Demystifying Gold and Oil Trading through the LBMA

It was once said that "gold and oil can never flow in the same direction. If the current price of oil doesn't change soon we will no doubt run out of gold."

ANOTHER - October 5, 1997

Part -I

ANOTHER's bold and unprecedented prediction of $320-360 gold on Kitco some ten days has apparently yielded sour grapes or uncovered ANOTHER as some charlatan or fake. Clearly, no one has the capacity to predict the future; thank goodness! While the world we live in, at least the financial world, seems to be a mystery of fiat illusions, goldbugs and physical scientists must cling to some shred of hope that the world will someday wake up from its march to this illusionary confidence game which is the so-called market.

While I hold little faith in forecasts or predictions, notwithstanding ANOTHER's apparent wisdom and insights, I do believe ANOTHER's current and past words are cause to reflect on the nature of the London Bullion Marketing Association (LBMA) with respect to their real or imaginary role in transacting gold, oil and U.S. treasuries. Need I remind the reader that it was N.M. Rothschild & Sons which in a July 1997 Toronto Globe & Mail article quoted Rothschild's primary business as the trading of treasuries and gold. Perhaps they failed to mention oil trading as well, as ANOTHER has alluded to and has confirmed my own suspicions.

Reflecting on past articles under the Red Baron's banner titled the Grand LBMA Expose, ANOTHER has left us with a legacy of provocative thoughts and challenges to think outside the traditional box. For many folks thinking outside such a "box" is problematic and heretical. But not I, nor ANOTHER. I make it my life's passion to imagine the impossible and to ask the heretical questions. You have known me for pushing that envelope to the point that I have felt my articles are suitable for the next X-Files episode.

Are we to discount ANOTHER's insights as fools-gold given that Friday March 20 has come and gone with a marginal $0.10 gain in gold to $291.60? I would submit, in defense of ANOTHER, NO! Why? Because we must probe deeper into this complex issue to understand that what may at first appear as reality may in fact be carefully engineered illusions.

ANOTHER has noted that "the western world uses paper as a real value, but oil and gold will never flow in the same direction." Indeed back in October 1997 he noted that "if the current price of oil doesn't change soon we will no doubt run out of gold." Well today a strange phenomenon has beset the world - plummeting oil prices. Yet most, including the gurus in the oil patch, ponder and wonder over coffee as to why prices are so depressed, notwithstanding the obvious pressures of demand and supply and the pesky Venezuelan over-production factor.

Indeed if we examine the "paper price of gold" and the "paper price of oil" we witness a disconnect in directionality compared to the increase in not various measures of money supply (both specie and M3). We also witness an imbalance between the annual increase in the physical supply of gold (2% per annum) which is exceeded by at least 7% (real terms) by M3 increases (some have argued correctly that it is M1 "paper specie" that probably really counts, but I would tend to argue that this current market run up is built on confidence and greed whose correct proxy is credit (M2 and M3)....who isn't borrowing to be part of this market?). Let me suggest the fact that M1 supply is actually declining while M3 is soaring (latest statistic on M3 pegs growth at 15% per annum as of yesterday) is not problematic in that we are witnessing a market hyperbolic curve fueled largely by credit investing, not specie investing, per se.

Global oil supplies are increasing at a rate which is also in disproportion to the increase in US M3 money supply (someone more knowledgeable can provide annual oil production statistics). Of course, unlike gold, a significant portion of annual oil production is consumed. Another disconnect, as I have noted is the imbalance between the rate of growth of the real physical economy of the Western world and financial markets, including money supply.

The physical imbalances between the rate of growth in physical stuff (gold, oil, and the real economy), which constitutes "real wealth" and money supply, which is an "article of faith" based on pure confidence must eventually manifest itself in systemic dysfunctions.

Where are the signs of such dysfunction? I purport, as does ANOTHER, that the signs are in the statistics of the LBMA. As Allen astutely noted (March 10, 20:00) key indicator is the fact that 100 times (300,000 tonnes) the annual production (3,000 tonnes) of global gold is trading on through the LBMA (using the most recent statistics). Since the LBMA first revealed its trading volumes (an unprecedented disclosure) back in January 1997 (I believe) the monthly trading volumes have continued to rise. As Allen asks, why is gold being traded so furiously and why are we witnessing a "fractional reserve banking" system....in a sense a NEW WORLD BANK, using a gold system?

Because, as both ANOTHER and Allen have noted, the real currency "oil" is being transacted in the form of $USXXX+XXounces of physical gold. If this is the case, the LBMA and Bullion Bankers have indeed every reason to want to maintain the illusion that gold is not "scarce" and steadily move gold price down in an effort to discourage speculation that will result when the world realizes that there is not enough physical gold in reserve by the LBMA or CB's in the world to meet the "call" requirements, if and when they come. I am always amused that the media does not pay any attention to the statistics the LBMA so freely reveals and that the LBMA has become the world's de facto CENTRAL BANK, at least for the transaction of oil, the world's second most strategic commodity. It is as if those who run the LBMA (including one N.M. Rothschild) are sending warning "flares" to all of us that an iceberg lies ahead of this stupendous market ship "Titanic". Instead the media and the world remains fixated on inconsequential news of the Belgian gold sale that was immediately absorbed by other "banks" (perhaps the LBMA and Rothschild banks themselves) knowing full well how "short" they really are. ANOTHER has supported my own theories that tight connection exists between London, South Africa and the Middle East and those transactions of gold and oil involve the master change agents, the N.M. Rothschild & Sons and other Rothschild affiliates, and undoubtedly their disciple, George Soros. Never forget that these folks know and understand that in these latter days of the confidence game, physical goods and assets are king (why else is Soros buying prime agricultural land in Argentina, silver interests or Warren Buffet buying silver but offshore away from the "Presidential Order" risk that would be exercised in the US should there be a financial crisis...Warren Buffett continues to show wisdom)

Enter my next theory as to why oil has dropped so dramatically. If you are part of the gang at the LBMA and part of the Western oil consumer "cartel", and you realize just how vulnerable you really are to the short squeeze and potential for a major default in confidence in fiat currencies and an evaporation of available gold supplies to cover, you buy yourself time. How, by depressing the price of oil itself (again moving in the opposite direction of the fiat currency confidence game). Of course all of this is muddied by real statistics of demand/supply short-term imbalances, El Niño effects, Venezuelan over quota production dynamics. Is this orchestrated smoke and mirrors. The US undoubtedly is content with overproduction by Venezuelan or increased capacity from Alberta, Canada since it improves their reserve situation and leaves them less vulnerable to the Arabs who continue to request payment in terms of both US$ and gold bullion. The Saudis still make money even at $9 oil and still demand an ounce or two of gold as payment. But, the fact is that a depressed oil price means less gold flowing into the hands of the Arab suppliers, thus reducing some pressure on the enormous short squeeze building at the LBMA.

When she blows, as I believe ANOTHER is alluding to in his $320 gold predictions, we will all stare in wonder and awe at the marvels of that exponential line, just as we stand transfixed at the wonders of the illusionary and surreal DOW or at the plummeting oil price line.

Another thought which has been raised by JTF is the possibility of two gold markets; one, as reflected by the COMEX gold exchange and one by the LBMA. The LBMA gold price fix may in fact be illusionary if indeed is a black market for "preferred" customers like those who soaked up the Belgium gold sale. The "fix" price, or London price may in fact be an illusion. Of course, there are geopolitical reasons for maintaining this illusion, as ANOTHER has suggested. The pressure on gold, real gold price, must be enormous and the volume of paper gold being transacted each day, is just one indicator of the pressure build up.

While sympathetic to those who after today would doubt ANOTHER's wisdom, I challenge us all to think again. Is not ANOTHER as wise as a Soros or Rothschild knowing that in this market it is the physical assets of the world (gold, land, oil) which make kings and fortunes of men and women? At the end of the fiat illusionary end-games physical assets will be KING and the world will scramble and fight for the scrapes. I side with John Kutyn on this front….I am deeply concerned for the welfare of us all.

Oracle of Alberta

March 20, 1998

Commentary welcome through Vronsky

Part II (next few weeks)