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Reverse Gold Hedging

Who in their right mind would sell gold at the current low price? GOLD-EAGLE readers know the answer to that: the U.S. government wants to suppress the price of gold. It appears it has been shorting the gold market in any way they can…by hook or by crook. Who else?

Many have been misled by the massive propaganda machine (also sponsored by Uncle Sam and his cohorts) to the effect that gold is passe', a "barbaric relic," and that it no longer has any useful monetary function in today's world.

And how about the gold mining companies? They, too, are selling their precious ore at unbelievably low prices, and yet they are still having trouble making ends meet. Many have already gone out of business. So why sell it at such a low price? Simply answer: cash flow. How can they keep their doors open if they do not have money coming in? They do not want to sell their gold at such low prices, but they need the money to keep operations going. But is there any way around this "catch 22"? Perhaps.

Many gold mining companies hedged at higher prices. Fair enough in a market with the price trending downward. But the end effect of selling more gold on the open market contributes to pushing the price down. Wouldn't it be nice if the process could be reversed? Besides delivering into their hedging contracts and closing them out, there is one more possibility. I am not talking about adding more paper contracts to the flurry of gold based paper derivatives going around. I am talking about continuing production…perhaps even increasing production -- but not selling gold on the open market. Rather, they should keep the gold and silver until higher prices are realized. And by the very act of not selling their precious metals, the prices will be driven up.

Let me digress for a moment. The U.S. government has apparently been using the Exchange Stabilization Fund to short the gold market in a big way. They want to suppress the price of gold so that the world will think that there is NO alternative to the U.S. dollar as the world's reserve currency. The U.S. government apparently still has massive amounts of gold it could potentially sell (illegally, that is) and may be able to pressure other governmentss central banks into selling or leasing their gold reserves. Apparently, that is part of the reason Great Britain is selling most of its gold. In addition, if the Exchange Stabilization Fund runs out of cash, the governement may be able to divert cash from some other department or just print up the money needed to continue to short the gold market. Since fiat money has no backing, it is possible to produce an almost unlimited supply. The only thing that can stop this bogus game is to cause a short squeeze in the physical gold market.

So, Mr. Mining Executive, how can you have your cake and eat it, too? That is, how can you maintain some kind of cash flow and yet not sell your gold at such low prices? If you personally own gold bullion, you can go to many banks and borrow money against your gold. You just leave your gold on deposit with the bank and they lend you a percentage of its present value. Why not do the same thing with your company's bullion production? Of course, you might reply, "But the banks will just lend our gold into the market." But they cannot do that if they are contractually obligated not to lend your gold. If the banks are not willing to hold your gold, why not create your own bank?

Imagine a union of precious metals mining companies. The union establishes a bank that will take depositors money and lend it to the mining companies. In return, the mining companies deposit gold and silver bullion in the vaults of the bank. The bullion just stays there and is not "leased" or sold into the open market. The mining companies pay a small amount of interest and the depositors are paid a small amount of interest. This amount of interest might be equal to the going market rate for bank deposits or it might be a little less, depending on what the market will bear. People might be willing to lose a small amount of interest for the safety of gold and silver backed deposits, especially in the current climate of systemic risks to banks with derivative contracts totaling many times their net worth.

The total amount of money available for lending to the mining companies could potentially amount to 80% or more of the value of their deposits. Or perhaps the amount could be based on a percentage of the 200 day moving average price of gold or silver. Also, the value of the bullion deposits might not necessarily amount to the total value of deposits. A video-screen could be put up in the bank that daily shows the percentage of deposits covered by precious metals deposits. Depositors would be free to deposit money or take it out at will, based on the total precious metals backing.

Now flash forward to the advertising campaign. On the TV ad, there sits Clinton fidgeting in his seat as he lies about his relationship with a certain young woman. The announcer comes on and says, "Most banks' customers' deposits are only backed up by politicians' promises. In the event of a major banking collapse, the FDIC would not be able to protect your money. At Gold Miners' Union Bank, your banking account is backed by solid gold up (the announcer slams a large gold brick on the table). Which do you prefer?" And then you see a close-up of Clinton with sweat on his upper lip, along side of the gold ingot close-up.

If such a union and bank were put into existence, and enough of the mining companies withheld their precious metals from being sold on the open market, the price of gold would soon rise because there would simply not be enough metal around to meet physical demand. The jig would be up for the governments and their cronies in the bullion banks. The mining companies would quickly become much more profitable, and the little guys (like you and me) who see what a mess the financial system is in, would finally savor victory.

Denis Paul Bouchard
Taiwan

27 October 2000