first majestic silver

I Accuse

November 22, 1999

In this article, I attempt to raise and level new specific accusations in the ongoing gold and silver manipulation. Before I articulate my new allegations, let me summarize what I've said to date. Starting over three years ago, on a number of public forums, I tried to present my analysis of why gold and silver were so consistently depressed in price, and what the likely outcome of that manipulation would be. Let's face it - there was, and is, widespread awareness that gold and silver have been depressed in price. The only question is whether the low price levels are due to the legitimate forces of supply and demand, or for some other obvious reason. You know where I stand. Tangible commodities can not be in protracted supply/demand deficits at historic low prices without an apparent explanation, this has never happened in the history of the world. The practice of the leasing of physical commodities, in which the underlying collateral of the lease is immediately sold or consumed, has also never existed in the history of the world. That the universally observed price depression of gold and silver has occurred for the exact same 15 year existence of metal leasing, can't possibly be coincidental. You just can't run down inventories of any commodity for years and years without rising prices under what we all know to be are the free markets and the laws of supply and demand. There would have to be an obvious over-riding influence. I've tried to document and explain that the only explanation is leasing/forward selling. That the price of gold exploded at the mere announcement that leasing might end, cements the depressed price/leasing connection.

While trying to explain leasing and its effect on the markets, I repeatedly invoked that leasing was fraudulent and manipulative in its very nature. Basically, the manipulation rests with the non-economic, unrecognized sale, not loan, of material. The fraud is the promise of repayment where no repayment is possible. While I am gratified to see leasing/forward selling finally getting the attention it deserves, I am taken back by not one analyst or commentator making the inherent fraud and manipulation connection. That will surely come. What has come is the realization that there is a profound difference between a miner who is hedged and one who isn't. Before Sept 26, that realization was not widespread. Lost in the sudden lurch in price, is the recognition that prior to that date, leasing had manipulated the price to artificially depressed levels for years.

In yet another proof of the century's greatest financial fraud, here is the new allegation, the reasons will follow. I claim that some of the leading dealers and financial firms in the metals business are guilty of actions that are fraudulent, manipulative and collusive in nature as defined by the RICO (racketeering) statutes. Those firms include (but are not limited to) Goldman Sachs, American International Group (AIG), JP Morgan, Republic National Bank, Chase Manhattan Bank, and Union Bank Of Switzerland (UBS). Prior to the release of this article, I notified the legal departments of each of these firms of this allegation, giving them a draft of this article and the opportunity to refute my claims. I offered to remove specific reference to their company if they would state in writing that they did not participate in the transactions in question. While I personally made sure that the information was delivered, none chose to respond. While some huffed and puffed when I first informed them of the nature of the material, there was no huffing and puffing once they received it. So be it. I am not a lawyer, but I recognize that you can't publicly libel and defame anyone without repercussions. If what I claim is not true, I expect to feel their wrath. If what I claim is true, I hope they feel the wrath of public condemnation and criminal prosecution. I do not make these serious allegations lightly.

The reason I publicly make these serious charges now, is because of just-released third quarter earnings reports by the publicly held mining companies. I am not dealing in what-ifs or innuendoes. I base my claim solely on public information. The information contained in these earnings statements is so damning to the dealers that I have mentioned, that there can be no doubt that what I allege is true. I am confident that I will be able to prove these allegations before an impartial third party. Let's see if I can convince you.

Before giving my proof, let me just put the whole scene into proper perspective. That there is such a thing as leasing/forward selling is self-evident. That very many gold mining companies around the globe have embraced the concept of selling years of production forward is self-evident. That this has never happened in history in any other commodity (since the central banks only had precious metals to "lend") is a simple statement of fact. That the metal "lent" is actually sold, is fact. That the dealers serve as the middle-men between the mining companies and the central banks in the leasing/forward selling transaction is fact. That we have seen mining companies go into immediate financial difficulties as a result of the jump in price of their main product is plainly observable. That virtually all of the mining companies who are subject to recently required Financial Accounting Standards Board (FASB) reporting guidelines have all reported deterioration in their mark to market positions as a result of the recent price jump is there for all to see.

It is based upon the recent FASB mark to market pronouncements that I base my allegations of racketeering against the above mentioned dealers. While I have long suspected that the dealers were up to their eyeballs in manipulation and fraud in gold and silver, it is only now that I feel I have the proof to make the claim publicly. The proof revolves around the mining companies earnings reports and common sense. Please indulge me as I explain.

For the sake of explanation, I want you keep in mind that hundreds of millions of ounces of gold and silver have been forward sold. That this very act has foreclosed on the possibility of big profits to the shareholders of the short selling miners is separate and distinct from my new allegations. That this massive forward selling is at the heart of the manipulation and fraud is intact. I want to add something new. That something new is the sudden outbreak and rash of dangerous option derivatives on the books of the mining companies, compliments of the crooked dealers. FASB pronouncements target these options. It is the required reporting of these options which proves the dealers guilt.

For this proof, I'll confine the discussion to four NYSE listed mining companies - Barrick Gold, Newmont Mining, Placer Dome, and Coeur d' Alene, but please remember this is somewhat random and is certainly not confined to these companies - the dealers crooked hand can be seen in hundreds of mining companies. Also, let me state clearly for the record that I have no personal financial interest in any of these companies, nor in any of the dealers I am accusing of criminal activity. Not long or short, not in the past (for at least 10 years anyway), not now, and not in the future. My motivation is to end the manipulation. Two of these companies are American , two (Barrick and Placer) are Canadian. Three are major gold producers, one (Coeur is thought of primarily as a silver producer) is small. Barrick and Placer are major forward sellers, committing years of production (Barrick four years and Placer two plus years of current production). Newmont is considered a light-hedger, Coeur medium - with less than six months production forward sold. Now, let's talk about the options and why the dealers are crooks.

It is my understanding that FASB relates to US companies, so we have detailed information for Newmont and Coeur d'Alene. Fortunately, Placer provides detail for its hedge program. Barrick gives the totals, but I have been unable to dig up the details. All four companies have aggressively sold call options on gold. Newmont has sold 2.35 million ounces of long dated (5+ years) calls, equal to about 7 months production. Placer has sold 2 million ounces of long dated calls, or 9 months production. Remember, we're talking about options only - forwards are being ignored in this exercise. Coeur has sold 370 thousand ounces of long dated calls, or over two additional years of production. Barrick has sold 4 million ounces of calls or over one and a quarter years production, in addition to the 14 million ounces sold forward. All told, these four miners sold collectively almost a years worth of their production in calls alone. This in addition to the years and years of production that some have sold in forwards.

For the companies on which we have details (excluding Barrick), we see another similarity in their options program. All three bought various short dated put options with the proceeds of the long dated call options sales. (When you buy an option you pay the premium, a sale results in the seller getting the premium). So here we have four separate and distinct companies selling aggressively long dated call options. At least three, and maybe the fourth, bought put options with the proceeds, with an undesirable maturity mismatch - the limited liability purchases expire before the unlimited liability sales expire. Also, due to the long term nature of the calls, we can safely conclude that these are OTC (over the counter) options as distinguished from exchange traded, clearinghouse guaranteed options (like the kind traded on the COMEX). What this means is that the dealers who sold the mining companies these calls, actually purchased the calls from the miners as a principal, rather than just facilitating the transaction as a broker. (We can't tell if the dealers were acting for an in-house proprietary account or a favored client, but the safe bet is the dealers own what was sold to the miners). We can say this about OTC options - they are generally customized and because they are not openly traded are therefore nowhere near as liquid as the exchange traded variety.

Let's take a moment and look at one company, Newmont Mining, in detail. For the record, I think Newmont is a fine company and in no way in the same class as, say Barrick Gold, who I have written about before. This does not change the fact that Newmont was defrauded by their bankers in their options transactions. In talking with the company, and from their press releases of Oct 13 and Nov 10 (, a clear picture emerges as to what I am basically alleging. Leaving their forward sale positions aside, Newmont bought put options for 2.85 million ounces of gold with a less than 2 year maturity and a strike price of $270. The cost of the puts ($37 million) was exactly defrayed by the sale of 2.35 million ounces of naked calls with an almost 10 year maturity and strike prices averaging around $375. This transaction took place in August. It's clear from the record, and Newmont admits, that they sold the calls to pay for the puts. Unfortunately for Newmont, roughly 40% of the puts have already been canceled due to an exotic 'knock-out provision' on the price rise after Sept 26, thereby negating 40% of the very reason that prompted their actions in August. The naked call position, also unfortunately, remains in full force. At the mark to market on Sep 30, Newmont acknowledged a loss of over $50 million on their option position, primarily from the calls increasing in value, but also from the write down and forced abandonment of a big chunk of the puts. While Newmont is quick to point out that this was not a 'cash' loss, and they claim no margin liability, it's hard to imagine how a trade could go so bad so quickly, no matter what the accounting methodology. And with the naked call position still intact, further large mark to market losses loom in the future. Sadly, Newmont now feels married to the trade, not willing, or unable, to spend the cash to buy back a bad short position. Newmont insists that they were not forced into these trades. I agree - they were tricked. Chase is said to be the main dealer, with a piece done by UBS. To put this trade in perspective, Newmont basically received roughly $2 per ounce per year premium, to give away any upside over $375 on 2.35 million ounces of future production for up to 9 years. And 40% of the proceeds from the call sales has gone up in smoke with the put 'knock-out' - but the full call liability remains. And the damage took place in a bit more than a month from when the transaction was established. All for 2 bucks an ounce.

What else do we know about these calls in general? Well, we know that most were sold this year. We know that the gold price was mostly at 20 year lows for the bulk of this year - hardly the opportune time to sell calls. We know that, in addition, the volatility premium on gold was at multi-year lows during the time of the option sales. It's hard to imagine a worse time to sell call option premium - when the absolute price of The underlying asset is at record lows, and at the same time, volatility premiums are low. Or conversely, a better time to purchase call options. Some will argue that this is only obvious in hindsight. To that I say nuts - hedging at or below the cost of production is guaranteed to bring disastrous results. The dealers knew, or should have known, this elemental precept.

Here's where the common sense comes in. We've just witnessed a time period (up through Sep 26) this year that was a uniquely bad time to sell calls on gold and an especially good time to purchase calls. We know now that call option premiums have exploded after Sep 26, richly rewarding call owners and harshly punishing call sellers. Let me state the obvious - there is no way in God's world that the miners all rushed, for the first time in their history, to the dead wrong side of the equation and the dealers to the home-run right side of the equation by coincidence. This year is the first time that many mining companies ever even did an options trade. I state this clearly - the dealers tricked the miners into going short these calls. It is not possible that the brain-dead miners could have found their way into this universally bad position on their own. It is not possible that the dealers accidentally just found themselves in such a rewarding position. I am stating that Chase and the others are criminally guilty of fraud, collusion, conspiracy, manipulation and price fixing. They should be driven out of the metal business. The RICO statutes were written with their actions in mind. The dealers' behavior is outrageous.

But I'm not done. What the dealers did to the miners is beyond the extremes of avarice common to the dealer world. They didn't just intentionally give bad advice to the miners and dump a bad investment in their laps, to profit on a one time basis. The dealers positioned themselves to profit, dollar for dollar, off the miner's misfortune on an ongoing basis. Only when the mining victims have no more blood to drain, like currently at Ashanti and Cambior, do the dealers forget about draining cash and then concentrate on seeking ownership. And let me clarify further what I'm saying. It is not the miners who are in the bad position - it is the shareholders of the miners who have been royally screwed. You see, this is the problem with all this forward and naked call selling. It isn't for the shareholders' protection - it's for management and director job protection. Most mine managements couldn't care less about the real owners. Hedging years of production at unattractive prices is all about management job protection - to keep things rolling. How does the shareholder benefit by the depletion of resources at depressed prices? If prices are low, gold and silver miners should shut down and preserve assets like all other mineral producers do, not participate in uneconomic gimmicks for preserving their own jobs. But this piece isn't about the stupidity or selfishness of mine management, it's about the criminality of the dealers. To that end, let's look at how big this buy put, sell call scam might be, and why the dealers have done this.

The evidence suggests that this was a significant campaign on the part of the dealers. On Wall Street, the trade where the sale of one class of options pays for the purchase of another class is usually referred to as an "alligator spread" - one that eats you alive. It is normally done to make a questionable transaction seem more attractive. In the case of the miners buying puts in the first place, the dealers had to convince them that the price was going down big. But I'm sure the miners were reluctant because buying puts requires cold cash, something most miners don't have plenty of. So the dealers did the miners a big favor and explained how, if you sell calls, you get premium. And since we all know the price is going down, what difference does it make if the miners sell calls to pay for the puts? Well the difference is this - when you buy options you only lose the premium at worst. When you sell options (particularly calls in a cheap market) you can lose hundreds, possibly many hundreds, of multiples of the premium in a price rise.

This was no accidental alligator spread. This was the con of a lifetime. What the dealers did was trick the miners into a position that guaranteed great wealth to the dealers. Let's look at this transaction from the dealers' side. They are on exactly the opposite side of the miners. The dealers are long calls and short puts. In essence, the dealers picked up what are now valuable call options for free (the purchase of the calls was paid for by the sale of the soon to be worthless puts). No real cash changed hands between the dealers and the miners, it's just that one ended up with a home run position for free, and one ended with a nightmare liability for zero basic consideration. In total, the dealers look like they have picked up around 50-100 million ounces in free, home run gold calls. I repeat, this was no accident. The miners who sold these calls will find that they have bet the company on a fraudulent transaction that is guaranteed to suck every ounce of their blood. Or, to be more correct, the shareholders have just been bled dry. The dealers basically bought out the shareholders for free - that is, the call selling miners have transferred the real owners' interest for zero consideration and without their knowledge. The only factor needed to ratify this evil done deal is the inevitable further price rise in gold and silver.

And the dealers are as well positioned for a price rise just as the miners are poorly positioned. With their ill-gotten call option position, the dealers stand to profit for upwards of a hundred million dollars per each one dollar move in gold - and the hapless mining shareholders are on the hook for that tab. It makes no difference whether the calls are held by the dealers or favored clients - the position was established on a systematic and fraudulent basis. It matters not if the dealers' position was assembled as a hedge to protect themselves against massive short obligations in the lease market - the assembly still was based on misrepresentation to the miners. No wonder the push to abolish any oversight in the institutional derivatives market. The whole scene is preposterous - money center banks and insurance companies and blue chip investment firms manipulating the metals market like cheap bucket shops. Get the bullion bank vermin out of these markets and we will have free markets once again.

The irony and shame are overwhelming. Innocent shareholders have put their money into companies that they thought that would prosper on higher metals prices. Instead, their investment is being squandered by incompetent management and criminal financial firms due to the recent gold price rise and the certain gold and silver price rise to come. It doesn't get more corrupt than this. I'm tired of waiting for our see-no-evil regulators to take action in an obvious mega fraud. It's not bad enough for the dealers to have manipulated the price of gold and silver for years, now they turn around and make the miners indentured slaves with a sham option transaction, and leave the shareholders completely disenfranchised. The solution isn't there ought to be a law - there already is a strong body of law. The solution is to enforce that law. Let's see how the regulators weasel out of this one, and how the arrogant corrupt dealers pretend that the laws don't apply to them. It's time for the manipulation and shenanigans to end. Shareholders should not rest until mine management has forced the banksters to rescind these fraudulent derivatives and for the dealers to return the stolen loot.

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”
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