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Rumors Move Markets
By Patrick A. Heller

In the financial markets, quick access to accurate information can often magnify profitable trading opportunities. Often, however, the earliest versions of information cannot be independently verified at all or at least not until the information is available far and wide. I call these rumors.

Rumors affect traders in all financial markets more than the general public might like. Sometimes the rumors are false and are deliberately planted to give a bloc of traders enough of a temporary advantage to get in and out of a market before the truth comes out. Other times the rumors are mostly or completely true, where those who take action quickly make the largest profits.

As far as I can tell, false rumors are regularly planted by the U.S. government through its trading partners to try to suppress the price of gold. The announcement by the British Treasury Minister Timms at the G20 meeting two weeks ago that the possible sale of International Monetary Fund gold would be in addition to any previous plans to sell IMF gold falls into this category. It took more than 24 hours for an IMF spokesman to state that any contemplated gold sale would be part of the already existing potential plans to sell gold. It was not a rumor that Timms made the statement, but it was a rumor because he was not the authoritative source to make such a pronouncement.

After significant last-minute efforts on Thursday to knock down the price of gold going into the long weekend, some significant rumors circulated which, if verified, could lead the price of gold to explode upward.

Rumor #1: A major British gold refiner (possibly Johnson Matthey) would be unable to meet its commitments for delivering gold in June and July.

Rumor #2: The German central bank had asked for physical delivery of the 14 million ounces of gold that it was rumored to have surreptitiously dumped on the market a couple years ago at the behest of the U.S. government. The original sale was allegedly done in a swap where the U.S. government supposedly agreed to transfer title to the German central bank of an offsetting amount of gold held in U.S. vaults.

Rumor #3: The British and Swiss central banks had almost exhausted their supplies of U.S. dollar reserves and were having to resort to alternative funding sources in order to avoid financial catastrophes.

Details on rumor #1: I saw today that two different sources report that the rumor is quite likely true. Supposedly the information came from a CNN interview with the CEO of Johnson Matthey. As I write, I have not yet seen a link posted to view this interview, but details are being sought.

Details on rumor #2: The German central bank long ago admitted that it had engaged in gold swaps on behalf of another central bank, without going into details about quantities, dates, or the identity of the other central bank. At the time that the original transaction took place, the U.S. Treasury revised its monthly report description of gold holdings from "gold reserves" to "custodial gold." Circumstantially, this rumor could be true as to past events. If the U.S. government has to physically move that much gold out of its vaults, it would almost certainly be detected and reported the exact reason why the U.S. government would have found another party to release the gold onto the market in the first place. If this turns out to have any degree of accuracy, the U.S. Treasury and Federal Reserve would immediately lose all credibility. The value of the dollar could nosedive.

Details on rumor #3: I have no more details on these rumors yet. Neither central bank would willingly admit that its reserves had fallen so low as to run out of U.S. dollars. Whether there is any truth to this rumor might be revealed by subsequent actions by the banks. However, if these rumors are true, the news would have huge negative consequences to the central bank and that nation's economy. Consequently, I would expect a lot of behind-the-scenes maneuvering to take place before the bank would have to confirm the truth.

In my search for information, I have to constantly evaluate a lot of rumors. Among the factors I consider on hearing a rumor is the long-term credibility of the source, whether the source is a likely candidate to have advance knowledge on the particular issue, the bias of the source, whether the information is sensible, and the past willingness of the source to quickly admit mistakes. It is not a perfect process and never will be.

Normally, I wait for confirmation before passing along a report. If I cannot confirm it, I try to identify it as being unconfirmed. So, if the first place you learn about something is in my essay, rest assured that a number of traders and investors have already acted on this information. However, I try to pick up tidbits that are not yet widely known to the general public. So, while you might not be there first, hopefully you can still be there early enough to enjoy the ride.


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