Some people have asked me, "How can I tell if silver's a good investment?" One mark of a wise investment is its ability to outpace inflation. If you bought $10,000 worth of silver at the low of $4 an ounce on November 21, 2001, you would have 2,500 ounces. At the spot price of $6.71 an ounce (as of NY close on 8/30), your investment would be worth $16,775. That's a 59.6% return! Official inflation estimates are 9.5% over that time period (see the inflation calculator at http://minneapolisfed.org/Research/data/us/calc/index.cfm). Even if you believe the government's numbers understate consumer inflation, silver would have protected your assets well.

Silver appreciated substantially, but let's compare it to stocks. If you bought a Dow index fund on the same day in 2001, the Dow Jones Industrial Average was 9,834.68. Yesterday, the Dow closed at 10122.52. Your investment would have increased 2.9%, well under the rate of inflation. NASDAQ was an even worse investment, underperforming the Dow. It reached 1,875.05 on November 21st, and only touched 1836.49 Monday, a loss of 2%.

Sprott Asset Management Breaks Silence on Gold Manipulation

As I've mentioned in previous newsletters, the Gold Anti-Trust Action Committee (GATA) has compiled a mountain of evidence which indicates that the gold market is manipulated. Their work has been ridiculed by almost all financial commentators, and their members have been marginalized. Now a mainstream investment firm, Sprott Asset Management publicly asserts that GATA is right. This Canadian company produced a 71-page report entitled, "Not Free, Not Fair: The Long-Term Manipulation of the Gold Price." This company is not a tiny hedge fund, either. It "currently manages over $1.6 billion in assets for institutions, endowments and high net worth individuals," according to its website. (The report is available at www.sprott.com).

The authors, John Embry and Andrew Hepburn, examine many documents from the 1990s relating to the gold market. They conclude that the gold price was "managed" by central banks and the International Monetary Fund. The Federal Reserve and the U.S. Treasury Department probably started their intervention in 1994 to keep gold prices artificially low. This would have minimized inflation fears, made the U.S. Dollar look strong in comparison, and suppressed interest rates.

Embry and Hepburn note that central banks felt compelled to intervene in 1998 when Long-Term Capital Management, a large hedge fund, went bankrupt. The Federal Reserve Bank of New York engineered a bailout of LTCM. They feared that if the hedge fund defaulted on its $1.25 trillion in derivatives, the financial markets could crash. Among other bad trades, LTCM had sold short 300-400 tonnes of gold, a debt that had to be assumed by a large bullion bank or government entity. If creditors had tried to buy gold to liquidate these positions, the price of gold would have soared. (In the end, LTCM's losses were estimated at $4.6 billion.)

In May of 1999, the price of gold had reached $290 an ounce, threatening the solvency of many large banks' short positions. The Bank of England suddenly announced it will sell 415 tonnes of gold in public auctions, supposedly to diversify its holdings. Many market observers realized this public declaration would drive down the metal price. Several gold mining CEOs even complained to Tony Blair, since Britain's tactics were unfairly depressing their profits.

In September of that year, 15 central banks decided to limit their gold sales and leasing activities in a pact called the Washington Agreement. Many banks who were shorting gold panicked at the knowledge that supply was drying up. In their buying frenzy, the price skyrocketed about $80 in two weeks. Fearing a crisis similar to the LTCM fiasco, central banks began to sell gold to cap the price at $330 an ounce.

The authors note that gold speculation is tempered by the belief that central banks have loaned or sold about 4,000 tonnes of gold, and they have almost 30,000 more in their vaults. The IMF set accounting regulations which list gold as an asset even when it's been loaned out. These policies seem designed to obscure central bank inventories. However, research by Frank Veneroso indicates that 10,000-16,000 tonnes have been dumped on the market already. This would explain why New York gold prices are significantly lower than world rates. It's statistically improbable that this difference would occur by chance, rather than by manipulation.

I don't know what effect this report will have on the gold price. It hasn't been covered by major media outlets in America. However, large investors will surely take notice of this extremely well-documented research. The rate of gold purchases has already increased this year in India and the Middle East, and strong physical demand will eventually cause prices to rise. This report also has relevance to silver investors. The central banks would not suppress gold without also manipulating silver. If the price of silver soared while gold remained flat, unwanted attention would be focused on the gold market. Embry and Hepburn warn that all manipulations will fail, and prices will skyrocket. Make sure you're well-positioned to profit when the silver price explodes.

I hope every one has a safe and happy Labor Day weekend! We appreciate your business.