first majestic silver

Ltcm & Boe Fiascoes Revisited

September 8, 1999

It is fascinating to me that much of what we have covered at the Cafe over the past year is starting to synchronize and boil over. So I thought I would put some labor into this Labor Day weekend and examine what is happening on the scandal front, as well as update you on the peculiar nature of it all.

Much of the hubbub about the manipulation of the gold market began early last fall. Then Long-Term Capital Management was supposedly taken off the hook on a 300- tonne "borrowed gold" short position by the financial entities that bailed them out. Since I had heard as early as May 1997 that LTCM might have this amount of gold exposure, it was no surprise to me to hear so many rumors floating around of this nature, and I did not hesitate to publicly question the propriety of it all.

Our protests caught the attention of Long-Term Capital Management and its attorney, James G. Rickards, who sent us a letter, along with an affidavit from fund principal Eric Rosenfeld. Rickards stated that Long- Term Capital Management denied any involvement in the manipulation of the gold market, and Rosenfeld said to the Cafe, "None of LTCM, LTCP, nor their affiliates, has ever entered into any transaction involving the purchase or sale of gold, including without limitation, spot, forwards, options, futures, loans, borrowings, repurchases, coin or bullion, long or short, physical or derivative, or in any other form whatsoever."

I responded to Rickards in a letter saying that the Cafe never accused LTCM of manipulating the gold market, nor did I ever say that that LTCM "traded" gold. I strongly suggested that LTCM had "borrowed" 300 tonnes of gold and had gold exposure in a credit sense with the bullion banks, and I asked him for a response. Rickards never did respond to me, and the other day it was announced that he has resigned from LTCM to join another firm.

Then there is information we received from a very sophisticated source that a blind trust for Hillary Clinton "shorted" gold instruments just prior to the Bank of England's announcement of its plan to sell gold. Interestingly, it was reported recently that the down payment for the Clintons' new home in Westchester County, N.Y., came from her blind trust.

It was strongly suggested to me from a source that we try to find out if Hillary Clinton has a blind trust at Goldman Sachs. The Gold Anti-Trust Action Committee and the Cafe now have allies looking into this matter. We are trying to find out who is handling her blind trust or any other accounts she might have and, once these are identified, attempt to elicit a response about the gold-shorting speculation.

Why would this be the 'H-bomb' as far as we are concerned? Simply put, I have set forth much commentary linking the Clinton administration, the New York Fed, Goldman Sachs, Long-Term Capital Management, the British treasury, the Bank of England, and Prime Minister Tony Blair. A revelation of this nature would solidify the link. For example:

  • Former Treasury Secretary Robert Rubin is a former Goldman Sachs CEO.
  • Former N.Y. Fed Governor Ed Corrigan is a senior partner at Goldman Sachs.
  • London-based senior partner Gavyn Davies is Goldman Sach's international economist and has close ties to Prime Minister Tony Blair. Davies' wife, Susan Nye, is officer manager for the chancellor of the exchequer.
  • Dr. Sushil Wadhwani, former director of equity strategy at Goldman Sachs International (1991-95), sits on the Bank of England's Monetary Policy Committee. The committee's duties include determining the bank's objectives and strategy.
  • Jon Corzine, former Goldman Sachs CEO, has close ties to John Meriwether, chairman of Long-Term Capital Management.
  • Former Fed Vice Chairman David Mullins was a partner in Long-Term Capital Management, which, of course, was bailed out in part by Goldman Sachs.

Exhibit 2 and further background information on the significance of the Hillary Clinton gold shorting story comes from this commentary about the Bank of England's gold sale from the document I sent to Sen. Phil Gramm, chairman of the Senate Banking Committee:

"Yet, the night before the BOE announcement (May 6, 1999), I feared duplicity and this is what I wrote in my Midas du Metropole commentary entitled, `XAU surges 46 percent':

"We know `the squad' are all lining up, one more time, to try to stifle a decent gold move to the upside. Deutsche Bank, Chase, Swiss Bank, and Goldman Sachs were all there selling gold during today's session and, when they had to, even throwing the kitchen sink at the bulls' attack. Deutsche Bank has been especially aggressive and noticeable in its selling the past few days. We got word late this afternoon that its bullion desk is calling clients saying that the gold market is stopping at $290. I don't think Midas followers will be surprised when we tell you that big sellers late in the day today and taking on all bids were `squad' honchos Goldman Sachs and Deutsche Bank. The Battle for Navarone is an important stand for them, for if $290 is taken out to the upside, their longstanding bearish position could begin to look a bit shaky."

The next morning I awoke to the Bank of England announcement. Since then the price of gold has collapsed more than $36 -- or almost 15 percent -- and the sale has ignited a furor all over the world, fostering talk of conspiracies, etc. Before I get into the ramifications of the sale, I thought the following utterances by some of England's most notable officials might raise an eyebrow or two:

Wire service commentary July 14, 1999 (my comments in parentheses): "Asked in Parliament if it was right to sell off part of Britain's reserves, Prime Minister Tony Blair replied, `The gold price has been falling for two years, so in fact if it carried on falling and we didn't sell we would lose money.'"

Blair then declined to say if he would meet with the South African gold industry delegation, but said the gold sale was justified, stating, "We did this on technical advice from the Bank of England." (Haruko Fakuda, CEO of the World Gold Council, was told that the decision was a political one and made by the British Treasury, not the bank.)

Blair went on to say, "It is only the Conservative Party's utter obsession with the euro in some bizarre way. Given that Argentina and Switzerland are also selling gold, what it has to do with the euro I do not know. It is only that which is making them raise this issue. It was done, as I say, on technical advice. It was carried through perfectly sensibly and we actually got the best deal for the country."

How wrong can you get? The best deal the Bank of England could have made would have been $30 to $40 more per ounce by carrying out the sale as all the other major countries have done for 20 years.

But the story now gets confounding. On Sunday, July 11, the chancellor of the exchequer, Gordon Brown, said in the London Times, "The proposal to sell the reserves was put to ministers by officials and, say treasury insiders, agreed to it with little discussion."

According to the London Times article, the chancellor is said to have been surprised and mortified by the reaction from Thabo Mbeki, the South African president, who said the Bank of England's gold sales would have a "potentially disastrous effect" on South Africa.

OK, so what gives here? Blair said it was a Bank of England decision. The Bank of England says it was a Treasury decision. The Treasury says it was only a Treasury decision of sorts and agreed to with littlediscussion.

Good grief. A decision that may have disastrous effects on South Africa, a democracy the West is committed to, was made with little discussion and no one will take responsibility for it. Yet it is such an important decision that Tony Blair will not reconsider it, even though it appears he does not know who made the decision in the first place.

Meanwhile, the mortified (but confused) chancellor of the exchequer, Gordon Brown, just prior to the trip to England by the African delegation, was all over the wire services talking about the righteousness of his decision on gold, while continuing to extol the virtues of the proposed gold sales by the International Monetary Fund. The headline on the Reuters dispatch read: "U.K.'s Brown Sees Wide Support for IMF Gold Sales."

But a Bloomberg audio report reveals that when the Bank of England's Eddie George was asked whether the bank's gold sale was 1) his decision, 2) whether he was involved in it, or 3) whether he was consulted, his response was that he was consulted, which is a euphemism for being told. When asked who made the asset allocation decisions on the "bank reserves," George answered, "the government" -- that is, the politicians.

So what do we have here? The British now say their decision to sell gold was planned for some time and made the announcement, coincidentally, as the price of gold was about to take off. They became the first central bank in more than 20 years to make an announcement of a gold sale in advance. They knew this announcement would devastate the market from a psychological perspective and send gold prices crashing -- and, of course, it did. The price went straight down more than $36 per ounce. This assured Britain the worst price possible and cost the country hundreds of millions of pounds. Now no one in the British government will own up to making this mysterious decision, which is devastating poor African countries, among others.

Meanwhile, as my previous commentary indicated, somehow the bullion dealers knew what was coming and told their clients as much.

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