An Open Letter to the Securities and Exchange Commission

May 6, 1999

The Honorable Arthur Levitt
The Securities and Exchange Commission
450 Fifth St, NW
Washington, DC 20549

Dear Chairman Levitt:

First, let me commend you on the strong stance your agency has taken with all manners of issues relating to our financial marketplace. There are many of us who recognize that you seem almost alone in Washington for the courageous stance you take on important issues, namely accounting practices and investor protection. Thank you, sir.

It is because of that courage that I write to you today. The issue that I respectfully beseech you to look into concerns a decade old fraud and manipulation in the precious metals market. While I recognize that large areas of this fraud lie outside your jurisdiction, a significant amount resides within. The part within revolves around public statements by publicly traded companies designed to mislead investors and financial practices which threaten many companies' continued existence as going concerns.

For the record, I intend to make public copies of this letter, with the express intent of bringing closure to a macro problem by inviting scrutiny from all quarters, including from those companies I am convinced are involved in the fraud.

A brief overview and then the specifics I hope your agency will investigate. Around 15 years ago, a financial scheme was developed by the domestic brokerage community which involved banks and other financial firms (called bullion banks) borrowing gold and silver from central banks for a very low interest rate (usually around 1% per annum or less). In turn, these bullion banks would sell the metal on the open market and pass the funds generated (either directly or constructively) to mining companies, who would promise return of physical metal at the conclusion of the loan from their future production. The mining companies would then use the funds for expansion or to generate higher returns in the money markets. Later, fabricators, users and large speculators became attracted to the (overly) generous terms offered by the central banks, and utilized the borrowed metal for consumption or cheap credit. The inherent secretive nature of the participants has generally kept these dealings from public scrutiny, but it is a very big business, with outstanding loans thought to exceed $100 billion. In terms of ounces, some 400 million ounces of gold and one billion ounces of silver are thought to be "on loan" from various central banks.

The Wall Street analytical community has come to embrace this concept, and looks more favorably upon those mining companies that utilize the practice of borrowing metal from a central bank, rather than borrowing money for expansion from a commercial bank. Herein lies the problem. All parties involved have convinced themselves that what they are doing is legitimate and sound business practice. Chairman Levitt, let me assure you that nothing could be further from the truth. Instead, the mining companies involved have just about insured severe financial difficulties at best, or their complete demise in the extreme, by participating in these metal loans. And, all the while, they have misled their shareholders with their public statements.

At the heart of the issue, there lies the misinterpretation of what these mining companies are actually doing. They claim they are just hedging against downward fluctuations in the price of gold and silver, but that is not what they are doing in actuality. It is really quite clear that all they are doing is short selling (naked) massive amounts of metal. For sure, they will rise in indignation and proclaim that since they produce gold and silver, they are legitimately hedging. I ask you to decide.

Hedging is the bona fide transfer of risk from the commercial producer or user to the speculator. As you know, it is the economic justification of our commodity futures markets. A commercial interest locking in a favorable price or cost is why we have futures markets. But this is far removed from what the mining companies are presently involved in. All they are doing is selling short massive quantities of borrowed metal and continuously adding more shorts. Unlike a legitimate hedge, they never cover and close out positions. Unlike a legitimate hedge, they sell recklessly without regard to price. They never plan to cover at all. Mr. Chairman, ask yourself this, with the price of gold and silver at multi-decade lows (without adjusting for inflation), do you think that now is the appropriate time for the largest short position in history to be held by the mining companies? The mining companies are disregarding every known tenet of commodity law by selling many years worth of production at depressed prices. This sir, is no hedge.

The mining companies, and their Wall Street cohorts, know (or should know) that the short sale of hundreds of millions of real ounces on the market will, of course, depress prices, as it has for 15 years. To add insult to injury, they have piled on by selling hundreds of millions of paper ounces via options, both listed and OTC. They must be stopped. While I recognize that the overall manipulation of the gold and silver markets may be outside your jurisdiction, what I think is inside are the actions and misleading statements that are issued by publicly traded companies.

Specifically, but certainly not limited to, I ask you to look into the actions and words of Barrick Gold Corporation. Barrick is the model for all this short selling. From their web site at they admit to shorting over 10 million ounces of gold with a principal value of $4 billion. In addition, you can be sure they are short call options in an enormous amount. They claim it matters not in which direction the gold price moves in, it's good for them. For that stupid and erroneous information alone, they should be sanctioned for misleading existing and potential investors. As you know there is no financial vehicle that makes money in all conditions. But more to the point, how could they possibly cover their outsized short position and avoid ruinous loss in a gold price spike? The largest commodity of them all, oil, recently nearly doubled in a matter of weeks. If that happened to gold, Barrick and the others would be dead meat. Barrick will counter claim that they have a special provision in their short sales that permit a deferral of up to ten years if the price surges. This will not help them if lease rates surge to 50% or 100%. (As has occurred in the past two years in silver, platinum and palladium). All the ten-year extension proves is that Barrick has no intention of ever covering their short sale.

And that's the problem - having no intention of ever covering. That's what makes it a scam. They are betting the very company that gold won't surge long term. I don't think their shareholders realize this. Instead of pulling in their hedges at multi-decade low prices, they are selling short more. It is a certain prescription for disaster. Barrick will say they can cover from production, yet in their history they have never made a net repayment. They look at their short position as a profit center, content with the 4% to 5% differential between the artificial low lease rate and the money rates that they currently collect, and ignoring the tsunami that will engulf them the minute gold rises strongly.

Mr. Chairman, I ask you to decide whether the short sale of years of production at a fixed price and financed with a floating and potentially volatile interest rate places this company in unusual and self-wrought jeopardy. Please keep in mind they are shorting commodities with high historical volatility. Further, I ask you to decide if Barrick has adequately conveyed this situation to their investors, bankers and auditors. If I may be of further assistance, please don't hesitate to contact me.



Theodore J. Butler

In 1933 President Franklin Roosevelt signed Executive Order 6102 which outlawed U.S. citizens from hoarding gold.