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"The $3.5 Trillion Dollar Sure Thing" An Issue to Watch

December 5, 2002

We in the gold community have a sticky decision to make. There is legislation presently in process, which would prevent a meltdown of the over-the-counter derivatives as it pertains to the granting entities, thereby removing from the financial perpetrators the risk of their miscalculated deeds or misdeeds. After all the legalese and flowered words are removed, what this bill intends is simple. It would prevent auditors, attorneys and bankruptcy judges from securing the assets of the profitable legs (offsetting transactions) of a derivative spread and protecting under chapter 11 those seeking to collect from the losing side (offsetting transaction). The only way these computer falsehoods (OTC derivatives) can go bust is if the transactions are split apart in bankruptcy proceedings (the profitable side seen as money and the loss side bankrupt), as would be the present effect of the now standing laws concerning bankruptcy. The new law would make the netting of the profit and loss to zero in the transaction in case of financial failure by the grantor.

The real sin in this situation is that the law is akin to a giant erasure that will run through the majority of 74 trillion dollars of transactions that stand now as special performance requirements that in truth cannot perform. The constructors of these will walk away with all their commissions and spread profits intact. It will be the largest pork belly bill ever granted for anyone in US history, particularly now for the banking and investment industry. It is a gift of no less than $3.5 trillion in revenue that these transactions have produced over the past 12 years of their ascendancy.

On the pro side of this legislation, no one in their right mind, myself included, wants to experience the downfall of this mountain of worthless paper. Its economic, social and political impact is simply too awful to consider.

Gold's Greatest Risk
A Violent Run Up
To Unsustainable Levels in a Short Cover

The only event that can ruin gold's ascent back into the MONETARY SYSTEM would be a collapse of the now $290,000,000,000 of gold derivatives (figure derived from latest reported number by the IMF & BIS (adjusted for the present price of gold versus POG @ time of report). Such a collapse would result under present law in a short cover that would take the POG to extraordinary levels. That short cover and resulting POG would destroy the statement of the Prime minister and Finance minister of Malaysia (one in the same person) who said that "the price of gold is harder to manipulate than Asian currencies." This is the cornerstone fundamental basis for the advent of the Malaysian Gold Dinar. As such it is an excellent example of why wild action in gold is undesirable to the gold bull. This is a long-term gold bull market which stands not only on the 5 Basic Fundamental Elements but also, and even more, on the Remonetization of gold. Gold re-entry into the monetary system will be via the Gold Cover Clause and the New Islamic Currency now developing out of the Malaysian Gold Dinar. I predict a gold convertible Islamic currency by 2005. This new currency, which is not the present form of the Gold Dinar, will mark its point of conception as the advent of this measure of inter-Islamic Nation trading with a gold settlement mechanism. The fact that the Gold Dinar, even as proposed, now breaks the IMF rules means absolutely nothing and will prevent absolutely nothing.

There is an unanswered question

That question is, if the derivatives are protected from liquidation by this new law that prevents splitting of the profitable side of the derivative spread from the loss side of the spread because the grantor is insolvent, what happens to the specific performance which requires all sides to perform? Since the derivative is guaranteed financially by the balance sheets of thesubsidiaries of major international banks and investment houses to be made totally insulated by this bill, how can the specific performance occur unfunded? There is no money in an outstanding derivative as the counter obligations or receipts and delivers net to approximately, if not null. However if one side cannot perform due to insolvency from whence does the specific performance come. There is no real money in these computer offsets but only computer monopoly money created by counter obligation in cyberspace. Somebody, somewhere will want something real to happen, like a gold producer.

I have wrestled with this question only to come up with the same answer each time. It depends on the specific performance of each and every derivative as interpreted by that hedger who is seeking the performance.

Now we have a new notice to be sent by the stockholders of those public companies that are hedgers in all items: gold, currency and interest sensitive items.

That is this entire article with a request to your gold producer hedger investment vehicle that they look at what would occur in terms of the specific performance due to them. I assume that this bill is not being rammed towards acceptance by the lobby of any industry other than financial firms. These derivatives, most certainly if we have seen the unthinkable, a top in the long and medium bonds, the "5th Element", many may fail. If such should occur and this bill is successful, how will the specific performance the gold producers are depending on or required to perform themselves be affected? If adversely then they should express their view to the committee now moving to see this bill passed.

The Downside of No Standards in OTC Derivatives

Because OTC derivatives lack standards, such as listed derivatives have, they are Non-Transparent by nature. That means there is no such thing as Dec. Comex gold with standard delivery specifics and a standard time of duration. All the OTC gold derivatives are best understood as custom-made specific performance agreements concerning the delivery and payment for gold in some form or another. Therefore only a review of the non-transparent paper named derivative by the gold producer will reveal if they are screwed or saved by this bill. I suspect screwed since it is not the gold producer who is pushing for this bill's acceptance. In fact, I doubt that most gold producers even know about the bill and its contents.

Email address references for following and understanding the contents of HR1161: "LaFalce Urges Speaker Hastert to Take Immediate Action on Important Netting Legislation" "Today's hearings will address three areas-over-the-counter derivatives; hedge funds; and contract netting-where legislative proposals are pending to reduce systemic risk to the financial markets. The legislation, in each case, is based upon recommendations from the President's Working Group on Financial Markets. The Working Group, which consists of the Secretary of the Treasury and Chairmen of the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, has creatively examined system-wide issues across the legalistic and jurisdictional divides that normally separate one regulator's thinking from another's." "The President's Working Group on Financial Markets on Tuesday unanimously recommended changes to the Commodities Exchange Act that are designed to create legal certainty in the over-the-counter derivatives markets and reduce systemic risk." "CHICAGO and NEW YORK, November 9, 1999 - The Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX) today jointly released the following statement in response to today's release of the report of the President's Working Group on Financial Markets:" "First, let me express the Roundtable's support for H.R. 1161, the Financial Contact Netting Improvement Act of 1999 introduced by Chairman Leach, Ranking Member LaFalce, and Representative Roukema. The purpose of this Act is to strengthen the provisions of the Federal Deposit Insurance Act (FDIA) and bankruptcy laws that protect the enforceability of contractual rights to terminate and close out certain capital markets transactions, net the amounts payable by each party, and foreclose on any collateral." "H.R. 1161, the "Financial Contract Netting Improvement Act of 1999," includes a number of proposed amendments to the laws that govern the insolvency proceedings for a broker-dealer, bank or other financial institution. Many of these provisions incorporate, or are based on, amendments to statutes that were endorsed by the Working Group in draft legislation previously submitted to Congress"

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