AngloGold edging toward bid for Normandy Mining


By Reginald H. Howe
July 11, 2000

"Ah! tenez, vous etes de la merde dans un bas de soie."

With this much quoted insult Napoleon concluded his
famous tirade against Talleyrand in 1809, an outburst
of anger that most expected would end with the grand
chamberlain hanging from a gate of the Tuileries.
Instead, he was merely dismissed. Talleyrand himself
would later suggest that Napoleon's clemency signified
weakness, "le commencement de la fin," an end that
Talleyrand in his enforced leisure secretly worked to

More than once at the FT World Gold Conference in
Paris, I found myself thinking how well Napoleon's
coarse description of Talleyrand fit certain bullion
bankers, and wondering whether they would prove as
adept as the great French diplomat at retaining money
and power through changing governments and
international alliances.

The new "consensus" figure on the net short physical
gold position seems to be about 5,000 tonnes, although
where this figure comes from or how it is derived is
far from clear. No matter, it is a figure that everyone
can live with, giving the longs hope but not scaring
too much the shorts. However, no one knows what the
actual figure is, and most seem to prefer this state of
uncertainty, along with an absence of discussion about
the possibility that gold prices are being manipulated
by a cabal of bullion bankers acting in league with
certain government officials. The bear case for gold of
a year ago has been replaced by predictions of stable
to modestly rising prices, just the right climate for
the shorts slowly to wind down their positions. Under
the surface, the great fear in the bullion bank camp is
another upward spike like that witnessed last fall in
the wake of the Washington Agreement. Much anecdotal
evidence continues to support the hypothesis of severe
tightness in the physical market.

Summed up briefly, my principal impressions from the
conference were: 1) the ECB and its 11 member central
banks do not have a common policy on gold, which
remains almost entirely subject to national control by
the individual member states; 2) while a few central
banks are making noises about a greater monetary role
for gold in the future, there is as yet little real
movement in this direction, either with respect to gold
support for the euro or as regards the monetary use of
gold by less developed countries; 3) the gold policy of
Germany and the Bundesbank is a mystery with
potentially explosive ramifications; 4) no one wants to
talk publicly about the recent increases in the
notional amounts of gold derivatives on the books of
the bullion banks, but at least some bullion bankers
evince concern that these numbers, despite acknowledged
difficulties of interpretation, may indicate rising
systemic risk; 5) some large gold mining companies are
beginning to show more sensitivity to investors'
concerns, including the dangers of hedging, the often
misleading use of "cash cost" figures, and the
importance of the "option value" of their shares on
rising gold prices, thereby creating a widening chasm
between companies that do not hedge (or hedge only
minimally) and those that do; and 6) outside of
investors, but especially among bullion bankers, there
is great reluctance to credit or even to discuss
seriously the mounting circumstantial evidence of an
international conspiracy to control gold prices.

No Common Gold Policy in the Euro Area

Perhaps the most striking fact to emerge on the first
day of the conference was the lack not only of a common
gold policy within the Euro Area but also of any
officially reported information on gold lending or gold
derivatives activities by EA central banks. Speakers
from the Banque de France and the Oesterreichische
Nationalbank ("OeNB" or Austrian National Bank), both
of which are EA member banks, described the gold
policies of their banks without once mentioning any
constraint imposed by EA membership or the ECB other
than the Washington Agreement. While both hailed the
agreement as an example of cooperation among European
central banks, the substance of their remarks made
clear that it was in large part necessary precisely
because the EA central banks do not have a coordinated
gold policy administered by the ECB.

For the French, Herve Ferhani suggested: 1) gold
lending is risky because gold lent out is not the same
thing as gold in the vault; 2) the return on gold
lending is low; 3) gold lending tends to push gold
prices lower, adversely affecting the balance sheets of
central banks that regularly mark their gold reserves
to market, which the ECB and all EA central banks do;
4) central banks with large gold holdings tend to lose
more due to revaluations at lower gold prices than they
gain from returns on gold lending; and 5) in light of
these considerations, the Banque de France, which has
gold reserves in excess of 3,000 tonnes, does little or
no gold lending.

Mr. Ferhani also noted the possibility that if major
reserve currency governments continue to reduce debt, a
shortage of "risk-free" assets might cause central
banks to add more gold to their portfolios to offset
rising credit risk in other assets. Although he did not
say so, it is also possible that if these governments
revert to their former ways, their additional debt
might not be viewed as still so risk-free and more gold
in central bank portfolios in that case would make
sense as well.

Dr. Peter Zoellner for the Austrians gave quite a
different view, emphasizing: 1) the lesser role of gold
as a safe haven in light of the central banks' success
in controlling inflation; and 2) the ability of central
banks through gold lending and other gold derivatives
activities to earn a modest return on an otherwise
sterile asset. Austria has reduced its gold reserves
from more than 650 tonnes in 1988 to under 400 tonnes
today, with a target of 320 tonnes in 2004. Much of
this reduction represents sales to the Austrian Mint
for its popular "Philharmonic" gold bullion coins.

During the question period, Mr. Ferhani tried to
explain the difference in the French and Austrian
positions on gold lending with reference to the
difference in the size of their respective gold
reserves. But admitting that the right gold policy for
a nation with 3,000 tonnes might not be the same as
that for a nation with only 400 tonnes, no effort was
made to explain why two countries that are members of a
common currency area having combined total gold
reserves of more than 12,000 tonnes should not follow a
common gold policy based on their combined reserves.

In conversation after his talk, Dr. Zoellner told me
that the OeNB limited its gold lending and derivatives
activities to not more than 5 percent of any particular
market or market segment. I asked if that meant,
assuming total gold loans were 5,000 tonnes, the OeNB
would be prepared to lend up to 250 tonnes. He answered
in the affirmative, and when I expressed surprise at
the idea of a central bank lending up to 62.5 percent
of its total gold reserves, he reconfirmed his answer.
In any event, the policy of the OeNB is not that of a
central bank that expects gold to return to the center
of the international payments system at much higher
prices any time soon.

After that same session of the conference, I had two
other revealing conversations. In one, a representative
from the Banca d'Italia told me that Italy takes very
much the same position as France with respect to gold
lending, and then added that the Bundesbank holds a
similar view. Since there are well-founded reports that
the Bundesbank may have loaned out as much as 10
percent of its gold reserves, I pressed him on this
point, but he insisted that his contacts at the
Bundesbank report that Germany does little or no gold

In the other conversation, a representative from the
ECB confirmed that it does not publish any figures on
gold lending or other gold derivatives activities by EA
central banks. He also confirmed that unlike Swiss
National Bank, none of the EA central banks issues an
annual (or other) report detailing its gold lending.
Indeed, it appears that the ECB itself does not have
these figures, which continue to be guarded at the
national level much as they were before the euro was
launched. Accordingly, it appears that there is
absolutely no way to police the Washington Agreement,
particularly as it relates to the signatories'
commitment not to increase gold lending or gold
derivatives from the levels that existed on the date of
the agreement.

The German Mystery

The gold policy of the Bundesbank is rapidly emerging
as a major issue with potentially huge ramifications.

Many believe that if the Bundesbank is in the gold
market, the bulk of its business is being channeled
through Deutsche Bank, Germany's biggest bank. In an
earlier commentary, I detailed the extraordinary
increases in the notional amounts of Deutsche Bank's
gold derivatives during the last half of 1999, all as
shown in its most recent annual report. At the
conference I learned from a reliable source that its
former chief gold trader left the bank a couple of
years ago, apparently forced out in a dispute over new
and more aggressive trading strategies.

At the conference, Jonathan Spall, head of central bank
marketing at Deutsche Bank, gave -- as did others -- a
current estimate of 5,000 tonnes of central bank
lending, attributing 1,700 tonnes to the European
signatories to the Washington Agreement and noting that
both the Bundesbank and the Swiss National Bank had
confirmed lending "a small proportion of their gold."
In the Swiss case, officially reported figures show
leased gold at the end of 1999 amounting to almost 320
tonnes, or more than 12 percent of total reserves. If
the Germans lend in the same proportion, total gold
lending by the Bundesbank would amount to around 420
tonnes of its nearly 3,500 tonnes of reserves.

However, excluding the gold reserves of France and
Italy, since these countries do little or no gold
lending, and even without adjustments for recent gold
sales, total gold reserves available for lending by the
signatories to the Washington Agreement are less than
10,400 tonnes, which, multiplied by 12 percent, yields
about 1250 tonnes of gold lending. Thus to arrive at a
figure of 1,700 tonnes of total gold lending by this
group, both more aggressive lending by some of the
smaller central banks and German lending at least equal
to Switzerland's as a percentage of reserves appears
required. In other words, if Mr. Spall is close to
correct, the Italian view of the Bundesbank's gold
lending activity is almost certainly mistaken.

Other interesting figures in Mr. Spall's talk: 1) his
estimate that "realistically the available balance for
expansion" of central bank gold lending worldwide is
not more than 1,000-1,500 tonnes; 2) of the some 70
central banks that are involved in the gold market, the
great majority lend gold via deposits of maturities
under one year; and 3) only 10 to 15 central banks
trade in options and perhaps no more than five or six
engage in lease rate swaps. Although there have been
rumors that the Bundesbank is among the central banks
writing call options, Mr. Spall unfortunately provided
no information on this point.

The day before announcement of the British gold sales,
GATA Chairman Bill Murphy reported online that Deutsche
Bank had notified its clients that "the gold market is
stopping at $290." Deutsche Bank was notable but not
alone in reporting exploding notional amounts of gold
derivatives in the last half of 1999. The same
phenomenon occurred at Morgan Guaranty Trust and
Citibank, but not at UBS, the market leader, or Credit
Suisse. Indeed, at the big Swiss banks during this time
period, the total notional amounts of gold derivatives
were flat to down. What is more, by all accounts Morgan
is the bank that sold Barrick its calls, a strange
transaction smelling of manipulation.

Deutsche Bank, which acquired Bankers Trust in mid-
1999, clearly aspires to be a major force in the dollar
area as well as in the EA, where it now faces greater
competition from large banks outside Germany. The
transition to the euro has deprived the big German
commercial banks of the home currency advantage they
enjoyed when the mark was the dominant currency of
Europe. Financings in euros can as easily be done by
French, Italian and other EA banks as by German banks.

An even bigger loser to the euro is the Bundesbank,
which has yielded its former position as the pre-
eminent financial institution in Europe to the ECB.
There are many who think that former French President
Mitterand and the Italians outsmarted Helmut Kohl in
negotiating the Maastricht Treaty. In any event, the
French and Italians, who used to have to follow the
Bundesbank's lead on monetary policy and interest
rates, now have some significant input through the ECB,
while the Bundesbank is reduced to just another EA
central bank, albeit one with memories of glory and a
surfeit of formerly important officials.

Under these circumstances, it is not inconceivable that
the German bankers might cooperate at some level with
an Anglo-American scheme to control gold prices. For
the Americans, the goal would be to protect and extend
the international dominance of the dollar, rebuffing
any challenge from gold or a gold-backed euro. For the
British, the purpose would more likely focus on
undermining the euro. Its success will almost guarantee
the demise of the pound as a major international
currency, forcing the British to choose between the
euro or the dollar. It is a choice the British do not
want to make and upon which they cannot agree. If the
euro fails, the British can muddle on with their own
currency and monetary policy.

For the Germans, if the euro fails, there is hope for
the restoration of their beloved deutschmark, and the
privileges, advantages, power, and prestige that go
with managing Europe's leading currency. All these
considerations hint at possible hidden motives for the
Anglo-American push for military action in Kosovo
during the euro's first year, as well as Germany's
willingness to support that action by sending its
forces to fight on foreign European soil for the first
time since World War II.

Notional Amounts of Gold Derivatives

Since these numbers surfaced, there has been
surprisingly little public discussion or even
acknowledgement of them. The bullion banks with the
largest increases have refused to discuss or explain
them. Others have sought to downplay notional values.
At the conference, in response to a question from
GATA's Bill Murphy, Kevin Crisp, formerly at Morgan and
now at Credit Suisse, refused to discuss the increases
in Morgan's gold derivatives on the grounds that he was
no longer there, and asserted wrongly that his new
employer did not have to report similar figures, a
mistake that was caught by his competitors at UBS.
Another speaker mistakenly tried to compare notional
amounts of gold derivatives to turnover figures for the

However, several bullion bankers approached Murphy and
me specifically to discuss the figures on gold
derivatives. Although they made some good points
particularly about the difficulties of interpreting
notional amounts, none could explain why certain large
bullion banks had huge increases in the notional
amounts of their gold derivatives during the last half
of 1999 while others experienced no growth or even
slight declines. A couple of the bankers also confessed
to having difficulties reconciling total gold borrowing
with total gold deposits -- that is, their inside
observations suggest a lot more borrowing by the
bullion banks than there are readily identifiable gold
deposits by central banks (and others) to support.

Within a single large bullion bank there are often
multiple trading operations frequently located in
different countries. A couple of bankers said that even
they did not know their own bank's total gold deposits.
Since the conference, another analyst has told me that
this problem is complicated by the fact that bullion
banks not only accept gold deposits from central banks
but also borrow gold from them. The deposits typically
fund trading operations, but the gold loans are more
often part of the bank's general funding under the
supervision of its treasury department. In any event,
it appears that some bullion bankers are beginning to
reach the same conclusion as Frank Veneroso, GATA and
others: there is a large, undisclosed source of
physical gold entering the market.

Synthesizing the bullion bankers' comments on gold
derivatives, several points merit mention. Both the
sharp price collapse that followed the British
announcement of gold sales and the even sharper rally
triggered by the Washington Agreement naturally stirred
up a lot of hedging and derivatives activity.
Basically, the third quarter was characterized by heavy
demand from miners and others to put on new short
positions, and the fourth quarter brought equally heavy
demand to cover these short positions or go long. Had
the fourth quarter demand been satisfied mostly in the
physical market, notional amounts logically would have
come down from end of third quarter levels. However, if
this demand were met mostly by derivatives, and
particularly by derivatives of different types that
are not as susceptible to netting, they would likely be
cumulative and add to the third quarter notional

For example, suppose a mining company entered into
forward sales contracts with bullion banks in the third
quarter for delivery of a million ounces two years out.
In the fourth quarter, it covered part of this
position. If it did so by buying back some of its
forward contracts or buying offsetting forward
contracts, the bullion banks would show lower notional
amounts. If it covered by purchasing physical bullion,
the notional amounts reported by the bullion banks
would not rise but probably would not fall either. But
if it covered by purchasing calls, both the forward
contracts and the offsetting calls would be reported in
the bullion banks' notional totals at the end of the
fourth quarter. Being different types of instruments,
they likely would not qualify for netting, particularly
if the precise terms of the calls did not exactly match
the forward contracts.

This example is hardly farfetched. Recent information
suggests that Barrick's calls are European-style, cash
settlement only, with maturity dates of Dec. 31, 2000,
and Dec. 31, 2001. Most of Barrick's forward contracts
are spot-deferreds. Thus the obligation to deliver
physical gold at a specified date (or another date
further out) is being covered by a cash obligation that
comes due on one of two specified dates at the prices
prevailing on those dates, which almost certainly do
not coincide with the delivery dates of more than a
few, if any, of the forward contracts. Clearly these
different sets of obligations are not appropriate for

However, while this example shows how notional amounts
could grow even as the size of a short position is
reduced, it also points at two other risks: 1) a real
or threatened shortage of physical gold; and 2) ever-
longer daisy chains of derivatives with increasingly
complex links. Indeed, as previously discussed in my
commentary on Barrick's calls, this kind of transaction
seems almost purposely designed to avoid triggering a
sharp covering rally in a market short of physical
gold, but of course it does nothing to deal with the
underlying problems of too little supply and too low

Changes in Hedging Strategies

Another important point about the increases in notional
amounts of gold derivatives reported by bullion banks
relates to changes in hedging strategies by many mining
companies, particularly in Australia where hedging has
not fallen into as much disfavor as elsewhere. However,
there are now many reports of Australian companies
changing the mix of their hedging to reduce the role of
forward contracts and increase that of purchased puts,
still typically financed by written calls. Logically
this practice should tend to inflate the notional
amounts of gold derivatives reported by the bullion
banks while leaving replacement values more or less
flat, and thus is consistent with the most recent Bank
for International Settlements statistics on the gold
derivatives of the major bullion banks and dealers in
the G-10 countries.

But again, this explanation also points to another area
of increased risk. To bullion banks, forward contracts
with mining companies represent a call on gold at
favorable prices in a gold bull market. So do any
purchased calls. But while written puts may provide
gold to bullion banks in a bear market, in a bull
market they merely permit the bank earn its premium
without engaging in much delta hedging. Thus a
significant move away from forward contracts toward
options tends to reduce the amount of physical gold
available to bullion banks at favorable prices in a
bull market. Again, some examples may help.

Prior to the Washington Agreement, a mining company
wanting to hedge a million ounces of future production
might typically have sold forward 800,000 ounces and
bought reasonably close-to-the-money puts on 200,000
ounces, financed by writing calls further out of the
money on 400,000 ounces. This activity would have
resulted in a total notional amount of derivatives
covering 1.4 million ounces. In a big bull market, the
company's maximum exposure would be to deliver 1.2
million ounces to its bullion banks at below-market

Today a company wanting to hedge a million ounces might
typically sell 200,000 ounces forward and buy puts on
800,000 ounces financed by written calls on an equal or
lesser number of ounces. These transactions would
create a total notional amount of derivatives covering
up to 1.8 million ounces. But the maximum delivery
exposure to the company's bullion banks in a bull
market would not exceed 1 million ounces, and could be
considerably less depending on the company's choice of
strike prices and the premiums it could obtain for its
written calls in the much more favorable climate for
selling them since the Washington Agreement.

Alternatively, the company might reduce its hedge
position to 800,000 ounces, with 200,000 ounces sold
forward, and purchased puts on 600,000 ounces financed
by written calls on another 600,000 ounces. The total
notional amount of these derivatives would cover 1.4
million ounces, the same as in the first example, but
the company's maximum delivery exposure in a bull
market would now be down to 800,000 ounces, or a one-
third reduction from the 1.2 million ounces in the
first example.

Admittedly all these examples are a bit arbitrary, but
the point is that the notional amounts of gold
derivatives reported by the bullion banks can remain
level or even increase while the maximum delivery
exposures of mining companies to bullion banks in a
strongly rising gold market actually decline.

More Evidence of Manipulation by the ESF

The June 2000 U.S. Treasury Bulletin
( contains the
financial statements of the Exchange Stabilization Fund
for the period ending Dec. 31, 1999. The ESF had a
trading loss of $1.627 billion in the the last calendar
quarter of 1999, or its first quarter of fiscal year
2000. This loss wiped out virtually its entire profit
of $1.637 billion in fiscal 1999, of which $1.257
billion was earned in the last (July-September) fiscal
quarter. (An earlier commentary traces in detail a
pattern over the past several years under the Clinton
administration of ESF losses in quarters marked by
strong gold prices and gains in quarters with weak gold

This pattern could not be more unequivocal than in the
last half of 1999, with large gains in the third
calendar quarter during the price collapse caused by
the May 7 announcement of British gold sales, and large
losses in the last calendar quarter dominated by the
sharp rally and complete reversal of sentiment brought
about by the Washington Agreement of Sept. 26. What is
more, since the administration denies making any
interventions in the currency markets during either
quarter, and since there were no other crises
appropriate for ESF intervention, nothing other than
gold trading appears available to explain these odd

Another interesting aspect of the most recent ESF
profit and loss statement is another mysterious entry
for commission income of $39 million, the second time
in the last three quarters that this new line item has
appeared. The closest historical analogue in prior ESF
statements to these "commissions" are "handling charges
on gold" that appeared prior to 1978.

I didn't hear it, but Bill Murphy reports that James
Riley of Goldman Sachs told a delegate to the Paris
conference that Goldman would offer unlimited amounts
of paper to keep buyers from pushing gold prices above
$310 to $320. This remark does not make much sense
unless Goldman Sachs, former Treasury Secretary Robert
Rubin's old firm, has unlimited backing from some
government entity. None is a more likely suspect than
the secretive ESF, as to which Treasury Secretary
Summers still has not responded to GATA's questions.
Last I heard, he was reportedly "looking into" the

Talleyrand -- Entre l'aigle et le lys"

Under this title in "Son et lumiere," the series of
summer evening spectacles in the Loire Valley, a cast
dressed in period costumes at Valencay, Talleyrand's
castle, celebrates his astonishing career. Because
members of his family still live in the chateau, only a
few rooms are open to the public, but there is an
interesting automobile museum in the park. Talleyrand
is buried at Valencay. He died in 1838 at his Paris
townhouse on the rue de Rivoli. Today two plaques, one
in English and the other in French, remind passers-by
that his former home, now the Hotel de Saint-Florentin,
is where the Marshall Plan for Europe was signed into

As bishop of Autun under Louis XVI, Talleyrand
anticipated the French Revolution. After moving to
Paris, he helped draft the Declaration of the Rights of
Man and became president of the National Assembly.

Fleeing France for England and America during the worst
excesses of the Revolution, he returned after the fall
of Robespierre. Talleyrand both assisted in Napoleon's
accession to power and managed his departure. At the
Congress of Vienna in 1815, Talleyrand negotiated a
favorable settlement for France under the restoration
of Louis XVIII, whom he served as prime minister at the
insistence of the European allies. With their departure
from France, he was sacked, but later returned as
advisor to Louis Philippe in the July Monarchy.
Talleyrand ended his official career as ambassador to
London in 1834 at the age of 80, having worked with
equal success for France's advantage and his own
through the most tumultuous half century in French

In 1800 as Napoleon's foreign minister, Talleyrand
signed a commercial treaty with the United States, and
in the process forced the American minister, Robert
Livingston, to pay a substantial bribe. In April 1803
Talleyrand arranged Napoleon's sale of Louisiana to the
United States for $15 million. In his definitive and
entertaining biography, "Talleyrand -- ou le sphinix
incompris" (Flammarion, 1970), p. 397 (English
translation, "Talleryrand -- The Art of Survival"
(Knopf, 1974), p. 281), Jean Orieux notes that France
paid an unexplained 10 percent negotiating charge on
the gross sales price, and hints that this "fee" may
have facilitated Talleyrand's acquisition of Valenay
the following month. Purchased at Napoleon's urging as
a place to receive princes and foreign diplomats,
Valencay, once under contract to John Law and among the
last remaining great feudal estates of the Ancien
Regime, fell by serendipity into Talleyrand's hands.
Thus, as Orieux wryly observes (p. 298), "The
shipwreck's most illustrious victim claimed the best of
the wreckage."

A malicious rumor that Talleyrand counterfeited notes
somewhere in the cellars at Valencay never gained
traction. His preference for real money was too well-
known. Acts of official thievery are one thing.
Undermining the monetary system is quite another. With
nothing but contempt for real money, today's
manipulators of the gold price share Talleyrand's
thirst for wealth and power, but they lack his ability
to discern and effect the broadest national and
international interests. His public legacy was relative
stability merely tarnished by greed. Theirs will be
chaos as the product of greed -- not the simple greed
of individuals but that of great commercial nations
seeking to capture much of the world's physical wealth
by foisting their unlimited fiat currencies upon lesser