MorganChase tells GATA it wants to be a leader in financial disclosure

Why the Gold Cartel Will Fail
to Prevent a Primary Bull Market in Gold
-- and the Real Reason They're
Trying to Prevent It Anyway

By James Sinclair
and Harry Schultz
September 3, 2002

1. J.P. Morgan/Chase appears to be, by
accident or intention, the main member of the
gold dealers' short seller's club.

2. In our opinion central banks have given
JPM lease agreements whereby JPM receives
physical bullion by paying three-quarters of
a percent annual interest. JPM and/or its
clients are free to use or sell this gold
however they want. JPM or its clients appear
to have used this gold to sell violently at
key technical points -- $312.50 to $314.80
(today) and $315 and $329.50-$330, thereby
depressing the gold price.

3. Moody's credit rating service recently
downgraded Morgan/Chase. Then Standard amp;
Poor's rating service downgraded Morgan/Chase
based on specific derivative positions.

4. The total derivative positions of
Morgan/Chase can be found at the U.S. Office
of the Controller of the Currency. The
Controller of the Currency reports to the
International Monetary Fund, which shares its
data with the Bank for International
Settlements.

5. So the positions carried by Morgan/Chase
are public, but the public has no real idea
on where to find the data.

6. The total of all derivatives on the books
of Morgan/Chase on all underlying assets is
$74 trillion. Yes, $74 trillion.

7. The size of the gold derivatives on
Morgans/Chase's books is $46 billion to $60
billion, depending on valuation methods.
Yes, $46 billion to $60 billion.

8. All gold derivative dealers use risk-
control programs to manage their gold
positions. These programs maintain the risk
of the gold derivative to the dealers at the
degree chosen by the trading management at
the inception of the transactions.

9. All the gold derivatives on the books of
Morgan/Chase are short spreads -- short of
gold. If they were not short spreads,
Morgan/Chase would be extraordinarily PLEASED
by the rise in the gold price and bullish
about gold.

10. The total of the international position
of short spread gold derivatives is $300
billion, according to IMF and BIS reports. If
you convert $300 billion into ounces of gold
at the present price, you get more than 900
million ounces.

11. When the gold price hit $305, it
triggered the risk-control programs of gold
dealers to buy gold to maintain the risk
exposure of the gold derivative short spreads
for the dealer cabal/cartel, of which, in our
opinion, Morgan/Chase is the major if not the
main player. As gold, with the help of the
cartel, dropped from the high $320s, the
risk-control programs triggered selling of
gold for the same reason. At $302-$305, risk-
control programs returned to neutral. Now
you can clearly understand the action of the
gold market.

12. If gold closes above $330, the risk-
control programs of gold dealers will start
to demand that for each ounce of gold sold
short in the short gold spreads, the dealers
must own long about .623 ounces of gold.

13. At a gold price close at/or above $354,
the gold dealer cartel's risk-control
programs will call for approximately .986
ounces of gold long for each ounce short on
the gold derivative short spreads.

14. That would be practically a 1-to-1 ratio,
one ounce short to one ounce long required to
maintain solvency under risk-control programs
at $354 gold.

15. The demand in gold ounces that would be
created among commercial banks, gold banks,
and gold dealers under risk-control programs
by a gold price at or above $354 would be
about 886,325,000 ounces. That number exceeds
all the gold that all the central banks have,
including all the gold they have leased and
not accounted for. So at a price of $354,
gold will have to go ballistic or the
greatest bankruptcy in history will occur
for the gold derivative dealers.

16. It is not the gold derivative position
that worries the major investment banks that
have gold-dealing subsidiaries. It is not the
$47 billion to $60 billion in gold
derivatives on the books of Morgan/Chase that
worries them. No, in our opinion what worries
them is the effect that an explosion in gold
derivatives would have on the $23.7 trillion
in other derivatives on the books of
Morgan/Chase.

17. This is why Morgan/Chase and the other
gold cartel members are stopping gold at
$312.50 to $314.80 today (as this is written)
with the help, in our opinion, of central
banks.

18. Such a manipulation to prevent the gold
market from rising above $354 will fail
because history tells us that no manipulation
can stop a primary, fundamentally driven bull
or bear market in anything.

18. The two greatest traders in history, the
late Bertram J. Seligman and the late Jesse
Livermore, taught that a successful
manipulation must always be in the direction
the market wants to take fundamentally and
technically. Any other manipulation not only
fails; a manipulation against the
fundamental and technical desire of a market
will create a coiled market that goes further
in the direction of its intention than it
would have gone in the first place. So the
result of the attempt by the gold cartel to
hold the market down will be to propel it
higher than it would have gone on its own.

19. To complicate the problem, gold
derviatives are as follows:

a. Not transparent.

b. Unregulated.

c. Unlisted.

d. Not clearinghouse-funded.

e. Not market-priced.

f. Generally non-transferable, as many are
specific-performance obligations.

g. Without standard, so that closing can't be
made at will.

i. Totally dependent on the balance sheet of
the granting entity.

j. Approximately 89 percent of these
transaction have been done with entities that
have nothing to do with them mining industry
as counterparty to the gold bank derivative
dealer. So the gold market has come under
continued selling by those entities (gold
banks and gold dealers), which will suffer
the most, assuming, as we do, that gold is in
a primary fundamental bull market, based on
five fundamental factors. Those factors are:

1. The U.S. current account must be in a
position of growing deficit. This is indeed
the present condition, and it shows no sign
of reversing. This account measures U.S.
dollars in the hands of non-U.S. entities.
This money is usually invested primarily in
U.S. federal debt instruments.

2. A negative trend in the U.S. dollar. It
should have the characteristics of a bear
market. This applies to the dollar today. We
have a classic long-term top called a head-
and-shoulders formation, which was confirmed
by price and volume action. Even the dollar
bulls now are looking only for the dollar to
stabilize at lower levels.

3. The general commodity market is showing in
many ways, fundamentally and technically,
that it is in a base formation from which one
can expect higher prices.

4. Trust in paper assets must be waning
for gold to assume an investment role
internationally. We see the recent problems
with the Arthur Andersen accounting firm, and
concerns about the accounting practices of
major companies like General Electric, IBM,
and Enron, which have turned investors away
from belief that paper assets are storehouses
of value.

5. The bond market must be weakening. We see
this now.

As these factors strengthen, the
underpinnings of a long-term market bull
market in gold will strengthen too. The
strenthening of these factors has caused the
rise of gold from $260.

So the gold cartel is in harm's way. A
bankruptcy of the derivative dealers that
represent those $72 trillion in derivative
positions (termed quot;sewagequot; by Warren
Buffett), the greatest debt ever created, is
why gold could go to $1,450 or even $1,700.

When gold reached $887.50 in March 1980, $900
was the price that would have balanced the
balance sheet of the United States, defined
as the comparison between federal asset gold
and external debt obligations. If a
derivative failure happens in the next five
years, it would produce a gold price between
$1,450 and $1,700 to balance the balance
sheet of the United States.

----------------------------

Harry Schultz is editor of the International
Harry Schultz Letter (www.HSLetter.com) and
Gold Charts 'R' Us. He can be reached at
HSLmentor@racsa.co.cr. James Sinclair is
chairman of Tan Range Exploration
(www.TanRange.com) and a veteran of the gold
business.