Gold Derivatives, Gold Lending, Official Management Of The Gold Price And The Current State of the Gold Market by Frank Veneroso

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Fifth International Gold Symposium

Lima, Peru

May 17th, 2002

Part 1

Gold Lending And Official Management Of The Gold Price

Let's begin with an explanation of gold banking and gold derivatives.

It is a simple, simple idea. Central banks have bars of gold in a vault. It's their own vault, it's the Bank of England's vault, it's the New York Fed's vault. It costs them money for insurance - it costs them money for storage--- and gold doesn't pay any interest. They earn interest on their bills of sovereigns, like US Treasury Bills. They would like to have a return as well on their barren gold, so they take the bars out of the vault and they lend them to a bullion bank. Now the bullion bank owes the central bank gold---physical gold---and pays interest on this loan of perhaps 1%. What do these bullion bankers do with this gold? Does it sit in their vault and cost them storage and insurance? No, they are not going to pay 1% for a gold loan from a central bank and then have a negative spread of 2% because of additional insurance and storage costs on their physical gold. They are intermediaries---they are in the business of making money on financial intermediation. So they take the physical gold and they sell it spot and get cash for it. They put that cash on deposit or purchase a Treasury Bill. Now they have a financial asset---not a real asset---on the asset side of their balance sheet that pays them interest---6% against that 1% interest cost on the gold loan to the central bank. What happened to that physical gold? Well, that physical gold was Central Bank bars and it went to a refinery and that refinery refined it, upgraded it, and poured it into different kinds of bars like kilo bars that go to jewelry factories who then make jewelry out of it. That jewelry gets sold to individuals. That's where those physical bars have wound up---adorning the women of the world.

New York Post - "Silence May Not Be Golden at J.P.Morgan Chase"

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New York Post

by John Crudele

NOT too many people would recognize the name Dinsa Mehta, at least not outside the rarefied world of J.P. Morgan Chase's executive suite. But it was a rumor about Mehta's employment status at the bank that had the world gold market buzzing last week.

For the record, Mehta is still working for J.P. Morgan Chase, where he's been for 26 years. But he is thinking of leaving after a major shake-up reduced his responsibilities as head of global commodity risk management and global foreign exchange.

The 30 Billion Dollar Not Sure Thing - HD Schultz & JE Sinclair

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We herewith discuss, via the kindness of Bill Murphy (www.lemetropolecafe.com) and in HSL (www.hsletter.com), the unique and weak character of the vehicles used for hedging by the majority of gold producers of 100,000 ounces per annum and up. To review for our new readers, those instruments are briefly:

  1. Unregulated.
  2. Traded in private treaty negotiations.
  3. Price determined not by market forces but rather by computer simulation.
  4. Short gold spreads mainly in one form of another.
  5. Far dated.
  6. Non transparent
  7. Without a clearing house function in order to guarantee the financial integrity of the instrument.
  8. Traded with in most cases between the gold producer and their gold bank which is usually a non guaranteed as to trade debt subsidiary of a major investment bank or commercial bank holding company.
  9. The Gold Banks do not as a rule publish the total nominal value of derivatives issued to all clients to which the bank is guarantor. Therefore there is no way to know the real financial integrity of even a rich gold bank.
  10. We know of no gold producer. hedger that has a right of offset in their client contracts with their gold bank. This is a critical point that is discussed in the body of this article.

We could write tomes on the technical nature of the construction of these instruments speaking to counter party risk among other weaknesses but that is not the purpose of this communication. Let us say that the brief review above of stand out points suffices to bring you into our conclusions.

We and our friends at GATA believe strongly in free markets. That is a gold market free of all manipulators both quasi-legal and illegal. We believe that a free market is not participated in by governments using extraordinary powers. We feel that governments must comply tightly with industry created referees rules that insure level playing fields for all interests. That being said we cannot oppose the practice of hedging by any commodity producer for whatever purpose that free agent has in the mind. The market, being a great leveler of interests, will work out the merits and the punishments of each entity's decision

Yet we have a great concern for gold itself. There is no question that a 30 billion dollar participation in hedging instruments by the gold producer can only result in a significant if not history making melt down of the hedging vehicles.

Should this melt down occur few participants in the industry will avoid the consequences which are:

Gold Aims to Recapture Its Lustre as a Safe Hedge in Troubled Times

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Source: Knight Ridder/Tribune Business News
Publication date: 2002-04-03

Apr. 3--After years of playing the part of Cinderella to other more-favoured financial assets, gold is finally shaking off its dowdy image and taking a shot at gaining the prize for best-performing asset market of 2002.

Since 1997, $300 (UKpound 208) an ounce has been a ceiling for gold as a combination of central bank auctions and lending to hedge funds, forward sales by gold producers and the much-touted death of inflation conspired to keep the price well below its historic high of $870 hit in 1980.

GATA Urges Support For Congressmen Ron Paul's Gold Transparency Bill

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DALLAS--(BUSINESS WIRE)--March 4, 2002--Research by the Gold Anti-Trust Action Committee Inc. has been cited by U.S. Rep. Ron Paul, R-Texas, in support of his legislative proposal to prevent the U.S. government from intervening in the gold market without authorization from Congress.

Paul's Monetary Freedom and Accountability Act, H.R. 3732, originates in concerns that the U.S. government, acting through the Federal Reserve Board, the Treasury Department, and the Exchange Stabilization Fund, has been surreptitiously suppressing the gold price in order to distort general measures of the U.S. and world economies.

All That Glitters Is Not Gold

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By Kelly Patricia O'Meara
Insight Magazine
March 4, 2002, edition Posted February 8, 2002

http://www.insightmag.com/media/paper441/template/templatemedia/subscrip...

Even though Enron employees and the company's accounting firm, Arthur Andersen, have destroyed mountains of documents, enough information remains in the ruins of the nation's largest corporate bankruptcy to provide a clear picture of what happened to wreck what once was the seventh-largest U.S. corporation.

O'Neill and Greenspan Staring at Checkmate - Bill Murphy

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Yesterday, Secretary Paul O'Neill testified before the Financial Services Committee on the state of the international economy and the performance of the IMF and World Bank. Congressman Paul asked Secretary O'Neill what he thought of the Monetary Freedom and Accountability Act (HR 3732). Secretary O'Neill said he believed the administration needed the flexibility to deal with changes in the international economic system and would oppose anything that reduces the administration's "flexibility."

GATA Coverage (Picture) from The National Post (Canada)

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GATA Coverage (Picture) from The National Post (Canada)

The Short Seller's Nightmare - Thomas Q. Nichols

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"What lies behind us and what lies before us are small matters compared to what lies within us." -Ralph Waldo Emerson.

Gold Bulls express frustration with the lack of exposure to the obvious and deliberate manipulation of the gold and silver markets. Its not that this interference is new, but rather that it is so obvious. While a casual reading of the Briefs in the Hove vs. BIS lawsuit certainly causes one to question motives, looming in the balance is a much larger fiasco that the gold and silver market stratagems are masking and which is threatening to be exposed. These monetary metals exert fiscal pressure in response to imbalances and even though cartels can covertly disperse these pressures temporarily, economic truth will eventually prevail and lay bare the manipulators.

Paul Introduces Legislation Requiring Congressional Approval of Treasury Gold Dealings

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Le Metropole Members,

The following dispatch was just sent to me by Norman Singleton, Congressmen Ron Paul's Legislative Aide. Next week The Gold Anti-Trust Action Committee will begin an all-out campaign to build support for this bill throughout Congress. That can be done by contacting members of Congress and advising them of the importance of this issue, etc. More on that to come.