You are here

Chris Temple''s commentary on gold price and Blanchard lawsuit

Section: Daily Dispatches

The 'lone gunmen' of gold strike again

The Globe and Mail, Toronto
Thursday, December 19, 2002
Online Edition
Posted at 4:39 PM EST

a href=

There's something about gold that makes
otherwise rational people well, kind of
loopy. Gold-rush miners risked life and limb
in their quest for the yellow metal, and even
though gold mining has become just another
vast industrial machine run by globe-spanning
corporations, it is still home to those who
see deceit and conspiracy theories around
every corner. At the center of many theories
is Canada's own Barrick Gold.

The latest twist in the gold-price saga is a
lawsuit against Barrick Gold and financial
giant J.P. Morgan, a suit launched this week
by Blanchard amp; Co. The New Orleans-based gold
dealer is alleging the two companies
depressed the price of gold through the use
of derivative strategies, the true nature of
which Blanchard claims is unknown because
they involved a variety of quot;off balance
sheetquot; transactions between the two.

The suit accuses the two firms of quot;unlawfully
combining to actively manipulate the price of
goldquot; and of making $2-billion (U.S.) or more
in profits by selling gold short (that is,
selling borrowed gold hoping the price will
drop, then repaying the debt and pocketing
the difference). According to Blanchard CEO
Donald Doyle Jr., quot;the growth of global
income and wealth would have lifted the gold
price to approximately $740 if the price had
been able to respond to the normal laws of
supply and demand.quot;

None of the claims has been proven, and
Barrick said the suit is quot;ludicrousquot; and
contains quot;numerous factual inaccuracies and
defamatory statements.quot; The case marks the
second gold-plated conspiracy theory to make
it to court in the past year although it
isn't quite as ambitious as the one launched
last year by the Gold Anti-Trust Action
Committee (GATA). That one named Federal
Reserve Board chairman Alan Greenspan and the
Bank for International Settlements, the
central bank of all central banks.

Although they are targeted at different parts
of the gold market, both the GATA suit and
the Blanchard suit stem from the same source,
namely the sense of righteous outrage some
gold bugs feel about the fact that the price
of bullion has been so low for so long
unjustly, they feel. And if that low price is
a wrong that has been done, which they
clearly believe it is, someone must be to
blame. And who is one of the largest gold
miners in the world, one whose name is
synonymous with hedging? Barrick.

Barrick's aggressive hedging program -- which
involves forward contracts and other
derivative instruments made the company
millions of dollars that it wouldn't have
made otherwise when the price of gold was
low. But it also produced some fierce
criticism within the gold community. Why? Not
just because of good old-fashioned jealousy,
but also because hedging was seen as almost
an act of treason against the industry, since
it was based on the idea that prices would
fall (heresy to a gold bug).

Similar sentiments have been expressed in the
oil and gas business in private at least
about companies that hedge their future crude
or natural gas production. Despite the fact
that such risk-aversion is in many cases a
sound business practice, it is often seen as
a lack of faith in the business, and many
producers silently rejoice when aggressive
hedgers get caught on the wrong side of a
major price swing. In fact, Barrick is seeing
some of that now as the price of gold has
climbed higher.

Adding to this perception is the fact that
large-scale hedging of gold can help to
depress the current price, since a futures
contract is effectively a promise to supply a
certain amount of gold at a certain price at
some point in the future. Depending on what
the price is and the amount, that future
supply can have a dampening effect on current
demand, at least in a small way although
large sales of gold by central banks has also
put significant pressure on the price in the
past few years.

Part of what gets the conspiracy theorists'
blood going is the fact that the use of
derivative contracts is poorly understood,
particularly in the gold world, and also that
the terms quot;derivativesquot; and quot;off balance
sheetquot; are often associated with everything
from the multibillion-dollar fall of hedge
fund Long-Term Capital Management in 1998 to
the scandal-plagued balance sheet of Enron.
To add to the scent, J.P. Morgan took an
almost $1-billion hit on some of its exposure
to Enron's trading book.

Not surprisingly, one of the star exhibits in
the gold conspiracy theorists' case is J.P.
Morgan's exposure to gold contracts, which
have a quot;notionalquot; or theoretical value of
about $45-billion -- three times as much as
some of its competitors. The implication, of
course, is that at some point it will have to
eat a big chunk of that exposure. J.P.
Morgan, however, maintains that its exposure
is not a problem, and that even if gold stays
high it will not have to take a major hit to
its bottom line.

In the end, the outcome of the lawsuit
against Barrick and J.P. Morgan and of the
GATA suit is almost irrelevant, because no
matter what happens in either case, the real
gold bugs will see it as more evidence that
they are right, and that a shadowy cabal of
politicians and corporate insiders is somehow
pulling the strings in the bullion market.