? by adding credible background [1985 - 1994] to the notion that covert price management of strategic commodities is neither new nor a far fetched idea that only lives in the minds of gold bugs.

Take note that the GSE or Not to GSE article referenced above begins, on a time frame basis, roughly with the time period of mid term elections in the first Clinton Administration [when Canada's sovereign gold has been largely exhausted]. The article cites Lawrence Summer's academic work done at Harvard with Barsky as it relates to Gibson's Paradox, interest rates, dollar policy and gold price fixing. Ed Steer's research along with Dana Allen's essay was the seed for that piece - and explains where the thought process [I prefer the term beta test] likely originated for Summer's and Barsky's academic efforts.

What is clear to me is in the 1980's during the Reagan administration, the strategic commodities of gold and oil were, in a sense "weaponized". Stated differently, their prices were surreptitiously managed down to the point that the Russian Bear had no viable/profitable means of generating hard currency [US dollars]. This is graphically illustrated in table 1 where the price of oil virtually collapsed in 1986. Reagan, hell bent on defeating communism, had proposed the advancement of "Star Wars" technology [a different word for an arms race] which in theory could have rendered Soviet weaponry obsolete - so they needed to "spend" to keep up. The pursuit of Star Wars technology along with other supply side experiments [like arms for the insurgent Mujahideen in Afghanistan] the Reagan administration was vigorously pursuing was driving unprecedented budgetary deficits by the mid 1980's.

The potent mix of deficit spending [money creation] along with energy price shocks in the 1970's had nearly dissolved the economic foundation of the entire capitalist world through a severe inflationary induced recession. While the price of oil had been brought under control by the mid 1980's, the price of gold was surging from roughly 300 to 500 dollars between 1985 and 1987. The gold surge largely resulted from the 1985's Plaza Accord [G-5, Canada not included] and subsequent devaluation of the US dollar. In the face of continued relentless deficit spending, another inflationary spiral might well have taken root. While official gold sales were factually occurring with increasing regularity "behind the scenes" with their importance being downplayed - meanwhile, the public face being spun in foreign exchange markets had morphed by early 1987 when the Louvre Accord was signed by what had now become the G-6 [Canada included], likely to acknowledge the contribution/sale of sovereign gold stocks.

I view this reality as nothing more than official acknowledgement that "Gold" buys respect on the world stage in all affairs relating to economics and global finance. What a pity that my country, Canada, has cashed in their chips so to speak. Just recently Stephen Roach, the vaunted and internationally acclaimed economist from Morgan Stanley, has recommended the G-7 be restructured to exclude Canada. In Canada, I suggest we as Canadians, all owe a big round of applause to our former Prime Minister, The Right Honorable Brian Mulroney and his sidekick in the Ministry of Finance at the time, The Honorable Michael Wilson. We couldn't have done it without you guys!

[Ed. Note: Well folks, there's an argument to be made that the G-5 became the G-6 because Canada had GOLD. Now, without gold, we in Canada are quite possibly facing the prospect of being jettisoned from this elite group of seven? At least the idea is being circulated. Does this not strike anyone as being odd?]

Simply raising interest rates [as was prescribed and successfully implemented by Fed chairman Paul Volker to stamp out inflation years earlier] to stem inflationary pressures along with the dollar's decline brought on the stock market crash of 1987. It would appear the heightened level of indebtedness had somewhat dulled the effectiveness of the customary use of raising rates as a means for reducing inflation, real or anticipated. As a result, increased and more aggressive gold sales were likely chosen to "mask" existing/continuing inflation and put a floor under the dollar while at the same time depriving the Soviet Bear of much needed hard currency.

In the 1980's the closed economy of the Communist Soviet System was not self sustaining and hence required trade, at a bare minimum in some commodities critical to them, with the west. It's hard to overlook, the Soviets also had their hands full on the military front, fighting an unrelenting U.S. funded insurgency in occupied Afghanistan. This type of military adventurism was then, as the Americans are learning on a couple of fronts today, ruinously expensive. During the 1980's, western governments were categorically running monetary policies tilted towards or biased [through deficit spending] to inflationary outcomes and expectations. Under these circumstances, in the absence of manipulation, gold would and should have been increasing in price, fulfilling its historic function as a barometer for inflation, throughout the 1980's.

Oil and gold were virtually the only two commodities the Soviets produced in sufficient exportable quantities that were readily "saleable" in the west. Crippling Soviet gold and oil revenues effectively drove them into bankruptcy which resulted in the fall of the Berlin Wall. The costs of maintaining an Empire had simply overwhelmed the Soviets, just like it had the Egyptians, Romans, Spaniards, French and English before them. Believe it or not, the failures alluded to above only mirror the success rate of fiat currency regimes since they've been known to mankind. Given these historical 0-fer success rates, we should all wish the Americans well - and good luck - in Iraq and Afghanistan and where ever else they end up next.

[Ed. Note: While the fall of the Berlin Wall was widely reported in America as the official end of the Cold War and the defeat of communism; it had little or zero effect on bringing down another more enduring symbol of communism, namely the Great Wall of China].

Another thing that has become abundantly clear in my mind is that the Russians [Putin] are nowadays more than well aware how they were "done in" at the hands of the vaunted American led/engineered price fixing [gold and oil] scheme in the 1980's - and they've taken something away from the experience.

First, they're publicly on the record acknowledging their awareness that nefarious price rigging in the gold market is a practice continued to this day by the U.S. government or its auspices at the Fed and Treasury. This point was made publicly in a speech by Oleg V. Mozhaiskov, Deputy Chairman, Bank of Russia at a meeting of the London Bullion Market Association [LBMA] this past June 3-4, 2004 in London, England. In his speech, Mr. Mozaiskov asserts the position of the Bank of Russia that gold prices would be some 200 or more dollars higher per ounce if the gold market were free of surreptitious interference. When GATA learned of this speech, where Mr. Mozaiskov acknowledged them as well, and requested a copy of his speech [provided to all attendees], their request was denied. Where I'm from, it's pretty scary when supposed advocates/proponents of free markets go to these lengths to suppress the truth. If there is no rigging in the price of gold, what would you suppose these suspected suppressors are trying to hide?

Now, I would like you all to consider what's occurring right now - as it relates to the long and prolonged downward slide the U.S. dollar [as measured by the U.S. dollar index or USDX] has been on over the past 3 years. Once again, in the face of mounting U.S. budgetary and trade deficits, the U.S. dollar has declined in value to multi-year lows [80.00] against the constituents of the index, shown in table 2, it is measured against.

At the time of writing, the USDX has "bounced" off 80.00. What I would like to point out to you, dear reader, is the following:

• The recent upward bounce of the dollar has occurred in every "free floating currency" with the exception of the Russian Rouble. In fact, the Russian Central Bank has just recently allowed its currency to begin fluctuating in value against the US dollar.

• While the U.S. dollar has had its biggest uninterrupted positive move [over the past 3 days] versus the Euro in a year - and moved up smartly against virtually every other currency - it has in fact declined against the Russian Rouble. I feel that technical analysis fails to explain this.

• I would suggest to anyone who wants to listen that the most recent up tick in the USDX from 80.00 to roughly 83.25 is not merely the result of the US dollar being "oversold" at 80.00. If this were truly the case, one would logically expect the Rouble to "sell off" against the dollar with the rest of the currencies. The fact that it did not suggests that COORDINATED INTERVENTION IS LIKELY RESPONSIBLE FOR THE US DOLLARS RECENT SHOW OF STRENGTH.

Table 3: Selected Fx quotes

• Ladies and gentlemen, I would suggest to you all that the Russian Central Bank is simply not playing along in the coordinated elitist interventionist game in this latest round of foreign exchange price management. This is all likely being orchestrated by Central Banks!

Failure of the US dollar to break below 80.00 after a few attempts resulted in some highly followed and admired technically oriented traders [whom I completely respect so they shall remain nameless] to start making proclamations [based in technical analysis] such as:

"So out of respect for the market, let me give you a mini-max on the US dollar counter-trend weak hand short squeeze rally."

• Minimum rally to .8400

• Medium point potential to .8600

• Maximum point to .8800

*So why wouldn't the Russians be willing to play along in this elitist game of currency rigging? Are the Russians trouble makers? Are the Russians slow learners at technical analysis? Do they not have the play book? Perhaps it's a case of "once bitten, twice shy?" Or has the discipline of technical analysis, in effect, betrayed itself - by its very nature predictably telling would be price fixers with adequate resources where they can turn would be buyers into willing sellers by achieving certain thresholds [aka: chart painting]. I suspect one of the underlying assumptions in technical analysis is that folks who trade do so to maximize profits. In this context, one should remember that price riggers do not necessarily care whether they maximize their paper profits or not. By their very nature they are generally in the business of printing as much of their fiat money as they need anyway.

Perhaps the Russians are really smarter than any of us think they are? The record shows that while their foreign currency reserves have been increasing [the result of a balance of trade surplus], they have been reducing their holdings of US dollars and they have been also increasing the percentage of foreign reserves denominated in GOLD.

Perhaps the Russians are leery with the manner in which the price of oil has fluctuated recently on world markets? Its "free market price" skittish behavior has strongly resembled that of the major currencies and gold which are highly suspect to be more or less "rigged".

The Russians have recently been making overtures about changing the way they do business in oil; debating whether or not they may soon price their sovereign oil exports in Euros instead of US dollars.

Perhaps when the Anglo - American fiat currency system completely collapses on top of us all, due to the sheer weight of unending and mounting debt/money creation - we will all finally get to see for ourselves that Fort Knox been emptied of gold right under our noses for some noble cause. If I was a betting man, I'd wager a roll of quarters that the Strategic Petroleum Reserve is missing a few quarts [or bone dry with an IOU swap left in its place] of crude oil too.

Perhaps the Russians have a better handle than anyone as to how much gold there is remaining in western world central bank's vaults? Perhaps that number is much less than anyone has ever guessed it to be? Perhaps this is why the Russian Central Bank is buying gold bullion? So many questions.

Then again - perhaps not - maybe soothsayers like newsletter writer Dennis Gartman are correct when they claim that conspiracies are rarer than hen's teeth? Perhaps there never really was such a thing as a grassy knoll? Maybe we all win lotteries and live life happily every after! After all, lottery odds are better than the ones you get for long term success in either Empire or Fiat.

Got Gold?

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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