"A promise is a debt; it is nothing else; and the attempt to make debt serve
the purpose of money always has been and always will be a failure.
Money and debt are as opposite in nature as fire and water;
money extinguishes debt as water extinguishes fire." [1]
Abstract
Market intervention is not new - it has been with us since ancient times that witnessed the birth of the first marketplace. Once men came together to trade - markets were born. It did not take long for those who always try to find a way around - to find a way around.
With the advent of indirect exchange - gold and silver coin circulated as money. Soon Kings and Queens became greedy, ordering the masters of the mint to debase the coin of the realm, in both regards to weight and purity.
Market intervention blossomed alongside of man's greed - as that is all it is - a means to an end: the desire for more by the appearance of less. Man has yet to learn the lesson that to try to obtain more for less goes against natural law. The greater the effort - the greater is the reward. The less the effort - the less is the reward.
Historical Record
Throughout history, there have been numerous attempts to intervene and control various markets. From taking a small piece of the action - to going for the big score - to settling back and collecting a steady piece of the pie on every transaction.
"An important factor in the commerce of Athens is the money-changer. There is no one fixed standard, which has very wide acceptance, but Corinth has another standard, and a great deal of business is also transacted in Persian gold darics.
The result is that at the Peireus and near the Agora are a number of little "tables" where alert individuals, with strong boxes beside them, are ready to sell foreign coins to would-be travelers, or exchange darics for Attic drachma, against a favorable commission." [2]
The moneychangers - busy plying their trade that transfers this to that - with some left over for their part. Such was the beginning of banking in Athens - based upon the exchange of different monies. From such a meager beginning came forth masters of credit and capital. The House of Pasion and The House of Nicanor were among the first.
"A Large Banking Establishment. Enter now the "tables" of Nicanor. The owner is a metic; perhaps he claims to come from Rhodes, but the shrewd cast of his eyes and the dark hue of his skin gives a suggestion of the Syrian about him. In his open office a dozen young half-naked clerks are seated on low chairs--each with his tablet spread out upon his knees laboriously computing long sums. The proprietor himself acts as the cashier. He has not neglected the exchange of foreign moneys; but that is a mere incidental.
His first visitor this morning presents a kind of letter of credit from a correspondent in Syracuse calling for one hundred drachmas. "Your voucher?" asks Nicanor. The stranger produces the half of a coin broken in two across the middle. The proprietor draws a similar half coin from a chest. The parts match exactly, and the money is paid on the spot.
The next comer is an old acquaintance, a man of wealth and reputation; he is followed by two slaves bearing a heavy talent of coined silver, which he wishes the banker to place for him on an advantageous loan, against a due commission.
The third visitor is a well-born but fast and idle young man who is squandering his patrimony on flute girls and chariot horses. He wishes an advance of ten mine, and it is given him--against the mortgage of a house, at the ruinous interest of 36 per cent, for such prodigals are perfectly fair play.
Another visitor is a careful and competent ship merchant who is fitting for a voyage to Crete, and who requires a loan to buy his return cargo. Ordinary interest, well secured, is 18 per cent, but a sea voyage, even at the calmest season, is counted extra hazardous. The skipper must pay 24 per cent at least.
A poor tradesman also appears to raise a trifle by pawning two silver cups; and an unlucky farmer, who cannot meet his loan, persuades the banker to extend the time "just until the next moon" of course at an unmerciful compounding of interest." [3]
Disadvantage
Such have been the ways of the moneychangers, since the dawn of man - taking advantage of the disadvantage of others. Some call it business, some call it trade; some call it usury, and some call it intervention - of the natural inalienable rights of man.
It has been with us, as long as we - have been with it. There is always a choice. Perhaps it is better "to never a borrower nor a lender be", as one never knows when the tables will turn - but turn they must:
"Many a table has been closed very suddenly, when its owner absconded, or collapsed in bankruptcy, and the unlucky depositors and creditors have been left penniless, during the rearrangement of the tables, as the euphemism goes." [4]
History is replete with examples of the intervention by man to manipulate the markets to make a killing: The Tulip Mania in Holland in the 1600's, the British South Sea Bubble in the 1700's.
Then there is John Law's infamous Banque Générale and the Mississippi Company, which he used to issue stock in the Compagnie d'Occident, which he then used as the cause to change the Banque Generale into the Banque Royale, which meant that the King of France guaranteed the notes of the Bank. Smart guy - would a made a great bookie or central banker.
Eventually Law had one company swallow up another until he ended up with the Compagnie Perpetuelle des Indes in 1719. In 1720 Law was appointed Controller General of Finance.
One year later in 1721 the value of the stock of the Compagnie Perpetuelle des Indes had lost 97% of its value - causing an economic crisis in France and in Europe in general. So much for intervening and manipulating the market. Law was demoted from his Controller General title and position. John boy was actually lucky to make it out of France alive.
We have written previously on the early American episodes attempting to manipulate finance, see Gold Wars: Intervention and Manipulation.
More Recent History
More recently, we have the London Gold Pool and the reputed present day manipulation of the gold market by the Federal Reserve in collusion with other central banks, as well as the Bank for International Settlements, The International Monetary Fund, The World Bank, The United Nations, and the World Trade Organization to name a few of the New World Order Gang. We have written on this previously in Gold Wars: Gibson's Paradox & the Gold Standard.
We must not forget Mr. Soros - and his generosity for his fellow man when he provided help to re-adjust the British Pound to its proper value according to his determinations. A kinder, gentler and nobler gentleman would be most difficult to emulate.
Exchange Stabilization Fund
In Gold Wars: Gibson's Paradox and the Gold Standard we read J. Virgil Mattingly's 1995 statement to the FOMC:
"It's pretty clear that these ESF (exchange stabilizing fund) operations are authorized. I don't think there is a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very broadly worded in terms of words like 'credit' -- it has covered things like the gold swaps -- and it confers broad authority."
US TREASURY EXCHANGE STABILIZATION FUND
Introduction
"The Exchange Stabilization Fund (ESF) consists of three types of assets: U.S. dollars, foreign currencies, and Special Drawing Rights (SDR's) Currently, the ESF has approximately $38 billion in these three assets.
The ESF can be used to purchase or sell foreign currencies, to hold U.S. foreign exchange and Special Drawing Rights (SDR) assets, and to provide financing to foreign governments. All operations of the ESF require the explicit authorization of the Secretary of the Treasury (the Secretary).
The Secretary is responsible for the formulation and implementation of U.S. international monetary and financial policy, including exchange market intervention policy. The ESF helps the Secretary to carry out these responsibilities. By law, the Secretary has considerable discretion in the use of ESF resources.
The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s, the Act provides in part that "the Department of the Treasury has a stabilization fund …Consistent with the obligations of the Government in the International Monetary Fund (IMF) on orderly exchange arrangements and an orderly system of exchange rates, the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities." [5]
A Pattern of Behavior
It is quite apparent that man has always tried to intervene in the markets, to direct and to manipulate in search of profit - the ever-fleeting temptress who teases with her daunting reflection - to both excite and to extinguish - at the same time.
And now we have the wizards and magicians of finance who conjure up the strangest of brews: derivative debt instruments that bet upon they know not what - as long as chance is offered - for the sake of chance and nothing more.
It is in the chase the perceived value lies - never satiated - never fulfilled. A sentence more terrible then even Sisyphus knows.
The greatest magicians have tried and tried - and yet failed to control the markets. They have indeed accumulated great wealth, however, their insatiable greed has been and will be their demise - the never ending pursuit to obtain more, which puts at risk that which they have already obtained.
The Land of Make Believe Wealth
Nothing exemplifies this better than the Bank for International Settlements most recent publication of the values of existing derivative contracts. Presently the total stands at $284 TRILLION as denominated in U.S. Dollars or Federal Reserve Notes.
Outstanding Over-The Counter Derivatives
(In billions of US dollars)
If that is not enough to make your stomach queasy, there is the following that should do the trick. Pay close attention to not only the notional dollar amounts, but also the time in which they occurred: the first quarter or 3 months of 2006.
That means the yearly totals, if they continue at the same pace - would be 4 times the total numbers indicated. That is a significant amount of money - even for paper fiat debt-money.
"The pace of trading on the international derivatives exchanges quickened in the first quarter of 2006. Combined turnover measured in notional amounts of interest rate, equity index and currency contracts increased by one quarter to $429 trillion between January and March 2006 (Graph 4.1) The year-on-year rate of growth rose to 28%, after 23% in the previous quarter, which indicates that the expansion in activity went considerably beyond the seasonal acceleration usually recorded in the first quarter."
"The increase in turnover was particularly strong in interest rate products (26%), as changing perceptions about the future course of monetary policy in the United States and Japan lifted activity in money market contracts in the dollar and yen."
"Uncertainty about Federal Reserve rate setting contributed to a 38% surge in trading in derivatives on short-term US interest rates. Turnover in futures and options on 30-day federal funds, which permit a more precise positioning on the timing of Fed decisions than the more heavily traded three-month eurodollar contracts, doubled to $36 trillion in the first quarter.
Open interest in these contracts rose from $7 trillion at the end of 2005 to almost $12 trillion three months later. By contrast, trading volumes and open interest in derivatives on three-month eurodollar deposits went up by only one third to $166 trillion and $35 trillion respectively.
The end of the policy of quantitative easing by the Bank of Japan and the prospect of the first rise in interest rates since 2001 led to a sharp increase in activity in money market contracts denominated in yen in February and March." [6]
Turnover of Exchange-Traded Futures and Options
Keeping It In Perspective
Kind of brings a new perspective to the word perspective, which if it sounds a bid odd - it should. As the saying goes: "those whom the gods wish to destroy, they first make mad."
Comic books do not have stuff as bizarre as this in them. Truth is indeed stranger than fiction, especially in the 21st Century New World Order. I mean just how much is $429 trillion dollars - are there that many grains of sand passing through the hour glass?
The inordinate amount of such sums indicates how valueless a dollar has become.
It is a tragedy unparalleled in history that will ultimately cause more suffering than any single war has. Its vibration will resonate across the ethers - requiring a balancing of huge proportions.
Obviously from all of the above there can be no doubt that intervention within the markets has and does take place - and to obscene degrees. Dante may have to come up with another circle to house the usurpers of such perverted extremes. Man doth know no bounds - yet.
What Remedy
The question before us is - what do we do with the information? Knowledge is power - IF it is used to accomplish something positive, otherwise it is worth nothing. It is not in the knowing - it is in the doing.
So we must do something - take action of some kind. The choices are several. First, there is the spreading of the information so that others become aware: the spreading of the word.
Next, there is the use of the information to try to implement change, which is a monumental task - which is ever more reason to take it on. It is all grist for the mill. There is nothing that cannot be accomplished - nothing. Whatever thought gives rise to - can be accomplish and acted upon, as all is but a thought made manifest.
Third, the knowledge should play a part in all investor's investment decisions. Presently most investors use technical analysis and or fundamental analysis. In today's New World Order, interventional analysis is mandatory.
When properly coupled with a contrarian understanding of how markets work, it provides a powerful tool along with technical and fundamental analysis. However, they all have their place; and they all have their limitations. To underestimate or overestimate either - is pure folly.
Parameters
To be aware that large entities intervene within the markets and have a significant affect is one thing - to be able to make precise predictions on subsequent market action is another.
If these elite moneyed interests have the capabilities of the latest cutting edge technology (which they do), as well as pockets deeper then deep to pay for it all - they are without doubt a most formidable opponent.
This does not mean that they cannot be beat. It does, however, suggest that it may be best to let them beat themselves. The proverbial "give them a long enough rope with which to hang themselves" comes to mind.
Buyers and Sellers
We want to make a note of what we consider to be a very important and relevant point to the issue at hand: for every buyer there is a seller - for every seller than is a buyer. This distinction carries much weight when extrapolated to the farthest reaches regarding the issue of manipulation and intervention.
Whenever a market manipulator intervenes within the market - they either buy or sell or both. It is even possible to have a net neutral position, although on the scale we are considering, such would be quite an accomplishment.
If they sell - someone must be on the other side of the trade. Likewise, if they buy, someone must be on the other side of the trade.
With futures and options and other derivatives of structured finance - the buying and selling on either side of the trade may not occur immediately, or simultaneously, nevertheless it must occur or the markets will seize up, which we hasten to add is always a distinct possibility.
Alf Fields put it very nicely the other day in his article Gold Update VII:
"At the outset let me say that I believe that GATA has done a good job in fingering the points of manipulation in the gold market, although I prefer to use the word distortion. The main areas where interference with normal market patterns has taken place are:
- Excessive short selling in futures markets either to extend a decline or prevent a rapid upward price thrust;
- Selling of physical gold by Central Banks;
- Leasing of physical gold to facilitate hedging or carry trade activities.
It should be noted in points 1 and 3 that for every downward price distortion caused by excessive short selling there should also be a countervailing upward price distortion when the trade is unwound. In the case of excessive selling of futures, these short positions will have to be closed eventually by corresponding subsequent purchases.
Hedging and carry trade activities are unwound by buying back what was sold or by delivering newly mined gold back to the Central Bank that supplied the leased gold, thus reducing physical sales to the market.
Selling of gold by Central Banks has had the purpose of limiting the gold price rise. A sharply rising gold price would attract attention to the rapidly declining purchasing power of the irredeemable currencies that all countries now issue.
This artificial lid on the gold price will in due course (already happening) attract the attention of countries accumulating large surpluses, mainly of US dollars, resulting in purchases of gold for reserve purposes.
In other words, all these distortions tend to be of relatively short term duration, and are followed by countervailing upward distortions. The underlying primary trend of the market will always flow through to be expressed in the major waves while the distortions will tend to be apparent in the minor waves." [7]
In other words, whatever extent the market is manipulated by or intervened within, over the intermediate term it tends to smooth itself out as water seeks its own level.
Point Of No Return
Granted, there can be some immediate distortions and imbalances, but over the long term, they will balance out - unless the market experiences a 10-sigma event greater than three standard deviations from existing computerized black box trading programs.
The mantra of the day would then be: Houston - we have a problem - copy. It would play out like a global game of dominos - a ring around the rosy of sorts, especially the part about "ashes, ashes, and they all fell down." This lovely nursery rhyme is about the plague.
Such an event comes closer to reality every day, as the mal-investments and stress in the system increases. Eventually the bifurcation point will be breached, and chaos theory will take over - with an example not soon to be forgotten - that markets are non-linear in form and function.
When faced with a herd of rogue elephants rushing at you it is best to get out the way. To try to take them on face to face is utter folly.
However, if one has planned their strategy out well in advance, and has just behind them a cliff or large pit unknown to the elephants - their wild charge will be their own undoing - they will destroy themselves. All you have to do is get out of the way and watch.
A wise saying in Judo is: let your opponent make the first move that starts his downfall. When facing the rogue interventionists in today's market - such wisdom is well advised.
Laws of the Market
Another point for consideration is to realize that although the opponent is strong and formidable - they do not, and cannot, completely control the markets.
They can and do direct them, and sometimes to large degrees - but no one or no one entity can completely control the market; for the market is the sum total of all players, and is consequently, larger than any individual player or group of players.
The market is a law unto itself and it will not be denied. The longer and harder that the primary trend of the market is manipulated by intervention, the larger and more powerful will the adjustment be when the market returns to its mean.
Just as a pendulum swings to and fro on either side of balance - the degree of opposition on either side are equal - forever seeking balance.
The best course of action is to take what the market offers. Do not fight the market. Accept whatever it offers. If one is aware that the trend is being manipulated in any one direction, let the rogues elephants run to they wear themselves out.
Then take the opposite position when the market has reached an extreme level. The risk to reward ratio will be quite favorable at such time. If one scales into their positions there is even less risk. In a bull market, one sells into strength and buys on weakness. In a bear market, one buys on strength and sells into weakness.
Buy or Sell
We have done exactly that in the recent top and retreat therefrom. When gold went over $700 I started selling as everybody was yelling. Once gold went down far enough and everybody was crying - I started buying.
So far - so good, as this is but a short-term play, unless it decides to run - and if it wants to, I will oblige and give it more slack. To have a contrarian point of view is mandatory in today's manipulated markets. Let them sell - then you buy. Let them buy - you sell to them.
Bond yields have been going up - not down. They have broken above significant resistance of a long-term nature. Perhaps it is a ploy - perhaps a misreading of the tealeaves. Time will tell.
In my opinion the opponent is strong - but he shows his weakness by relying on $284 TRILLION DOLLARS of make believe money-values in make believe derivatives - derived therefrom.
He adds to his weakness by employing them repeatedly, turning them over to the tune of $429 TRILLION every three months.
I was going to state the yearly total but my calculator does not go that high. I am not even sure what comes after a trillion - perhaps God only knows and he is not telling - yet. I am not sure I even want to know.
Weak Links
A chain is only as strong as its weakest link: 284 trillion are a lot of links. When one of them breaks it will be because the bifurcation point has been breached, and once that occurs, chaos theory takes over and there is no coming back - it's straight on till morning - just follow the fairy.
There is no stopping it - it is a run away vibration whose exponential amplitude must play itself out. Such events throughout history have taken down huge bridges and buildings by a single vibration run amuck.
So yes it is true that the opponent is strong, and yes he can conduct large and powerful operations to direct the markets - but outright control: no - it would run against not only natural law but cosmic law - against Destiny. Even the gods pay heed to Destiny - as they are Destiny's Child.
OCEANIDS: Who then is the steersman of Necessity?
Prometheus: The three-shaped MOERAE and mindful ERINYES.
OCEANIDS: Can it be that Zeus has less power than they do?
Prometheus: Yes, in that even he cannot escape what is foretold. [8]
Come visit our new website: Honest Money Gold & Silver Report
And read the Open Letter to Congress
[1] Organization of Debt into Currency and Other Papers of Charles Holt Carroll
[2] Title: A Day In Old Athens Author: William Stearns Davis
[3] Same
[4] Same
[5] Exchange Stabilization Fund
[6] BIS Quarterly Review, June 2006 12 June 2006
[7] Elliott Wave Gold Update VII - Field
[8] Aeschylus, Prometheus Bound 515
