When it comes to discussing gold price, John Embry doesn’t mince words. Last August, the Chief Investment Strategist for Sprott Asset Management put out a report on systematic manipulation of the gold market-something he believes has been going on for a long time-entitled simply, “Not Free, Not Fair”.

The document is a sort of X-Files of gold trading, delving into the seamy underworld of international finance, where banks report phantom gold and the world’s most powerful financiers cut secret deals with each other to advance their agendas. But this is no television show: Embry details over 60 pages of facts, stats, and expert commentary on the actions of the “gold cartel”, challenging conventional wisdom that gold trades under market forces.

The situation now, his report notes, is similar to the late sixties and early seventies, when a conglomerate of European banks known as the London Gold Pool joined forces with the U.S. Federal Reserve to keep the gold price fixed at $35/oz. Member banks contributed gold bullion into a pool that could be sold onto the market when the gold price started to rise. Thus any incipient gold run ups were stopped dead. Central banks today are similarly flooding the market periodically with gold, states Embry’s report, the only difference being that then “the management of gold price was out in the open,” whereas today “everything is occurring in a covert fashion.”

As evidence of this hidden intervention, Embry points to the fact that several promising gold rallies over the last few years have coincided with announcements of gold sales from central banks that immediately caused the gold price to plunge. He also delves into the bookkeeping of the U.S. Exchange Stabilization Fund (ESF) – a body that has a stated mission of maintaining price stability in foreign exchange markets. Although the Fund claims not to trade any gold on behalf of the U.S. Treasury, analysts like James Turk have speculated that it may in fact be doling out gold to strategically depress prices. As Embry points out, a recent lawsuit against the ESF alleging its involvement in gold price-fixing revealed discrepancies between gold on its books and gold in its vaults. He quotes plaintiff Reg Howe (of Golden Sextant Advisors, a gold investment banking service) as saying that the suspicious numbers, “imply corresponding gold trading activities by the ESF.”

The real victims of this price management, says Embry, are small gold traders who believe they are buying and selling in a free market and have been kept from realizing their rightful gains. Mining companies have also suffered, he notes, because of the sluggish prices that manipulation creates.

With news of potential sales from the International Monetary Fund currently helping to put pressure on gold, we thought it was a particularly appropriate time to catch up with John Embry for an update on the themes presented in “Not Free, Not Fair”.

Interview by Dave Forest for KitcoCasey

K/C: It’s been almost six months since your report came out. Where would you say we are now in terms of gold-price manipulation?

Embry: The thing that’s amazing, if you can imagine, is that the suppression and manipulation of the gold price is worse now in my opinion than it’s ever been.

K/C: You said in your report that so-called “bullion banks” are one of the major factors motivating the suppression of the gold price. These banks borrowed gold when it was cheap, sold it, and then invested the money they earned. But now they owe so much gold that having to repay it, especially at higher gold prices, would cause bankruptcies and a major financial crisis, something the central banks won’t allow. Are these bullion banks at risk today?

Embry: That’s hard to document, although I believe that an enormous number of derivatives are probably at risk. My suspicion is that the central banks, who are in cahoots with the bullion banks, may have let these guys off the hook by assuming their debts. But it really doesn’t make any difference whether the bullion banks owe the gold or the central banks eat the loss and then just don’t have enough gold in their vaults. Either scenario would be very bullish for the gold market.

K/C: If the central banks have assumed the liabilities of bullion banks, does that change the situation at all?

Embry: No it doesn’t. Eventually they just won’t have the gold to put into the market. At that point, I don’t know how the central banks would cover it. Maybe just with paper. Banks can create as much paper as they want. They can’t create gold.

K/C: And how would it affect the market overall if the banks don’t have enough physical gold to cover their obligations?

Embry: Well, for one thing, it’s inflationary. And also any sort of revelation along those lines would drive physical gold buying berserk. People would realize that the whole scam was over.

K/C: In the past, you’ve also mentioned that the U.S. government has a vested interest in keeping gold undervalued because the gold price is viewed as a “canary in the coal mine” for the dollar-that is, if gold goes up, investors figure something is wrong with the greenback and the U.S. economy. Given the weakness we saw in the dollar at the end of last year, could we expect U.S. officials to step up anti-gold campaigning?

Embry: I think that explains very well what we’re seeing. There’s concern about inflation, we’ve got measured interest rate rises, we’ve got a housing boom that’s out of control. To me it portends inflation and a collapse of the U.S. dollar. But if they can keep the gold price looking boring then they can point at that and say, “If there was a problem, the gold market would have picked up on it.” They can suggest that the weak prices indicate there is no problem. And I think there’s a huge problem.

K/C: So there may be more U.S. interest now in keeping gold down?

Embry: You can bet on it. If they go deeper into this morass of debt, it’s absolutely essential that they keep up the appearances of low inflation, so they can keep interest rates at a very low level. That’s the only way that this whole thing can continue. They don’t want gold looking good against the U.S. dollar, so they’re pulling out all the stops. They’ve created the illusion that everything is fine.

K/C: So, you’d say that the drivers for gold price suppression are still in place?

Embry: If anything, they’re intensifying. There is probably a growing physical shortage of gold. From everything I can see-the physical demand for gold bullion going through Turkey, which is a conduit into the Middle East, premiums in India and Shanghai, the fact that gold refineries can’t meet demand-all this stuff to me bespeaks tremendous physical demand. At the same time, we had mine supply down four percent last year. So when I project these trends over the next few years, I think the best we could do is hold gold supply flat, and chances are it will actually continue to decline. If that’s the case, with the physical market on fire, in the absence of tremendous amounts of central bank gold entering the market the price has to go up. Up like a rocket. So the anti-gold interests have to keep trying to make gold look bad.

K/C: Do you think these forces were involved in the gold price drops we’ve seen this month?

Embry: There’s no question that there’s manipulation going on. Gold has fallen eight or nine percent in the last two months. People say gold is an inverse correlation to the U.S. dollar. Well, the dollar’s been firmer, but it’s only up about 5 percent. The fact that gold is down significantly more than that, while the physical picture for gold is so strong, would say to me that there’s something in the market that doesn’t meet the smell test.

K/C: To change tack a bit, what was the reaction to “Not Free, Not Fair” when it came out?

Embry: That’s a good question. It was received by anyone who shared our opinion as a worthwhile contribution to the cause. But otherwise it was met mostly with eerie silence from the gold community. A few people in the mining companies expressed to me their appreciation, but a lot just won’t go there.

K/C: Why is that?

Embry: If you’re a gold company, taking on the establishment may not be the smartest move. The governments control your taxes, your permits, and there’s a lot of ways they could make life more difficult for you. The World Gold Council does not support this report at all-they’re controlled by the hedgers who have a totally different agenda. All they want to do is sell more gold jewelry or something, which to me is absurd.

(Editor’s note: Although the gold community may have been silent about the report, they have in the past spoken out about gold price manipulation. Former Placer Dome CEO John Willson told the Financial Times in 1999, “I find it difficult to believe… that there is not some concerted action going on between central banks to hold inflation down through holding down the price of gold.” Around the same time, an AngloGold spokesman told The Independent, “For a long time we, as producers, saw people manipulating our market.” A London Dow Jones article on 1999 gold sales by the Bank of England put it much more bluntly, saying, “Central banks are selling gold in order to prevent a further sharp rise in prices from causing a major financial crisis.”)

K/C: What outcome are you hoping to see in terms of breaking price suppression?

Embry: It’s one of these things that’s going to be either black or white. Today it looks like the gold market is a true market, reflecting reality. At some point, it will be overtaken by financial events that will make people see that the emperor, in fact, doesn’t have any clothes. I’m comfortable with this point of view because I was involved in the gold market in the early seventies, and that was not dissimilar to now. The London Gold Pool put a lid on the market from 1968-71 and the central banks dumped well over a hundred million ounces into the market and they kept the gold price in the $35 range. But then they reached the tipping point where the demand was far greater than what they were willing to dump into the market, and the price exploded. I think the gold fundamentals are better this time. The longer they keep the lid on, the higher it will eventually go.

K/C: So this is something that will just fall apart on its own?

Embry: Absolutely. We hoped, by writing that report, that we could point out to people what was really going on in the market-and perhaps expedite the falling apart.

K/C: Has it had an effect?

Embry: I think so. When I first started to talk about this subject several years ago, most people looked at me like I had two heads. Now, I think the activity in the market has been sufficiently blatant and obvious that anyone who is prepared to look at it with an open mind will acknowledge that there is management of the gold price. I hate the word conspiracy-I think if you put this in its simplest terms, the central banks recognize that gold is a currency and they do not make any bones about that fact that they manage currencies. So in their way, on that premise, they can justify managing gold. But the problem is that it’s supposed to be a free market and the guys who are trading it on the premise of it being a free market are getting screwed.

K/C: What do you see for gold prices if they break out of this “management”?

Embry: I see multiples of the current price. When I see people projecting $460 or $500 two or three years out, I don’t buy that. I think it’s either going to be in the current range because they’ve been successful in defusing gold as an asset, or it’s going to be markedly higher. And I think the chances of it being markedly higher far exceed the chances of them keeping it in this range.

K/C: And the trigger for a big move upward would be…?

Embry: The trigger is two-fold. Firstly, further deterioration in the financial situation of the world-to keep this whole debt bubble going they’re going to have to create more paper. That’s the fundamental reason why people at the margin will move from paper to gold. Then you set that against the backdrop of falling mine supply creating a huge gap with natural demand. Once the central banks aren’t in a position to fill that gap, to me, it’s a lay-up. I also think there are other central banks who do not have the same point of view as the western central banks-China, Russia, etc.-and I think they’re buying gold every time the western banks sell. When the day comes and everybody opens their books up, there’s going to be very little gold left in the western central banks. It’s all going to be in the eastern central banks. That’s when the price will really get marked up.

K/C: So once demand outstrips the central banks’ ability to supply the gap, the lid comes off?

Embry: Exactly. Big time.