- Before beginning this article, I just want to say that
I thought long and hard about writing this, because in a sense it's self-serving.
But after finally seeing some recognition of these issues in the mainstream
media, especially the letter to investors from Berkshire Hathaway founder
Warren Buffet, I decided it was time to address gold, derivatives, and
the next big economic bubble that's due to pop.
For the record, this is self-serving because I own shares two gold mining
companies who shall remain nameless, so keep that in mind when you read
this. I'm writing from a self-interested point of view.
I have a personal interest in seeing the price of gold go up, but conversely,
this also lets the reader know that I'm putting my money where my mouth
is, unlike the so-called financial analysts on Wall Street who the mainstream
media revealed were pushing stocks that they KNEW were crap, according
to leaked internal memos.
-
- This Saturday, Warren Buffet released his annual letter
to shareholders, which included a scathing attack on the derivatives market.
He called derivatives, 'financial weapons of mass destruction, carrying
dangers that, while now latent, are potentially lethal.'
-
- It's important that you know who Warren Buffet is. He
and Charlie Munger are the founders of Berkshire Hathaway. Until Bill
Gates came along, they were the richest men in America.
Buffet is called the Wizard of Omaha. He's THE insurance company in America.
He's Mutual of Omaha, and a gazillion other little fronts. A quick visit
to the Berkshire Hathaway site will give you some idea what an incredible
Octopus Mr. Buffet has created. It's the most solid business in America,
bar none.
www.berkshirehathaway.com/subs/sublinks.html
Why is he so solid when everyone else is in the crapper?
Well, basically, he refused to buy tech stocks on the grounds that the
PE ratios (Price to Earnings ratios) were ridiculous (normal stocks are
around 15 PE, people were sitting at like 200 PE or more), and the stock
prices unsustainable.
And everyone said he was a relic from another age who didn't know what
he was talking about. The difference is, Warren Buffet understood the
difference between artificial consumer CON-fidence and actual cash flow.
While everyone else was crying, Warren Buffet was saying, 'I told you so,
assholes.'
Berkshire Hathaway has tens of billions in cash flow, and eighty three
billion plus in market capital. And the company continues to grow because
of the buying power insurance companies have. Even the claims from 9/11
only put a small dent in BRK, because they lay off the majority of risk
to reinsurance companies, who lay off the risk to others, and so on, and
so on. Ultimately, you and me pay for the damage caused by 9/11.
You see, insurance is the ultimate scam. Their job isn't to pay you in
the event of a liability claim. Their job is to try and find reasons NOT
to pay you. It's a gamble they take, speculating that they won't have
to pay a large percentage of claims based on missed payments, exemption
clauses in the insurance policy, or through refusal of claims until a claimant
sues, gambling that the claimant won't have the resources or patience to
see the lawsuit through.
It's even a bigger scam than that, because it's a government-assisted scam.
You can't drive a car without buying insurance, but the government doesn't
control the rate you pay, the insurance companies do. Same with medical
coverage. You need it, but half the time it ends up not covering you when
you really need it, unless it's an expensive policy most people can't afford.
You can't run a business without insurance, or make a movie. And it's
all enforced by law. The government forces you to pay these people whose
job it is not to give you money when you need it.
It's such a good scam that insurance companies are allowed to use 100%
of monies received from insurance policies as collateral for fractionalized
loans. In other words, the government lets them assume they're going to
keep all the incoming money without having to deal with any payouts when
an insurance company wants to borrow money to buy things. That should
tell you how much "risk" insurance companies really take.
Warren Buffet has been King of the Hill for a very long time. Through
all the ups and downs of the stock market, Berkshire Hathaway remains.
Compare the % of volatility in Microsoft, IBM, bank shares or defense
stocks with the fluctuation of Berkshire Hathaway shares, and you'll see
who REALLY holds the cards where the economy is concerned.
Go to a stock tracker website and see for yourself.
Search IBM Ð 52 week high $108.85, 52 week low $54.01
Search MSFT - 52 week high $32.50, 52 week low $20.70
Search BRK.A Ð 52 week high $78,500.00, 52 week low $59,600.00
YES, you read that right. ONE SHARE of Berkshire Hathaway Class A shares
costs between 60 and 78 thousand per share. They have bargain B shares
too, which go for the bargain basement price of 1/10 the cost of an A share,
which is still more expensive than a second hand car. That's what it takes
to get into the upper echelons of the insurance game.
You may have heard Warren Buffet's name elsewhere, on conspiracy websites.
He was hosting his annual golf tournament at the most secure military
base in the USA on 9/11. Offut Air Force Base is so secure that it's where
they brought Dubya after he stopped reading the goat story to those kids
in Florida. Mr. Buffet and a number of high profile CEO's were safely
tucked away at Offut even before the Commander of Thieves got there with
the Secret Service.
That said, this is what Warren Buffet has to say about derivatives. I
strongly suggest using the link to read the whole letter, but for the lazy
or those who already understand the derivatives market there are highlights
below.
www.fortune.com/fortune/investing/articles/0,15114,427751-1,00.html
-
- "Charlie and I are of one mind in how we feel about
derivatives and the trading activities that go with them: We view them
as time bombs, both for the parties that deal in them and the economic
system."
-
- Having delivered that thought, which I'll get back to,
let me retreat to explaining derivatives, though the explanation must be
general because the word covers an extraordinarily wide range of financial
contracts. Essentially, these instruments call for money to change hands
at some future date, with the amount to be determined by one or more reference
items, such as interest rates, stock prices, or currency values. If, for
example, you are either long or short an S&P 500 futures contract,
you are a party to a very simple derivatives transaction--with your gain
or loss derived from movements in the index. Derivatives contracts are
of varying duration (running sometimes to 20 or more years), and their
value is often tied to several variables.
-
- Unless derivatives contracts are collateralized or guaranteed,
their ultimate value also depends on the creditworthiness of the counterparties
to them. In the meantime, though, before a contract is settled, the counterparties
record profits and losses--often huge in amount--in their current earnings
statements without so much as a penny changing hands.
-
- The range of derivatives contracts is limited only by
the imagination of man (or sometimes, so it seems, madmen). At Enron, for
example, newsprint and broadband derivatives, due to be settled many years
in the future, were put on the books. Or say you want to write a contract
speculating on the number of twins to be born in Nebraska in 2020. No problem--at
a price, you will easily find an obliging counterparty."
"Another commonality of reinsurance and derivatives is that both generate
reported earnings that are often wildly overstated. That's true because
today's earnings are in a significant way based on estimates whose inaccuracy
may not be exposed for many years.
-
- Errors will usually be honest, reflecting only the human
tendency to take an optimistic view of one's commitments. But the parties
to derivatives also have enormous incentives to cheat in accounting for
them. Those who trade derivatives are usually paid (in whole or part) on
"earnings" calculated by mark-to-market accounting. But often
there is no real market (think about our contract involving twins) and
"mark-to-model" is utilized. This substitution can bring on large-scale
mischief. As a general rule, contracts involving multiple reference items
and distant settlement dates increase the opportunities for counterparties
to use fanciful assumptions. In the twins scenario, for example, the two
parties to the contract might well use differing models allowing both to
show substantial profits for many years. In extreme cases, mark-to-model
degenerates into what I would call mark-to-myth.
"Another problem about derivatives is that they can exacerbate trouble
that a corporation has run into for completely unrelated reasons. This
pile-on effect occurs because many derivatives contracts require that a
company suffering a credit downgrade immediately supply collateral to counterparties.
Imagine, then, that a company is downgraded because of general adversity
and that its derivatives instantly kick in with their requirement, imposing
an unexpected and enormous demand for cash collateral on the company. The
need to meet this demand can then throw the company into a liquidity crisis
that may, in some cases, trigger still more downgrades. It all becomes
a spiral that can lead to a corporate meltdown."
-
- Derivatives also create a daisy-chain risk that is akin
to the risk run by insurers or reinsurers that lay off much of their business
with others. In both cases, huge receivables from many counterparties tend
to build up over time. (At Gen Re Securities, we still have $6.5 billion
of receivables, though we've been in a liquidation mode for nearly a year.)
A participant may see himself as prudent, believing his large credit exposures
to be diversified and therefore not dangerous. Under certain circumstances,
though, an exogenous event that causes the receivable from Company A to
go bad will also affect those from Companies B through Z. History teaches
us that a crisis often causes problems to correlate in a manner undreamed
of in more tranquil times.
-
- In banking, the recognition of a "linkage"
problem was one of the reasons for the formation of the Federal Reserve
System. Before the Fed was established, the failure of weak banks would
sometimes put sudden and unanticipated liquidity demands on previously
strong banks, causing them to fail in turn. The Fed now insulates the strong
from the troubles of the weak. But there is no central bank assigned to
the job of preventing the dominoes toppling in insurance or derivatives.
In these industries, firms that are fundamentally solid can become troubled
simply because of the travails of other firms further down the chain. When
a "chain reaction" threat exists within an industry, it pays
to minimize links of any kind. That's how we conduct our reinsurance business,
and it's one reason we are exiting derivatives."
"Charlie and I believe, however, that the macro picture is dangerous
and getting more so. Large amounts of risk, particularly credit risk, have
become concentrated in the hands of relatively few derivatives dealers,
who in addition trade extensively with one another. The troubles of one
could quickly infect the others. On top of that, these dealers are owed
huge amounts by nondealer counterparties. Some of these counterparties,
as I've mentioned, are linked in ways that could cause them to contemporaneously
run into a problem because of a single event (such as the implosion of
the telecom industry or the precipitous decline in the value of merchant
power projects). Linkage, when it suddenly surfaces, can trigger serious
systemic problems.
-
- Indeed, in 1998, the leveraged and derivatives-heavy
activities of a single hedge fund, Long-Term Capital Management, caused
the Federal Reserve anxieties so severe that it hastily orchestrated a
rescue effort. In later congressional testimony, Fed officials acknowledged
that, had they not intervened, the outstanding trades of LTCM--a firm unknown
to the general public and employing only a few hundred people--could well
have posed a serious threat to the stability of American markets. In other
words, the Fed acted because its leaders were fearful of what might have
happened to other financial institutions had the LTCM domino toppled. And
this affair, though it paralyzed many parts of the fixed-income market
for weeks, was far from a worst-case scenario.
-
- One of the derivatives instruments that LTCM used was
total-return swaps, contracts that facilitate 100% leverage in various
markets, including stocks. For example, Party A to a contract, usually
a bank, puts up all of the money for the purchase of a stock, while Party
B, without putting up any capital, agrees that at a future date it will
receive any gain or pay any loss that the bank realizes.
-
- Total-return swaps of this type make a joke of margin
requirements. Beyond that, other types of derivatives severely curtail
the ability of regulators to curb leverage and generally get their arms
around the risk profiles of banks, insurers, and other financial institutions.
Similarly, even experienced investors and analysts encounter major problems
in analyzing the financial condition of firms that are heavily involved
with derivatives contracts. When Charlie and I finish reading the long
footnotes detailing the derivatives activities of major banks, the only
thing we understand is that we don't understand how much risk the institution
is running.
-
- The derivatives genie is now well out of the bottle,
and these instruments will almost certainly multiply in variety and number
until some event makes their toxicity clear. Knowledge of how dangerous
they are has already permeated the electricity and gas businesses, in which
the eruption of major troubles caused the use of derivatives to diminish
dramatically. Elsewhere, however, the derivatives business continues to
expand unchecked. Central banks and governments have so far found no effective
way to control, or even monitor, the risks posed by these contracts.
-
- Charlie and I believe Berkshire should be a fortress
of financial strength--for the sake of our owners, creditors, policyholders,
and employees. We try to be alert to any sort of mega-catastrophe risk,
and that posture may make us unduly apprehensive about the burgeoning quantities
of long-term derivatives contracts and the massive amount of uncollateralized
receivables that are growing alongside. In our view, however, derivatives
are financial weapons of mass destruction, carrying dangers that, while
now latent, are potentially lethal."
-
- Warren Buffet is too high profile a figure to point fingers
at specific markets and companies without crashing their stock, and potentially
damaging the US economy. He leaves plenty of hints throughout the letter
as to who and what markets he's talking about though. You just have to
read between the lines, and follow the derivatives trading news from the
last few months to get some idea what he's talking about.
I believe one of the markets Mr. Buffet is talking about with the potential
to have a domino effect on US markets is the gold market.
www.insightmag.com/main.cfm?include=detail&storyid=370641
-
- Panic Is Near if 'The Gold Is Gone'
-
- Posted Feb. 19, 2003
-
- http://www.insightmag.com/main.cfm?include=displaystaffbio&authorid=35278
- By Kelly Patricia O Meara
Gold. It's been called a barbarous relic, and those who focus on its historic
role as a standard of value frequently are labeled "lunatic fringe."
Given the recent highs in the gold market, it looks like the crazies have
been having a hell of a year. With the stock market taking its third yearly
loss, gold returned nearly 30 percent to investors, moving from $255 an
ounce to six-year highs of $380.
-
- Just about every analyst and "expert" on Wall
Street willing to mention any of this has been quick to explain that the
increase in the price of gold is due to impending war with Iraq. But hard-money
analysts are arguing that should the United States go to war it will be
of very little consequence to the price of gold -- a momentary blip --
because gold is a commodity and its price a matter of supply and demand.
-
- The "lunatic fringe" long has argued that the
price of gold was being manipulated by a "gold cartel" involving
J.P. Morgan Chase, Citigroup, Deutsche Bank, Goldman Sachs, the Bank for
International Settlements (BIS), the U.S. Treasury and the Federal Reserve,
but that the manipulation had been sufficiently exposed to require that
it be abandoned, producing the steady upward increase in the price of the
shiny, yellow metal.
-
- In fact the "gold bugs," as they're known,
are so sure of their research that not only do they believe the price of
gold will continue to climb, but many are expecting to see prices of $800
to $1,000 an ounce. Until recently, most in the gold and financial worlds
scoffed at such a prediction, but last month the Bank of Portugal made
an announcement that shocked those who credit official gold-reserve data
and added fuel to the contention of the gold bugs that the "gold-cartel"
manipulation is in meltdown.
-
- What the Bank of Portugal revealed in its 2001 annual
report is that 433 tonnes [metric tons] of gold -- some 70 percent of its
gold reserve -- either have been lent or swapped into the market. According
to Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA),
a nonprofit organization that researches and studies the gold market and
reports its findings at www.LeMetropoleCafe.com: "This gold is gone
-- and it lends support to our years of research that the central banks
do not have the 32,000 tonnes of gold in reserve that they claim. The big
question is: How many other central banks are in the same predicament as
the Portuguese?"
-
- Murphy explains: "The essence of the rigging of
the gold market is that the bullion banks borrowed central-bank gold from
various vaults and flooded the market with supply, keeping the price down.
The GATA camp has uncovered information that shows that around 15,000 to
16,000 tonnes of gold have left the central banks, leaving the central-bank
reserves with about half of what is officially reported."
-
- This is why those who follow such arcana are predicting
an explosion in the price of gold. According to Murphy, "The gold
establishment says that the gold loans from the central banks are only
4,600 to 5,000 tonnes," but his information is that these loans are
more than three times that number, which means "they're running out
of physical gold to continue the scheme."
-
- According to Murphy, "The cartel has been able to
get away with lying about the amount of gold in reserve because the International
Monetary Fund [IMF] is the Arthur Andersen of the gold world." He
has provided to Insight documents from central banks confirming that the
IMF instructed them to count both lent and swapped gold as a reserve. "In
other words, the IMF told the central banks to deceive the investment and
gold world[s]. Once this gold is lent [or] swapped, it's gone until such
time as it can be repurchased. And with the skyrocketing price of gold
we're now seeing, it would be incredibly expensive, let alone nearly physically
impossible, to get it back."
-
- What is important to understand, says Murphy, "is
that there is a mine and scrap supply deficit of 1,500 tonnes, which is
an enormous deficit when yearly mine supply is only 2,500 tonnes and going
down. On top of that, there are these under-reported gold loans and other
derivatives that are on the short side. There is no way to pay this gold
back to the central banks without the price of gold going up hundreds of
dollars per ounce. So the peasants and women of the world will have to
sell their jewelry at say $800 an ounce to bail out these short positions
or someone is going to have to tell the world that they don't have the
gold that they have reported," shaking the world's financial system
to its core.
-
- The gold bugs appear to be basing their identification
of a world gold shortage on industry data, much of which has been summarized
in two papers prepared by four different gold analysts at different times
using separate methods. The first paper was written by governmental investment
adviser Frank Veneroso and his associate, mining analyst Declan Costelloe.
Titled Gold Derivatives, Gold Lending: Official Management of the Gold
Price and the Current State of the Gold Market, it was presented at the
2002 International Gold Symposium in Lima, Peru, and estimates the gold
deficit of the central banks at between 10,000 and 15,000 tonnes. The second
paper, Gold Derivatives: Moving Towards Checkmate, by Mike Bolser, a retired
businessman, and Reginald H. Howe, a private investor and proprietor of
the Website www.goldensextant.com, estimates the alleged shortage of central-bank
gold at between 15,000 and 16,000 tonnes -- nearly a decade's worth of
mine production.
-
- George Milling-Stanley, manager of gold-market analysis
for the World Gold Council (WGC), a private organization made up of leading
gold-mining companies that promotes the acquisition and retention of gold,
is aware of these papers and shortage numbers but tells Insight that "there
are no official [gold-reserve] reports." That is, "The central
banks are under no obligation to report what they lend into the market,
what they place on deposit and what they do with their swaps, so there's
a conventional-wisdom view, and a couple of different bodies have done
some fairly serious research in[to] this and have come up with a figure
[of] around 4,500 to 5,000 tonnes."
-
- Stanley's estimate is based on data provided by so-called
"serious" researchers, including London-based Gold Fields Mineral
Services (GFMS), one of the world's foremost precious-metals consultants,
and a report titled Gold Derivatives: The Market View, commissioned by
the WGC to London-based Virtual Metals Consultancy. While these two groups
appear to be the research choice of the official gold world, there are
in fact no "official" figures, and both studies, like the Veneroso/Costelloe
and Bolser/Howe reports, are based on interviews, data analysis and other
research generally available to the industry.
-
- Those who believe the central banks to have misrepresented
their actual gold holdings place much of the blame for the lack of transparency
on the shoulders of the IMF, which presents itself as being responsible
for ensuring the stability of the international financial system. Although
the IMF would not respond to questions about its gold-loan/swap requirements,
what information has been made public appears to support GATA's understanding
of how central-bank reserves are reported.
-
- For example, in October 2001 the IMF responded to questions
posed by GATA by saying it is not correct that the IMF insists members
record swapped gold as an asset when a legal change in ownership has occurred.
According to this response, "The IMF in fact recommends that swapped
gold be excluded from reserve assets." Nonetheless, says GATA, there
is abundant evidence that this is not the case, citing as an example the
Central Bank of the Philippines (BSP).
-
- A footnote on the Website of the Central Bank of the
Philippines (www.bsp.gov.ph) in fact directly contradicts the IMF's claim:
"Beginning January 2000, in compliance with the requirements of the
IMF's reserves and foreign-currency-liquidity template under the Special
Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with
noncentral banks shall be treated as collateralized loans. Thus gold under
the swap arrangement remains to be part of reserves, and a liability is
deemed incurred corresponding to the proceeds of the swap."
-
- The European Central Bank (ECB) also made it clear that
the IMF policy is to include swaps and loans as reserves. The ECB responded
to GATA: "Following the recommendations set out in the IMF operational
guidelines of the 'Data Template on International Reserve and Foreign Currency
Liquidity,' which were developed in 1999, all reversible gold transactions,
including gold swaps, are recorded as collateralized loans in balance of
payments and international investment-position statistics. This treatment
implies that the gold account would remain unchanged on the balance sheet."
The Bank of Finland and the Bank of Portugal also confirmed in writing
that the swapped gold remains a reserve asset under IMF regulations.
-
- Although the WGC's Stanley stands by the data provided
by the industry's "serious" researchers, he insists he cannot
say for certain that the numbers are accurate. "There is no requirement
on any country to tell the IMF how much gold it owns," says Stanley.
"The requirement is to tell the IMF how much gold it has decided to
place in its official reserves. Nobody knows whether that is the total
of what they own or not. Obviously they can't report more than what they
own, but they can certainly report less if they chose to. That gold may
have been lent out, but is nevertheless still owed to them. It's a bit
like any company reporting a cash position. It will report cash on hand
and cash due -- money owed by other people. I'm not saying this is ideal,
but this is how it works."
-
- John Embry, the manager of last year's best-performing
North American gold fund and manager of the Royal Precious Metals Fund
for the Royal Bank of Canada, says he is putting his and his clients' money
on the "lunatic fringe" in this dispute: "I've examined
all the evidence gathered by GATA and everyone else, and I think these
guys are anything but lunatics. They've done their homework and have unearthed
a lot of interesting stuff. The problem, though, is that the market is
sufficiently opaque that there is really no way to know who is right and
who is wrong."
-
- "The fact is," continues Embry, "a lot
of this stuff is based on estimations. I do however believe that, based
on the evidence dug up by Veneroso and Howe, they are presenting equally
if not more credible numbers than the other side. I find the campaign to
undermine their credence simply bizarre. I think these guys [GATA] are
right and that the number put out by Gold Fields Mineral Services as the
amount of gold loaned out by the central banks is definitely wrong. Now,
whether it's as much as 15,000 is up for interpretation. The recent release
by the Bank of Portugal is important. When a central bank has 70 percent
of its gold loaned or swapped, I don't think it is operating independently,
and I suspect there are an awful lot of them that have loaned out much
more than has been reported."
-
- Embry says, "I've made a fortune for my clients
investing in gold and gold stocks because I have operated on the premise
that the Veneroso/Howe reports are right -- that gold was significantly
undervalued in the daily quote and that it was going a lot higher. The
circumstantial evidence, and I bet my clients' money on it, was very much
in favor of the guys who said a great deal more central-bank gold had entered
the market and driven the price down far too low. GATA has had this story
from day one. I think that they're right and that officialdom doesn't want
this exposed. GATA is willing to have a public debate but the gold world
won't debate. I think there is a tacit admission of anyone who has an IQ
above that of a grapefruit that Veneroso and Howe have a pretty good point.
I'm an analyst who has looked at both sides of the issue and I bet my money
on GATA. So far they've been right."
-
- Whether the gold bugs are right about the reasons for
the meteoric rise in the price of gold is uncertain, but, according to
GATA's Murphy: "It's all the more reason to have the central banks
come clean about the actual amount of gold that physically exists in their
reserves. Either way, the price of gold will continue to rise because,
as we already know and others are discovering, the gold is gone."
-
- Kelly Patricia O'Meara is an investigative reporter for
Insight magazine.
-
- I know what some of you are thinking. What rubbish.
Gold gone. Conspiracy to keep the price depressed. Bollocks. Well,
if it's bollocks, what about this story in NY Times?
www.nytimes.com/2003/03/02/business/worldbusiness/02GOLD.html
After years of top performance, Barrick's stock price has slid, falling
nearly 11 percent over the last year, as prices for gold have soared nearly
18 percent. Randall Oliphant was recently shown the door as chief executive
and replaced by another longtime Barrick executive, Gregory C. Wilkins.
Now, Barrick has been sued by a gold dealer and gold investors who say
its success of the last decade relied on manipulating gold prices.
-
- At the foundation of many of its troubles is a wide perception
among investors that Barrick is not set up to take advantage of a rising
market because of its strategy of locking in prices for future gold production.
That strategy -- known as taking a hedge position -- has been used
by Barrick for some 15 years, and company executives credit it with bringing
in some $2.2 billion of additional profit during that time."
"Recent events have only fueled the debate. With a strategy described
in exotic terms like "off-balance sheet position" and "fixed-forward
contracts," the hedge program sounds the way the kind of toxic ploys
used by Enron did. For conservative gold investors, they are the equivalent
of the investment bogyman.
-
- "As a percentage of Barrick`s total assets, its
off-balance-sheet assets make Enron look like a champion of full disclosure,"
said Donald W. Doyle Jr., chief executive of Blanchard & Company, a
gold dealer in New Orleans that is the lead plaintiff in the suit against
Barrick in Federal District Court there.
-
- Barrick insists -- and numerous analysts agree --
that its strategy is far simpler and more adaptive to market conditions
than investors seem to believe. It begins with a contract between Barrick
and a large bullion dealer, like Citigroup or J. P. Morgan Chase. Under
the terms of the contract, Barrick is required to deliver gold at some
future date. The contract, known as spot deferred, allows Barrick to postpone
delivery, however, for up to 15 years.
-
- With the contract in place, the bullion dealer then leases
that same amount of gold from a central bank, selling it in the spot market.
The dealer then effectively places the cash from the sale on deposit, where
it earns interest. During the contract's life, the dealer pays interest
to the central bank as a fee for borrowing the gold. Once Barrick delivers
the gold, it receives the cash from the spot sale and the accumulated interest,
less the lease rate and certain fees paid to the dealer."
-
- "None of this is free of risk. If gold's spot price
rises above the hedge price for more than a decade, Barrick would be forced
to sell its gold for less than its nonhedged competitors would receive.
Moreover, the bullion dealers could demand delivery if Barrick violated
certain financial and performance requirements -- for example, if a disaster
occurred at its production facilities that impeded its ability to deliver
gold.
-
- The hedging strategy also now faces a legal challenge.
In the federal lawsuit filed late last year, Blanchard and the other plaintiffs
accused Barrick of using its hedge program to manipulate gold prices in
violation of federal antitrust laws.
-
- In essence, the lawsuit says Barrick and J. P. Morgan
Chase, which has participated in the hedge program for years, used the
strategy to force down prices, allowing them to profit at the expense of
other market participants.
-
- "If you look over the past six years, you will see
that when Barrick's hedge position has gone way up, the price of gold has
gone way down and vice versa," said Mr. Doyle of Blanchard. "Barrick
created an anticompetitive environment through the manipulation of the
price of gold, and they did it with the knowledge and assistance of J.
P. Morgan and perhaps some of the other bullion banks."
-
- With the hedge program bringing future sales of gold
into the immediate spot market, Mr. Doyle said, Barrick had the ability
to cripple any rally in the price of the commodity. Because the program
also allowed it to profit in markets that left competitors in poor shape,
he said, Barrick was able to use its competitive advantage to acquire other
companies, fueling huge growth."
According to NY Times, Barrick Gold, the darling that Kissinger, Bush Sr,
and Brian Mulroney were involved in which brought us the Bre-X scandal,
has been taking a beating in the markets of late. A few months ago, a
broker friend of mine passed on a suggestion from his former employer (he's
since left this company) that I buy into Barrick.
I sent him back an email saying, "don't you dare get me into Barrick.
It's a scam and people are going to lose money."
It turns out I was right to invest elsewhere in the gold market. But gold
has been going up steadily for a year. How could Barrick's shares be doing
badly?
Things aren't going well because Barrick is heavily engaged in hedging.
They supply the derivatives market by doing futures contracts to sell
gold at a fixed price. According to GATA, they've been deliberately suppressing
the price of gold on behalf of JP Morgan and others.
The entire mechanism is too complicated to explain here.
www.gata.org
You can get the full lowdown at <http://www.gata.org/>www.gata.org
and decide for yourself whether or not there's a relationship between Barrick's
hedge position increasing and the price of gold going down. The evidence
is compelling.
GATA's not the only one screaming bloody murder. Congressman Ron Paul
(R-Tx), a Republican Libertarian, has been calling for an investigation
for some time now.
www.house.gov/paul/congrec/congrec2002/cr060502.htm
www.house.gov/paul/congrec/congrec2002/cr091002b.htm
www.house.gov/paul/committeework/bankingtrans/99_2_24.htm
www.house.gov/paul/tst/tst2002/tst061002.htm
www.house.gov/paul/congrec/congrec99/bank031799pau.htm
Keep in mind, these sources I'm quoting, Fortune Magazine, Warren Buffet,
NY Times, and Insight Magazine, aren't exactly conspiracy papers. This
is no fringe lunatic set discussing the danger of hedging and derivatives,
it's the players.
And the domino principle is real too. Sure, Barrick is fairly protected.
But Morgan, Citigroup, the Federal Reserve, and countless others could
get caught with their pants down. What if gold keeps rising, they need
to buy gold to cover, and there's not enough cash or asset reserves to
cover the difference between the low hedge price and the market price,
for a really long time?
Meltdown. The banks, rather than go under, will start calling in demand
loans. Almost all loans are actually demand loans. While there may be
a payment schedule, the bank in most cases reserves the right to call in
your loan or mortgage or line of credit on demand in order to cover their
own losses.
So if they can't pay, they call in loans on property, and foreclose on
assets. Except no one's going to pay book rate for assets or property
into a declining economy and depressed dollar, so they end up having to
foreclose on two properties to pay one bill for half the amount. And as
the vultures move in as real estate prices to plummet, it affects other
banks' situations, because EVERYONE has put up their mortgages as collateral
for other loans and purchases.
So what was once five trillion in assets backing one hundred trillion in
loans is now toilet paper, and more loans have to be called in to have
sufficient collateral to stay legal. And so on and so on, until the interest
rate is 0%, growth stagnates, currency devalues, and the economy implodes.
And all because some bastards want to buy time for a bankrupt economy so
they can stay on top for a few more years.
Ask the Japanese about how quickly economic chain reactions related to
loans backed by overvalued asset and property values can go wrong, and
how hard it is to recover. They've been at 0% interest for their third
year now, with no relief in sight, and the second largest debt in the world.
Their stock market is at the lowest point since 1983. America's looking
at itself a few short years from now.
http://news.bbc.co.uk/2/hi/business/2828189.stm
So what do we take away from this as valuable information?
1. Barrick Gold is vulnerable if their ability to deliver is impeded.
Such an obstacle to delivery could result in people calling in gold markers
that they can't deliver. Perhaps someone should talk to Barrick's miners
and explain to them how they're working toward their own enslavement and
that of everyone else. Trouble at Barrick's mining operations could have
a synergistic domino effect, crashing, or setting of a crash of the US
economy.
2. The gold market appears to be deliberately depressed by certain parties,
with the complicity of central banks. If this is not the case, I challenge
the Federal Reserve to have a group of GATA auditors walk through the reserve
and allow them to take a physical inventory of the US gold reserves.
3. While Barrick may be in a reasonably risk-free position should gold
prices rise, their client bullion banks (JP Morgan Chase, Citigroup) most
certainly are not. Watch for them to tank as gold prices rise above $400.
4. For the record, my Canadian shares are NOT in Barrick. Barrick sucks.
The Bushies used Barrick and their genocidal pal Suharto to scam Bre-X
investors out of billions, that's how they got where they are. If you
buy Barrick, you support Bush and his gang of criminals. Go ahead and
sue me Barrick, so I can make all your Bre-X shenanigans public record.
I dare you.
So what to do with this knowledge, and why am I publishing this silly,
boring, dry economic info at this time?
Because if some of you owned Enron or WorldCom shares, you don't want to
go through that again where your bank accounts are concerned, do you?
I wouldn't either.
I'd suggest buying gold shares or physical gold. If you buy shares, I'd
suggest not buying into a company that's heavy on hedges. Shares can be
better than physical gold (for now) so long as the currency you're buying
shares in isn't going into the toilet because of the way gold share prices
change in relation to the market. In other words, if the price of gold
goes up 2% but the currency you own the shares in goes down 3% against
the world market, you're getting boned.
It works like this. A company can mine gold at a specific price per ounce.
Let's call it 200 bucks an ounce. So if gold moves from 250 to 300 an
ounce, the value of gold has only increased by 20%, but the profit margin
for the mining company has doubled from 50 bucks an ounce to 100 an ounce.
And the shares reflect that change quite consistently. They rise faster
than physical gold. Just don't get caught in a currency that's deflating
against the world market faster than the price of your gold shares is increasing.
There's a movement underway in Malaysia and elsewhere in the Islamic world
to return to a gold standard currency. This push, led by Mahathir Mohammad,
is for real. I've been to Kuala Lumpur, and they've created the infrastructure
of a business haven around the Petronas towers. All that's needed is the
new central bank to kickstart the economy, and Malaysia will be on its
way.
www.321gold.com/editorials/sinclair/sinclair111902.html
"I have made the decision to present to you in this manner as it must
be read with an open mind. There is an Islamic currency coming. That is
a fact. There is a high chance that this is it. The Dinar is a tactic nuclear
monetary weapon of self-protection in the Islamic perspective. It is a
statement by them of Islamic Self Consciousness and Islamic Self Esteem.
It is an Islamic rally point for all 1.2 billion of that persuasion. It
is coming soon and it is real. It may not be viewed objectively by the
West, in the environment of a weak dollar now existing. That weak dollar
situation looks to me as if it will get significantly worse before it gets
significantly better. This is not low amplitude noise. This is a NOISE
that may scream soon the unthinkable word, Remonetization. Here are the
words of its architect. Pay close attention to the final point in the words
of this Minister of Finance's own words. They need to be understood completely
in order to understand what is coming."
CLICK THE LINK ABOVE TO SEE THE REASONS FOR A GOLD BACKED CURRENCY, IT'S
TOO LONG TO INCLUDE HERE.
BELOW is Jim Sinclair's conclusion based on the speech above.
-
- Dear Friends of the Gold Community new and old, this
is a very young gold market with a long way to go. It is only in the crawling
stage and has done magnificently so far. Soon it will stand up, become
strong and be recognized. This time Atlas will not Shrug but rather Gold
as an economic Atlas will be used to bolster and restore confidence in
the US dollar through a revitalized Gold cover Clause. When the next bull
market in equities begins it will be gold that will stand as the foundation
to that event and not more paper foolishness from any central bank or international
derivative traders. The really millennium begins when gold revitalizes
world economies not through convertibility but rather through the gold's
real role in the monetary system. Gold is a control item that disciplines
the creation of monetary aggregates. That is what the Gold cover clause
does and that is why Nixon sterilized it. Mark my words. It is coming and
it brings good times, not the four horsemen now looked for as the specters
coming over the hill. The ascendancy of gold will be hard-fought but will
be finally embraced as now-popular central bank tools of interest rate
manipulation and monetary aggregate expansion are destined by their own
definition to fall flat on their political faces. It is amazing that out
of Islam comes what will save the Western World's economic system. I am
certain that Divinity, whatever He, She or It is or is not, has a unique
SENSE OF HUMOR and loves Infinite Variety.
-
- James Sinclair
- jes108@aol.com
- November 18, 2002
-
- Consider the current economic situation in America. The
US economy is teetering, and the dollar dropping against the Euro daily.
China dropped half their US dollar reserve for Euros last year. The US
Dollar is going belly up. Not long ago it was CDN$1.62 to one US dollar.
Today the Canadian dollar is at $1.46 to one US. While Bush policies
caused the US economy to shrug off 308,000 jobs in February, Canada with
1/9 of the US population, created 55,000 jobs. Bankruptcies are at an
all time high these last two years. The dominoes are already starting
to fall.
-
- http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullSto
- ry&c=StoryFT&cid=1045511424674&p=1012571727201
-
- China recently opened up their gold operations to foreign
markets and opened up their internal gold market, allowing citizens to
once again buy gold, adding 1.2 billion potential buyers to the gold market,
which over time is sure to have the effect of driving the price up. If
GATA is correct, and I believe they are, JP Morgan Chase and other bullion
banks have run up trillions in shady derivatives, which will kill them
if gold continues to rise.
-
- http://e-mj.com/ar/mining_china_opens_door/
-
- www.china.com.cn/english/2002/Oct/47277.htm
-
- What happens when you open up a market to 20% more buyers
who've been banned from having a popular product for more than a generation?
Just wait till the Chinese exchange gets going.
-
- If anyone thinks all these moves by China, the Malaysians,
and others are accidental, think again. They see the fatal flaw in the
pyramid scheme that is the US economy, and they intend to target it with
both barrels. US economic growth has been backed by unpayable paper for
a generation now, and the gold reserves are likely depleted to the point
where the theft can't be hidden for much longer.
-
- On top of all these forces working against the US economy
and low gold prices, no one will let us know for real how much gold is
left. In the derivatives market in general, Enron is the tip of a massive
iceberg that's infected every aspect of the world financial markets. IMF
debtor nations are defaulting one by one, putting pressure on the already
shaky US and Japanese economies. And when the dollar gets REALLY shaky,
people are going to run to commodities like gold, silver, and platinum.
-
- The US economy is being held up by that illusory force
known as CON-fidence, and little else.
-
- We're in the land of Oz. And when in Oz, one should
listen to the Wizard. We live in a world of speculative paper backed by
nothing, corporate crime over human rights; and assholes in control of
everything. They're bringing the house down. It's time to protect yourself
by sticking your money, at least some of it, into something that won't
go tits along with the dollar.
-
- Don't say I didn't warn you.
-
- Peace
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