So
recognizing the futility of capping the gold price, they instead
compromise by letting the gold price rise somewhat, say, 15 percent
per year. In fact, against the dollar, gold is actually up 16.3
percent per year on average for the last eight years. In battlefield
terms, the U.S. government is conducting a managed retreat for fiat
currency in an attempt to control gold's advance.

 Though
it has let the gold price rise, gold has risen by less than it would
in a free market because the purchasing power of the dollar continues
to be inflated and because gold remains so undervalued
notwithstanding its annual appreciation this decade.

These
gains started from gold's historic low valuation in 1999. Gold may
not be as good a value as it was in 1999 but it nevertheless remains
extremely undervalued.

For
example, until the end of the 19th century, approximately 40 percent
of the world's money supply consisted of gold, and the remaining 60
percent was national currency. As governments began to usurp the
money-issuing privilege and intentionally diminish gold's role, fiat
currency's role expanded by the mid-20th century to approximately 90
percent. The inflationary policies of the 1960s, particularly in the
United States, further eroded gold's role to 2 percent by the time
the last remnants of the gold standard were abandoned in 1971.

Gold's
importance rebounded in the 1970s, which caused Volcker to lament the
so-called mistakes of policymakers. Its percentage rose to nearly 10
percent by 1980. But gold's share of the world money supply
thereafter declined, reaching about 1 percent in 1999. Today it still
remains below 2 percent.

From
this analysis it is reasonable to conclude that gold should comprise
at least 10 percent of the world's money supply. Because it is
nowhere near that level, gold is undervalued.

So given the
ongoing dollar debasement being pursued by U.S. policymakers, keeping
gold from exploding upward to a true free-market price is the first
thing they gain from their interventions in the gold market. The
other thing they gain is time. The time they gain enables them to
keep their fiat scheme afloat so they can benefit from it, delaying
until some future administration the scheme's inevitable collapse.

So
how does the U.S. government manage the gold price?

They
recruit Goldman Sachs, JP Morgan Chase, and Deutsche Bank to do it,
by executing trades to pursue the U.S. government's aims. These banks
are the gold cartel. I don't believe that there are
any other members of the cartel, with the possible exception of
Citibank as a junior member.

The cartel acts
with the implicit backing of the U.S. government, which absorbs all
losses that may be taken by the cartel members as they manage the
gold price and which further provides whatever physical metal is
required to execute the cartel's trading strategy.

How
did the gold cartel come about?

There
was an abrupt change in government policy around 1990. It was
introduced by then-Federal Reserve Chairman Alan Greenspan to bail
out the banks back then, which, as now, were insolvent. Taxpayers
were already on the hook for hundreds of billions of dollars to bail
out the collapsed "savings and loan" industry, so adding to
this tax burden was untenable. Greenspan therefore came up with an
alternative.

Greenspan
saw the free market as a golden goose with essentially unlimited deep
pockets, and more to the point, saw that these pockets could be
picked by the U.S. government using its tremendous weight, namely,
its financial resources for timed
interventions in the free market, combined with its propaganda power
by using the news media. In short, it was easier to bail out
the insolvent banks back then by gouging ill-gained profits from the
free markets instead of raising taxes.

Banks
generated these profits through the Federal Reserve's steepening of
the yield curve, which kept long-term interest rates relatively high
while lowering short-term rates. To earn this wide spread, banks
leveraged themselves to borrow short-term and use the proceeds to buy
long-term paper. This mismatch of assets and liabilities became known
as the carry trade.

The
Japanese yen was a particular favorite to borrow. The Japanese stock
market had crashed in 1990 and the Bank of Japan was pursuing a
zero-interest-rate policy to try reviving the Japanese economy. A
U.S. bank could borrow Japanese yen for 0.2 percent and buy U.S.
T-notes yielding more than 8 percent, pocketing the spread, which did
wonders for bank profits and rebuilding the bank capital base.

Gold
also became a favorite vehicle to borrow because of its low interest
rate. This gold came from central bank coffers, but central banks
refused to disclose how much gold they were lending, making the gold
market opaque and ripe for intervention by central bankers making
decisions behind closed doors. The amount lent by central banks has
been reliably estimated in various analyses published by GATA as
between 12,000 and 15,000 tonnes, nearly half of total central bank
gold holdings and four to six times annual gold mine production of
2,500 tonnes. The banks clearly jumped feet first into the gold carry
trade.

The
carry trade was a gift to the banks from the Federal Reserve, and all
was well provided that the yen and gold did not rise against the
dollar, because this mismatch of dollar assets and yen or gold
liabilities was not hedged. Alas, both gold and the yen began to
strengthen, which, if allowed to rise high enough, would force
marked-to-market losses on those carry-trade positions in the banks.
It was a major problem because the losses of the banks could be
considerable, given the magnitude of the carry trade.

So
the gold cartel was created to manage the gold price, and all went
well at first, given the help it received from the Bank of England in
1999 to sell half of its gold holdings. Gold was driven to historic
lows, as noted above, but this low gold price created its own
problem. Gold became so unbelievably cheap that value hunters around
the world recognized the exceptional opportunity it offered and
demand for physical gold began to climb.

As
demand rose, another more intractable and unforeseen problem arose
for the gold cartel.

The
gold borrowed from the central banks had been melted down and turned
into coins, small bars, and monetary jewelry that were acquired by
countless individuals around the world. This gold was now in "strong
hands," and these gold owners would part with it only at a much
higher price. So where would the gold come from to repay the central
banks?

While
the yen is a fiat currency and can be created out of thin air by the
Bank of Japan, gold is a tangible asset. How could the banks repay
all the gold they borrowed without causing the gold price to soar,
worsening the marked-to-market losses on their remaining positions?

In
short, the banks were in a predicament. The Federal Reserve's
policies were debasing the dollar, and the "canary in the coal
mine" was warning of the loss of purchasing power. So
Greenspan's policy of using interventions in the market to bail out
banks morphed yet again.

The
gold borrowed from central banks would not be repaid after all,
because obtaining the physical gold to repay the loans would cause
the gold price to soar. So beginning this decade, the gold cartel
would conduct the government's managed retreat, allowing the gold
price to move generally higher in the hope that, basically, people
wouldn't notice. Given gold's "canary in a coal mine"
function, a rising gold price creates demand for gold, and a rapidly
rising gold price would worsen the marked-to-market losses of the
gold cartel.

So
the objective is to allow the gold price to rise around 15 percent
per year while enabling the gold cartel members to intervene in the
gold market with implicit government backing in order to earn profits
to offset the growing losses on their gold liabilities. The gold
cartel's trading strategy to accomplish this task is clear. The gold
cartel reverse-engineers the black-box trend-following trading
models.

Just
look at the losses taken by some of the major commodity trading
managers on their gold trading over the last decade. It is hundreds
of millions of dollars of client money lost, and the same amount
gained for the gold cartel to help offset their losses from the gold
carry trade -- all to make the dollar look good by keeping the gold
price lower than it should be and would be if it were allowed to
trade in a market unfettered by government intervention.

As
I see it there are only two outcomes. Either the gold cartel will
fail or the U.S. government will have destroyed what remains of the
free market in America. I hope it is the former, but the flow of
events from Washington and the actions of policymakers suggest it
could be the latter. "

1)Now we know why
gold investment has long been demonized and ridiculed by the
mainstream media and Wall Street.

2)They did what
they could to suppress the gold price.  But did they achieve their
goal?  Did they make the economy better?  Did they make the stock
markets higher?  Did they make the U.S. dollar stronger? Did they
make the job markets better?   Did they make investors make money? Did they erase the budget deficit?   Did they eliminate the trade deficit?  Did they improve the standard of living for American people?   Did
they make our next generation feel proud and promising?  Did they
make people around the world respect Americans more?  Did they take
the responsibility for the economic turmoil they created?