September 17, 2000. Snakes Writhing: More and Bigger Tremors

Wow! Like snakes before an earthquake, heavyweights in the gold/financial arena are behaving strangely as their world experiences the first premonitory tremors of the coming financial cataclysm. Now is a good time to reread a prior commentary: Real Gold, Paper Gold and Fool's Gold: The Pathology of Inflation. Today's commentary hits the larger tremors of the past fortnight. More detail on some may be provided in future commentaries.

Tremor 1. More Convulsions over the Euro. After the European Central Bank meeting in Frankfurt on August 31, 2000, raising interest rates by 25 basis points, an obviously concerned Jean Claude Trichet, Governor of the Banque de France, charged at a news conference that the financial markets were making "a flagrant underestimation" of the value of the euro. Five days later, German Chancellor Gerhard Schroeder took quite a different stance, saying that a weak euro was good for exports, adding: "The current euro-dollar rate is more of a reason to be happy than concerned."

Then, on September 14, rejecting another interest rate increase, the ECB flirted for the first time with intervention. Announcing a decision made two weeks previously, the ECB converted dollar and yen interest rate income on its foreign exchange portfolio to euros, giving a brief boost to the beleaguered currency. Afterwards, Wim Duisenberg, head of the ECB, wryly observed: "I was not disappointed in the market reaction."

Two points stand out: (1) the widening split between the Euro Area's center-left governments, focused on continuing economic growth even at the expense of the currency, and the ECB and other EA central banks, intent on establishing the credibility of the new currency as a worthy successor to the Deutschemark; and (2) the continuing refusal by the ECB to play the gold card in any way, probably out of fear of precipitating a worldwide financial crisis stemming from uncontrollable dollar flight.

For an interesting recent speech by Mr. Duisenberg about the euro, see The International Role of the Euro, given September 8, 2000, in Calgary.

Tremor 2. BIS to Buy Back Privately Held Shares. In a press release issued September 11, 2000, the Bank for International Settlements announced a compulsory withdrawal of all privately held shares. A full discussion of the history of these shares is beyond the scope of this commentary. The so-called American tranche, which represented 15% of the BIS's capital when it was created in 1930, was originally intended for purchase by the U.S. Federal Reserve, but had to be privately placed because the isolationist Congress of the era would not allow purchase by the Fed. The American and Belgian tranches trade on the Swiss Exchange; a French tranche trades in Paris.

The effective closing date for the buy back is January 8, 2001, when the BIS will hold an extraordinary general meeting to amend its articles to exclude private shareholders. An important asset of the BIS, and what makes it a quasi-gold stock, is the approximately 200 metric tonnes of gold that it holds for its own account. Accordingly, any valuation of its shares depends importantly on the gold price employed or in effect. The closing date implies an expectation (or at least a wish) for relatively stable gold prices until then.

Being a private shareholder of the BIS, I am not going to express any opinion on the fairness of the proposed SwF16,000 buy out price, which represents an approximate doubling of the market price for the American tranche prior to the announcement.

However, I can make three comments on the valuation: (1) any valuation dependent upon an assessment of the outlook for gold prices is inherently suspect coming from J.P. Morgan, particularly in light of the extraordinary increase in its gold derivatives during 1999; (2) the BIS sold shares in 1999 to new central bank members at prices that should be explained more clearly than they are in its most recent annual report, where no equivalent price in current Swiss francs is disclosed; and (3) because the BIS is an active participant in the gold market and privy to a great deal of non-public knowledge about official activities and intentions with respect to gold, it is under a duty to act with scrupulous fairness toward its private shareholders.

There are at least three plausible but somewhat contradictory hypotheses to explain the buy back, none of which is fully disclosed in the public statement. Indeed, the problems mentioned in the release with respect to low volume, lack of liquidity and difficulties of transfer have existed for years, and if anything are less troublesome now than earlier due to modern communications.

One hypothesis is that the BIS and its member banks know what is coming in the gold market and are just trying to buy back its shares at what will prove a bargain price in future. In this connection, the press release states that the withdrawn shares will not be retired or canceled but instead "redistributed" to central banks pursuant to a plan not yet unveiled. Could the Fed now be planning to take its "rightful" 15%?

A second hypothesis is that the BIS expects to add still more central banks as members, and that the private shares could complicate this process if their market value on the Swiss Exchange rises above their book value at market prices for gold and currencies. In other words, when the private shares are trading at a discount to net asset value, as they have been during the gold bear market, there is no problem in bringing in new central banks at book or appraised value. But if the private shares go to a premium in a gold bull market, as they almost surely will, then there is a significant dilution issue if new central bank members come in at less than market.

The third hypothesis is that the BIS is actually planning to invade, use or sell its own gold reserves, and in fairness to the private shareholders, is pushing them out ahead of this fundamental change. In this event, the situation in gold banking must be critical and the BIS must be unusually concerned.

Historically, the BIS has usually acted with fair regard for its fiduciary obligations to its private shareholders. In this connection, it has almost always conducted its operations with much more consideration for the bottom line than other public institutions. Indeed, the existence of private shareholders may not only have given its operations more discipline, but also on occasion provided a convenient excuse for not participating in otherwise questionable public interest activities, or requiring higher levels of security than given to other public participants. In this sense, the loss of private shareholders may have long-term adverse consequences for the BIS that are not fully appreciated.

Tremor 3. Chase to Acquire J.P. Morgan. On September 13, 2000, Chase confirmed that it plans to buy J.P. Morgan by exchanging 3.7 Chase shares for each Morgan share, putting an approximate $30 billion price tag and market cap on Morgan at the current Chase share price of about $50. Based on the most recent OCC derivatives reports for the period ending June 30, 2000, the new J.P. Morgan Chase will combine in one bank what were formerly the big two in notional amounts of both total derivatives and gold derivatives, as shown in the tables under tremor 4 below.

Whether there is an anti-trust problem here depends on a number of considerations, but key among them is the nature of the current gold derivatives market. If the OCC figures actually represent what is mostly hedging by gold mining companies, as both Gold Fields Minerals Services and the World Gold Council assert, there may well be a problem that should definitely concern gold mining companies with active hedge books. A Reuters story (reprinted at dated September 15, 2000, expressly flagged continuing consolidation and contraction of counterparties in the gold lending market as an unfavorable aspect of the Chase/Morgan marriage.

On the other hand, if these gold derivatives positions are predominantly proprietary trading positions of the two banks themselves, or largely represent a warehousing of short positions with federal support (as I believe), any anti-trust problem is greatly reduced. The reaction of the active hedgers in the gold mining industry will say a lot about what they think these gold derivatives really are, or whether companies like Barrick may be among those protected by the use of these derivatives to hold down gold prices.

Ironically, Chase is buying Morgan for almost exactly the total notional amount of its gold derivatives at June 30. By way of comparison, the total notional amount of Chase's own gold derivatives is now a little over half its market cap ($62 billion at $50/share). At Citicorp, the total notional amount of gold derivatives is less than 5% of market cap ($250 billion @ $55/share).

Some market rumors hint that there may be a derivatives problem at Morgan, and that Chase is effectively bailing Morgan out of some positions gone sour. The premium price that Chase is paying does not support these rumors, but contributing to them are two unusual items: (1) Peter Hancock, Morgan's CFO and the person with overall responsibility for its derivatives operations, resigned unexpectedly on Friday, September 8, just a few days before the merger was announced; and (2) assuming any substantive basis for the earlier rumors that Deutsche Bank would acquire Morgan, the Chase deal was done at warp speed after Deutsche Bank withdrew.

If there are bad derivatives at Morgan, they could well include gold derivatives, i.e., the derivatives that would be "alarming" if they are what they are rather than what Jessica Cross, the WGC and GFMS say they are. Indeed, as discussed in the next section, the new OCC figures on gold derivatives as of June 30, 2000, continue to raise questions about both Morgan and Chase, which has now clearly joined the gold cabal.

Tremor 4. BIS Confirms that Cross/WGC Study Is Wrong. Stating the obvious, a BIS official confirmed to a U.S. gold analyst on September 13, 2000, that the data it reports on gold derivatives is position data as set forth in a prior commentary, Jessica Double-Cross Study Puts Q(uisling).E.D. on the WGC, not turnover or transactions data as claimed by Jessica Cross in her study for the WGC, Gold Derivatives: The market view. In June, GFMS refused to debate GATA on gold derivatives. Now, in a press release dated September 5, 2000, issued on the heels of the fatally flawed Cross/WGC study, GFMS embraces it as proof that the publicly reported gold derivatives data is essentially meaningless and that its proprietary unreported and unverifiable figures are correct.

One bite out of a rotten apple is usually enough. But particularly in the financial world, when someone is trying to pull the wool over your eyes, closer scrutiny is often indicated. So it is with the Cross study, published by the WGC and embraced by GFMS. Ms. Cross's explanation for the huge increases, both absolutely and as a percent of prior levels, in the total notional value of gold derivatives during the last part of 1999 at Chase, Morgan and Citicorp can be summarized in one word: volatility. Like others who try to dismiss the publicly reported data on gold derivatives as meaningless fluff, she makes no attempt to analyze the gold derivatives of certain banks versus those of others, or to try to account for the differences.

The following table shows the total gold derivatives, all maturities, of Chase, Morgan, Citicorp (through Citibank) and Other as reported by the OCC from December 1998 through June 2000. All amounts are in US$ billions. Columns do not add due to rounding and exclusion of separately stated figures for Bankers Trust prior to June 1999.

    Bank     12/98  3/99  6/99   9/99  12/99   3/00  6/00

   Chase      24.1  23.7  20.5   22.6   22.1   31.5  35.0
   Morgan     16.8  15.1  18.4   30.5   38.1   36.3  29.7
   Citibank    6.7   7.3   7.2   10.7   11.8   11.8  11.4
   Other      15.0  13.5  14.2   19.3   15.7   15.9  15.7
   Total      68.3  65.1  61.4   83.3   87.6   95.5  92.1

The largest relative and absolute increases are highlighted in bold. The figures as of September 30, 1999, reflect positions as of four trading days after announcement of the Washington Agreement on September 26, during which period the gold price moved from around $265/oz. to over $300. The rally continued into October, with gold prices trading as high as $325 during the first two weeks, and then generally declining to just under $300 by the end of the month. For the rest of 1999 and into February 2000, gold traded in a $20 dollar band under $300. In the second week of February, a sharp rally took gold to over $315, but again the price was quickly brought under control, and it remained generally in the $280-290 range from the beginning of March through June, although falling into the low $270's in May.

Mere volatility in gold prices cannot explain the variations in these numbers. However, the variations themselves do suggest strong reasons for trying to hide them under the "volatility" smoke screen. Taking each line of the table, the following picture emerges: (1) Chase's gold derivatives remained flat until the first quarter of 2000, when they started to accelerate sharply; (2) Morgan's gold derivatives almost doubled in the third quarter of 1999, grew sharply in the fourth, leveled off in the first quarter of 2000 and declined in the second back to the September 1999 level; (3) Citibank's gold derivatives jumped sharply in the third quarter of 1999, then remained stable at this higher level over the next three quarters; and (4) the Other category of gold derivatives, which includes all banks not separately identified, also jumped sharply in the third quarter of 1999, but returned in the fourth to prior levels, where they have remained.

What can explain this variegated picture? Chase has a reputation for doing a lot of producer business, and like the big Swiss banks has long been active in gold derivatives. The notional values of their gold derivatives, too, were flat to down in the last half of 1999. The Washington Agreement thus does not appear to have precipitated any large or immediate consequences in the gold derivatives of the largest and most experienced players with established gold banking clienteles of long standing.

Morgan has a reputation as the Fed's bank. Anecdotal reports reliably attributed to the highest sources indicate that the Fed was heavily involved in trying to control the September/October 1999 rally. Morgan's sudden emergence in the third and fourth quarters of 1999 as a veritable fountain of gold derivatives is consistent with this role. The growth of Chase's gold derivatives in 2000 is consistent with being pressed into service as gold derivatives threatened to swamp Morgan, particularly as producers began to try to reduce or cover forward positions put in place prior to the Washington Agreement.

The notional amounts at Citibank and in Other are much smaller than at Chase or Morgan. Also, for the institutions involved, the risks of their gold derivatives are generally much smaller in relation to their overall capital structures. Both Citibank and Other appear to have responded to client demands immediately following the Washington Agreement, and then to have quickly brought their gold derivatives back under more normal control. With the possible exception of Citicorp, where former treasury secretary Robert Rubin now hangs his hat, it is unlikely that any of them had official support to continue to maintain dangerous positions in gold derivatives.

The next table, drawn from the same OCC reports, shows the maturity structures of the gold derivatives for Chase, Morgan, Citibank and Other from June 1999 through June 2000. Again, all amounts are in US$ billions.

                        <1 yr  1-5 yrs   >5 yrs   Total  

    Chase  (6/30/00)     12.0    16.6      6.5     35.0
           (3/31/00)     11.3    14.1      6.2     31.5 
          (12/31/99)      9.1     9.1      3.9     22.1
           (9/30/99)     10.6     8.4      3.6     22.6
           (6/30/99)      7.9    12.3      0.4     20.5

    Morgan (6/30/00)      9.2    17.7      2.8     29.7
           (3/31/00)     24.5     8.0      3.8     36.3
          (12/31/99)     20.9    11.3      5.8     38.1
           (9/30/99)     21.0     7.6      1.8     30.5
           (6/30/99)     13.8     3.8      0.8     18.4

  Citibank (6/30/00)      4.6     4.0      2.9     11.4
           (3/31/00)      4.7     4.3      2.8     11.8
          (12/31/99)      5.0     3.6      3.2     11.8
           (9/30/99)      4.8     2.9      3.0     10.7
           (6/30/99)      3.1     2.0      2.1      7.2

    Other  (6/30/00)     11.8     3.3      0.6     15.7
           (3/31/00)     12.3     3.2      0.4     15.9
          (12/31/99)     11.6     3.7      0.4     15.7
           (9/30/99)     15.7     3.4      0.2     19.3
           (6/30/99)     11.5     2.6      0.1     14.2

    Total  (6/30/00)     37.9    41.5     12.8     92.1
           (3/31/00)     52.8    29.5     13.2     95.5
          (12/31/99)     46.6    27.8     13.3     87.6
           (9/30/99)     52.3    22.4      8.7     83.3
           (6/30/99)     36.9    20.9      3.6     61.4

Examination of these maturity structures and the changes therein reveals: (1) a very noticeable absolute and relative increase in the longer maturities beginning with the last quarter of 1999 and continuing through the first half of 2000; (2) virtually the entire shift to longer maturities is encompassed in the figures for Chase and Morgan, with Chase's over-one-year maturities surging in the first quarter as Morgan's were cut back, and Morgan's surging ahead again in the second while Chase's remained flat; (3) a pretty much stable and unchanging maturity structure at Citibank and in Other; and (4) a huge reduction of over $15 billion in Morgan's under-one-year maturities in the second quarter of 2000, accounting for all of the total reduction in this category for the quarter.

Again, the picture is one of relative normality at Citibank and in Other, but very unusual activity and changes at the new J.P. Morgan Chase. This unusual pattern, too, is consistent with: (1) heavy selling through Morgan into the rally caused by the Washington Agreement of September 26, 1999; and (2) massive accommodation by Morgan and later Chase of gold mining companies and others wanting to cover short positions and adjust maturity structures due to changed expectations and perceptions of risk in light of that agreement.

Tremor 5. Shattered Journalistic Standards at the FAZ. The Chase/Morgan deal was announced less than two weeks after market rumors suggested that Deutsche Bank would acquire Morgan. In retrospect, it appears that the favorable August 25 and August 30 articles in the Frankfurter Allgemeine Zeitung about GATA may have been the Bundesbank's way of killing that idea. The second article, which expressly discussed Morgan's US$38 billion of gold derivatives at the end of 1999 in the context of GATA's allegations of gold price manipulation, contained an implicit threat to focus similar attention in future on Deutsche Bank's even larger gold derivatives position.

Deutsche Bank had precious metals derivatives (almost all are gold derivatives) the end of 1996 with a total notional value under US$5 billion. By the end of 1999, it had grown this business to a total notional value in excess of $51 billion, or by more than 10 times in three years. The increase in 1999 alone amounted to $35 billion or more than 200%, most of which came in the last half and in the longer maturities. Nor does this growth reflect derivatives added by Deutsche Bank's mid-1999 acquisition of Bankers Trust, for which the OCC reports showed precious metals derivatives with a total notional value of just over $1 billion at June 30, 1999, down from $6 billion the prior quarter.

If Deutsche Bank had purchased Morgan, ultimate supervisory responsibility for its gold derivatives would have shifted from the Fed to the Bundesbank. It could well be a problem that Buba did not want, particularly on top of Deutsche Bank's already huge gold derivatives. If the FAZ does not publish GATA's response to the slurs contained in the September 7 article by its London correspondent, based on sources at GFMS, the WGC and the bullion banks, it will definitely give the appearance that Buba used the FAZ to send a message and then, having achieved its purpose, directed the FAZ to close down the story with as little damage to Deutsche Bank as possible.

The Bundesbank's possibly stiffening resistance to U.S. pressures is also on display in an article, "Problems of international comparisons of growth caused by dissimilar methods of deflation - with IT equipment in Germany and the United States as a case in point," in the August issue of the Bundesbank's Monthly Report. Buba, it seems, is not falling for "hedonic" price deflators any more than it is for the idea that large notional amounts of gold derivatives are mere reflections of volatility with no further significance.

Tremor 6. U.S. Treasury Responds to Query about the ESF. By letter dated January 19, 2000, to Senator Joseph Lieberman (Dem. Conn.), Fed Chairman Alan Greenspan, responding to inquiries from GATA, denied any efforts by the Fed to manipulate gold prices. GATA propounded similar inquiries to Treasury Secretary Lawrence Summers regarding the Exchange Stabilization Fund, but he has never responded. On September 14, 2000, a GATA supporter received a letter dated September 6, 2000, from an acting assistant secretary, with a copy to Senator Connie Mack (R., Fla.), who had inquired on behalf of this constituent.

The letter, which appears quite carefully drafted, is reprinted in full within a larger GATA message. The assistant secretary makes a distinction in the first paragraph between the "Treasury" and the "ESF," but nowhere indicates receipt of authority from the Secretary or the President to speak for the ESF. Although the GATA supporter specifically requested an explanation of the ESF's huge trading loss in the last quarter of 1999, the assistant secretary does not address it but does assert: "The ESF does not engage in any transactions in the market for any metal such as gold, either in spot markets or in any of its various derivative forms."

On careful reading, this sentence certainly leaves open the issue of whether the ESF is providing financial guarantees or other backing to gold trading institutions. Depending on the meaning given to "engage," it may also leave open the possibility that the ESF is acting in the gold market through agents. But far more noteworthy is the only other significant sentence: "I would like to underline that Treasury does not seek to manipulate the price of gold or any agricultural commodity by intervening in or otherwise interfering with the market." Having both made the distinction between the Treasury and the ESF and employed it as quoted previously, this last sentence seems to suggest that although the Treasury is not, the ESF is in fact intervening or otherwise interfering in the gold market.

The last quoted sentence sort of echoes Fed Chairman Greenspan's statement to Senator Lieberman: "Most importantly, the Federal Reserve is in complete agreement with the proposition that any such transactions on our part, aimed at manipulating the price of gold or otherwise interfering in the free trade of gold, would be wholly inappropriate." Notwithstanding this statement, which I originally tended to credit, anecdotal evidence now shows in virtually conclusive fashion that the Fed not only helped Long-Term Capital Management out of a short gold position of 300 to 400 tonnes, but also supported massive intervention to halt and turn the gold price rally triggered by the Washington Agreement.

Perhaps the most important point about these broad denials of intervention in the gold market is that they reflect awareness by the Fed and the Treasury/ESF that they should not be doing what they almost certainly are: acting to control the price of gold. Neither has asserted or even suggested that it has or may have any power or right to act in the gold market as it does in the foreign currency markets, where Fed and Treasury/ESF interventions, although rare in recent years, are accepted as within their normal powers.

This guilty behavior, coupled with the massive manipulation of gold prices to which huge amounts of circumstantial and anecdotal evidence now point, has important implications for the gold mining industry, a topic that I plan to explore further in my next commentary, tentatively entitled: "Gold Mining Companies: Explorers Rolling on Firestone Tires."

September 12, 2000. Fighting Dirty, but Fighting at Last: Gold Cabal Gets Desperate

On Saturday evening, September 9, 2000, from approximately 8:15 to 9:15 p.m., persons trying to access this site received a message stating that there was no response, the server might be down, and to try later. EarthLink, which hosts this site, reports no record of any malfunction or outage of the server that hosts this site, or the related DNS server, during or near this time period. Accordingly, the problem almost certainly resided at some point in the Internet between persons trying to reach this site and EarthLink's DNS server, i.e., in a part of the Internet outside EarthLink's control or responsibility.

The proprietor of this site is in possession of considerable circumstantial evidence to indicate that the problem was not some mysterious Internet gremlin, but a concerted attack directed at this site by persons, including government officials, unhappy with the content of certain commentaries appearing here, particularly the commentary dated September 10 (the "Cross commentary"), posted September 9 at about 9:30 p.m. Some (but not all) of this circumstantial evidence relates to events in and around the approximately one hour outage, including e-mail transmissions of drafts of the Cross commentary for review and comment by others, among them Chris Powell, a newspaper editor who is secretary/ treasurer of GATA, and Bill Murphy, chairman of GATA and Le Patron at Le Metropole Cafe, where he posts his Midas column.

The outage prevented posting at the time planned. Immediate arrangements were made for publication as quickly as possible by other means. Before access to this site was restored, GATA had dispatched the Cross commentary by e-mail and steps to publish it forthwith at Le Metropole Cafe were under way. Thus the attempt to prevent publication last Saturday evening failed, thanks to help from Chris and Bill. No doubt other Internet press organizations that have previously published articles from this site would have helped too, if requested or needed.

The Cross commentary is rather critical of a study by Jessica Cross published by the World Gold Council on September 4. On that very day, in connection with its story about the Cross study, Le Metropole Cafe experienced an episode of Internet vandalism. Someone hacked into the site, stole the e-mail list, and sent a fake e-mail notice of the story after it had been posted (for editing) but before the legitimate e-mail notice went out. The fake e-mail was an obvious effort to embarrass and defame Bill Murphy. What is more, certain parts of the fake e-mail give every indication that whoever sent it had access to Bill's telephone conversations during that day.

On August 25, 2000, the Frankfurter Allgemeine Zeitung, regarded by many as Germany's leading newspaper, published a quite favorable article about GATA, followed by another favorable article on August 30. Both articles were prepared by a free lance journalist and appeared under the dateline "AH, Frankfurt." Their possible significance is discussed in a prior commentary, Buba: Blowing the Whistle on Big Bubba's Gold Manipulators? Since its publication, some have questioned whether the Bundesbank played any role in connection with these two FAZ articles, pointing out that many of GATA's German friends had urged the FAZ for months to give more coverage to the gold market and GATA's allegations with respect thereto.

Of course, these explanations are not mutually exclusive. It is still unclear why these articles where published when they were, and why there was no mention of Deutsche Bank. By sending readers to GATA's Gold Derivative Banking Crisis, the articles almost ensured that Deutsche Bank's role would become known. In any event, the FAZ articles marked the first extensive and favorable coverage of GATA in a world class newspaper in a G-7 country.

On September 5, 2000, under the dateline "BES, London," the FAZ published an article about the Cross study. Two days later, under the same BES, London, dateline, it published another article highly critical of GATA. Prior to becoming a journalist, BES is reported to have worked for Deutsche Bank. Sourced largely on information received from the Gold Field Minerals Services, the World Gold Council and the bullion banks, the September 7 article contained several comments apparently aimed at reinforcing certain false insinuations in the fake e-mail. GATA has since formally replied by letter to this FAZ article.

Few international cabals have the power or organization to coordinate Internet vandalism and the tapping of e-mail and telephone communications in the fashion indicated by all these events, not to mention buttressing the effort with publication of an article in the FAZ originating from a London correspondent. And there is only one band of conspirators that could have any conceivable motive to target this site and Le Metropole Cafe at the same time over the same subject: the cabal of government officials and big bullion banks engaged in an on-going conspiracy to control world gold prices, and who are thereby endangering the entire world financial system for personal and political gain.

The good news is that the cabal is clearly desperate. So desperate that they have exposed more of their game. Only if the basic thrust of the information presented at this site and in GATA's Gold Derivative Banking Crisis is correct would they risk, or need to risk, or dare to risk, striking at the First Amendment's guarantees of freedom of speech and of the press. The U.S. Civil Rights Laws provide heavy criminal and civil penalties for this sort of activity, far more severe in general than those for mere market manipulation on however vast a scale.

This site may be but a small piece of the national and world press. Its proprietor is a lone journalist, yet over the past year he has received from good people all over the world an astonishing amount of support and encouragement for which he will be forever grateful. The idea that he and other Internet gold bugs can be silenced by surreptitious raids targeted at their websites would be laughable except that sadly so many in such high offices seem to hold it. As Gandhi said: "First they ignore you. Then they laugh at you. Then they fight you. Then you win." So cabal, from this site to you: Welcome to the fight, losers!

September 10, 2000. Jessica Double-Cross Study Puts Q(uisling).E.D. on the World Gold Council

Where do the World Gold Council's first loyalties lie? Are they with the gold mining industry that supports it and needs higher gold prices just to survive? Or is the WGC, like Gold Fields Minerals Services, now little more than a shill for the big bullion banks and their friends in the Clinton administration and the Blair government? Gold Derivatives: The market view, a study by Jessica Cross sponsored and published last week by the WGC, puts Q.E.D., Quisling Erat Demonstrandum, to these questions. In a stunning double-cross of the gold mining industry, the study puts the WGC squarely on the side of the bullion bankers and the political elite. Even so, the study might still be defensible were it intellectually honest. Sadly, it is not. Rather, it is brazen disinformation aimed at neutralizing the impact of publicly reported figures on notional values of bullion banks' gold derivatives.

These figures and the reporting system under which they are produced have been addressed in several prior commentaries, including House of Morgan: From Gold Bugs to Paper Hangers, Deutsche Bank: Sabotaging the Washington Agreement? and Gold: Can't Bank with It; Can't Bank without It!, all of which are also included in the updated version of GATA's Gold Derivative Banking Crisis. Another prior commentary ("Ah! tenez, vous êtes de la merde dans un bas de soie."), addresses at considerable length some of the problems associated with aggregating notional values and using them as measures of exposure or risk. I have been asked by several people whether Ms. Cross or the WGC contacted me in connection with her study. The answer is no, although I was informed by a top official of the WGC that he at least is quite familiar with all these commentaries.

In connection with implementing the Basle Capital Accord and to provide greater transparency to regulators, market participants and public shareholders, the Bank for International Settlements administers a regular reporting system for OTC derivatives of the major banks and other financial institutions in the G-10 countries. Established pursuant to recommendations contained in the Yoshikuni Report, issued by the BIS in June 1996 and available online under the title Proposals for Improving Global Derivatives Market Statistics, the system involves three steps: (1) collecting at the head office of each reporting firm all required derivatives data for its operations worldwide; (2) transmitting the individual firm data to the central bank or other relevant national authority (e.g., the Comptroller of the Currency (OCC) in the United States) in the country where the home office is located; and (3) transmitting assembled derivatives data for each country to the BIS.

The BIS issues regular semi-annual reports summarizing this information. Available at its website (, click on Regular Publications, then on Regular OTC Derivatives Market Statistics), they include figures for the total notional value of all derivatives in each of several categories. As described by the BIS in these reports (footnote 1): "The notional amount, which is generally used as a reference to calculate cash flows under individual contracts, provides a comparison of market size between related cash and derivatives markets." In preparing these summary statistics, the BIS halves the notional values of contracts between reporting institutions in order to avoid double-counting.

Under the 1995 amendment to Basle Capital Accord, the determination of capital adequacy requirements for OTC derivatives involves the application of percentage factors to notional values. These factors vary for different types of derivatives, according to maturity, and depending upon whether the current exposure method or original exposure method is used. But in general, for gold and foreign exchange contracts, the applicable percentage factors run from 1% to over 7% for the longest maturities. Under certain circumstances capital requirements can be reduced by netting, and in all circumstances there is every incentive to avoid any unnecessary overstatement of notional values since to do so would weigh on capital.

Some national authorities, such as the OCC and the Swiss National Bank, also publish regular reports summarizing the derivatives data for the banks based in their countries. Through annual survey reports (e.g., Trading and Derivatives Disclosures of Banks and Securities Firms), the BIS encourages individual firms to provide in their annual and periodic reports information about their OTC derivatives at an appropriate level of detail for their particular operations.

The WGC has consistently opposed the idea that changes in the notional value of gold derivatives, either collectively or for individual banks, provide any meaningful information about the gold market. Ms. Cross's study picks up where "Looking for a scapegoat," the lead article in the July edition of the WGC's Gold in the Official Sector, left off. But her study does more. It demonstrates beyond doubt that neither Ms. Cross, nor anyone at the WGC who read her study before publication, grasps the most elementary fact about notional value figures: They are position data at a point in time, not transaction data measuring sales or turnover over a period of time.

Ms. Cross's most complete discussion of the notional value figures appears at pages 95-96 of her study. She makes no effort whatever to describe the design or purposes of the reporting system that produces these figures or to describe the relationship of the BIS figures to those of the OCC. Nor does she mention that some bullion banks, particularly the largest Swiss and German banks, themselves report reasonably detailed figures on their gold derivatives, including total notional values by maturity category and, in the case of the Swiss banks, separating forwards and options. None of these banks, incidentally, describes notional value in terms of turnover. They all use definitions of notional value which track quite closely that used by the BIS.

According to the BIS (Yoshikuni Report, A2.2): "[T]he collection of turnover data is not envisaged as part of the regular reporting framework." Nevertheless, Ms. Cross asserts that notional value figures are "grossed-up total turnover." According to the BIS, it decided to require data on notional values because (Yoshikuni Report, B3.1): "A sum of notional amounts outstanding thus provides a rough approximation to the scale of gross exposures to price risk transferred between the contracting parties, just as adding the principal amounts of a group of cash market assets offers a picture of the price risk embedded in those assets." Ms. Cross disagrees.

Speaking about the US$243 billion total notional value of gold derivatives reported by the BIS for the major banks and dealers in the G-10 at year-end 1999, Ms. Cross asserts: "[W]e believe that this outstanding position should not be described as 'exposure' as it certainly could have negative if not alarmist connotations. A more objective reference would be a commercial banking presence in gold-based derivatives." She is entitled to her (wrong) opinion, but it does not change what the BIS and relevant national banking authorities require. Then, trying to clarify her position with an example, Ms. Cross proves her error.

A mining company sells 10 tonnes forward through a bullion bank. Assuming that the bank covers the full amount of its long exposure in this transaction, she points to a total turnover counting both the long and short legs of 20 tonnes, which presumably in her view also represents 20 tonnes of notional value. Then the mining company "elects to buy back 5 tonnes of its forward sale," and the "bank will unwind the exposure in both legs of the original transaction." As a result of these two transactions of 5 tonnes, "the turnover against the whole strategy in that quarter is now 30 tonnes." The reader is left to believe that the total notional value at this point is 30 tonnes.

But in fact, the notional value is not more than 10 tonnes. As reported by the BIS, it would be even less if some parts of the surviving position are with other reporting institutions. But the surviving position is at most a long and a short of 5 tonnes each, or a total of 10 tonnes. In Ms. Cross's fictional world, this position would count as 30 tonnes and require the same bank capital as a new forward sale transaction by another mining company of 15 tonnes, which including both the long and short sides would equate to 30 tonnes of notional value. Quite obviously, no rational person would argue that the same amount of bank capital should be required to carry these two positions, one a forward sale of 5 tonnes and the other a forward sale of 15.

Finally, Ms. Cross suggests that the publicly reported notional value figures "...are very similar to the enormous trading volumes reported by Comex/Nymex where we know one ounce of gold gets traded over and over again but delivered or settled for only once." The proper analogy, however, is not to volume but to open interest. On an exchange with standardized contracts, counting the number of open or outstanding contracts gives a good measure of market size and individual exposures at any given point in time. For custom-tailored OTC derivatives contracts, summing notional values is an effort to do substantially the same thing.

So what explains Ms. Cross's flatly wrong assertions about the concept of notional value? Why did no one at the WGC catch her egregious errors prior to publication? "Worrying" and "alarming" are the words Ms. Cross uses to describe the import of the notional value figures if they are what they are rather than what she says they are. And in this case, worried and alarmed is just what the big bullion banks with their huge short gold positions are. In a similar state of concern are heavily hedged mining companies like Barrick, which as one of the largest producers carries considerable influence at the WGC since it is funded by assessments on ounces produced. But most worried and alarmed of all are the politicians. They know that soaring gold prices mean collapsing political careers.

September 1, 2000. Buba: Blowing the Whistle on Big Bubba's Gold Manipulators?

The German Bundesbank, or "Buba" as it sometimes called by certain locals, is reputed to make its views known on occasion through articles placed in the Frankfurter Allgemeine Zeitung, one of Germany's leading newspapers. On August 25, 2000, the FAZ ran an article about gold that featured GATA and suggested that its allegations about recent manipulation of gold prices -- likely orchestrated by the lame duck big Bubba in Washington -- deserve serious hearing. In a follow-up article on August 30, the FAZ discussed GATA's theories in more detail, focusing on gold derivatives and naming all the major players and suspects except one: Deutsche Bank. English translations of both articles are available at

It is hard to believe that a major German newspaper, having delved this deeply into the gold story, plans to leave it without mentioning the principal German connection. Accordingly, my guess is that there will be at least one more FAZ article to address the role of Deutsche Bank, including the recent huge growth of its gold derivatives, especially during the last half of 1999, and its apparent advance knowledge of the May 7, 1999, announcement of British gold sales. In short, the Bundesbank may be about to answer the question posed at the conclusion of Deutsche Bank: Sabotaging the Washington Agreement?, and unlike Shoeless Joe, this Buba may not have to disappoint its fans.

Before speculating on the possible significance of the FAZ articles, a few other facts may be relevant. First, on July 25, 2000, the BIS published in the Review section of its website the speech by Hervé Hannoun, First Deputy Governor of the Banque de France, to guests of Goldman Sachs at its dinner party at Les Invalides during the FT World Gold Conference in Paris last June. In discussing the conservative views of the Banque de France on gold, Mr. Hannoun identified the Banque de France and the Bundesbank as "a driving force" behind the Washington Agreement, which, in his words, "has re-emphasized the role of gold." [Bold and italics in the original.] He added:

It is true, however, that initial market reaction to the joint statement was extreme. The immediate impact of the Washington Agreement was all the more dramatic as a number of market participants (gold mines, hedge funds) had accumulated big and, I would say in some cases, excessive short positions. The fact that the short sellers had to rapidly square their positions induced a brief period of higher volatility, but also created the conditions for a more orderly market and thus, during the last months, gold prices have fluctuated in a relatively narrow range.

Second, on June 30, 2000, Hans Meyer, Chairman of the Governing Board of the Swiss National Bank, unexpectedly announced that he would retire at the end of the year. The SNB's press release on his retirement states: "The reason he gave for his decision was that he was certain it would be in the overall interest if the new Governing Board could begin its work already at the beginning of next year." Mr. Meyer is closely identified with the Swiss gold sales. His early retirement would be consistent with a concern that sharply rising gold prices might soon make these sales an embarrassment to the SNB, which in the eyes of many has been less than candid with the Swiss people about the reasons for them.

Third, Deutsche Bank apparently continued to build up its gold derivatives in the first half of this year. Its mid-year financial report does not give the same level of detail on its precious metals derivatives as its annual report. In the mid-year report, precious metals derivatives are put in the "other" category, for which the total notional value is E67.5 billion, broken down by maturity as follows: < 1 year, E27 billion; 1-5 years, E33.3 billion; > 5 years, E7.1 billion. By way of comparison, at year-end 1999, adding E50.9 billion total notional value of precious metals derivatives to E9.5 billion of other commodity derivatives gives a total other category of E60.4 billion.

Because the non-precious metals component of the other category has been in sharp decline over several quarters, a reasonable estimate is that this number is now down to E6.5 billion or less, which suggests a total notional value of precious metals derivatives at June 30 of roughly E61 billion, up E10 billion since year-end, or 20% in euro terms. Due to the decline of the euro against the dollar, the increases in dollar terms would be roughly 10% less.

Fourth, moving in the opposite direction from Deutsche Bank, UBS has apparently reduced its gold derivatives quite sharply during the first half of 2000. In the case of UBS, the mid-year report does not give any figures on notional or replacement values. What it does give are 10-day 99% confidence Value at Risk numbers for precious metals. Comparable numbers also appear in its 1999 annual report. The following table gives a comparison for the four time periods identified in the two reports. All amounts are in SwF millions.

      Period        Minimum  Maximum  Average  Period-End

  7/1/98-12/31/98     16       48       32        19
  1/1/99-12/31/99      5       36       21        28
  1/1/00-3/31/00       7.1     27.4     15.1      13.5
  4/1/00-6/30/00       4.3     15.3      9.4      12.1

Interestingly, at the FT World Gold Conference in Paris, representatives of UBS were almost alone among the bullion bankers in wanting to engage in serious discussion with Bill Murphy and me about our interpretation of the reported figures on gold derivatives. At the end of 1999, based on total notional value, UBS's gold derivatives business was by far the largest of any bank, but in contrast to that of big competitors like J.P. Morgan and Deutsche Bank, had remained flat rather than surged in the last half of the year.

Shortly after Deutsche Bank: Sabotaging the Washington Agreement? was posted here on May 20, GATA added it to the online version of Gold Derivative Banking Crisis, which several friends of GATA brought to the attention of top officials at the Bank for International Settlements. What is more, given the seriousness of the issues raised by Deutsche Bank's gold derivatives as discussed in that commentary, concurrently with posting it here, I sent a copy to Andrew Crockett, General Manager of the BIS, together with a request that he forward a copy to the Banque de France. A Swiss banker whom I used as a reference in my communication with Mr. Crockett also sent a copy of the commentary to a friend in a senior position at the the Bundesbank, who replied only that it had acted "responsibly."

Facts are always preferable to speculation, but interpreting the gold market requires more than the usual amount guessing since transparency in this market is so limited. This special Labor Day update to my recent essay, Gold or Dross? Political Derivatives in Campaign 2000, posted only a couple of days ago, sets forth my current working hypothesis on the significance of the FAZ articles and what they may suggest for the future.

Upon initial review by the BIS, GATA's document must have created sufficient concern to warrant some further investigation. The BIS has a great deal more information on gold derivatives than what it publishes, including breakdowns between forwards and options and between contracts with other reporting financial institutions and contracts with non-reporting institutions, e.g., gold mining companies, fabricators, hedge funds, speculators, etc. It has a highly competent research staff quite knowledgeable in the most sophisticated mathematical and statistical modeling techniques, backed by first-rate technology and equipment. And it has its own considerable knowledge of the gold market plus what must be an unrivaled web of contacts at the highest levels of international finance.

As a result of this new investigation, the BIS along with the other major central banks of continental Europe, particularly the Bundesbank, the Banque de France and the SNB, likely concluded that the gold market had in fact fallen victim to a much larger degree of manipulation than they had previously suspected. This new information also helped to explain why the gold market's reaction to the Washington Agreement had been more extreme than they had anticipated. And it suggested that the Bundesbank's gold leasing, most of it carried out initially through Deutsche Bank, had probably resulted in a much larger negative impact on gold prices than previously appreciated. Indeed, both the Bundesbank and the SNB may now feel somewhat duped by the bullion banks that advised them on their extensive gold lending programs.

Within the Euro Area, the Bundesbank immediately aligned itself with the pro-gold views of the other two major gold holders, the Banque de France and the Bank of Italy. Of course, neither of them has engaged in any significant gold lending, so within the Euro Area, the Bundesbank now carries principal responsibility for resolving the problem of excessive gold lending and gold derivatives activities. The FAZ articles are Buba's first shot across the bows of the bullion banks, especially Deutsche Bank.

With respect to the Swiss, their gold sales continue at the maximum permissible rate under the Washington Agreement for substantially the reasons discussed in prior commentaries. See Gold: Unchained by the Swiss; Ready to Rock! and Central Banks vs. Gold: Winning Battles but Losing the War? Swiss sales also are likely directed toward assisting UBS to reduce its gold borrowings, just what it appears to be doing. Even if the SNB wanted to speed up this process, it is constrained by the limits in the Washington Agreement. Although the SNB will be embarrassed by any large rise in gold prices on the heels of its sales, by investing the proceeds in euros, it expects to be in the currency that will benefit most from higher gold prices.

In his talk to Goldman Sachs and its guests, the shorts that Mr. Hannoun mentioned were gold mining companies and hedge funds. At least some of this group have used the period since last September to reduce or eliminate their short positions. Mr. Hannoun did not mention bullion banks, and among the largest, only UBS seems to have taken the hint. But then, among this same group and whatever its role prior to 1999, UBS is quite clearly not a party to the continuing Anglo-American scheme to manipulate gold prices that began in May 1999 with the British announcement of gold sales.

The FAZ articles suggest that the Euro Area central banks, together with the BIS and SNB, are now prepared for a showdown over gold. Whether these articles are also aimed at boosting the foreign exchange value of the euro is harder to say. Exacerbated by high dollar oil prices, inflation is becoming a more significant problem for the Euro Area. Whether by design or not, the Anglo-American war on gold is effectively an attack on the euro as well. In any event, a strong rally in gold should help the euro vis-a-vis both the dollar and the yen.

If another FAZ article is planned, and especially if the Bundesbank is behind these articles, the next article is likely to come out over the long Labor Day weekend. In that event, and maybe even without it, the FAZ articles could well do for the gold market this year what the Washington Agreement did last year. This year, however, the European central banks are unlikely to lose their nerve as quickly as before. They almost certainly will turn a deaf ear to cries of pain from overexposed bullion banks.

The danger, of course, is that soaring gold prices could trigger sharp and mutually reinforcing sell offs in stocks, bonds and the U.S. dollar. But with the future of the euro ever more visibly at stake, and the manipulation of gold prices growing increasingly blatant, the central banks of the Euro Area may no longer feel that they have a choice. If little Buba, weakened but still dangerous, really is about to blow the whistle on big Bubba's gold manipulators, Labor Day 2000 may mark the sunset of unchallenged dollar dominance in the world financial system and the dawn of a new golden millennium.

Final thought for Monday, September 4, 2000. Daniel Webster never spoke to a Labor Day gathering. The holiday did not exist in his time. Probably people were working too hard. But he did speak to the occasion: "Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money."

August 30, 2000. Gold or Dross? Political Derivatives in Campaign 2000

More than a century has passed since gold and money played a leading role in the rhetoric of a presidential campaign. At the Democratic convention of 1896, William Jennings Bryan won the presidential nomination with a speech dishonoring the deeply held monetary beliefs of Jefferson and Jackson, thundering to the other party: "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

William McKinley won and the Republicans promptly made good on their promise to complete the nation's return to the gold standard in law. Economic crucifixion, however, had to wait for more than 30 years. This unhappy event required the interaction of three phenomena almost unimaginable when Bryan delivered his famous tirade: the Federal Reserve (1913), World War I (1914-1918), and replacement of the classical gold standard with the bastardized gold exchange standard (1925).

If gold or the prospect of impending hard times plays any role in the current campaign, waged in conditions of unparalleled prosperity, it will likely be that of the ignored elephant in room. Ignoring the elephant is not always bad policy if the time is used to plot strategies for dealing with the beast. Can this election be won only by losing? Or is there some strategy by which each party might really win by winning? There are gold bugs in both political parties. They know the monetary and economic score. Never have their parties needed them more.

So begins my newest essay. For the complete work, click here.