Essays

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:

1. Unregulated.
2. Traded in private treaty negotiations.
3. Price determined not by market forces but rather by computer simulation.
4. Short gold spreads mainly in one form of another.
5. Far dated.
6. Non transparent
7. Without a clearing house function in order to guarantee the financial integrity of the instrument.
8. 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.
9. 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.
10. 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:

"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.

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).