Sinclair praises GATA in New Orleans, sees Asian/Islamic gold strategy

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4:31p CT Friday, November 8, 2002

Dear Friend of GATA and Gold:

This seems to have been the week when GATA's publicizing
J.P. Morgan Chase's suppression of the gold price through a
huge issuance of derivatives exploded in the mainstream
financial press. Today's examination of the issue comes in
a long story in Canada's National Post, appended here.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

The rumour that won't die:
Investors keep worry about
J.P. Morgan's gold hedging exposure

By Steve Maich
National Post / Financial Post, Canada
Friday, November 08, 2002

The rumour that J.P. Morgan Chase & Co. is facing massive
losses on gold derivative exposure is the market conspiracy
theory that will not die.

J.P. Morgan insisted yet again yesterday that its derivative
exposure remains minimal, calling the latest rumours "false
and irresponsible." But that didn't stop investors from driving
the shares down 6.6 percent yesterday.

Despite the denials, thousands of investors and analysts
suspect J.P. Morgan has more on the line than it's letting on.
Just as they did when Barrick Gold Corp. and Placer Dome
Inc. slipped last summer on concerns about their extensive
hedging strategies, investors are complaining about a lack of
transparency in derivatives trading, and a general distrust of
complex financial structures.

One former brokerage credit officer, now working as an
independent analyst, said the market has very little faith
in assurances about risk exposure when they aren't backed
up by hard data.

"To see what some of these companies have as real
exposure and then hear their public statements, it just
boggles the mind sometimes," he said. "You just don't
know, and that's the point."

J.P. Morgan became heavily involved in forward gold
contracts in the 1990s when the commodity price was
in a slow decline. Market watchers at the time said gold
was going nowhere in the new global economic environment,
and the derivatives market allowed banks like J.P. Morgan to
extract profits from a marooned asset class.

As far as most analysts are concerned, J.P. Morgan's
massive derivatives program amounted to a short position
on the price of gold. And with gold prices up 17.5 percent in
the past year, speculation is swirling that the bank is now
taking a serious pounding.

How big the losses are, is a matter of endless debate.

David Hendler, a bond analyst at Creditsights Inc., an
independent research firm in New York, discussed the
gold question in a Sept. 23 report to clients. He concluded
that there is not enough public information released by the
bank to precisely determine the risks, but there are a few
clues that suggest reasons for concern.

First and foremost is J.P. Morgan's extensive participation
in the derivatives market, he said. In all, the bank holds
about US$26-trillion in futures and options contracts, or
roughly 50 percent of the overall market. That's more than
twice the size of the entire annual U.S. gross domestic
product.

J.P. Morgan has reduced its gold contracts over the past
year, but it is still relatively overexposed compared to other
major banks, Mr. Hendler said. At the end of the second
quarter Morgan's gold contracts were worth US$45-billion
on a notional basis. Citigroup, the largest financial services
company with about 50% more total assets than J.P. Morgan,
has just US$12-billion in gold derivatives.

Notional value isn't a true reflection of the bank's risk, because
it refers to the potential maximum value of a contract. But even
a writeoff of 5 percent of its total gold contract would represent a
loss in excess of US$2-billion, greater than the bank's total net
income in 2001.

Like all banks, J.P. Morgan has stress-tested its portfolio and
insists that even in its worst-case "value at risk" scenario, its
gold contracts would cut just US1 cent per share from its 2003
earnings. But, like all banks, it refuses to go into the specifics
of trading strategies, or how they arrive at their risk models,
as these are proprietary secrets.

If the denials are starting to ring hollow, it's because J.P.
Morgan has had to issue so many of them in recent months.

The bank is trying to recover US$965-million in losses from
doomed derivatives transactions with Enron Corp. The insurance
companies involved maintain the deals were tantamount to fraud
and they've refused to pay. The bank also faces a variety of
lawsuits arising from its role as financier to Enron and WorldCom
Inc. The bank has denied all allegations of wrongdoing, and so
far hasn't taken a provision for the potential losses, insisting
that they'll be vindicated.

Back in July, Kathy Shanley, an analyst at Gimme Credit, an
independent bond research firm, said "there is no way to
responsibly quantify the ultimate financial impact of the
current investigations."

J.P. Morgan is also at the centre of a Securities and Exchange
Commission investigation into allegations that the bank forced
clients to buy more shares of bank-led IPOs in the aftermarket
to ensure new issues surged in their first few days of trading.
Again, executives have denied the charges, but investors are
well aware that Credit Suisse First Boston paid US$100-million
last year to settle similar charges.

For a bank that saw third-quarter profits plunge 91 percent thanks
to a slew of credit writeoffs, all the outstanding questions are
creating an unappealing picture.

In an environment like this, whispers about multi-billion dollar
derivatives losses are finding fertile ground among nervous
shareholders.