Boom! Gold Shorts Start to Default

October 4, 1999

In the last "Midas," I reported that several sources had told me that the Federal Reserve was "jawboning" futures commission merchants not to pressure firms to deliver gold. In other words, they all know that the gold is not there for the shorts to deliver and, as I have long suspected, it appears that the Fed is protecting the positions of certain bullion dealers and other financial institutions that are short gold.

This is clear evidence that the gold market has been manipulated just as the Gold Anti-Trust Action Committee has alleged.

Two days ago I received information that a futures commission merchant had been told by another futures commission merchant that it was not prepared to deliver gold on its gold forward or futures contract obligations that were expected to be fulfilled for a client of the firm who wanted delivery. In essence, the shorts were declaring "force majeure," proclaiming: "We cannot deliver."

This is not a Comex problem as far as I know. From what I am hearing, it is a problem in the over-the-counter market, where few people really know what is really going on behind the scenes.

The firm that expected delivery was stunned. It was about to be "floored."

According to our sources, the firm then got a phone call from the Federal Reserve requesting that it not pressure the shorts into making delivery and assuring the firm that the Fed would make sure that it received its gold eventually. I am not privy to exactly how that would happen.

According to another source, there were actually a couple of firms that told the longs that they were not prepared to deliver forward contract gold in the size expected. Goldman Sachs is said to be one of the firms not prepared to fulfill its obligations.

It should be of no surprise to you that the co-chairs of the Counterparty Risk Management Group, Goldman Sachs and J.P. Morgan, were all over London CNBC this morning talking down the gold market. Goldman is reported to have suggested on the tube that the big gold shorts covered on the recent pricerunup, while Morgan's Kevin Crisp called for $275-$280 gold when the current blip was sorted out. So whose risk are they both concerned about?

Strange. Today Goldman Sachs and Chase banks were big BUYERS of gold options on Comex. Why buy options if you are not bullish or if you believe that the gold market has topped out for the time being? Yes, the buying can be for clients. But are their clients not listening to them? On that note, maybe for the first time in Comex history the gold option volatility is higher than that for the silver contract.

There are other Goldman Sachs stories out there but I want more confirmation of them before I present them to you.

Last night I received a phone call from a very informed hedge fund manager who confirmed that George Soros is long "forward" gold, but not Comex gold. Soros is also long aluminum and silver, according to this source.

This source also tells me that Soros most likely does Comex business with Refco, as do many of the big hedge funds. I do not know where Soros does his OTC business with or whom he trades with in London. But according to this hedge fund manager, one should start at Refco for tying all this altogether. Is that the firm that is being denied delivery?

This extraordinary development is an affront to all who believe in free markets.

There has been an orchestration by some bullion dealers and government officials to hold down the gold price so that their own selfish interests can be served. Meanwhile miners are out of work, mining companies are going bankrupt, and shareholders have been decimated.

This is an outrage of the highest order and it has been going on for some time.

Back on April 27 the following letter was sent to U.S. Rep. James Saxton, chairman of the Joint Economic Committee of Congress, to prepare him for a meeting with me.

Dear Rep. Saxton:

The purpose of my visit is to try to be of some assistance to you and your committee regarding the issue of the proposed IMF gold sale. It is the opinion of the Gold Anti Trust Action Committee that the real reason for the intense lobbying and orchestrated PR barrage about selling IMF gold by the White House and the Treasury is not being revealed to Congress. We believe that the real reason to promote the IMF sales has to do with a concerted manipulation of the gold market to keep the price down in order to bail out the gold shorts of Wall Street (i.e., bullion banks, hedge funds, and other financial institutions).

That has been going on for some time but began in earnest when Alan Greenspan made this statement before a Senate Agriculture Committee on July 30, 1998, "central banks stand ready to lease gold in increasing quantities should the price rise." We would like someone in Congress to ask Mr.Greenspan exactly what he meant by that comment when he is testifying again before committee.

It is important to understand that there is a natural supply/demand deficit in the gold market, meaning that demand for gold far outstrips natural mine supply. Our associates figure that deficit is around 1200 to 1600 tonnes and that deficit has been met by gold producer forward selling, some central bank sales, scrap supply and gold lending. We think that the gold lending is now so large that it has created a potential "systemic risk" problem. Bullion dealers have been lending out central bank gold to financial institutions at 1% interest rates. The gold is sold into the physical market (depressing the price) and the proceeds are then invested elsewhere. This is called the "gold carry trade" which operates under the same principle as the "yen carry trade" which blew up late last summer when the yen rallied strongly against the dollar. The short term demise of the yen carry trade caused great financial consternation.

The "carry trades" only represent cheap sources of capital if the price of the entity borrowed stays the same, or decreases. When the price of the yen suddenly rose sharply late last summer, it caused great financial distress as what had been very inexpensive loans suddenly became onerous. But, at least they could get out of the loan via liquidating the yen; in essence giving it back.

We believe that the speculative gold loans are now as high as 3,000 tonnes of gold and that the total gold loans (producer forward sales, etc.) have reached 8,000 to 10,000 tonnes. If we are correct and, at some future date, the price of gold rallies like the yen did, there will be financial turmoil. As yearly mine supply in 1998 was only 2529 tonnes, the borrowers will not be able to lay their hands on that much gold very quickly. Inevitably, there will be defaults and many financial institutions here and abroad will go bust. Many of the banks are getting in this too deeply and are at risk of becoming "Long Term Capital Managements." Panic is definitely not too strong a word to be used here.

This appears to us that the current administration and the New York investment houses are in cahoots and what we may have here is one of the great financial scandals in U.S. history. Financial commentators often point to the muddling, low gold price as to how all is well in the economy and administration officials point to a low gold price with pride, almost using it as a report card on the great job they have done. The bullion banks and investment houses have picked up on this and are making sure that the price does not go up by supplying gold to the market place. They feel they can borrow gold with impunity, even at these low prices, as a result of Mr. Greenspan's comments. And, of course, there is the connection of Wall Street to Secretary of the Treasury, Robert Rubin. Everywhere we turn in our investigation, we find Goldman Sachs, his former firm, involved in gold bashing efforts.

Our committee (GATA) has retained one of the premier anti-trust firms in the United States, Berger & Montague of Philadelphia, to assist us in our investigation into this matter. If further evidence corroborates what we already have, we intend to sue some New York bullion dealer/investment houses for violation of the Sherman and Clayton Acts. These firms are making fortunes (while many associated with the gold industry are being destroyed) through investments, after borrowing gold at 1% interest rates. However, we think that some of them are making these fortunes illegally as a result of collusive activities and, in the process, have created a "ticking time bomb" that could blow up to be a financial disaster in the future.

It is this cozy arrangement the administration has with these investment houses that we believe is the real reason behind the constant calls to sell the IMF gold. They both benefit from the sale of the IMF gold, but the poor countries in South Africa and West Africa lose as their mining industries deteriorate. I know you have had other experts testify on all of this to you so I will not get into that. But the American public, as well as this country's mining industry, could really lose, too. Our last monthly trade deficit was $20 billion. At some point, there will be an attack on our dollar. Our gold resources are one of our greatest assets. Why sell any of them at these very, very low prices? We can point to our gold stocks in defending our dollar in the future. There are many financial analysts that think a financial bubble has been created. That may or may not be the case, but to advocate gold sales at this point in time will be looked on as great folly if there is a bubble, and it bursts.

Yes, the current administration and the greedy Wall Street houses are winning the day today with this gold market manipulation. But, if this charade about gold is not stopped now, someday the American public will be big losers if a financial panic sets in. If someone had stopped the Savings and Loans from their over-extensions a decade ago, we might not have had that big a crisis. The potential gold loan crisis could dwarf the Savings and Loan one if the orchestrated gold selling game is not curtailed now. I have attached some material for your perusal which elucidates much of what I have brought to your attention. That material is:

  1. An April 16 Reuters PRNewswire in which Chris Thompson, the Chairman of one of the world's biggest gold producers, Gold Fields Limited, decries the tactics of the New York based bullion dealers.
     
  2. An essay by John Hathaway, the highly regarded senior portfolio manager of The Tocqueville Fund in New York, entitled, " Bullion Dealer: Spin Meisters of the Gold Market".
     
  3. Commentary from Veneroso Associates entitled, "Gold Zaitech - A Bear Bubble Driven By Cheap Credit." Frank Veneroso wrote the 1998 Gold Book and is one of the leading authorities in the world on the gold market. He has been economic policy advisor to the World Bank, the I.F.C. and the O.A.S. as well as many countries.

    Frank Veneroso is also one of the leading authorities on the gold loan issue. I was with Frank when he determined out how large the gold loans are and I saw how he figured it out by learning what the gold loans were at individual bullion banks. In addition to that, I was there when he spoke to Terry Smeeton, who just retired as England's Chancellor of the Exchequer, about the gold loans last year. Five years ago, Mr. Smeeton was very chatty with Frank about the loans. Last year, he would say nothing and could not get off the phone fast enough when Frank told him how large he now thought the gold loans had become.

     
  4. Commentary from the highly regarded James Turk, who publishes the Freemarket Gold & Money Report. James is one of the other leading authorities in the world on the gold market and is known by all in the industry. His April 26 piece is very timely and covers the problem of the payback of the gold loans. His work shows that it could take a gold price of $608 to $923 to solve this very sizable problem.
     
  5. Brief commentary from the well established "International Harry Schultz Letter." Harry Schultz also expounds on the nefarious tactics of the bullion dealers.
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