THE GOLD DERIVATIVE BANKING CRISIS
by William Murphy
June 13, 2000
GATA (Gold Anti-Trust Action Committee) believes that a cabal of bullion banks and U.S. government agencies has orchestrated the manipulation of the gold market.
Nominees for the "gold collusion awards" go to: Goldman Sachs, Deutsche Bank, UBS, Morgan Bank, Chase Bank, and possibly Morgan Stanley. For the U.S. government nominee, we believe it is coming from either the U.S. Treasury Department's Exchange Stabilization Fund or the New York Fed.
The issue of manipulation is in some ways very simple to ascertain, yet, at the same time, it is extremely complicated.
The motive for the investment banks and their clients is that for years now they have been able to borrow gold from central banks at 1 percent interest rates, sell that physical gold in the market, and then invest the proceeds in other financial instruments such as U.S. Treasury bonds, etc.
A pretty sweet deal. How would your readers like to go to their bank and borrow money at those rates -- practically interest-free? There is one catch. When the borrower of the gold goes to pay back the loan, the borrower must pay the market price of gold. If the price of gold were to skyrocket, the effective interest rate of the loan would soar into loan shark rate territory.
That is the motive for the banks to make sure the gold price does not rise past $290, which is where most of the loans have been priced in recent years. That is why the gold price is always pushed back below $290 every time it rises above that mark, or gets close to it.
GATA now believes that a nightmare problem for the bullion banks has developed. It is our opinion that the gold loans (which the bullion banks have borrowed from the central banks) now exceed 11,000 tonnes. Mine supply for 1999 was only 2,579 tonnes. Worse, most of that "loaned gold" is not lent but sold. It cannot be retrieved because it has been converted to jewelry form and is being worn by the people of India, Hong Kong, etc.
The manipulation crowd knows they have a big problem on their hands in the sense that there just is not enough physical gold to be had if the gold price rises and a number of the gold loans are called in. That is the motive for the manipulation. It is our guess that the gold market was not initially manipulated at all, but when the above mentioned players realized how bad the situation was, an effort to hold down the gold price was begun.
As a result of the incredible buildup in gold derivatives at Deutsche Bank and, to a much lesser degree at Dresdner Bank, we now think that the Germans may have been co-opted into the manipulation scheme -- at least for the time being. In late September 1999, 15 European central banks announced an agreement to curtail European central bank gold sales to 400 tonnes per annum and to cap future gold lending at present levels.
The price of gold exploded $84 in a couple of weeks. That price reaction by gold players to the Washington Agreement revealed a short position far larger than the signatory European central banks anticipated. Facing a melt-up in gold prices and possible defaults on their own outstanding gold loans, these banks -- probably further prodded by Anglo-American pressure -- permitted the two German banks to participate in a rescue operation as the price of gold was forced lower once again.
That may not be the case, but it sure looks like that is what happened.
We now have some public evidence that supports our contentions. A gold derivative is just a financial instrument that is related to gold bullion. A put, call, or futures contract is a derivative. Over the past many months commodity prices have been steadily rising and the oil price in the U.S. is over $30 once again. Historically, that would be constructive for the gold price. At the same time, major producers like Normandy Mining Ltd. of Australia are delivering into their forward hedges, not selling gold into the market, which means world gold supply has been reduced somewhat.
Why is the gold price not going up? It is a bit complicated but it is not physical gold that is holding down the price of gold, but PAPER gold, or gold derivatives. There are facts out there in the public arena that support the Gold Anti-Trust Action Committee's contentions and those of Reginald H. Howe ofwww.GoldenSextant.com.
According to the findings of the Office of the Controller of the Currency in its March 31, 2000 report:
* The notional off-balance-sheet gold derivatives on the books of J.P. Morgan increased to $36.3 billion from $18.1 billion as of July 1, 1999.
* Chase Bank increased their gold derivative position by more than 40 percent to $31.5 billion from $22 billion. It took Chase 14 years to get to $22 billion.
* Deutsche Bank's gold derivative growth is just plain stunning in the speed and magnitude of its growth, as it went from almost nothing in 1996 to a total notional value of over US$50 billion, or nearly 5,000 tonnes of gold, at the end of 1999. Even more remarkable is that this position exploded to $51.2 from only $16.2 billion in one year.
At the same time, GATA delegate and braintrust Reginald Howe points out that the latest Bank of InternationalSettlement figures from Basle, Switzerland, show that "gold deposits by central banks fell almost 12 percent from 927 tonnes to 819 tonnes, and gold assets also fell by 108 tonnes to 1,018 tonnes. However, gold held in bars declined almost 20 percent. from 813 tonnes to 658 tonnes. At the same time, total gold lending increased 47 tonnes to 360 tonnes, and accounted for over 35 percent of total gold assets versus 28 percent the prior year."
One cannot help to come to the conclusion that there is great stress in the physical gold market. Physical gold supply is diminishing, lending is up, gold derivatives have risen sharply. Those are the facts. The Gold Anti-Trust Action Committee believes that a gold price explosion is coming when these facts are understood by the investing world.
|An Open Letter to
By Dale Schnitzler, November 15, 2000
As a former larger shareholder and backer of Newmont Mining I would like some answers from you as to the reasons for the excessive destruction of shareholder value at Newmont while on your watch. That is, over the last 5 years Newmont's stock price has gone from around $60.00 a share to a little more than $13.00 on the NYSE close today -- a destruction of wealth of almost 80 percent.
Now as a seasoned investor of some 25 years, I have seen many a bear and bull market, and have owned other companies before that have declined even more than 80%. However, I have NEVER owned companies in an industry such as yours where the CEO's and management teams are so totally complacent after such a long fall. Further, from all outward public appearances, Newmont's management team seems to not only be satisfied with the company's stock performance, but it appears to take exception to shareholders who are critical of the company and those same shareholders who have questions about the shenanigans which are occurring daily in the gold market.
As I said earlier, having followed financial markets for more than 25 years, it is CRYSTAL CLEAR to anyone who is watching that all is not right in the gold market. Hundreds of thousands of investors and market participants either believe or know the gold market is being manipulated, yet the management's at the major mining companies remained conspicuously silent. My questions to you below are designed to ascertain whether you are aware of the ongoing manipulation in the gold market, and if you are, whether your management team is part of that manipulation. The questions I am seeking your answers to are as follow, and I would appreciate specific answers to these questions:
1. Have you read the Gold Derivative Banking Crisis report that GATA personally presented to the speaker of the House, Denny Hastert? It can be located at www.GATA.org. A copy was sent to Newmont by GATA Chairman Bill Murphy. If you didn't read it, why haven't you? If you did read it and you did not agree with the VOLUMINOUS amount our evidence that the gold market is manipulated, please list what you find is wrong in that document. Specifics please.
2. How do you account for the buildup of gold derivatives on the books of J.P. Morgan, Chase, and Deutsche Bank -- banks that GATA has cited as part of the gold cabal for two years? The derivatives at other banks like UBS Warburg have not gone up at all. Please explain your interpretation of this massive explosion in derivative positions.
3. How do you explain the price of gold rising $84 after the Washington Agreement only to come all the way down again to the same price, all while there is a huge natural gold supply/demand deficit? My own sources put the supply deficit at 1,500 tonnes annually. Where is the gold coming from? Please be specific as to your beliefs of where all this gold is coming from to support this deficit.
4. How do you account for the gold price going down when many hedgers are delivering into their hedges and reducing gold supply that would have been supplied to the market? It was recently announced that the big Australian hedger Sons of Gwalia has delivered into their forward sales all year (contrary to what the market had been thinking). Please be specific.
5. How does Newmont account for the fact that gold always goes down on days when it should go up -- like today for example, in the midst of a collapsing NASDAQ and a presidential political crisis? That has been the case for years. Every single time. How do you account for the fact that gold has not been allowed to rally decently for two days in a row for the past seven months? Not one time. Free markets do NOT trade this way. Even when the Dow was around 800 back in 1982, and in a nasty bear market, it NEVER went seven months without some sort of decent rally. Please explain your belief as to why gold sells higher overnight the last three months, only to get slammed every morning in New York on the opening. And to add insult to injury, the better the news for gold the harder it gets slammed. Why is this?
6. Lastly, why do you offer financial and moral support to anti-gold people and organizations such as Jessica Cross at the World Gold Council, yet ignore organizations like GATA, which has tried to help the mining industry and its shareholders? Why has Newmont not invited GATA to Colorado to present its findings and discuss them? If you believe GATA is wrong and does not deserve the financial and moral support of Newmont, please explain why, and be specific.
Thank you for your attention and your anticipated answers to my questions. Although I hold only a fewshares of Newmont -- fewer than 1,500 -- I hope to take a substantial position in Newmont someday. However, it may have to wait until Newmont either gets a management team that has an understanding of the industry, or a management that isn't involved in manipulating the price of gold lower for its own ends. Clearly, your management's behavior regarding the gold market is a true enigma.
I look forward to written responses to my questions.