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Buba: Blowing the Whistle on Big Bubba's Gold Manipulators?
The German Bundesbank, or "Buba" as it sometimes
called by certain locals, is reputed to make its views known
on occasion through articles placed in the Frankfurter Allgemeine
Zeitung, one of Germany's leading newspapers. On August 25,
2000, the FAZ ran an article about gold that featured
GATA and suggested that its allegations about recent manipulation
of gold prices -- likely orchestrated by the lame duck big Bubba
in Washington -- deserve serious hearing. In a follow-up article
on August 30, the FAZ discussed GATA's theories in more
detail, focusing on gold derivatives and naming all the major
players and suspects except one: Deutsche Bank. English translations
of both articles are available at www.egroups.com/message/gata/517.
It is hard to believe that a major German newspaper, having
delved this deeply into the gold story, plans to leave it without
mentioning the principal German connection. Accordingly, my guess
is that there will be at least one more FAZ article to
address the role of Deutsche Bank, including the recent huge
growth of its gold derivatives, especially during the last half
of 1999, and its apparent advance knowledge of the May 7, 1999,
announcement of British gold sales. In short, the Bundesbank
may be about to answer the question posed at the conclusion of
Deutsche Bank: Sabotaging
the Washington Agreement?, and unlike Shoeless Joe, this
Buba may not have to disappoint its fans.
Before speculating on the possible significance of the FAZ
articles, a few other facts may be relevant. First, on July 25,
2000, the BIS published in the Review section of its website
the speech by
Hervé Hannoun, First Deputy Governor of the Banque
de France, to guests of Goldman Sachs at its dinner party at
Les Invalides during the FT World Gold Conference in Paris last
June. In discussing the conservative views of the Banque de France
on gold, Mr. Hannoun identified the Banque de France and the
Bundesbank as "a driving force" behind the Washington
Agreement, which, in his words, "has re-emphasized
the role of gold." [Bold and italics in the original.]
He added:
It is true, however, that initial market reaction to the joint
statement was extreme. The immediate impact of the Washington
Agreement was all the more dramatic as a number of market participants
(gold mines, hedge funds) had accumulated big and, I would say
in some cases, excessive short positions. The fact that the short
sellers had to rapidly square their positions induced a brief
period of higher volatility, but also created the conditions
for a more orderly market and thus, during the last months, gold
prices have fluctuated in a relatively narrow range.
Second, on June 30, 2000, Hans Meyer, Chairman of the Governing
Board of the Swiss National Bank, unexpectedly announced that
he would retire at the end of the year. The SNB's press
release on his retirement states: "The reason he gave
for his decision was that he was certain it would be in the overall
interest if the new Governing Board could begin its work already
at the beginning of next year." Mr. Meyer is closely identified
with the Swiss gold sales. His early retirement would be consistent
with a concern that sharply rising gold prices might soon make
these sales an embarrassment to the SNB, which in the eyes of
many has been less than candid with the Swiss people about the
reasons for them.
Third, Deutsche Bank apparently continued to build up its
gold derivatives in the first half of this year. Its mid-year
financial report does not give the same level of detail on its
precious metals derivatives as its annual report. In the mid-year
report, precious metals derivatives are put in the "other"
category, for which the total notional value is E67.5 billion,
broken down by maturity as follows: < 1 year, E27 billion;
1-5 years, E33.3 billion; > 5 years, E7.1 billion. By way
of comparison, at year-end 1999, adding E50.9 billion total notional
value of precious metals derivatives to E9.5 billion of other
commodity derivatives gives a total other category of E60.4 billion.
Because the non-precious metals component of the other category
has been in sharp decline over several quarters, a reasonable
estimate is that this number is now down to E6.5 billion or less,
which suggests a total notional value of precious metals derivatives
at June 30 of roughly E61 billion, up E10 billion since year-end,
or 20% in euro terms. Due to the decline of the euro against
the dollar, the increases in dollar terms would be roughly 10%
less.
Fourth, moving in the opposite direction from Deutsche Bank,
UBS has apparently reduced its gold derivatives quite sharply
during the first half of 2000. In the case of UBS, the mid-year
report does not give any figures on notional or replacement values.
What it does give are 10-day 99% confidence Value at Risk numbers
for precious metals. Comparable numbers also appear in its 1999
annual report. The following table gives a comparison for the
four time periods identified in the two reports. All amounts
are in SwF millions.
Period Minimum Maximum Average Period-End
7/1/98-12/31/98 16 48 32 19
1/1/99-12/31/99 5 36 21 28
1/1/00-3/31/00 7.1 27.4 15.1 13.5
4/1/00-6/30/00 4.3 15.3 9.4 12.1
Interestingly, at the FT World Gold Conference in Paris, representatives
of UBS were almost alone among the bullion bankers in wanting
to engage in serious discussion with Bill Murphy and me about
our interpretation of the reported figures on gold derivatives.
At the end of 1999, based on total notional value, UBS's gold
derivatives business was by far the largest of any bank, but
in contrast to that of big competitors like J.P. Morgan and Deutsche
Bank, had remained flat rather than surged in the last half of
the year.
Shortly after Deutsche
Bank: Sabotaging the Washington Agreement? was posted here
on May 20, GATA added it to the online version of Gold
Derivative Banking Crisis, which several friends of GATA
brought to the attention of top officials at the Bank for International
Settlements. What is more, given the seriousness of the issues
raised by Deutsche Bank's gold derivatives as discussed in that
commentary, concurrently with posting it here, I sent a copy
to Andrew Crockett, General Manager of the BIS, together with
a request that he forward a copy to the Banque de France. A Swiss
banker whom I used as a reference in my communication with Mr.
Crockett also sent a copy of the commentary to a friend in a
senior position at the the Bundesbank, who replied only that
it had acted "responsibly."
Facts are always preferable to speculation, but interpreting
the gold market requires more than the usual amount guessing
since transparency in this market is so limited. This special
Labor Day update to my recent essay, Gold
or Dross? Political Derivatives in Campaign 2000, posted
only a couple of days ago, sets forth my current working hypothesis
on the significance of the FAZ articles and what they
may suggest for the future.
Upon initial review by the BIS, GATA's document must have
created sufficient concern to warrant some further investigation.
The BIS has a great deal more information on gold derivatives
than what it publishes, including breakdowns between forwards
and options and between contracts with other reporting financial
institutions and contracts with non-reporting institutions, e.g.,
gold mining companies, fabricators, hedge funds, speculators,
etc. It has a highly competent research staff quite knowledgeable
in the most sophisticated mathematical and statistical modeling
techniques, backed by first-rate technology and equipment. And
it has its own considerable knowledge of the gold market plus
what must be an unrivaled web of contacts at the highest levels
of international finance.
As a result of this new investigation, the BIS along with
the other major central banks of continental Europe, particularly
the Bundesbank, the Banque de France and the SNB, likely
concluded that the gold market had in fact fallen victim to a
much larger degree of manipulation than they had previously suspected.
This new information also helped to explain why the gold market's
reaction to the Washington Agreement had been more extreme than
they had anticipated. And it suggested that the Bundesbank's
gold leasing, most of it carried out initially through Deutsche
Bank, had probably resulted in a much larger negative impact
on gold prices than previously appreciated. Indeed, both the
Bundesbank and the SNB may now feel somewhat duped by the bullion
banks that advised them on their extensive gold lending programs.
Within the Euro Area, the Bundesbank immediately aligned itself
with the pro-gold views of the other two major gold holders,
the Banque de France and the Bank of Italy. Of course, neither
of them has engaged in any significant gold lending, so within
the Euro Area, the Bundesbank now carries principal responsibility
for resolving the problem of excessive gold lending and gold
derivatives activities. The FAZ articles are Buba's first
shot across the bows of the bullion banks, especially Deutsche
Bank.
With respect to the Swiss, their gold sales continue at the
maximum permissible rate under the Washington Agreement for substantially
the reasons discussed in prior commentaries. See Gold:
Unchained by the Swiss; Ready to Rock! and Central
Banks vs. Gold: Winning Battles but Losing the War? Swiss
sales also are likely directed toward assisting UBS to reduce
its gold borrowings, just what it appears to be doing. Even if
the SNB wanted to speed up this process, it is constrained by
the limits in the Washington Agreement. Although the SNB will
be embarrassed by any large rise in gold prices on the heels
of its sales, by investing the proceeds in euros, it expects
to be in the currency that will benefit most from higher gold
prices.
In his talk to Goldman Sachs and its guests, the shorts that
Mr. Hannoun mentioned were gold mining companies and hedge funds.
At least some of this group have used the period since last September
to reduce or eliminate their short positions. Mr. Hannoun did
not mention bullion banks, and among the largest, only UBS seems
to have taken the hint. But then, among this same group and whatever
its role prior to 1999, UBS is quite clearly not a party to the
continuing Anglo-American scheme to manipulate gold prices that
began in May 1999 with the British announcement of gold sales.
The FAZ articles suggest that the Euro Area central
banks, together with the BIS and SNB, are now prepared for a
showdown over gold. Whether these articles are also aimed at
boosting the foreign exchange value of the euro is harder to
say. Exacerbated by high dollar oil prices, inflation is becoming
a more significant problem for the Euro Area. Whether by design
or not, the Anglo-American war on gold is effectively an attack
on the euro as well. In any event, a strong rally in gold should
help the euro vis-a-vis both the dollar and the yen.
If another FAZ article is planned, and especially if
the Bundesbank is behind these articles, the next article is
likely to come out over the long Labor Day weekend. In that event,
and maybe even without it, the FAZ articles could well
do for the gold market this year what the Washington Agreement
did last year. This year, however, the European central banks
are unlikely to lose their nerve as quickly as before. They almost
certainly will turn a deaf ear to cries of pain from overexposed
bullion banks.
The danger, of course, is that soaring gold prices could trigger
sharp and mutually reinforcing sell offs in stocks, bonds and
the U.S. dollar. But with the future of the euro ever more visibly
at stake, and the manipulation of gold prices growing increasingly
blatant, the central banks of the Euro Area may no longer feel
that they have a choice. If little Buba, weakened but still dangerous,
really is about to blow the whistle on big Bubba's gold manipulators,
Labor Day 2000 may mark the sunset of unchallenged dollar dominance
in the world financial system and the dawn of a new golden millennium.
Final thought for Monday, September 4, 2000. Daniel
Webster never spoke to a Labor Day gathering. The holiday did
not exist in his time. Probably people were working too hard.
But he did speak to the occasion: "Of all the contrivances
for cheating the laboring classes of mankind, none has been more
effective than that which deludes them with paper money."
Reg Howe
row@ix.netcom.com
http://www.goldensextant.com
9 September 2000
