Kitco and Blanchard Square Off Over Gold Market Manipulation

By Jon A. Nones
03 Jan 2007 at 06:05 PM EST


St. LOUIS (ResourceInvestor.com) -- Neal R. Ryan, Vice President and Director of Economic Research for Blanchard and Co., a U.S.-based rare coin and bullion dealer, contacted Resource Investor after a number of clients requested a public response over alleged criticism to the company’s recent study “Gold Market Lending.”

Ryan said he felt compelled to respond to “disparaging remarks” after “being goaded on by a number of clients who have requested a public Blanchard response.”




On December 14, the same day as the study, RI posted the following comments by Jon Nadler, analyst for Canadian-based bullion dealer Kitco.com.

“We remain extremely sceptical of so-called research articles that allude to the gold market being rigged in any fashion or to the fact that its price is at the mercy of 'hidden' gold lending or 'sinister conspiracies',” he said.

“Let's get something straight: gold is a market, and by definition, buyers and sellers a market make. At a time when global investor holdings are larger than those of the official sector, it is not rocket science trying to figure out just who is in control here.”

“Our fear is that many a would-be investor is being misled by reports that suggest that were they to attempt to protect their wealth with a lining of gold investment, they will be 'punished' for such actions by either a price manipulation which will severely damage the value of their gold, or by some sinister confiscatory move on the part of one government or another.”

“These bizarre scenarios really have nothing to do with today's reality in the gold marketplace,” Nadler concluded.

Ryan said the Blanchard paper is “100% about market transparency issues,” and not gold market manipulation.

“I specifically left out any mention of manipulation in the paper simply because the paper is not about manipulation,” he said. “For someone to dismiss the paper out of hand as a paper on market manipulation, tells me that the commentator did not grasp the simple points summed up in the first page of the paper.”

But Nadler said his comments were nothing more than a continuation of a debate that had started in New Orleans between himself and GATA in November, and “there was no mention of Blanchard & Co. - overt or implied.” (The panel in at the New Orleans 2006 Investment Conference was made up of Bill Murphy, James Turk, Frank Veneroso, Jon Nadler and Mary Anne and Pamela Aden.)

“The reports in question are one and the same: GATA reports,” he added.

In the points on the first page of the paper, Blanchard makes the following conclusions:

Gold loaned by central banks into the market is a major source of supply.
No statistics providing accurate levels of loaned and swapped central bank gold are publicly published by countries or the International Monetary Fund (IMF), but only “estimated” loan levels and impact are done by outside sources.
The levels of gold loaned in the market can significantly impact the price.
Central banks do not supply the market with this information.
Bullion banks have significant advantages over the investing public in understanding the market impact of their gold lending.
According to Blanchard, the IMF is looking into changing how they allow central banks to account for gold loans from their reserve holdings. The study calls for a mandate in accounting treatment, demanding that “loaned gold levels need to be reported to ALL market participants on a quarterly, if not monthly basis.”

GFMS estimates 2,970 tonnes of loaned gold in the market from central banks currently, while Virtual Metals makes the estimate of 3,276 tonnes – translated into about 95-105 million ounces.

But Blanchard disputes stats by GFMS and Virtual Metals, saying neither use audited numbers, their surveys are published only once a year, and they do not include the loan data in their supply demand statistics.

Jeffery Christian, head of CPM Group, told RI that central banks probably are lending around 75 million ounces (2,332 tonnes) of gold at any given time, plus or minus 10 million ounces.

The figures by GFMS and Virtual Metals “represent an estimate of how much gold lent by central banks that is several years old,” said Christian. “The range of 95-105 million ounces was CPM's estimates in the late 1990s.”

Since that time the amount of gold lent into the market by central banks has fallen, he added.

“All of these estimates are just that: Estimates. They have been taken up as industry standards, although the market has moved away from these levels,” he said.

He gave four reasons for the decline:

Many of the central banks that lent gold to the market a decade ago has sold much of the gold they were lending and don't have it anymore.
The demand for borrowed gold from the jewellery trade and the banks that intermediate between central banks and the jewellers has declined sharply, as jewellery use has fallen.
The rates achievable by lending gold have fallen to unattractively low levels - the low price of lendable gold reduces the supply of lendable gold.
The risks of lending gold to more risky credit-wise borrowers have risen. With lower rates being paid, the increased risks are not as worth taking, so supply has declined.
But Ryan said the gold market is dominated by one segment of the market and it is nearly impossible to calculate the OTC activity.

Ryan notes that LBMA clearing statistics show a 31% increase in average daily turnover this year compared to 2005, despite falling central bank sales and only marginal increased in jewellery and investment demand off take.

There are currently six clearing banks on the LBMA handling gold loan transactions: Barclays Bank PLC, ScotiaMocatta, Deutsche Bank AG, HSBC Bank, JPMorgan Chase Bank & UBS AG.

“To think that a bullion bank who lends central bank gold into the market doesn't have a distinct advantage in terms of market information over the average investor is ludicrous. The IMF has the ability to change this and the average investor should be made aware of this potential change,” added Ryan.

The paper highlights the following scenario:

“Bullion Bank A has gold desk operations in every gold market in the world, Dubai, New York, Sydney, Hong Kong and London. If Bullion Bank A knows that when the London market opens, they will be selling 100 tonnes of loaned gold into the market that has the potential to impact prices, what’s stopping them from front running those trades in other markets beforehand? Nothing. Being the sole beneficiary of their own market activity, Bullion Bank A now has the ability to place their bets in each gold market around the globe with the knowledge that when the London market opens, a certain level of gold that they control will be sold into the market.

“A certain number of gold loans are settled out via cash transactions and due to the vague accounting allowed on loans and swaps by the IMF for gold reserves, the cash settlement becomes the call on the loan instead of the return of the gold to reserves…while at the same time staying on the books as gold in reserve.”

But Ryan told RI the paper is about transparency of information, not about manipulation.

“A transparent market is a healthy market,” he said.

Nadler responded to Blanchard’s comments in saying that transparency was “all good for the market,” but the paper “smacked of the same flavour we had heard before” from GATA.

“Time and again I invited Murphy to show me the evidence - I would show him mine - pictures of all of the gold in Fort Knox being there - but never got him to do it,” he said.

Nadler said he has publicly disagreed with GATA’s Bill Murphy, as well as James Turk, Frank Veneroso, and others on the issue of alleged gold price manipulation.

“I will continue to do so, as I believe my direct former involvement in the WGC, my contacts at the Treasury Department and my first-hand and on-site experiences while an officer at Bank of America gave me ample opportunity to become convinced that I have more accurate information at my disposal than the proponents of conspiracy theories,” he said.

Ryan offered his two cents on gold price manipulation, “despite the fact that the paper isn't about manipulation,” he said.

“Bond markets around the globe have been manipulated, treasury repo markets have recently been manipulated, propane markets have been manipulated, natural gas markets have been regularly manipulated, the copper market was manipulated by someone who controlled less than 5% of forward contracts, individual stocks are manipulated daily, currency markets are intervened in and manipulated, countries manipulate their currency on a daily basis, many would argue that OPEC's only directive is to manipulate oil markets, but mention gold market manipulation … and you're called a kook and a conspiracy theorist,” he said.

Nadler said he couldn’t presume to know the truth about the conspiracy issue or similar theories, but only followed the market “based on real facts and figures.”

“We are not saying we are right, but would naturally prefer to be proven wrong by hard facts, accurate figures and solid proof. Until such time, both sides will continue to operate on belief. We believe in the power of individuals, others believe in the dark forces lurking behind the scenes. Life goes on,” said Nadler.

He said he will continue to warn investors that fear of gold being manipulated is one of the last things that should be on their agenda.

“At the end of the day, the logical facts are that investors got back into the market in historic proportions, at the same time the WAG (Washington Agreement on Gold) came into effect, and at a time of production difficulties and real dollar problems, and the results have been obvious 2001 to now,” he said. “Had manipulation been successful, do you think we would have $600 gold? I certainly do not.”

Ryan agreed in saying that the gold price has made significant advances, but without a completely transparent market.

“We believe once additional changes are made to that transparency, the market will continue to experience exponential growth in prices,” said Ryan. “Regardless of how much information becomes public from the IMF, just the fact that there is some new transparency being added to the market makes the gold market more viable for all investors.”

Nadler concluded: “I think we can just say that we are both in agreement on transparency and that we can continue to publish our own conclusions. The market will ultimately decide who is right, if any of us are.”



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