Financial Times sees end to gold hedging

Section:

12:25a EDT Wednesday, December 15, 1999

Dear Friend of GATA and Gold:

We owe another debt of gratitude to our good friend
Arthur Hailey, the novelist and longtime advocate of
gold's traditional monetary function, who remarks
favorably about GATA in a big feature story about him
in the current issue of BusinessAge magazine. The
story follows. Please post it as seems useful.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

THE GOLD CRUSADER

BusinessAge Magazine
London, November/December 1999

Arthur Hailey has written some of the most successful
blockbusters of the century and has earned a fortune
from his efforts. Much of it he put into gold stocks,
but the author is now furious about the way leading
gold producers appear to be fixing the market. David
Guyatt reports.

By David Guyatt

Internationally renowned author Arthur Hailey has
waded into battle on behalf of honest mining-sector
shareholders who oppose an international cartel
composed of Wall Street's finest blue-chip companies
and a group of leading gold mining operations said to
be manipulating the price of gold.

Hailey, who is now almost 80 years old and has made
millions from his bestsellers "Airport" and "Hotel"
among a host of others, has now written to major gold
mining company Barrick Gold to tell them he is
"disgusted" with the way the company had "excessively"
hedged their future production. He believes that the
company's hedging strategy was designed to create
downward pressure on the price of gold which would
otherwise "rise to natural and honest levels."

Hailey's letter to Barrick states that he is an
"enthusiastic supporter of the Gold Anti-Trust Action
Committee" (GATA) and that until "a few days ago" he
was a "long-time shareholder of Barrick Gold," along
with his wife. He adds ominously: "But no more."

"I have sold our Barrick shares and am actively urging
others to do the same," Hailey states. "You simply
cannot trust these people to put shareholder interest
first," he adds. So angered is the acclaimed novelist
at on-going price manipulation of the gold market that
he has now invested in other mining companies that
specifically do not hedge their future production. He
urges others to do likewise.

The author is in good company when it comes to charges
that the gold market is being manipulated. Robert
Champion de Crespigny, chairman of Australia's largest
mining company, Normandy Mining, when asked about the
recent plunge in gold prices, told reporters: "I think
you'll find this is banks manipulating the price
because of the financial trouble two gold companies are
in." De Crespigny is believed to be referring to
Ashanti Gold and Cambior. Both are said to have been
virtually destroyed following the unexpected and
massive rise in the price of gold in late September.
Their trouble stems, it is believed, from structured
hedging programmes that failed to take into account a
large surge in the gold price. It was a hedge that
didn't work.

Meanwhile, Hailey's action follows a call to arms by
GATA, an independent watchdog group, which has led the
fight against price manipulation in the gold market
over the past year. Long ignored, GATA's claim of
market manipulation came to the fore earlier this year
when the price of gold plummeted $30 per ounce.

This followed a surprise announcement last May by the
Treasury that Britain was to sell over half the
nation's gold reserves held by the Bank of England. The
move was widely interpreted as being designed to dampen
the price at a time when it was close to breaching a
significant upward resistance level. A hue and cry
followed in Parliament and elsewhere due to the huge
losses -- almost $400 million was wiped off the value
of the reserves prior to their auction. British gold
sales had hitherto been conducted in the greatest
secrecy and later announced as a fait accompli.

The move by the Treasury is said to have caused deep
anger amongst numerous European central bankers due to
the damage that the unexpected price drop did to the
Euro -- itself partly backed by gold. In late September
1999, this anger turned to action when 14 European
central banks dramatically announced an agreement to
restrict gold sales and gold lending for the next five
years. The price leapt almost $50 per ounce on the
news.

The issue of cheap gold centres on gold leasing. This
is a technique where some central banks have lent their
gold to Wall Street and other international investment
banks for as little as 1 percent per annum. Central
bankers argue this provides them with an income stream
from an asset (gold) that otherwise does not perform in
terms of interest growth.

Others argue, however, that this explanation avoids the
core issue that has more to do with the banking
fraternity networking for profit at tax-payers expense,
than anything else. Having been granted a cheap gold
loan, the investment bank can sell the physical metal
on the spot market in exchange for cash. This can run
to hundreds of millions -- if not billions -- of
dollars. The next step in the procedure is to invest
the cash in, for example, US Treasury securities. These
have paid above 6 percent annual yield during 1999. The
difference of 5 percent is clear profit for the
investment banks.

With short positions estimated at well above 10,000
metric tonnes throughout the banking sector, the
derived profits are simply enormous and could run into
billions of dollars. The only downside for those banks
and firms that have been involved in this action is if
the gold price moves against them. Since a gold loan is
structured at an agreed "strike price" for the physical
metal of, say, $300 an ounce, any downward move in the
price will generate additional "mark to market" profits
for the "short" bank.

Meanwhile, a price rise above the strike price will
cause losses. More importantly, with mining production
at only 2,500 metric tonnes a year, those banks with
short position are finding it virtually impossible to
obtain physical gold to repay their outstanding loans.
This, obviously, creates a severe haemorrhaging of
balance sheets. Ordinarily, this would create even
stronger demand for physical metal and, consequently,
force the price even higher.

That is not happening. On the contrary, from a high of
$330 per ounce at the beginning of October, the price
has now dropped back to under $300 an ounce. This,
clearly, defies the rules of supply and demand but
complies with heavy selling of options in the
derivatives markets. The latter market is the key
mechanism of structured hedging that many larger gold
mining companies have so heavily relied upon.

Yet matters do not end there. According to market
sources, the recent European five-year restriction on
gold sales originated with Germany, France, and Italy.
According to these same sources, Chancellor Gordon
Brown was excluded from these discussions in punishment
for Britain's gold auctions that the Europeans viewed
as favouring the US dollar. This had the effect,
sources say, of galvanising the Bank of England into
scurrying around in the background in a panicky attempt
to participate in the European decision if only to
avoid losing influence in European monetary affairs --
providing the announced gold sales could proceed on
schedule.

By mid-October the European move was countered by the
unexpected announcement that Kuwait had authorised the
Bank of England to lease the 79 metric tonnes of
Kuwaiti gold reserves. This was a significant counter-
punch to the European strategy and has eroded the gold
price still further. Round two in this clash of
monetary Titans can be marked up to the Anglo-American
contingent, it seems.

It was into this fearsome fray that novelist Arthur
Hailey strode. His letter to Barrick Gold was timed to
coincide with the Denver Gold Conference, an annual
event attended by the glitterati of the gold world.
Hailey has promised to bring his influence to bear on
his "wide circle of friends and contacts" to copy his
move and support a "free gold price."

Speaking from Nassau in the Bahamas, Hailey told
BusinessAge of his long involvement with gold, dating
back to his 1975 best-seller, "The Moneychangers,"
which is due to be re-released in the UK next summer.
The author also hit out at the "gold collusion crowd,"
which he sees as a "conspiracy among the very rich to
make themselves even richer at the expense of ordinary,
modest investors." This he added resulted from
"dishonest manoeuvering in the gold market," which he
believes, "along with GATA, will be forced to an end
soon." This he thinks will cause "an inevitable rise in
the gold price."

Although the author still has a small holding of gold
coins, his investments are now principally concentrated
in mining companies that do not hedge their production.
His own experiences with the gold market are not good,
however. An earlier holding of gold bullion held in
Zurich was sold when the price of gold plummeted,
causing a "bad loss."

"I resent the manipulation of the gold market," he
says, echoing a growing sentiment among many
shareholders and others who believe the time has come
for the authorities must take action to corral the
excesses of the movers and shakers. "There is so much
dishonesty."