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WHITHER GOLD? a Brilliant Essay

Section: Daily Dispatches

Hello GATA Members,

In this posting are four GATA E-mail Campaign Action Messages, and an
extract from an essay by David Tice of the Prudent Bear Fund on the true
position on derivatives as opposed to that given by FED Chairman, Alan
Greenspan. Plus a final word on where to find in-depth information on
what is happening in Kosovo.


Richard Harmon writes:

On 17 March GATA member Richard Harmon advised me: "Around February 15th
I E-mailed my Senator (Wayne Allard) asking he put a stop to the
manipulation of gold price. Two weeks ago, I got a letter from him
explaining that he did not believe the Federal Reserve was involved in
the manipulation and conspiracy BUT,was forwarding my E-mail to the
Federal Reserve requesting (strongly) a written response and his office
and me. This letter was dated Feb. 25. As the price of gold is still
being manipulated and as I have received no response I am giving the
story to Steve Forbes today.

"When the Federal Reserve refuses to even respond to an American Citizen
& a Senator concerning manipulation of gold price, we've caught them.
Now with Congressmen writing bills which would do away the Federal
Reserve we will win. The fact that the Federal Reserve refuses to reply
to a US Senator concerning the issue say a volume - don't you agree?"

GO GATA Comment: Absolutely, agreed. If other GATA members write to
Steve Forbes at Forbes Magazine, it will help ensure that he picks up
the story and runs with it.

- - - - -
New GATA member Jim Cole, sent this letter to the editors listed at

Dear Sir,

I trust you are aware that Congressman Jim Saxton (NJ) who is also
Chairman of the Congressional Joint Economic Committee; and his fellow
Committee members are reviewing the pleas to sell U.S. gold for the IMF.

Congressman Saxton, who has been on the Hill since 1984, has a
website. His office phone is 202 225 4765,
his fax is 202 225 0778 and his email address is

I have heard reports that the Committee does not understand why this has
to be done as it is apparently really an accounting gimmick. All the IMF
has to do is reduce the interest rates they are charging the poor
countries. It was reported that one staffer to whom a friend spoke said
"Jim Saxton and I understand that selling more gold hurts those mineral
rich, but poor, African countries, the IMF says it wants to help!". He
also said " the Committee was at "war" of sorts with the Treasury,
headed up by Robert Rubin, former top dog at Goldman Sachs.

They do not like certain ways the IMF is operating and disagree with a
decent amount of the IMF's policies. From a tactical standpoint they
know they can only focus on certain issues with their "war" with the
Treasury. The IMF gold sale proposal is one that they have chosen to
highlite the errant ways of the IMF. They feel it can be a lightening
rod for them.

On Friday 03/19, Congressman Saxtons office issued the Press Release on
behalf of the Joint Economic Committee. HOWEVER, THE WIRE SERVICES DID

I don't know whether or not you have heard of GATA (Gold Antitrust
Action Committee). This is a non profit federation of investors and
mutual funds, gold exploration/mining companies and others who suspect
world wide active collusion to keep the price of gold down; with the
principal actors reportedly being some very prominent U.S. Investment
Bankers with Goldman Sachs and J.P.Morgan reportedly heading the list!

It is believed that scandalous profits are being made by pursuing what
may very well be a violation of U.S. Anti-Trust Laws.

Donations are on a strictly voluntary basis. I am a 76 year old
supporter and own over $100,000 (current depressed value) in gold and
metal stocks. In just a few weeks, with their campaign just getting
underway GATA has raised almost $ 30,000. It is their intention to
retain a nationally known eminent Anti-Trust counsel ( such as a Berger&
Montague) as GATA's law firm in the near future to get to the bottom of
this and to support GATA's belief that US Anti-Trust laws are being
violated by US Gold Traders and Investment Bankers.

IF the light of day is focused on this question and collusion/criminally
illegal activity is found to be rampant, this could blow the lid off the
whole mess and lead to an explosion in gold prices- as the "shorts" try
to cover!! This could well be impossible, if reported short figures are
correct.Such an event could additionally have an adverse impact on
governments who continue to print "paper money" and central banks who
have "leased" their gold to the shorts (to enable the shorts to
manipulate the market); especially if the shorts are unable to repay the
borrowed gold- or worse yet- go bankrupt!

For further background information, I would strongly suggest you-write
to Bill Murphy, Chairman of GATA at as well
as visiting their website at

In addition I would suggest you or your staff visit
This site; WHICH IS FREE FOR TWO WEEKS is an excellent compilation of
articlesfrom people around the world commenting on/supporting the
suggestion that something is definitely AMISS in Alices Wonderland!
While lengthy I hope this letter has aroused your investigative nature
enoughto merit taking a closer look.


James A. Cole Jr
* * * * *
Press Release from Congressman Jim Saxton


Legislation to enforce Congressional reforms of the International
Monetary Fund (IMF) could finance its policy initiatives without gold
sales, Congressman Jim Saxton said today. Saxton pointed out that if the
IMF discontinued its policy of using heavily subsidized interest rates,
additional funds would become available to the IMF that would strengthen
its financial structure.

"A key problem with the IMF is its use of deeply subsidized,
below-marketinterest rates on most of its loans," Saxton said. "The
standard IMF interestrate is below 4 percent, and even the alternative
higher interest rate sometimes used by the IMF is also subsidized.
Interestrates in the range of 4 to 7 percent for deeply distressed
borrowers distort price signals, waste taxpayer money andtend to deepen
existing moral hazard problems. "

One effect of the gold sales proposal is to help the IMF provide debt
reliefwithout having to resort to the use of true market interest rates
to increasecash flow. Congress should closely examine this proposalfor
gold sales in light of the Congressional IMF reform legislation
intendedto mandate the use of market interest rates in typical IMF
bailouts. In thecase of the Brazil bailout, for example, the IMF
interest rates are still considerably below market interest rates.

"The new IMF bill ready for introduction will pressure the IMF to comply
withthe reform legislationpassed last fall by using true market interest
rates intypical IMF bailouts. Unfortunately, there have been indications
that the IMF and Treasury may not implement this legislation in line
with Congressional intent.

In my view, instead of minimizing the interest rate reform, the IMF
shouldapply it much more broadly to all of its lending. "The issue of
gold sales should also be viewed in the context of the IMF's financial
structure. The IMF has very short-term liabilities and much longer-term
assets. This maturity mismatch between the liabilities and assets on the
IMF balance sheet undermines its liquidity. In addition, IMF loans are
heavily concentrated among its 5 largest borrowers, lessening
diversification and increasing risks.

Furthermore, the IMF's use of interest rate subsidies promotes moral
hazard and underminesits potential reserves, encourages complicated ad
hoc measures to finance additional programs such as debt relief, and
fosters a reliance on continual quota increases.

Unqualified acceptance of the gold sale proposal would be viewed as an
endorsement of these current IMF policies,"Saxton concluded. For more
information on the IMF,please visit the JEC website at

- - - - -
Rod Michel, who had a good response from Senator Lugar of Indiana to a
pro-GATA communication, has followed up with:

Dear Senator Lugar,

Thank you for a response, and raising some of my concerns, I can
appreciate both sides of the issue, but must get this off my chest: My
GOD when are the Orwellian type of proposals and laws gonna stop!!!

Since big banks want to regulate the common man, perhaps we need to
regulate them and their collusionary hedge fund activities in they yen
carry trade, and gold-carry trade arenas? What is good for the goose, is
good for the gander, except in this case, we are the geese and are
getting cooked!

Much of the world economic turmoil is due to the manipulation of the
markets when hedge funds like LTCM are selling borrowed currencies (Thai
Bhat, Brazilian Real for examples) then selling the currencies to buy US
Gov't Treasuries and Bonds, and ain't it interesting how the borrowed
currencies are subsequently being' devalued'? It has been a real eye
opener for me as a youngster climbing the mountains of knowledge and
'seeing' clearly behind the facades of numbers and spin being promoted
by the Clinton Administration, Exchequer Brown & Cronies Inc.

I am EXTREMELY concerned about China as we all rightfully should be, and
I cannot believe that our US Gov't gave the Red Chinese our Tech!?!

Thanks for listening,

Please Respond.

- - - - -
Jim Bruce writes:

Check out for a great site that offers daily
commentary on markets with heavy emphasis on metals. Headed up by
Steven Jon Kaplan

Also Large coin dealer.

The American Sentinel, Editor Lee Bellinger, PO Box 12497, Charlotte, NC
28220. Office 704
504-1899, Secure Editorial Fax 704 365-1845 - E-mail Conservative monthly
12 page newsletter. Strong on how government is eating away our
freedoms and the ways they employ that. Price fixing of our most
precious asset? Circulation probably 25-50,000.

The McAlvany Intelligence Advisor, PO Box 84904, Phoenix, AZ 85071.
Editor Donald S. McAlvany. Monthly 30-36 page newsletter with analysis
of global economic, monetary and geo-political trends which impact the
gold and precious metals markets and is explicitly Christian,
conservative and free market in its perspective. 800 528-0559 Probably around 10,000 circulation. Has a coin and
bullion division

Gold Rarities Gallery - Al Pinkall, President - PO Box 1140, Amherst, NH
03031 - Coin Dealer - Suggest letter for help with donation and his
contacts in the business. He has no site or newsletter.

Strategic Investment, LLC - Editors Rt. Hon. Lord Rees-Mogg, James Dale
Davidson - 1217 St. Paul St., Baltimore, MD 21202 - 410 234-0691 - This
is a great newsletter that is pro-gold, anti-Clinton and high
circulation probably >100,000.

More when I can...

- - - - -

Ken Reser, Rod Michel and Jim Bruce have all written in, pointing to
the importance of GATA putting together good information for the GATA
E-mail Campaign on how derivative trading through hedge funds is
destabilising the financial markets. We need to show how the manic
trading is compelling CB's to be soft on credit expansion and hard on
gold, as part of maintaining the pretense that all is well with the
dollar, when it clearly isn't.

GATA Secretary Chris Powell and I, Bodwin, are working on this. We are
doing this inbetween working on 101 other things or maybe fewer and
would really appreciate your sending us facts and figures and

In the meantime, members who are e-mailing the media and politicians and
posting at gold sites, could make good use of this information about
derivatives, taken from David Tice's posting at Le Metropole Cafe on
Wednesday, March 25:

Last week, Mr. Greenspan spoke before the Futures Industry Association
where the topic of his speech was financial derivatives. He began his
speech stating "By far the most significant event in finance during the
past decade has been the extraordinary development and expansion of
financial derivatives." He goes on to say that the total amount of
derivatives globally now likely approaches $80 trillion. For US
commercial banks, alone, the number is $33 trillion, which compares to
total commercial bank equity of about $460 billion. Derivative positions
have grown since 1990 at a 20% compound rate. And while it would have
been reasonable to expect a more cautious approach to derivatives after
the recent debacles in Asia and Russia, our banks have shown anything
but caution. US banks have expanded total derivative positions by 30%
the past year. This is appalling and it is simply unthinkable that Mr.
Greenspan remains such a devoted proponent of derivatives. All the same,
Mr. Greenspan explains, "The reason that growth has continued despite
adversity, or perhaps because of it, is that these new financial
instruments are an increasingly important vehicle for unbundling risk".
Later, he adds, "In short, the value added of derivatives themselves
derives from their ability to enhance the process of wealth creation."
Mr. Greenspan also makes the claim that "derivatives are mainly a zero
sum game: One counterpartys market loss is the other counterpartys
market gain."

We are afraid that Mr. Greenspan is completely mistaken about
derivatives. In past speeches, he has even gone so far as to make the
claim that derivatives have increased the standard of living for
citizens globally. We doubt too many government officials or citizens in
Asia, Russia or Brazil would see derivatives in such a positive light.
Indeed, derivatives were much a contributing factor to the currency
crises in SE Asia, and later, Russia and Brazil. First, investment
bankers created huge amounts of sophisticated derivative instruments
involving Asian currencies and securities as part of the enormous
increase of global capital that flooded into the region between 1993 and
1996. Wall Street derivative departments created very popular
instruments to participate in the Asian Tiger "miracle". (For a great
read, check out the book F.I.A.S.C.O. by Frank Portney) It became very
fashionable in the US hedge fund industry to buy call options on SE
Asian equity markets. It became commonplace, as well, to buy
sophisticated derivatives that, for example, would allow the holder a
big bet on Thailand debt securities with funds borrowed in Japan at low
rates and through shorting the Japanese yen.

These derivative trades had all the appearance of "easy money",
leveraging the interest rate differentials between various markets,
until it became clear to some that the regions big financial and
economic bubble was in jeopardy. Then, capital flight quickly led to
currency pressure and, quickly, the breaking of currency pegs. These
pegs had, for years, held many Asian currencies to the dollar and were
critical to enticing foreign capital into these economies. But when
investors wanted their money back, there was no one to take the other
side of the trade and the pegs broke almost instantly. As always,
markets work great during bull periods when money is coming in, but
falter quickly when money wants to get out.

The derivative trades broke with the Asian currencies, as these highly
leveraged speculations were but a house of cards that quickly collapsed.
An unwinding of these derivative positions led to a wholesale dumping of
the underlying currencies and securities, leaving markets frozen in
illiquidity. In South Korea, where the Korean won traded with a 10%
daily price change limit, this currency traded "limit down" four
straight days as huge sell orders swamped the market and no buyers could
be found. Throughout the region, derivative-related forced selling led
to the virtual collapse of currencies, securities markets, financial
systems and economies throughout the region. In Russia, foreign
investors who were speculating aggressively in the Russian debt markets
entered into derivative contracts with Russian banks to protect against
a decline in the Ruble. When the Ruble collapsed, the Russian banks also
collapsed and defaulted on their derivative obligations. It became one
big derivative fiasco.

Importantly, many "hot money" speculators and institutional investors
that came to the region were under the assumption that it would be
possible to use derivatives to protect against loss; to use them as
insurance. The belief was that when storm clouds approached, they would
simply call their favorite Wall Street derivatives trader and buy puts
to protect against loss. Importantly, this assumption of the easy and
inexpensive availability of insurance changed behavior; investors took
more risk then they would have, had derivatives not existed. In this
regard, a good analogy would be the availability of inexpensive flood
insurance leading to homeowners building expensive homes along a river,
within the "100 year flood plane". Everything is great for awhile, as
considerable building takes place along the river and insurance
companies makes lots of easy money writing flood insurance. But,
unfortunately, it is a disaster for all involved with the inevitable
arrival of the wipeout flood.

A massive "flood" hit the emerging markets and it was truly an absolute
wipeout. Derivatives had enticed imprudent behavior by investors and
absolutely reckless behavior by speculators. Derivatives did not
contribute to wealth creation, but, instead, exactly the opposite. They
were a major factor leading to huge "hot money" flows, a complete
distortion of risk perceptions and they certainly became a major factor
behind the huge financial excesses and economic distortions that led to
the regions terrible bubble and collapse.

Unfortunately, we see all the same types of behavior in the US today. In
Asia, when the crisis developed, market participants not only tried to
dump their leveraged derivative positions, they also attempted to
purchase derivatives as insurance, much like homeowners on a river
trying to buy flood insurance after the heavy rains begin. This only
exacerbated the crisis and led to a self-feeding meltdown.

What was not appreciated in Asia or Russia then, and what is certainly
not understood in our market today, is that only individual market
participants can hedge exposure with derivatives, not the entire market.
If much of the market attempts to use derivatives for hedging, there is
simply no one with the resources to take the other side of the trade. If
no one takes the other side, the only way to hedge is to sell securities
and, when the crisis begins, prices collapse as derivative-related
selling simply overwhelms the market place. With about $14 trillion of
stock market value in the US today, the market is too large for
significant amounts of risk to be "unbundled", as Mr. Greenspan likes to
say. Indeed, who has the resources to "insure" against a 25% market
correction that would involve stock market losses of $3.5 trillion? The
answer is no one.

Granted, derivatives have worked well in the US equity market so far,
just as they appeared to work great in Asia and Russia during their
respective bull markets. Its been like writing flood insurance during a
long drought. However, derivatives are much a bull market phenomenon.
They work splendidly when prices rise and their most favored use is for
leveraged speculation. They dont work well at all and are, in fact,
disastrous when a bear market strikes and the underlying derivative
leverage is exposed. The panic is only further exacerbated by put buying
for insurance purposes. Here, as was the case in SE Asia and Russia,
they hold the potential to create a debacle. We mention derivatives
today as we believe they will become a major issue going forward in the
developing bear market.
It is our view that derivatives have come to have too much impact on our
stock market. We suspect that huge amounts of hidden leverage exist
through derivative speculations. Certainly, the Dows run last week to
10,000 was much related to derivative trading and options expiration. It
is certainly our belief that derivatives will be a major factor in the
coming US stock market decline. Mr. Greenspan was Fed Chairman back in
1987 when portfolio insurance derivative strategies were a major force
behind the crash. It is just shocking that he has become such a
proponent of derivatives and believes that they actually reduce risk
when it is patently obvious that a proliferation of derivative trading
only greatly increases systemic risk. With the coming crisis it will
become obvious that losses for our financial system and economy will be
anything but "a zero sum game"!

- - - - -

In Peace,
FOR GATA, for gold,

Boudewijn Wegerif (Bodwin)
Moderator GO GATA E-mail Group