STRAIGHT TALK ON MINING
No. 22
Gold Manipulation - Nothing
New Under the Sun
Dr. Keith M Barron
October 1, 2004.
"The fact that their scheme
might bankrupt innocent men, destroy commerce, ruin the country's
standing in the world credit markets, and cover themselves with
scandal never entered the conversation."
The
Gold Ring
 A small clique of speculators, industrialists,
and bankers, aided and abetted by a few Washington insiders and
a smattering of politicians, attempted to control the gold market.
Sound familiar?
It happened... and...
furthermore, to this day no one has ever claimed otherwise.
The following potted history
draws partly on the historical research of Kenneth D. Ackerman,
in The Gold Ring. This work was published in 1988 and
is just about to be re-released.
Ackerman has produced a splendid
page-turner, that kept me spellbound and sleep-deprived for a
week as I eagerly devoured it by flashlight in my tent in the
bush, while doing geological fieldwork. I give it my highest
recommendation.
In 1862, Honest Abe took the
United States off the gold standard for the third time in US
history (the Continental Congress had done it, and so had the
administration during the War of 1812... but that's another story).
The War Between the States was going badly for the Union. As
the current administration in office is learning, war is a spendy
business - feeding and equipping troops, buying armaments and
ammunition, transporting materials to and fro - it all costs
lots of money. In those days before today's punitive income taxes
were introduced, the Federal Government subsisted largely on
income from customs and excise duties. With the seceding of the
Confederacy, all that cash from the importation of goods bought
with revenues from cotton exports was effectively gone. This
was the cash that had financed those colonnaded antebellum mansions
in the deep South.
On the brink of bankruptcy
and pressed to finance the war, Abraham Lincoln had in 1861 introduced
the first non-interest bearing federal paper since the War of
Independence. These treasury notes - "demand notes"
as they were called - like the later gold and silver certificates
- were redeemable in coin from the US Treasury. A design in green
ink was printed on the back of each note and in a short matter
of time the notes came to be known as "Greenbacks".
No doubt the idea of the notes at the time was to maintain a
fractional gold reserve system, based on the unlikelihood of
sudden demands for gold by large numbers of note holders. In
this way the currency could be inflated to pay for the war. However,
as confidence in the ability of the government to redeem the
notes started to erode with each victory by Gen. Robert E. Lee,
and it became obvious that a run on the bank was indeed possible
if not probable, drastic action was necessary and in 1862 the
notes were changed to say:
"This note is a legal
tender for all debts public and private except duties on imports
and interest on the public debt and is receivable in payment
of all loans made to the United States".
This currency - not redeemable
in gold - was a fiat currency, backed up by essentially nothing
but promises. US Treasury bondholders were to be paid their interest
in gold - this was an important guarantee to foreigners holding
US debt - and like today, most debt was foreign held. It was
important that foreign banks like Rothschilds continued to buy
US debt to finance the war. Duties on imports were also to be
paid in gold - in reality foreigners distrusted greenbacks and
so import purchases had to be paid for with gold coin as they
always had. The Federal Gov't was just making sure it was getting
access to physical gold by taxing importers. The US Mint continued
to coin gold from domestic gold mine supply, but it was kept
aside for Treasury transactions, and rarely got into the pockets
of the people.
The fledgling Confederacy also
issued paper notes to be "redeemed with gold when hostilities
were suspended". These notes, commonly known as "Confederate
Money" were issued by the individual states and by the Confederacy
itself. Soon after Lee's surrender at Appomattox these notes
became worthless and became the butt of a century's worth of
jokes.
Once the Greenback was officially
declared domestic money, the door was opened for trade in gold,
and the gold price was quoted in Greenbacks in all financial
districts of major US cities. The Greenback was discounted to
gold and always remained so until January, 1879 when the US Currency
was returned to the gold standard. Rather than being posted in
dollars-per-troy-ounce, as it is today, the gold price was quoted
in dollars-per-$100-in-specie. In other words, the number of
Greenbacks required to purchase $100 in gold coin (about 4.84
oz).
By the end of the Civil War,
somewhere between a third and half of all US circulating paper
was counterfeit! Both North and South had been printing phony
notes to debase the opposition's currency. At one period during
the war the gold price was as high as $300 per $100 in coin.
These huge price spikes never lasted too long, since gold would
quickly funnel in by paddle steamer from Britain or by rail from
Canada, to take advantage of temporary high prices. In the aftermath
to the war, gold typically traded in a $130 to $140 per-$100-in-coin
range.
Which would you rather have?
Jay Gould and Jim Fisk Jr.
fitted right in with the postwar era of Robber Barons and Carpetbaggers.
The two had checkered careers on Wall Street and had made and
lost fortunes. They saw opportunity, and together schemed a plan
to make themselves - and a small clique of friends and insiders
- wealthy beyond imaginable.
If you were an importer in
a US port city, gold was fundamental to your business and a scarcity
of physical gold would mean you couldn't pay your import duties,
or your foreign suppliers. In those days before electronic transfer,
moving strongboxes of bullion and coin around the country was
no mean feat, and kept folks like Pinkerton and Wells Fargo busy
supplying the "grease" to the wheels of international
commerce. Communication and transport being what it was, it could
take weeks for coin and bullion shipments to cross country from
San Francisco to New York, or for shipments of bullion to cross
the Atlantic by paddlewheel steamer.
Gold was vital to a city like
New York, where stevedores daily handled huge amounts of cargo
at its many docks, wharves and piers. What Gould and Fisk sought
to do was "corner" the gold market - not the entire
international market (there was none), but just the local market
in New York City - and for a short period of time only. Gould
was a partner in a brokerage firm, and he knew that the gold
market was small enough that large purchases on the New York
Gold Pool could "bull" up the price, because there
was always constant demand for the metal and a finite local supply.
The gold could be lent out for greenbacks which were used to
repay the original seller. If the order was large enough it was
sure to send up gold prices and accrue profit for the trader
- this was a veritable "license to print money". The
plan was to constrict the gold supply by buying up most of the
coin and bullion available. Merchants would be forced to pay
the higher prices for gold or suspend their business. At any
given time there was only about $15 million in gold coin circulating
in New York. Locking up a goodly percentage of it was do-able
by someone with deep pockets, or a syndicate of wealthy individuals.
There were two keys to this
plan: firstly, access to large sums of available cash in order
to make the gold purchases. That was easy through their crony
Boss Tweed and the Tenth National Bank which certified their
cheques. The second key - and the wildcard - was the Federal
Government. Tackling that was no easy matter.
The US Treasury maintained
a reserve of about $100 million in gold. Any squeeze on the New
York gold supply would induce the Treasury to accelerate their
bond redemption programme and make gold immediately available
to the market. The Treasury took its orders from the Commander-in-Chief,
President Ulysses S. Grant. If Grant could somehow be induced
into keeping gold in the Treasury coffers, their scheme would
work. How to get to Grant on side?
They approached Grant obliquely,
through his brother-in-law Abel Corbin. Corbin was presented
with the scheme and given a piece of the action. He cosied up
to his famous relative and got Gould a personal audience with
the Big Guy. Gould argued that a cheap dollar would enable American
farmers to export their crops more easily because European gold
would buy more wheat and cotton. The unreadable Grant liked the
idea, though he didn't let on at the time. Corbin would later
report back to Gould that all was well to initiate the "corner".
Later, the popular press would be recruited to spread the rumour
that Grant was against official gold sales, and later still the
press would accuse the President of complicity in the scheme.
A second refinement came later
as the game was afoot: as Gould and Fisk began to ramp up metal
prices through purchases of physical gold, bankers and merchant
houses fought to bring the gold price down by borrowing gold
and selling it into the market, thus attempting to balance out
the shortage, or even turn the tide and temporarily bolster the
supply. Gould and Fisk lent their gold out - many times over
and anonymously, through small brokerages - so that they could
later turn the screws on the borrowers by demanding margin calls
(the difference between the price when gold was borrowed and
the current price). Gould and Fisk didn't intend to break the
shorts; only to have them owing them huge sums on paper. Since
they would then deal from a position of strength the actual settlements
could be finalized over cognac and cigars at their opulent Opera
House offices. They would lend the gold out, buy it back from
the borrower and lend it out again. In this way they ultimately
controlled 5 times the New York physical supply.
The scheme was started by Gould
in August, 1869, when the price was $135 (per $100 gold). By
the third week of September a titanic battle was being waged
by Bulls and Bears - the Bulls representing Gould and Fisk's
Gold Ring, and the Bears the old money New York banking establishment.
US trade had ground to a halt - there was no gold to pay for
imports, and exporters were loath to sign contracts that locked
in a gold price in a time of tremendous volatility. Offensive
wave after offensive wave of gold buying was launched by Fisk
and his henchmen. The bears threw huge lots of gold on to the
market to bring down the price but it was like a garden hose
on a forest fire. The shorts were skewered. Facing huge margin
calls the brokerages began to fail one by one. Wall Street took
on the appearance of a fairground, replete with hawkers and peddlers,
and onlookers came from far and wide to witness the spectacle.
Every up-tick in the gold price was greeted by cheers and groans.
On a day that came to be known
in the popular press of the time as Black Friday - September
24, 1869 - the game finally ended. There was real fear of a "panic"
such as had been witnessed in 1857, and the government decided
it must take action.
Before the market had officially
opened, the gold price was already up to $150. Fisk's agent upped
the price in dollar, then two dollar, then 5 dollar increments.
Not much gold was offered - there wasn't much to sell - but for
every dollar increase, Gould and Fisk made millions on margin
calls from borrowers. Then the news went around that the Fed
would sell $4 million in gold the next day. The shorts found
new courage and began an avalanche of selling that crashed the
price from a high of $162 to $133 in minutes. The police were
called and the market degenerated into bedlam. Gould and Fisk,
who had been pulling strings from a nearby office discretely
ducked out the back way as a lynch mob approached. However, all
was not lost. Through the day Gould had been quietly selling
through nominees as gold inched upwards - was he breaking ranks
with Fisk or was it prearranged? We will never know. So many
trades were made that the Gold Exchange - the clearinghouse for
gold trades - was backlogged for a month and had to call in a
small army of bookkeepers. Lawsuits abounded and bought judges
would eventually null many of the trades. No telling what Fisk
and Gould made after the dust had settled. To find out their
ultimate fate, and for a captivating blow-by-blow narrative of
the lock-up scheme find yourself a copy of The Gold Ring.
Reading this book almost the
same time as John Embry's classic treatise on the Gold Manipulation
- Not Free Not Fair: The Long-Term Manipulation of the Gold
Price (downloadable from www.sprott.com).
I couldn't help but wonder if history was once again repeating
itself..and, if Mr. Embry was right, how would it all end? Would
we eventually see a bunch of central bank governors doing the
"perp walk"? Or would an angry mob hunt them by torchlight
as in olden days? Would Germany or France break ranks and find
new courage to embrace gold as they had for centuries? Would
China, who surely keeps its dollars only because of fears of
mutually-assured-economic-destruction turn renegade and trade
their paper for tangible metal? Heck, would the Oracle of Omaha
get the inside skivvie on what's in Fort Knox and take a run
at gold? Supposing Embry is right and the most of the world's
Central Bank Reserves were sold off years ago and are now dangling
round the necks of young wives in Bangalore and Mumbai? Wouldn't
that mean a dangerous shortage of metal? Could someone with inside
information on the true state of the gold supply and Central
Bank Reserves attempt to corner the gold market? Of course the
premise of Embry's argument is that a cabal of forces have conspired
to keep the gold price down - not to raise it up, like Fisk and
Gould did. Whatever the outcome of current developments in the
gold market, I am confident that 100 years from now our great
grandchildren will be reading about them.
Indeed, history is nothing
more than a tableau of crimes and misfortunes.-Voltaire
Fun Gold Facts:
The word "gold" has
its origins in the Indo-European word "ghel", meaning
yellow. The chemical symbol of gold is Au, which is short for
the Latin word for gold "aurum". "Electrum",
a natural alloy of gold and silver, comes from the Greek word
"elektron", meaning "amber", and was a term
first used by Pliny the Elder, a Roman nobleman and historian,
in his volumes of "Natural History" in AD 77.
Fire Assay
For a good while I've been
meaning to write a short summary of what is meant by "fire
assay", since it figures so prominently in press releases
and reports on mining properties.
Back in the dusty Straight
Talk archives I found a 1996 article in the Vancouver
Sun concerning the use of non-conventional methods to determine
platinum and other precious metals in samples of "desert
dirt" from a property in Franklin Lake, California. The
company claimed to have 7 ounces of platinum group metals per
ton of rock. After the property failed to live up to these fantastic
results in an investigation by the Alberta Securities Commission
- where fire assay figured prominently as the ultimate say on
the precious metals content - the promoter eventually agreed
to a 10-year ban on any involvement in the stock market, and
the company was delisted.
It is perhaps ironic that the
same issue of the paper carried an article discussing the use
of a cyanide leaching process by Bre-X Minerals for their Busang
samples. As an Alberta Exchange listing, Bre-X would be required
under new rules to disclose fire assays and there was concern
amongst investors, because the company had been routinely using
cyanide leach. The V.P. Stephen McAnulty claimed that the use
of cyanide was justified because of coarse gold in the samples
(which we now know was nefariously introduced alluvial gold).
McAnulty was quoted as saying, "There's so many misrepresentations,
some of them gross, some of them mild."
Fire assay has NEVER failed
to identify paying ore, and so, if someone claims spectacular
gold results from "ore that is not amenable to fire assay"
or they use a "proprietary process to analyze for gold,"
take your money and run!
There's another side to this
though... when taking samples for assay it's important to disclose
whether or not the material is representative. In 1868, at Meadow
Lake, California it was reported that a walnut-sized piece of
ore assayed $93,770.97 per ton. Over 60 years the whole mining
district produced barely twice that amount.
It's very easy to sit on an
old ore pile for half a day and collect or "high grade"
samples with visible gold. Not too long ago I saw a press release
from a company (that ought to know better) that released extremely
high grade sample results from an old ore pile. Don't be misled
by this kind of stuff because chances are it's highly unlikely
that the abandoned mine next to the ore pile ever typically produced
those high grades. Mining analysts often look for results from
diamond drill core. The diamond drill is sometimes called the
"truth machine" in mining circles, because it samples
blindly. Mining promoters know the saying, "drill it
and kill it," because many prospects only exist by virtue
of selective surface sampling - the best stuff, or in the highest
grade spot. Many gold prospects fall by the wayside once drilled.
Fire assaying has been around
for a lot of years and dates back as far as the age of alchemy
and the search for the Philosopher's Stone. There is though
no magic that can change dross into gold - only sleight of hand.
Laboratories use basically
the same methods for fire assay the world over. The first step
is crushing the rock, usually in a soft-iron jaw crusher or roller.
Unless it's required to pulverize all the coarse material, normally
only a portion is taken to the next stage and pulped (ground
to rock flour) using a special tungsten carbide mill. Depending
on the requirements of the client, normally 30 grams or 50 grams
of rock flour would be carefully weighed out on a balance. This
becomes the assay charge. In the USA some labs still weigh
out an assay ton or 29.167 grams. One ton of ore contains
29,167 troy ounces and so use of an assay ton makes the math
easy. The unused portion of the pulp and the unpulverised coarse
rock material (the reject) are typically kept aside and
stored so that check assays can be done if required.
The assay charge is placed
into a crucible - a small ceramic cup for fusion
or melting in the furnace. An amount of flux is added
to the crucible and the mixture is fused at high temperature
in the furnace. Fluxing agents include lead oxide or litharge
which is used as a collector of precious metals. The flux
also might contain silica, borax, soda ash, potassium nitrate
and household flour. Each laboratory has its own recipe to coax
the precious metal out of the rock...(it's not legal to add gold
by the way - see below). In the furnace the litharge is reduced
to lead metal. The lead droplets collect the gold and silver
and a glassy slag forms at the top of the crucible. On cooling,
a lead button containing any precious metals is broken from the
slag.
The lead button then undergoes
a secondary process called cupellation. In cupellation
the lead button is again heated in a furnace at 960°C to
1000°C, but this time in a bone ash cup or cupel.
On oxidation, the lead turns back into lead oxide, which is absorbed
into the cupel itself, leaving a small round bead or prill
of precious metal. On cooling, the prill is carefully extracted
from the cupel. At this stage it is doré - a gold/silver
mixture. The prill is then weighed, flattened out and rolled
until very thin, and then placed in nitric acid, which dissolves
away or parts the silver. The difference between original
weight of the bead and final weight is the silver that was contained.
The final step of weighing is called gravimetric finish.
In samples where the residue from cupellation is too small to
weigh, it can be dissolved in aqua regia and then analyzed
using atomic absorption (AA finish) or other technique.
The final step in the process involves a calculator; where the
weight of the recovered gold is compared with the original assay
charge. It then becomes a simple matter to backtrack the gold
content in grams-per-tonne, parts-per-million, or ounces-per-ton,
depending on your preference.
Note the following well because
many people mess this up!
If converting from ounces
per ton to grams per tonne: 1 troy ounce = 31.1034768 grams,
but a troy ounce/ton using a conversion of 31.103481 gives you
only GRAMS PER SHORT TON. To complete the metric conversion you
must also convert short tons to tonnes using the conversion factor
0.90718474.
So: 31.1034768 grams per ton
÷ 0.90718474 = 34.2857142 grams per tonne.
"Assaying was a good business,
and so some engaged in it, occasionally, who were not strictly
scientific and capable. One assayer got such results out of all
specimens brought to him that in time he almost acquired a monopoly
in the business. But like all men who achieve success, he became
an object of envy and suspicion. The other assayers entered into
a conspiracy against him, and let some prominent citizens into
the secret in order to show that they meant fairly. Then they
broke a little fragment off a carpenter's grindstone and got
a stranger to take it to the popular scientist and get it assayed.
In the course of an hour the result came - whereby it appeared
that a ton of rock would yield $1,248.40 in silver and $366.36
in gold! Due publication of the whole matter was made in the
paper, and the popular assayer left town 'between two days'."
Mark
Twain
Roughing
It
1872
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October 1, 2004
©2004 Keith M. Barron Ph.D.
kmbarron@straighttalkonmining.com
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