The hedging horror unfolds


9:25p EDT Wednesday, October 6, 1999

Dear Friend of GATA and Gold:

Yesterday GATA Chairman Bill Murphy was on nationwide
radio in South Africa. Today he was featured in a major
article at Here it is. Please post it as
seems useful.

Gold Anti-Trust Action Committee Inc.

* * *


By Jon E. Dougherty

Copyright 1999

Several months ago, when Gold Anti-Trust Action
Committee Chairman Bill Murphy warned congressional
leaders that something was amiss in the gold market,
few listened. And throughout the summer months, when
Murphy's best industry minds were sounding the alarm
that the market price of gold was being artificially
manipulated downward, not many industry leaders,
central bankers, and gold bullion bank CEOs heeded their

But today it is a different story. The industry is
finally beginning to come around after the price of
gold jumped from around $290 an ounce, where it has
been for most of the past year, to its current level of
about $315 an ounce.

And today, Murphy says, there is panic -- or, at a
minimum, "near-panic in the gold loan industry."

At issue is whether some of the world's most
influential central and bullion bankers have attempted
to manipulate the gold market to their advantage, and
the advantage of key investors, by artificially
depressing the price of gold while making short-term
loans on millions of ounces of non-existent gold. For
years, this appears to have been the case, Murphy says,
because of the uncharacteristic "supply-and-demand"
behavior of the gold market.

Murphy voiced his suspicions to WorldNetDaily in May,
saying, "I've been a trader for 25 years, and I began
noticing that the gold market was just not trading the
way it was supposed to."

Over the past couple of years, Murphy said, when gold
reached a plateau of $295-300 per ounce, "I began
noticing that the market price for gold would always
stop (at a certain level), lose, then come right back"
to the previous level -- but never higher. That didn't
follow the established rules of supply and demand, he
explained, and caused alarm bells to go off in his
mind, and in the minds of his industry gurus.

Murphy said this led to an enormous short on gold
futures -- in the neighborhood of 10 tons -- though
banking industry specialists continued to advise
banking executives that short positions on gold
were only leveraged "in the 3- to 4-ton neighborhood."

Now, Murphy said, key banking industry executives are
waking up to the reality that it has become virtually
impossible for the gold mining industry to keep up with
"all of the gold futures contracts that are out there."
Hence, as he and GATA predicted, normal supply-and-
demand forces may now be poised to take over the gold
market as European central banks move to limit gold

"Gold bullion (in Australian and Asian markets) was
quoted at $324.50/$326.50 per ounce late on Tuesday,"
Reuters reported Oct. 5, "after trading as high as
$331.50 -- the highest in two years amid a need by
holders of big short positions to cover their bets or
face potentially ruinous financial consequences."

In a separate story, Reuters also reported that some
Australian central banks might be short to cover gold

"As spot bullion failed to stay above the resistance at
around $330 an ounce in late afternoon (yesterday),
profit-taking and fresh buying emerged," said the
report. "A bullion trading source said market talk that
an Australian bank was facing huge losses from recent
sharp gains in bullion prices triggered fresh buying as
the bank would be forced to cover its positions soon."

"Banking sources in bullion markets in Australia said
most Australian banks running gold books were short 'to
some degree,'" Reuters said.

"All of what has been occurring in the gold market has
been the result of one-way trading," Murphy told
WorldNetDaily. The recent announcement by the Bank of
England to sell most of their gold reserves, the offer
to buy short loan positions by some of the world's
wealthy, and the announcement by 15 European central
banks that they would cut back on their gold leasing
"demonstrates that all the supply was coming from
borrowed gold," he said.

"All of a sudden, the European central banks were
saying, 'We're going to restrict this borrowed gold and
it's going to affect your lease rates,'" Murphy
said. Consequently, "over the summer, the lease
rates for borrowed gold rose from 1 percent to 3
percent (per annum) right after the Bank of England's
announced sale."

Most European banks, Murphy believes, were unaware "of
what they were getting into" by shorting so many gold
loans, and the move to restrict further leases of gold
was an attempt to stop the bloodletting.

European banks, he said, were fooled by "the published
figures that there were only about 4,500 tons of gold
loans, but we've been telling people the loans are
actually for something over 10,000 tons." Once the
realization began to spread, he said, "it led to
increased lease rates now of about 5-6 percent."

"If you were borrowing leased gold all summer at $258
an ounce with a 3 percent rate," Murphy said, "and now
all of a sudden gold jumps to $315 an ounce at 5 or 6
percent, what kind of a great loan does that turn out
to be?"

Worse, he said, the "global hedge funds that would be
used to cover these loans are also massively short. The
10 million ounces of gold still out in these
'structured loans' amounts to more than these mining
companies either have in the ground or can produce in a
reasonable amount of time." Even the Union Bank of
Switzerland, Murphy said, announced yesterday that the
hedge funds are "short 20 million ounces of gold."

As of June 30, West Africa's Ashanti Goldfields was
hedged 11 million ounces of production -- or roughly 50
percent of its reserves -- vs. 8.75 million on March
31, according to a report by John Hathaway of
Tocqueville Asset Management. Using "conservative
assumptions," the value of the "hedged book," he wrote,
was $290 million.

However, that asset would become worthless "if gold
traded at $325; at $350, the company would begin to
face margin calls," Hathaway wrote. "The Ashanti hedge
book is a bet that the gold market will remain
quiescent and trouble-free. Ashanti's sanguine view is
not unusual. Few in the industry are prepared for a
spike in the gold price, especially one which does not

"Ashanti's U.S. banker is Goldman Sachs, according to
market sources, perhaps explaining why Goldman was
rumored to be a big buyer of gold options l ast
Wednesday, following gold's explosive two-day move,"
said a report from

Murphy said gold would likely reach a level of "$400 an
ounce in the near term if there is a massive sale or
something, but in essence it will take $600 an ounce to
clear the market -- meaning to get it to a proper
supply-and-demand equilibrium price."

"I believe central banks discovered they had
collectively a gigantic short position" in gold, via
exposure to gold producers, Donald Coxe, chairman of
Harris Investment Management and Jones Heward
Investments of Chicago, told

He said some mining companies increased their so-called
hedging activities in recent years to combat the
decline in gold prices.

"The companies essentially took a loan against their
future production and used the cash to maintain current
operations," the report said. "But had the price of
gold continued to weaken, it would have further
depressed the future value of their assets, potentially
forcing some producers into bankruptcy or into the arms
of bigger firms, neither situation being particularly
palatable to lenders."

"If you're a producer whose cost (of production) is
$270, and the price is $250, you're trying to make up
the difference in interest income," Coxe said. "But if
gold is at $220, you're out of business. Central banks
looked into this and said, 'Are these guys good for

Additionally, finance officials realized they were
putting their own assets at risk -- both in actuality
and via their exposure to hedged producers -- because
of the uncertainty regarding future gold sales, Coxe