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How Barrick Gold evades hedging rules

Section: Daily Dispatches

12:30a EDT Monday, June 28, 1999

Dear Friend of GATA and Gold:

It's time again for an exchange with an expert and
articulate critic, Martin Armstrong of Princeton
Economics International, who has graciously given
permission for me to send to you the essay below,
recently posted at the PEI web site.

Martin and I had an exchange here some weeks ago
and I hope it was as enlightening to you as it was fun
for me. I'll reply to Martin again shortly, and I think I will
have another reply to distribute to you from someone
else, after giving you time to study what Martin has to

But let me interject a cordial correction at the outset.

Martin calls GATA quot;a two-man army.quot; In fact, GATA
has three hard-working officers, dozens of contributors,
hundreds of correspondents, and, I think it is fair to
say, thousands of friends all around the world. If we are
not quite a full division yet, we are at least several
regiments, and well more than a patrol -- not a
military unit you'd want to confront in the dark,
which is exactly where we have to challenge our
enemies in the financial world.

But even a two-man army can cause a bit of trouble.
For I remember the old story from the Arab-Israeli war
in 1967.

The 3rd Egyptian Division was approaching the Suez
Canal when an Israeli Army lieutenant popped up on
a very high sand dune, hailed the Egyptian commander,
and politely urged him to take his soldiers back to Cairo.

Of course the Egyptian commander was annoyed at this
impertinence and sent a platoon up the dune to capture
the Israeli lieutenant, and all the soldiers in the platoon
went over the top. An hour passed and none of the
Egyptians came back -- but then the Israeli lieutenant
reappeared atop the dune and again warned the Egyptian
general to take his men back to Cairo.

This time the Egyptian general sent a regiment after the
Israeli lieutenant, and again they all disappeared over the
dune. Again an hour passed, whereupon the Israeli
lieutenant was back atop the dune warning the Egyptian
general to take his men back to Cairo.

Furious, the Egyptian general sent a full division after the
lieutenant this time, and all 20,000 soldiers disappeared
over the dune to chase the troublesome Israeli. Three
hours later there was a stirring at the top of the dune.
It was a wounded Egyptian private. He crawled over the
edge, propped himself up on his elbows, and cried out:
quot;General, go back! It's a trap! There are TWO of them!quot;

If anyone has Alan Greenspan's email address, copy this
to him as fair warning from GATA.

With good wishes.

Gold Anti-Trust Action Committee Inc.

* * *

Gold: Manipulation or Exaggeration?

By Martin A. Armstrong

Copyright 1999 / Princeton Economics International

June 10, 1999

A two-man army calling itself GATA has begun to besiege
the media attempting to gain a lot of press on the
platform that gold is being quot;manipulatedquot; by a cartel
of investment banks. They constantly point to what they
call the huge quot;carry tradequot; in gold were there is far
more gold sold than exists.

The tenets of the commodity markets, be it cash or
futures, is that every position is offset by and equal
and opposite position. There cannot be more outstanding
short positions than long positions, yet the total
number of positions combined can far exceed the actual
supply. However, the same thing can happen in Samp;P 500
futures or even U.S. 30-year bond futures. That is the
nature of the free markets. Those who own a commodity
have the right to sell it, lend it or hedge it to
someone else who is willing to take the other side for
whatever reason, be it hedging a future use or betting
on the next bull market.

Above all, this single misconception has been man's
greatest downfall. For during almost every great
financial panic in history, government has launched
intrusive investigations seeking to uncover that
horrible short position that has manipulated the entire
marketplace through its sheer ability to overpower it
with size. Every investigation to date has begun with
that misguided belief that a short position can be
larger than a long position, failing to understand in
the process that all positions must balance.

In the wake of the Panic of 1907, short selling was
declared a criminal act despite the fact that they
never found that horrible person who overpowered the
marketplace. Fortunately, the U.S. Supreme Court struck
down that law against short selling and the free market
went on. The true cause of the decline was only finally
revealed as a cash-flow problem, which in turn gave
birth to the Federal Reserve six years later.

An investigation was launched following the Crash of
1929 from which the Securities and Exchange Commission
was born. People from all over the country were
questioned by Congress and accused, without evidence,
of somehow being short behind the scenes. The mere
accusation made against people ruined their reputations
and provided the basis that launched a thousand
lawsuits. When the evidence was finally collected, all
the famous names were found to have been long not
short. From Rockefeller on down, they all lost
staggering amounts of money. The multimillion-dollar
short position never surfaced once again.

The same was true following the Crash of 1987. Those
who should have been short as a hedge against their
stock portfolios were in fact found to have been
significantly under hedged. No massive short position
ever surfaced from the 1987 investigation and they
imposed circuit breakers that needed to be revised in

The quot;carry tradequot; in gold that has been the subject of
much discussion is seriously misunderstood. There are
those who would like to point to this position as the
cause for the decline in gold. They are dead wrong.

The quot;carry tradequot; in the OTC gold market has been
around for years. The Arabs have used gold as a means
to earn interest without calling it interest. Islam
forbids the lending of money for interest known as the
sin of usury. The Arabs have used the carry trade in
gold since the early 1980s. They buy spot and sell
forward and collect the quot;carryquot; or premium on a back
month. This premium is a reflection of the cost to
quot;carryquot; a gold position. If you buy the current spot
and sell the forward, you earn that net difference
without being exposed to the price fluctuation of gold

In reality, the investment banks can book billions of
dollars of such transactions that have NO impact or
relevance to the gold market. Technically, the Arabs
are not receiving interest but instead they are buying
gold today and selling it for a few dollars more 3
months out. These profits are allowed under Islam,
whereas normal interest earnings are forbidden.

The Japanese are also involved in the quot;carry tradequot; in
gold. Public futures funds in Japan are still regulated
under the commodity acts even if they trade Nikkei or
Samp;P500 futures. Since the definition of ALL futures
funds remains that of a quot;commodityquot; fund according to
Japanese regulation, there is a strict investment
guideline. ALL futures funds must be invested 50
percent at all times in commodities. Hence, the
Japanese futures funds are also using the gold quot;carry
tradequot; in order to meet the crazy requirement that the
fund must be invested 50 percent in commodities at all
times. Again, gold is purchased on the spot and sold
forward without risk. Again, this becomes a paper
transaction where a bank will certify that there is a
trade on their books thus allowing the fund to meet its
requirements for being invested 50 percent in
commodities at all times. The balance of the fund then
CANNOT be invested in commodities and off they go into
the financial futures world trading Nikkei, JGBs, Samp;P
500, and the like.

Of course, the last type of this quot;carry tradequot; involves
the mining companies. Here, gold is sold forward in
order for a company to plan its operating expenses. A
budget can be established only if there is some assured
return for their production. Others may borrow gold on
an interest rate differential. In this case, a gold
loan comes with a lower interest rate. The gold is sold
on the spot and the loan is repaid from future
production. It is a cheap means of acquiring financing.

Interest on gold loans tends to be lower because it is
a dead asset on the books of its owners since there is
no income and often there is storage and insurance
costs. Consumers of such loans are typically mining
companies or manufacturers. The granters of gold loans
are holders including central banks. Holding gold
without lending can be very costly, but by lending the
gold a holder retains ownership since the borrower is
committed to repay the loan in gold plus interest
thereby reducing the holding costs.

Gold is no more being manipulated today in some grand
conspiracy than it was going into the 1980 high. We
disagree that the Hunts were market manipulators in
silver back in 1980. Perhaps one could have argued that
the Hunts manipulated silver IF it was the only
commodity to have risen during the entire period.
However, the CPI was hitting 17 percent annually and
people were hoarding toilet paper. All commodities were
in a strong bull market -- not ONLY silver.

Likewise, we find it extremely difficult to also accept
that just because of the quot;carry tradequot; in gold that it
is being manipulated lower when all other commodities
are also in a bear market. To further argue that if
these massive short positions were forced out of the
marketplace gold prices would rise makes no sense. If
you chase the Japanese and the Arabs out of gold,
nothing will change. These types of transactions do NOT
impact prices, but they do have an impact by making
gold appear to be extremely liquid. If you outlaw gold
loans you destroy the free market and most likely cause
massive liquidations on the part of those who have such
hoards but need some kind of income.

Those who jump up on the soapboxes and cry foul about
sales of gold by the International Monetary Fund, Bank
of England, and the rest of the central banks seem to
miss the point. The governments of the world DO NOT
share their belief that only gold is money and that a
return to the gold standard is inevitable. Such a step
back in time would require the complete abandonment of
virtually every social program introduced since World
War II -- a highly UNLIKELY political decision. The
governments of the world have a self interest in not
returning to the gold standard.

In 1985, we argued that governments must return to some
fixed exchange rate mechanism or that volatility would
escalate into 2003 disrupting the world economy as a
whole. The White House responded by stating that any
return to the fixed exchange rate system would mean
that quot;domestic policy objectives would be held hostage
to international policy objectives.quot; This was a fancy
way of stating that such a system meant a return to a
balanced budget, and in turn that meant that
politicians could NOT offer wonderful social programs
if they had to actually fund them long-term.

We do NOT disagree that the floating exchange rate
system has allowed national debts to explode and that
at some point in the future there must be
reconciliation with reality. However, such a collapse
in society is not likely to come before the 2012 time
period when the obligations of governments will be
unbearable. In effect, the formation of the European
Monetary Union this year is a step toward preparing for
these serious default problems in the future. In
France, there are plenty of guarantees by the
government for your pension but there is no money set
aside to support those guarantees. The French
population has no 401K or private system that they can
count on. This situation could spark the next French
revolution when the population faces the fact that
their pensions have only been political promises.

The same is true in many regions of Europe. By banding
together, Europe hopes to capture the capital that
moves between the cracks and thus increase their
revenues in an effort to reduce all future liabilities.
A Federal Europe will be far better equipped to deal
with the problems together rather than on a divided
basis. By allowing the euro to collapse, they are in
effect devaluing their future obligations, which is one
way of getting out of the mess. You meet your
obligations but you pay with a currency that is worth
far less than it was at the point the promise was made.
Then they manipulate CPI in an effort to reduce any
increase in liabilities by purporting that there is no

There is a serious question that needs to be asked
based upon the events economically since World War II.
The gold standard gave way because governments
continued to increase their debts but never readjusted
the price of gold in proportion to the increase in
money supply. Instead of admitting that their
borrowings had created inflation, they chose to close
the gold window and end the gold standard. The rally in
gold during the 1970s was a natural response for any
and all commodities that had been artificially
restrained. Thus, if one wants to discuss
manipulations, the gold standard was the biggest
manipulation of all by keeping the value of gold fixed
while the supply of money increased. Gold was NOT
money; it was merely a store of wealth in which money
was expressed. This is why the gold standard collapsed.

The global economy is indeed showing signs of distress.
The IMF loan portfolio looks like a charity case with
assets that will never be repaid. Any normal bank would
be declared insolvent and closed with a portfolio of
this nature. The IMF has long past its expiration date.
The original intent behind the IMF was to be a lender
to nations who temporarily were unable to meet their
obligations under the gold standard. Hence, the IMF
became the largest holder of gold in order for it to
provide gold loans. Since there is a political agenda
that is intent upon never returning to a gold standard
due to its impact upon the social goals of the left
wing, it makes perfect sense that central banks and the
IMF should in fact liquidate their gold assets. While
this may be a major bearish factor short-term, it is
also most likely going to provide a true free market in
gold long-term.

Gold will also be capped as long as the bulk of its
supply remains in the vaults of the central banks. The
idea that they are trying to manipulate gold lower is
not well-founded. Australia sold its reserves when they
caught wind of the true agenda of liquidation. From the
Australian perspective, they sold about $100 higher
than the current price, saving considerable national

For these reasons we do not see a conspiracy to push
gold lower just an international policy that has not
been publicly expressed. We do not see this as a
manipulation but as a change in monetary system policy
that is promoting the liquidation of gold assets and
its quot;officialquot; demonetization.

We have been blamed and criticized intensely for our
view on gold. We warned six months before the
marketplace became aware that the central banks were
going to be net sellers and we received hate mail
claiming that we were making up the entire issue. We
warned about the silver squeeze and that there was no
true shortage but that the metal was instead headed to
London where inventories are not disclosed.

We were attacked again claiming that we were making up
the entire affair, and companies like CPM claimed that
industrial consumption was the cause of the drain in
silver inventories. When the Bank of England suddenly
got involved, then Warren Buffett admitted that he
bought the silver and that it was in London where
several other parties were engaged in front-running
Buffett's order out of sight from the Commodities
Futures Trading Commission. We did warn that some of
the bullion dealers were selling gold aggressively and
buying silver to help push it up to the $7 level,
depressing gold in the process. Our sources on this
entire matter have always been reliable and they have
proven to be correct.

There is most likely the typical summer rally from a
June low that may yet develop. The public funds are all
quite aggressively short and a rally is starting to
appear overdue where a retest of $275-280 may be
likely. Nevertheless, the prospects for lower prices
into next year remain quite strong, where a drop to
just under $200 performs a retest of the 1974 high.

The bullion trade has tried to use Y2K as a reason to
rush out and buy gold. The central banks have been the
sellers into that retail consumer demand as well. Even
the British are now running advertisements offering new
gold coins struck for the millennium. Some of the
bankers have expressed a fear that the hype over Y2K
that has been used by some bullion dealers could prove
to be quite damaging to retail demand next year. The
concern remains that a sharp drop in demand could
unfold when the public sees that the banks have not
collapsed and that life goes on.

There is also a growing fear that perhaps net sales by
the public may also emerge causing prices to decline
even further. Those banks that are selling gold to the
public do NOT want to see a price collapse. They
naturally want to sell gold coins at the highest
possible price, as was the case with Australia.

We can entertain conspiracy theories and blame or
threaten everyone who has ever uttered a bearish word
about the precious metals, but this will not change a
thing. It is going to be a very difficult period ahead
for many involved in the precious metals and most other
commodities as well.

Nonetheless, the only hope will be new lows in 2000 and
a return to inflation perhaps due in part to Y2K. Any
disruption to supply will cause a shortage of goods and
that is price inflationary as was the case during the
late 1970s.

If there is no serious problem and the stockpiling of
goods and raw commodities by manufacturers going into
year-end results in excess inventories, then there will
be a risk of a further deflationary trend into 2002-
2003. Such an outcome would prompt further deflation
and postpone any bull market in commodities until the
2003-2007 time period. These are major economic issues
that will take time and patience to resolve.

Short-term price manipulation by dealers who run after
the stops of fund managers are a commonplace event in
the OTC cash markets of gold and foreign exchange.
Nonetheless, this does not rise to the level of a grand
conspiracy of monumental proportions intent upon
forcing a particular long-term directional trend. If
the central banks sell everything, they will have
nothing left to prevent a bull market from unfolding.
It will take time before we can see the new light of
day and a shift in the economic prospects worldwide.


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