Conspiracy at The Gentlemen's Club

U.S. Federal Reserve Bank Chairman Alan Greenspan has been sued for gold price manipulation. Deutsche Bank is also alleged to be involved in this shady business.

What do Fed chairman Alan Greenspan, the Bank for International Settlements (BIS), and leading global investment banks such as Deutsche Bank, J.P. Morgan, and the soon-to-be former U.S. treasury secretary, Lawrence Summers, have in common?

These gentlemen and banks are responsible for one of the biggest scandals in economic history -- that is at least what the American lawyer and gold analyst Reginald Howe claims. Accordingly, the adviser for the Gold Anti-Trust Action Committee (GATA), an organization whose stated purpose is the fight against this alleged manipulation of the gold market, filed a lawsuit in U.S. District Court for the District of Massachusetts in Boston.

Howe based his complaint on the U.S. Sherman Act. That statute expressly forbids the fixing of prices in international trade. "This cartel has fraudulently suppressed the price of the precious metal to an artificially low level," claims the plaintiff. The go-ahead for these machinations allegedly came from the White House.

Howe determined the BIS in Basle to be the instrument of this "conspiracy," where the bosses of the most important central banks maintain close ties like members of a gentlemen's club. Howe is one of the few private stockholders of the BIS (the vast majority of shares are held by central banks) and is already known as a troublemaker.

Officially the Basle institution, as well as Deutsche Bank, refuse any substantive comment. The U.S. Federal Reserve Bank left inquiries regarding the lawsuit unanswered.

The complaints are heavy stuff: "Mining companies, their employees, and owners are forced into financial ruin as a result of the low gold price," says Howe. "In developing countries, the weak are left by the wayside." And, as paradoxical as it sounds at first blush, the Wall Street banks supposedly pocketed billions through the allegedly manipulated gold price.

Indeed, the metal has lost much of its luster. Until World War I, the currencies of all of the most powerful countries were tied to the price of gold. From World War II to the early 1970s, the international monetary system was based on the U.S. dollar as its exclusive reserve currency, which was convertible into gold.

Although emotion and the mythical image of the shining metal still dominate trade, its price has tanked drastically after it initially soared at the end of the '70s. For months now the price has been stuck between $300 and $260 per ounce.

This mostly hurts gold producers like South Africa. For the first time in its history did the Republic on the Cape export more platinum and palladium than gold. Even 20 years ago the glittering stuff lead the export lists. Then dealers temporarily obtained prices upwards of $800 per ounce.

Today, calculates GATA Chairman Bill Murphy, the gold price should be at "more than $600 per ounce." For, according to Howe and GATA, the financial elite trusts in only one equation: Only a low gold price is a good gold price.

A rising gold price is generally regarded as a warning of a coming devaluation of money in the United States, and a gold boom signals a weakening dollar in international financial markets. Both are nightmares for Greenspan.

If the gold price pushes too high, so claim the critics, gold is dumped on the market in London and New York, the most important trading centers. "Central banks stand ready to lease gold in increasing quantities, should the price of gold rise," Greenspan confirmed in July 1998, testifying before the banking committee of the U.S. House of Representatives. For Howe this is an open and shut case: "This statement is equivalent to an admission that the price of gold is controlled."

The big money houses made hefty profits from leasing gold. At the end of 1999 Deutsche Bank alone showed trades with an estimated value of 5,000 tons of gold -- 1,500 tons more than the official gold reserves of Germany. Morgan, Chase, and Citibank declared figures in June of 2000 that would be the equivalent of a gold mountain of 8,461 tons.

The trades follow a simple pattern: Banks borrow gold from central banks at extremely low interest. The advantage for the central banks is that at least a small profit is drawn from the largely useless piles of gold in stock.

The banks then sell the borrowed gold bars. With the proceeds they buy financial instruments, the yield of which far surpasses the lease rate. This business is as lucrative as it is risky -- and all of it is on margin.

If the gold price breaks out too far, Deutsche Bank, Goldman, Chase, and consorts pay a heavy price. Then the leasing rate would climb as well and -- worse -- they would not be able to pay for market purchases required to return the borrowed gold, for the central banks eventually want the borrowed gold back.

Even now the "gold carry trade" is out of control. Experts estimate that the private banks owe central banks as much as 7,000 tons of gold. "Too much to ever be repaid," warn the experts of Solomon Smith Barney, a division of Citigroup.

Therefore, concludes Howe, "Goldman, Chase, and Deutsche Bank have choked off any apparent gold price rally on the New York commodities exchange, COMEX, through massive selling."

But Howe's theory is controversial. "Some of my clients also believe in a conspiracy," says analyst Martin Murenbeeld, the publisher of the Gold Monitor Newsletter. "According to the data available to me, I am not convinced that this theory is valid." Gold Fields Mineral Services, a London-based consulting company, accuses Howe of statistical misinterpretation. It maintains that the conspiracy theory is off the mark.

These experts rather ascribe the falling gold price to the strong dollar and a low rate of inflation. In addition, many central banks used even the smallest rally in the price of gold to lose some of this dead asset. Indeed, some 33,000 tons of gold are still stored in the vaults of central banks and international organizations.

When the combatants will finally trade punches must now be determined by the presiding judge in Boston. Howe hopes he will then be able to expose the gold cartel's machinations before the eyes of the public. Greenspan and the other representatives of high finance will then be forced to testify under oath.