[Jaco]

I've been lurking here for awhile and stop by this forums almost daily.
This topic was discussed here before and decided to contribute.


October 01, 2009


The Opaque World of Gold Derivatives
Michael Coulson, Author of The Insiders Guide to the Mining Sector


In the last couple of weeks the issue of gold derivatives has returned to centre stage following the massive Barrick share sale to raise funds to reduce its gold hedge position materially. It virtually coincided with an announcement by the Gold Anti-Trust Action group (GATA) that the US Government, through the Federal Reserve, has refused its request to view documents under the Freedom of Information Act relating to US gold swaps over the last decade or so. GATA have also got their hands on some recently released documents from 1975 when then Federal Reserve Chairman, Arthur Burns, outlined in some detail the Fed’s gold policy. Much of that policy consisted of actions taken to control gold market sales and purchases by other central banks including France and Germany, which rather undermines the view of some commentators that the US Government has no interest in the gold market whatsoever.
The Barrick and FIA events, whilst not related, are not completely unconnected, for it is Barrick that GATA has been sniping at for some years over what it believes is Barrick’s central role in acting as a stalking horse in the gold market for a range of entities, including the US Government, anxious to keep the price of gold down and thereby calm nervous currency markets which have been in a state of high excitement since the financial crises of the late 1990s. The theory put forward for so long by GATA is that a strong gold price signals to the world that currencies, particularly the US dollar, cannot be trusted and that danger, as in the 1970s, lurks just round the corner for the advanced economies.

Both President Reagan and Paul Volker, ex Federal Reserve Chairman, have made comments in the past about gold and peoples’ perception of the ‘mighty’ dollar if gold rose strongly. Although gold has recently poked its head over US$1000/oz again there has been much derision in the anti-gold corner, always an overcrowded area, concerning the yellow metal’s inability to take off during the financial crisis of the last year and a bit. GATA say that this dull performance is just another example of the way that the major investment banks, in cahoots with the US Government and helped by pliant gold producers, have manipulated the gold market to stop the price rising.

The view is, getting back to Barrick, that this huge gold producer has over the years entered into a range of derivative strategies that have helped the investment banks carry out this strategy, as agents of the US Government, to keep the gold price from rising. In the last few years this clearly has not worked and we suspect that Barrick has decided that it is time to take a torch to the greater proportion of its derivative contracts by closing them out, albeit at huge cost (a US$5.6 billion writedown in the 3rd quarter). Readers will remember for many years, when interest rates were high (and thus the contango was juicily high also), Barrick’s realised gold price was always well above the persistently weak market price of gold. With interest rates now low and gold rising that position has been disastrously reversed for the company.

There has been much excitement that Barrick will have to buy considerable quantities of gold in the market in order to make delivery to its counterparties as the hedging is unwound. We doubt that this is a complete train smash, although it will be hugely expensive for Barrick, as we suspect that many of these contracts will allow Barrick to pay cash rather than deliver gold to close out the contracts, and those contracts requiring physical delivery can in part be satisfied by Barrick delivering some of its own gold. As ‘bears of little brain’ an examination of Barrick’s accounts, the sections on its hedging strategy, and the positions it currently holds, needs us to have a much larger cold towel than we can lay our hands on to enable us to be absolutely clear what is going on. However the accounts do appear to show that Barrick has two classes of hedges, one requiring delivery of physical gold and the other requiring the closing out of the contracts which is essentially a cash issue.

Returning to our old friends, GATA, recent correspondence from Federal Reserve Governor Kevin Warsh deputed to deal with GATA’s FIA enquiries, alludes to gold swaps but does not specifically admit that the Fed engages in them. This is not dissimilar in tone to the legal action between Barrick and Florida fund manager, Blanchard & Co, back in 2003 over gold market manipulation. Here Barrick signed off by saying that as/if they were agents of the central banks (in the gold market) they could not be sued as central banks cannot be sued, and Barrick as their agent is therefore also legally protected.

So again almost an admittance of gold market activities by central banks, but not quite! Also some of the documents received by GATA as a result of an earlier FIA request had been heavily edited suggesting intriguing facts, names and even trading strategies may hide beneath the black ink. GATA wanted these omissions to be reinstated but again Mr Warsh was not inclined to be helpful, stating that the omissions were covered by the FIA which allows a number of exemptions particularly where commercially sensitive information is being withheld.

With mine hedging almost over and with central banks now turned buyers there is an increasing chance that GATA’s quarry will slip away from them into the night. Having been derided for years an increasing number of sceptics are coming round to the view that GATA has been right about gold market manipulation from the beginning. It is frustrating for the group, therefore, that completely transparent proof of this lies tantalisingly just out of reach.

As for gold itself it continues to dice with the magic US$1000 mark but as yet has been unable to break through decisively. A pull back in the short term cannot be ruled out but we suspect that gold will persist in its attempt to achieve a sustained hold on the US$1000 plus ground, and well before the end of the year.

http://www.minesite....ivatives/1.html

[Jaco]

Sorry...I meant to post this in the Oct thread.

[Whadda I Do Whadda I Do]

If gold is leased out then one can claim no responsibility with how it is used.