An Unlikely Conspiracy, an Entirely Likely Swindle

Reviewing lawsuits isn’t exactly my favorite form of recreation…but I’ve recently been taken to task for not taking seriously a lawsuit filed on Dec 7, 2000 by one Reginald Howe in the US District court of Massachusetts.

The suit names, among others, Alan Greenspan, the US Secretary of the Treasury and the Bank for International Settlements (BIS). And alleges a conspiracy to manipulate the price of gold; as well as violations of the Sherman Antitrust act, various SEC regs and common law claims. It has been financed and promoted by a group called GATA (the Gold Anti-Trust Action Committee), of which I presume many readers who are interested in gold may have heard.

Briefly, the complaint explains how certain mining firms and gold dealing banks sell the metal into the futures market for a premium; how central banks lend their gold to commercial banks to collect about 2% interest; and how commercial banks capture the difference. The suit argues new production of gold is 2,500 tonnes – but consumption is 4,000 – and that this deficit is filled with borrowed gold, constituting a giant short position.

That short position, says GATA, can never be covered at anywhere near current prices. So far, I agree.

But then the suit jumps to the conclusion that just because some people have an interest in seeing the gold price stay stable – otherwise they might get caught short in a runaway gold bull market partially of their own making – that those people are conspiring to depress the price of gold.

What do I make of it?

Well, I don’t hold myself out as a legal maven, but all this suit proves is that anybody can sue anyone about absolutely anything. I’m sympathetic to the intent behind this suit, of course. But I don’t think it’s got a snowball’s chance.

In fact, I expect it will be dismissed out-of-hand by the court. I can hear the judges chuckling up the sleeves of their ample robes as they compare it to lawsuits alleging the Queen of England still owns the US, or that sovereign individuals in the US don’t have to pay income tax under the law.

As per their price fixing count, it makes sense to me that there’s a huge uncovered short position in the gold market. But it doesn’t make sense to me that the powerful people and institutions named would collude to keep the gold price down, however much that might be to their advantage.

Rather, in the real world, the guys that could get hurt most would be trying to cover before the other guys do, recognizing you can’t control a market forever; these aren’t plowboys who just fell off a turnip truck. And the idea of the Fed Chairman, the Treasury Secretary and a roomful of bankers sitting down at a table to collude wouldn’t even make a good movie, because it’s so incredible. At least to me.

It’s clearly in the interest of all governments and central banks for the price to stay low, giving the appearance that all’s right with the financial and economic worlds. (It’s one thing for the stock market to be weak. But if gold takes off at the same time, that could cause people to push the panic button for real.) So maybe governments are trying to manipulate the price of gold; that’s the type of thing they’ve always done. In fact, that’s what most people think they ought to do. But if they are, what do you think the chances are of a government court saying they shouldn’t? I’d say slim and none. And Slim’s out of town.

If I were the judge I’d throw it out of court as a grandstanding effort of a bunch of sore losers and conspiracy wankers – despite my dislike of central bankers, and my sympathy for gold.

Another part of the complaint decries the BIS attempt to force its private shareholders to tender their shares for US$ 9,280 per – when recent fairness opinion set their value at over twice that much.

Well, of course the public shareholders are being screwed. It happens all the time; that’s what management buyouts are usually all about.

Personally, I’d like to see the BIS wound up, and its capital distributed. And frankly, I wouldn’t mind if its officers and directors were shot at dawn. But that doesn’t mean I’m particularly sympathetic to its shareholders. They bought into a corrupt and destructive quasi-governmental institution, controlled by central bankers where all the other shareholders are central banks. You swim with sharks, you can expect to get bit. Tough luck.

The lawsuit also has a bunch of miscellaneous Constitutional and Common Law violations thrown in for good measure. But the US Constitution is a dead letter, except for certain of its aspects in which the Supreme Court has taken an interest. And gold ain’t one of them.

Common Law has, unfortunately, been superceded in all meaningful ways by statute law in the US. Which actually leads me to what I think is a rather distasteful aspect of the suit, namely its respectful reference to US securities and antitrust laws – two areas of legislation in need of abolition. Every suit filed referencing them, serves only to legitimize them. But perhaps that’s just a personal bete noir of mine.

Don’t get me wrong. I’m happy to see folks do this kind of thing, if only because it distracts the enemy. Maybe there’s a chance in a hundred that a lower court will entertain part of it, before it’s thrown out on appeal. I wish these folks well. But mostly, I think it’s just a waste of time. And regrettably, it adds to the reputation of gold-bugs as windmill tilters and conspiracy buffs.

Yours,

Doug Casey
Chicago, Illinois
May 16, 2001

*** Better to travel hopefully than to arrive, as the saying goes. Arriving at the expected Fed rate cut yesterday, Mr. Market was so unimpressed he almost turned around and went home.

*** The Dow lost a negligible four points while the Nasdaq gained a meager 3. Perhaps the only surprise was that there was no surprise. The Fed reduced rates by the full half-point that most had expected, despite last Friday’s upbeat retail sales report and buoyant Michigan consumer sentiment survey.

*** Poor Alan Greenspan. Once a devotee of Ayn Rand and ‘The Individualist,’ now he approaches his retirement as a complete conformist. The stock market expected him to cut rates by 50 bps – so cut rates he did, despite the fact that the bond market is telling anyone who will listen that it sees inflation rising.

*** “Gas at record high,” warns one of yesterday’s headlines. But “Industrial Production Fell for the 7th Straight Month” said another. Greenspan, caught between the former rock and the latter hard place probably could have left well enough alone. Instead, he went along with the crowd – fearful, no doubt, that failing to cut rates yesterday would have triggered a major sell off.

*** Or perhaps, there’s something else, entirely. “Does the Fed fear a deflation tsunami?” asked Greg Weldon following the last Fed cut. “The Fed is cutting rates as the stock market is rallying and at the same time it is allowing the money supply to explode. The only plausible explanation for this hat trick is that the Fed fears a deflation tsunami is rolling towards the U.S.”

*** The Wall Street Journal reported a big drop in corporate profits this year. They’re down more than 40%. And Floyd Norris, in the NY Post, says that Wall Street’s profits are expected to decline 75% this year.

*** “The Golden State today epitomizes bubble economy precariousness,” Doug Noland warns. “[Tax revenue] projections from only a few months ago of a combined $8 billion surplus for this year and next have recently been revised to a $7.5 billion deficit. The state has authorized the issuance of $13.4 billion of bonds to finance energy purchases,” Noland writes. “It’s estimated that the California general fund will have absorbed $9 billion of energy expenditures by August.”

*** Already, yields on California 10-year general obligation bonds have jumped about 40 basis points over the past few months, reflecting a palpable anxiety about the state’s worsening fiscal condition. Senate Budget Committee Chairman Steve Peace predicted last week that California’s revenue shortfall for the 2001-02 fiscal year could swell to as much as $20 billion. That would be pretty harsh, dude!

*** California is also getting ready for $3 gasoline… literally. Platts Oilgram News reports that some oil companies have started to stock up on the numeral “3” to use at their gas stations. Specifically, they are buying “3 points,” the large font signs used to denote $3, followed by a decimal, says Platts.

*** “Real-estate developers picked a bad time to step up the pace of speculative office-building development,” the WSJ also observes. “After showing a surprising amount of restraint throughout the 1990s, developers this year are set to deliver 163 million square feet of speculative space, more than any year since 1985, according to Reis Inc…Reis predicts that only 101 million square feet will be absorbed this year,” a drop of 31% from last year.

*** Even in this Age of Information, people make mistakes. If it’s any comfort, the real estate developers were hardly alone in overestimating the durability of our bubble economy.

*** Venture capitalists made some of the most egregious miscalculations of all. Flatiron Partners, the once-vaunted venture capital firm that backed pioneering Internet companies like theStreet.com and Kozmo.com is moving back in with Mom and Dad, so to speak. The NY Times reports that the firm “is giving up its offices to save on rent. The 5-year-old venture capitalist operation is moving in with its main backer, J.P. Morgan Chase & Co. The firm will save ‘millions of dollars a year’ by giving up space with views of the historic three-sided Flatiron Building at Fifth Avenue and Broadway.”

*** Meanwhile, how much do you think 141,530 acres of land in Florida might be worth? Barron’s reports that a company called Alico owns that much land in Polk, Hendry, Collier and Lee counties. At less than $20 a share, the company has a total stock market value of $130 million. Uh… let’s see. The math is not too difficult. If the market value of the land is more than $1,000 an acre – Alico will be a bargain. Recently, the company signed a contract to sell 44 acres for more than $113,000 each.

*** I attended a meeting of our supper club in Chicago last night. My plane was held up, but I arrived in time to see a presentation on the interactive video game business. Did you know that it is a bigger industry than the movie business? Last year, video games sold $21 billion worth of product. And they are more profitable than movies. A movie costs, on average, about $40 million to make. But a video game only costs $4 million. A heavily-promoted movie, such as “A Bug’s Life,” will gross about $100 million in sales. But a video game can gross even more. And while most stocks that have anything to do with computers fell last year – video game companies soared. Activision, for example, rose 300%. What a business.

*** If you have young boys, you’ll already know that these things are expensive…and very popular. My son Jules, 13, can spend an entire day playing video games. The sun may be shinning outside… on a rowboat that sits on the edge of our pond. Fish jump from time to time. Water rats scurry around. There are trees, woods, pastures…new born calves…chickens (including a dozen or so little chicks)…ducks, turkeys… barns, bicycles, swings – nothing real, it seems, can compete with the make-believe world of video games.