Open Letter to GATA

By Keith Weiner

Dear GATA and Mr. Chris Powell:

I am writing this in response to your article Monetary Metals’ Weiner refuses to see anything wrong in the gold market.

There is a certain irony for me to read that I refuse to see. I have spent eight years studying the mechanics of the market, building a model, developing software to run the model through several generations, and licensing nearly three terabytes of data giving every bid and offer in both the spot and futures markets with sub-millisecond resolution, going back to 1996.

In my previous company, I architected a massively scalable 3D voice server. In a normal world, I would be working on another Internet software company. Instead, I made a huge investment in drilling deeper into the gold market. The reason is that I am driven by a powerful need to see.

Two theories compete to explain the gold and silver markets. One, the conspiracy theory, holds that the big banks are naked short futures in a long-term effort to keep the gold price far below what it should be. The other, my theory, is that the banks are primarily market makers and they do not hold a massive and perpetual short position.

I proposed a way to test whose theory is right: to look at the behavior of the gold basis as each futures contract heads into expiration. In my recent article, Thoughtful Disagreement with Ted Butler, I published the experiment and the data. The results are conclusive. Whatever else may be going on in the markets, the alleged massive, chronic naked short position in futures does not exist.

In that article I encouraged—and still do—anyone to criticize either my method or my data. So far, no one has come forth with any serious criticism. At the time, you dismissed it as mere “technical analysis. It is not.

In your latest, you say that I “would need to know the details of every gold-related transaction…” No, I would not need to know that. Just as if someone stands on a scale, I do not need to know the details of everything he ate, or the name of his personal fitness trainer. I can read the needle.

You continue that “…leasing gold is not really ‘carrying’ the gold for the duration. He is carrying the liability.” Let’s drill down. The market maker simultaneously enters into a set of transactions:

  1. Borrow dollars
  2. Buy gold bar
  3. Sell gold future for a fixed duration (e.g. 6 months)
  4. Lease gold out for same duration

The market maker does this to earn a profit, which is basis + lease rate – borrowing cost. In other words, the market maker is carrying the gold position. It does not own the gold. It has sold the economic ownership, i.e. price exposure, to the buyer of the future. It is carrying the metal.

Now let me address the second part of your headline, that I deny that anything is wrong in the gold market. Actually, everything is wrong in the gold market, starting with the very use of fiat money, and the fact that we buy and sell gold in the first place.

Aside from that, there should not even be a gold futures market. There should be a gold interest rate market—i.e. a gold bond market. There should not be propaganda in every government school, teaching that money means Federal Reserve Notes and that gold is a volatile commodity. There should not be investment regulation that forces advisors to treat gold as risky, or an investment (it is neither).

There should not be a Fed-induced perpetually-falling interest rate which fuels endless asset market speculations including gold. There should not be a general belief that investing means seeking capital gains provided by the next investor who hands over his capital as your profits. There should not be capital gains taxes on gold, and taxpayer should not be forced to keep their books in dollars, which show a phantom profit if their gold holding increases in price.

One of the consequences of this lust for capital gains combined with the belief that gold is just another chip in the casino, to bet on the price action, is the gold futures market. Futures markets developed as the way for people to coordinate storage and later consumption of commodities which are produced seasonally. Gold is not produced seasonally (or consumed).

I could go on.

Let me clarify one other point. You ask, “If central bankers do not think about gold, why is their agent, the Bank for International Settlements, constantly swapping and leasing gold…?” I will clarify my point. The central banks do not care about the price of gold. They have no motive to conduct a long-term suppression scheme. If gold is $200, $2,000, or $20,000 it makes no difference to them. Gold did not circulate as money when it was trading in the $200 range. There was no sign of circulation when it traded at nearly $2,000 in 2011, and it will not circulate when the gold price reaches $20,000.

The central banks are in the gold market to make money—which all agree means dollars. They seek to earn fees on what would otherwise be an asset with a negative-yield.

The irredeemable currencies will continue to do what they are doing—which is be used for every kind of transaction in trade and finance, while they gradually fail. That failure is not the thermonuclear blast of hyperinflation expected by the gold bugs. It is the slow sinking under the water line of drowning in debt.

And at the end, when America collapses as Rome did, and there is blood in the streets—look to Caracas Venezuela for as small preview of what this will look like—gold will be far too precious for anyone to want to show his neighbors that he has it. Which pretty much describes the Dark Age that followed the collapse of 476AD.

In other words, the central bankers should be afraid that their system is failing, but they are not. One thing is for sure, gold is no more a threat to them than a 1955 Ferrari. Both are just chips people use to bet for dollars.

You make one other remark, “Weiner is in the gold arbitrage business and complaints of manipulation of the gold market by governments and central banks may be bad for that business…” The second part is simple, so I will address it first. Monetary Metals is not affected by the price of gold. Monetary Metals is not a bullion dealer and does not buy or sell gold. We do not promise clients that gold will go up. We have long argued that gold does not go up or down, but that it is the dollar which goes down or up.

As to our business, Monetary Metals has two products but they are not based on gold arbitrage. I write about arbitrage, which is the basis (pun intended) of my weekly writings on the gold basis. That is for insight into the likely direction of the price of the metal. The gold basis is the basis for the only true fundamental analysis of the metals.

Our flagship product is gold fixed income. We pay interest on gold. We do that by providing the gold to jewelers, manufacturers, and others who use gold working inventory or as work-in-progress. They need to finance this physical gold, and are happy to pay interest. Investors want interest, and are happy to provide the gold. It’s a win-win deal. It is honest finance, unlike much of what passes for gold “lending” in bullion markets today.

We are doing this for a simple reason. I believe—and I’ve written a lot about this over the years—that interest is the regulator of flows of gold. If the interest rate is zero, gold cannot circulate. It disappears into private hoards. It may be traded for the price action, but it is not used in finance or as a medium of exchange.

We believe that paying interest on gold paves the pathway for the world to move forward to the gold standard, “creating good conditions for the gold business and restoring free and transparent markets”.

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