Now that a thin layer of dust and familiar silence has settled over a series of shocking revelations about the markets for gold and silver, I had an opportunity to discuss these topics with a man who has stood at the epicenter of this long-standing controversy.
GATA start from the beginning
Bill Murphy co-founded the Gold Antitrust Action Committee (GATA) back in 1999, shortly after the implosion of the hedge fund firm Long Term Capital Management. What Murphy observed as gold price manipulation in the wake of that crisis set him upon a quest for truth and transparency in the gold market.
At a hearing of the Commodity Futures Trading Commission (CFTC) this past March, Murphy entered into testimony emails from London metals trader Andrew Maguire that blew the whistle on alleged silver price suppression by bullion banks, including JPMorgan Chase (NYSE: JPM ) , and his efforts to tip off the CFTC before (and during) specific incidents of questionable price action.
Since the respective custodians for SPDR Gold Shares (NYSE: GLD ) and the iShares Silver Trust (NYSE: SLV ) are the very pair of bullion banks alleged by GATA to maintain market-making short positions on the COMEX, wary Fools detect a potential conflict of interest. When combined with the shocking insinuation that the over-the-counter bullion market in London is leveraged 100:1 over the underlying physical supply, the result is a natural erosion of confidence by discerning precious-metal investors in the unencumbered status of physical holdings reported by the popular bullion ETFs. Not surprisingly, the new bullion alternative Sprott Physical Gold Trust ETV (NYSE: PHYS ) has met with robust investor demand.
Bringing it home to you
To ensure that readers contemplate the implications of these issues, I asked Bill Murphy to join me for an exclusive interview.
Christopher Barker: The story still doesn't seem to be gaining a lot of traction outside the gold community.
Bill Murphy: Why do you think that is?
Barker: I think it's a failure of investors to understand the implications of this story, whether they're invested in precious metals or not.
Murphy: Well that's one thing we tried to do with the Wall Street Journal ad; that's why we paid $264,000 to wake people up, and that was two months before the financial markets collapsed.
Barker: One part of your testimony that jumped out at me was actually a quote from your Wall Street Journal ad, where you said: "Manipulation is a primary cause of catastrophic excess in the markets." Could you explain to my readers how gold price suppression could facilitate market excess?
Murphy: What's important for your readership to understand is that the markets have been made dysfunctional by U.S. policy and what these bullion banks are doing. Even Alan Greenspan said recently that interest rates were left too low for too long. Had the gold price been allowed to trade freely, interest rates wouldn't have been able to stay down as low as they were. It would have been a warning sign for people not to get involved in the behavior that they did ... not to go with all of the risks that developed. And there's a good likelihood that the disaster would have been nowhere near as bad as it was.
Alan Greenspan called gold a "thermometer." So they diffused the thermometer by keeping the gold price managed. And what's important for people to understand now is that the same thing is going on. If we're correct, it's going to lead to a bigger catastrophe, because no one has learned any lessons.
Barker: In your view, what is needed to convert these myriad allegations into the kind of slam-dunk case that commands widespread media scrutiny or prompts a regulatory overhaul?
Murphy: How has every scandal that has really been an important one broken? Revco, Enron, Madoff ... it has to blow up. And it's so sad. All the whistleblowers at Enron, and in the Madoff scandal, were ignored or ridiculed, like we've been ridiculed for the last 10 or 11 years. It's always the same, because we're taking on the rich and the powerful in America ... and they don't like it. Unfortunately, that's what it's going to take. It might be some kind of default on gold and silver delivery. It takes the markets to blow up, and then you have the big to-do about 'how could this have happened?' It makes me sick to my stomach.
Thank goodness for the Internet, though, because it's changing everything. The story that we're telling, which we believe will go down as one of the great financial scandals in American history, would never have been discovered without the Internet, because none of us would have met each other. It's truly remarkable what the Internet is doing, and it's allowing the little guy to take on the big guys. As hard as it is still, at least we have a chance.
Question by CAPS member AvianFlu: [solicited from my blog]
I would like [Murphy] to speculate as to what the motivations are for manipulation of the metals markets. There is a reason for everything.
Murphy: Gold's a tiny market, but it's a featured market. When the gold price goes up, everyone's aware of it. The fact is, the government has been messing with the gold market forever. This shouldn't surprise anybody. What's important is to realize what they've done to the average person by making its usefulness dysfunctional.
Question by CAPS member fndr489:
With a view to the long-long term, if the manipulation stops and gold/silver prices are allowed to rise, what does Mr. Murphy think about the government possibly confiscating the physical bullion to balance the budget, a la FDR?
Murphy: In terms of the confiscation, the world has changed since then. I think the rest of the world now, with China and Russia as big gold producers, and their populace buying gold (especially in China and India), and with the dollar in such a precarious position with our fiscal policies and all that ... the rest of the world would laugh at the United States and the price of gold would go beserk. Everybody would want it.
Second of all, the American public is almost totally not involved in gold. There's very little interest yet. That's how much of a bull move we have left. If I can do nothing else, I hope your readers will go and get to some sharp gold bulls and find out which of these little gold stocks to buy. It hasn't even started. It's like in the Internet in the first year when it was founded. That's how much money is going to be made by those people who are willing to do their homework and look into this.