Gold Manipulation Once Again

Taking to task the Gold-market manipulation theories again...

TAKE ANY firefighter from my neck of the woods out for coffee and you'll hear this plaint, writes Brad Zigler at Hard Assets Investor.

"You'd think it's all over when we douse the flames, but it's not. We have to stick around long enough to suppress the hot spots. We often spend more time stamping out these little fires than we do on the blaze."

So it goes with the story of Gold manipulation, too. We've expended a lot of electrons here at Hard Assets Investor with our online articles challenging the assumptions made by some theorists. Readers sent a lot of flaming arrows our way after each of these articles were published, but soon thereafter the heat dissipated and left just smoldering embers.

Those embers sparked to life in our recent interview of Andrew Schectman, co-founder of precious metals dealer Miles Franklin LLC.

Schectman, like a number of other observers, holds out as evidence of manipulation a supposed admission by Gold Mining giant Barrick Gold Corp. (NYSE: ABX) in federal court that it was acting at the behest of the US Federal Reserve to suppress the price of gold. Because of this alleged agency, Schectman claims, Barrick also argued it could claim sovereign immunity from prosecution.

Neither one of those contentions, however, is accurate according to the very record most often cited by manipulation theorists. The Gold Anti-Trust Action Committee, an organization spearheading the litigation of alleged collusion in the gold market, regularly uses as the basis of its contention a motion to dismiss filed by defendant Barrick Gold in the case cited by Schectman (Blanchard & Co. et al, v. Barrick Gold Corp. et al., No. 02-3721 E.D. La.).

Schectman, as many others who contend that Barrick confessed to manipulation, should actually read the motion. There's no confession to be found. The language used in Barrick's motion to describe the alleged scheme was, in fact, recitations of the plaintiff's very own complaint, used to lay groundwork for the defendants' argument. That's citation, not confession.

A reading of the motion will reveal that Barrick doesn't purport to be an agent of the central bank at all. The company merely acknowledges hedging its production through bullion banks. It's the London Bullion Market Association market makers that deal directly with the central banks in leasing arrangements, though they themselves cannot properly be called agents of the central banks, either. As dealers or principals, they owe no fiduciary duty to the central banks. The market makers' motive is profit; they undertake the risk associated with borrowing and lending/selling metal in hopes of earning a spread.

Neither will you find Barrick contending it's entitled to sovereign immunity. The motion to dismiss is based upon the concept of joinder – that all parties at interest in the suit should appear before the court trying the case. The plaintiffs' suit asks for rescission of lease contracts between the central and gold dealing banks, but fails to bring all the banks before the court. As government instrumentalities, of course, the central banks can fend off appearance, but that's not the point of the motion, really. It's the inequity and harm that would result if the plaintiff prevailed against one dealing bank (J.P.Morgan Chase), the suit's other defendant, and one producer (Barrick).

In the end, J.P.Morgan Chase was dismissed from the suit and Blanchard ended up settling, under undisclosed terms, with Barrick. Part of Blanchard's motivation to settle might have come from the defamation suit filed by Barrick against the coin and metal dealer – a suit, by the way, that went all the way to a decision by the Ontario Court of Justice in Barrick's favor.

Funny, but I never see that case cited in the manipulation theorists' arguments...

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