Dow Jones story on gold carry trade cites GATA

9:20p EDT Thursday, August 19, 1999

Dear Friend of GATA and Gold:

You may be interested in this story about the gold
carry trade from the Dow Jones News Service out of New
York yesterday. The top part of it, minus the quotes
from GATA Chairman Bill Murphy, were published in The
Wall Street Journal today. We're hopeful that the WSJ
will be doing a story about GATA soon.

Please post this as seems useful.

CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.

* * *

Echoes Of Yen Carry Trade Risks
Reverberate In Gold Market

By Michael Casey and Janet Whitman

August 18, 1999
Dow Jones News Service

NEW YORK (Dow Jones) -- Looking for another market risk
factor to worry about? Try the gold market.

There, certain investors have taken advantage of the
precious metal's relentless slide in the past three
years to put on what's known as the gold quot;carry trade.quot;

The trade involves borrowing gold from banks at
prevailing low interest rates, selling it and
converting it into cash, then using the proceeds to buy
higher yielding assets such as Treasurys.

If and when investors are forced to cover those
positions, some say the effect could resemble the
turmoil caused by the reversal in the popular yen carry
trade last fall, when the dollar nose dived and
investors were forced to flee high-risk assets.
Treasurys, already under pressure from concerns over
U.S. inflation risks, could be among those markets to
suffer in the fallout.

Limited disclosure means no one can ever really know
the full extent of the quot;carry tradequot; in gold, but talk
is certainly starting to grow on the issue.

Significantly, London-based Gold Fields Mineral
Services Ltd. this year made its first ever reference
to the carry trade in its closely watched annual survey
of the gold market.

quot;For many years a significant quantity of gold has been
borrowed as a source of cheap finance,quot; Gold Fields
said in its report. quot;The arbitrage has in fact been
remarkably similar to (though far smaller than) the
famous 'yen carry trade.'quot;

Gold Fields managing director Philip Klapwijk later
told analysts he estimated the size of those positions
to be 400 metric tons -- worth about $3 billion at
current rates.

The potential impact of a sudden reversal in gold, both
in terms of the quot;short squeezequot; boost it would give to
the price of gold and its effect on other markets,
would depend on the circumstances surrounding the
short-covering activity, said Gold Fields director Paul
Walker.

quot;If there were to be a major economic shock, those who
had been shorting the gold market would have to do some
quick covering. And, of course, 400 tons is not a
trivial amount,quot; Walker said.

Gold Remains The Cheapest Currency

At this stage, market analysts outside the gold market
don't seem focused on the gold carry trade at all. Many
told Dow Jones Newswires they were unaware of it.

This could suggest Wall Street's risk-hungry clients
aren't as enamored with the gold carry trade as they
once were with the equivalent yen strategy, and in that
sense that it presents less of a systemic risk. The
conservative policies adopted by hedge funds and other
such institutions after they suffered heavy losses
during the crisis in the fall may have had a
constraining effect.

There's no question, however, that the gold carry trade
has been an attractive deal, one that many hedge funds
and other speculative short sellers would have found
irresistible.

quot;Gold is the cheapest currency around,quot; said Hunt
Taylor, senior vice president of Rye, N.Y.-based
Tremont Partners, which tracks hedge fund performance.
quot;Hedge funds do occasionally find creative ways to
finance transactions in gold.quot;

Indeed, some market observers and participants allege
that, at the time of its near collapse, Long Term
Capital Management was exposed to the tune of 300 tons
of gold. An LTCM spokesman told Dow Jones Newswires
earlier this year that the fund had never invested in
metals, including gold.

Jump In Gold Lease Rates May Sour Carry Trade

From the time gold peaked at around $417.50 a troy
ounce in February 1996 to until just recently, gold
leasing rates rarely rose above 1 percent, while
long-term Treasury yields have been either side of 6
percent. That's a healthy spread.

However, lease rates, which reflect the cost of
borrowing gold, shot above 4% last week, with some
market observers speculating that Y2K fears and
liquidity concerns were behind the jump in rates.

quot;Lease rates have come down a bit, but they're triple
normal,quot; said Bill Murphy, chairman of the Gold Anti-
Trust Action Committee, or Gata, a group alleging that
a cabal of unnamed Wall Street investment houses and
bullion banks have been manipulating the gold market in
a collusive fashion. Industry and market participants
have responded with deep skepticism to Gata's claims.

Conspiratorial or not, Murphy's analysis highlights
some inherent risks in higher gold lease rates.

quot;It has to do with the general liquidity situation out
there,quot; said Murphy. quot;If the credit rates are rising,
why should there be any less scrutiny in the gold
market? Banks are going to start withdrawing their gold
liability in addition to the credit problems
surrounding Y2K. So you've got a double whammy.quot;

While gold prices skidded in a narrow range along 20-
year lows for much of July, the market began to stage a
bit of a recovery since last week, in part bolstered by
the jump in lease rates.

Some believe the higher rates could portend a sudden
and damaging short-covering rally in gold.

Still, it's difficult to to say how much gold is
currently being used as a true quot;naked shortquot; in the
carry trade and how much is simply part of producer
hedges or gold that is borrowed by fabricators to
produce gold-based products.

quot;There are some who argue that because of the huge
losses in yen carry trade that banks have been
refinancing their yen-dollar carry trades with gold,quot;
said Frank Veneroso, a gold expert at Veneroso
Associates and author of the Gold Book Annual. quot;I'm
very skeptical of that. And in any case, if lease rates
stay around 4 percent, the carry trades would be
reduced.quot;

While a rush to cover short positions would be of huge
benefit to the price of gold, it's unlikely to have
significant ramifications on other markets, he said.

quot;I don't think (the gold carry trade) is a big deal,quot;
he said. quot;I think that sometime down the road, it will
get unwound. But I've never believed it's been large
enough to create any systemic risk whatsoever,quot; he
said. quot;A couple of tens of billions of dollars ain't
going to get you anywhere in terms of systemic risk.quot;