NY Post credits GATA for Euro CB action


12:54a EDT Monday, October 4, 1999

Dear Friend of GATA and Gold:

You'll enjoy this article from Sunday's San Francisco
Chronicle. It's probably the best one yet from the
mainstream press about what's happening with gold in
the world economy. I don't mind noting that, as usual
lately, GATA is at the center of it all.

Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *


By Rick Ackerman
San Francisco Chronicle

October 3, 1999

With gold on a bullish rampage last week, small
investors racked up impressive gains on dirt-cheap
mining stocks while many hedge funds and bullion
bankers got caught with their pants down around their

Equity portfolio managers and other institutional
investors have been largely out of gold stocks for more
than a decade, mainly because mining shares have been
too depressed and too illiquid to buy or sell in size.

But the diehards who held them last week feasted as
spot bullion prices rocketed from below $270 to above
$320 in just a few days. Echo Bay shares, which earlier
this month had sold for $1.18, shot up to $2.62. Durban
Deep went from $1.69 to $2.50, and Placer Dome soared
from $10 to $17.

Commodity speculators who were positioned with the
trend fared even better. "Some of my customers held
$180 call options that went to $3,500," said one
Chicago broker, Rob Rosenberg. "The market was sold
down so hard that it was ready for a bounce."

Call it sweet justice.

For years the institutional leviathans have been raking
in easy money by betting on gold's continued decline.
Their strategy has been to borrow, or "short," gold
with the expectation of replacing it at lower prices.

With bullion's value in practically ceaseless decline
since the late 1970s, this has been the sweetest game
in town.

It works like this: First the hedgers borrow gold from
the central banks of Europe or the United States for a
nominal rate of 1-2 percent; then they sell it for cash
and park the proceeds in risk-free Treasury paper
yielding anywhere between 4-6 percent.

The spread is profitable by itself, but many pushed the
leveraging a step further, using the Treasurys as
collateral to speculate in the stock market.

For a while this strategy simulated a kind of financial
perpetual motion machine whereby everything that the
hedgers owned moved up in value while all that they
owed moved down.

This borrow-yourself-rich gambit is known as a "carry
trade," and it is the same trick the pinstripe crowd
once performed to spectacular excess using the Japanese
yen, which can still be borrowed for next to nothing.

Even so, the high-octane money-machine seized up when
the yen began to appreciate sharply against the dollar
13 months ago, making it more costly for carry-trade
operators to pay back their yen-denominated debt.

It wasn't long before the Japanese currency's
precipitous and wholly unexpected rally put some
massively leveraged U.S. hedge funds on the ropes,
necessitating a strident easing of credit by the
Federal Reserve to prevent a systemic financial

Now it's possible the Fed will have a new crisis on its
hands, since some very big institutional players that
have been using borrowed gold for carry-trade leverage
are rumored to be in way over their heads.

One reason is that gold lease rates have skyrocketed.
While just a few months ago the hedgers were able to
rent gold for 2 percent or less, the rate spiked last
week to 11 percent.

Even if rates fall by half, it will be prohibitively
expensive for gold shorts to maintain their positions.
Moreover, there is not enough physical gold readily
available to replace what they have borrowed.

The problem boiled up on Tuesday, when Europe's central
banks said they would restrict bullion sales to 400
tons a year for the next five years.

Before the announcement the central banks had been the
gold hedgers' best friends, lending more or less
unlimited quantities of bullion on demand, and at
bargain-basement rates.

Moreover, by frequently announcing sales of large
quantities of gold from their inventories, the central
banks helped to keep a lid on gold prices to the
further benefit of gold borrowers.

How much bullion are the hedgers short? Just four of
them alone account for at least 70 million ounces,
according to estimates published at

LeMetropole's sick-ward list includes Tiger Fund, Tudor
Capital, Moore Capital, and that notorious troublemaker
of recent memory, Long-Term Capital Management.

Some big banks as well are reportedly short gold in
quantity, including Chase, J.P. Morgan, and Citigroup.
Ironically, even a few gold producers could be in big
trouble, since they have been among the most
enthusiastic players in the carry-trade game.

LeMetropole's owner, Bill Murphy, has been warning
stridently for months that the gold carry-trade would
trigger a squeeze on bullion inventories that would
cause the metal's price to soar.

At the same time, acting through a group called the
Gold Anti-Trust Action Committee (GATA), Murphy and his
associates have pursued the indictment of banking's
international elite and the hedgers, who he says
colluded to suppress gold prices.

For now, though, precious metal prices are quite
buoyant, portending problems of a higher order of
magnitude than those faced by mere bullion bankers and
hedge funds.

For it can only be at the expense of a strong dollar
that Europe's central banks would choose implicitly to
support the price of gold. In declaring to the world
that they plan to limit bullion sales, Euroland has
affirmed a willingness to give gold a monetary role.

This is a direct assault on the greenback, since the
dollar is backed by nothing of substance, much less
gold. By deigning to support a standard that implies
the dollar's inferiority, Europe is clearly seeking to
elevate the value and utility of its euro while
diminishing the dollar's role in world trade and its
dominance as a global reserve currency.

Clearly the Europeans are scared of a world manifestly
awash in dollars, just as they are fed up with the
obligation of supporting a global financial system that
conducts most of its business in dollars.

Japan may be thinking along the same lines, since its
central bank recently rejected the idea of easing
credit to slow the yen's steep rise against the dollar.

If Europe and Japan succeed in breaking the world's
dependency on dollars, it will surely spell trouble for
the U.S. economy. For a weaker dollar would diminish
investment by foreigners in our Treasury bonds, raise
interest rates, and curtail the ability of our
consumer-oriented economy to function effectively
without savings.

It would also increase the cost of the many things we
now buy abroad, the bill for which has been running at
a monthly clip approaching $25 billion.

If the threat to the U.S. economy of a weaker dollar
and higher interest rates is real, the stock market has
so far failed to acknowledge it. Share prices are only
slightly below their levels prior to gold's surge and
by week's end looked to be firming.

While I will not hazard a prediction concerning gold's
course, I seriously doubt that U.S. share prices can
make much headway in the coming months, given the
weakness in the dollar.

If there are any stocks that can buck the trend, they
will most likely be found in the mining sector. Some of
them, particularly the still-depressed shares of South
African gold producers, look like they can't lose.

Before you take the plunge in any of them, though, make
certain their profits come from selling gold they
extract from the ground rather than from their
successful exploitation of the carry-trade.