Gold Derivatives, Gold Lending, Official Management Of The Gold Price And The Current State of the Gold Market by Frank VenerosoSubmitted by Administrator on Fri, 2002-05-17 07:00. Section: Essays
Fifth International Gold Symposium
May 17th, 2002
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.
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:
- Traded in private treaty negotiations.
- Price determined not by market forces but rather by computer simulation.
- Short gold spreads mainly in one form of another.
- Far dated.
- Non transparent
- Without a clearing house function in order to guarantee the financial integrity of the instrument.
- 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.
- 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.
- 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:
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."
"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.
When, lo, as they reached the mountain's side,
A wondrous portal opened wide,
As if a cavern was suddenly hollowed:
And the Piper advanced and the children followed,
And when all were in to the very last,
The door in the mountainside shut fast.
"The Pied Piper of Hamelin"
Images of riots and runs on banks in Argentina greeted our New Year. For Americans, it's just another disaster in some distant country. It's just another run-of-the-mill Latin American or Third World crisis. Nothing new, they have them all the time!
T. S. Eliot wrote ("Philip Massinger," The Second Wood,1920): "Immature poets imitate; mature poets steal." The famous literary critic Lionel Trilling gave Eliot at least one good review, writing in the September 1962 edition of Esquire (as quoted in The International Thesaurus of Quotations (Harper Collins, 1996), p. 508, and in R. Andrews, Famous Lines: The Columbia Dictionary of Familiar Quotations (Columbia Univ. Press, 1997), p. 368): "Immature artists imitate. Mature artists steal."
A few weeks ago I received an interesting email from Andrew Hepburn. He is a diligent researcher who has done yeoman's work for www.GATA.org, an organization formed for one purpose - to find the truth about who is keeping a lid on the gold price. Andrew and I recently have been sharing information and research on a number of matters, and he brought to my attention an intriguing footnote in a 1997 report called the "Consolidated Financial Statements of the US Government" (CFS).
What U.S. and Foreign Officials Have Said About The Fed's Activities in the Gold Market - Bill MurphySubmitted by Administrator on Mon, 2002-01-07 08:00. Section: Essays
From the transcript of the minutes of the Federal Open Market Committee on March 26, 1991 (www.federalreserve.gov/fomc/transcripts/1991/910326Meeting.pdf): Near the end of a lengthy discussion (pp. 8-21) of U.S. foreign exchange reserves, which are held in approximately equal portions by the Fed and the Exchange Stabilization Fund, former Fed governor Wayne Angell added (p. 19):
The following documentation and statements were presented in Reg Howe's lawsuit filed in the District Court of Massachusetts against Defendants: Bank for International Settlements, Alan Greenspan, William J. McDonough, J.P. Morgan & Co. Inc., Chase Manhattan Corp., Citigroup, Inc., Goldman Sachs Group, Inc., Deutsche Bank AG and Lawrence H. Summers, Secretary of the Treasury.
*In July 1998, Fed Chairman Alan Greenspan, testifying before the House Banking Committee, stated: "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise." This statement amounted to a declaration that the gold price had been and would continue to be controlled.
The Christmas, end-of-year holiday season is often a time of reflection for many of us. As a result of the Terrorist attacks and warring strife in the world, the closing out of 2001 may be more poignant than most years. As chairman of The Gold Anti-Trust Action Committee, it certainly is for me.
Chris Powell and I will soon commence year four in our effort to expose the manipulation of the gold price. From day one we stated that our main goal was to expose the "truth" about the gold market. That is what we told the Speaker of the House, Dennis Hastert; the chairman of the Subcommittee on Domestic and International Monetary Policy, Spencer Bachus; the chairman of the House Joint Economic Committee, James Saxton; and the President of the United States, George W. Bush, via his private fax.