Peter Brimelow looks at gold in light of commodities exchange margin hike


12:09p ET Sunday, February 16, 2003

Dear Friend of GATA and Gold:

Sunday's New Orleans Times-Picayune, the
biggest newspaper in Louisiana, has an
excellent story about Blanchard & Co.'s
lawsuit against Barrick Gold and Morgan
Chase. The story describes very well the
opportunity for collusion among Barrick,
Morgan Chase, and the central banks for
suppressing the gold price. The newspaper's
business writer, Stewart Yerton, took a
lot of time to understand the situation.
This is a good one to distribute to other
news organizations. Please help GATA do

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

* * *


A New Orleans retailer is accusing a
mining giant and one of the biggest names
on Wall Street of illegally manipulating
the price of gold

By Stewart Yerton
New Orleans Times-Picayune
Sunday, February 16, 2003

In a David-and-Goliath antitrust battle that's drawing
intense interest from the world of avid gold investors,
a New Orleans retail gold dealer is going toe-to-toe
in an increasingly pitched legal fight against one of
Wall Street's oldest and most prestigious investment
banks and a Canadian mining giant.

The allegation: that the bank and the mining firm have
colluded to drive down the price of gold to the
detriment of individual investors.

In the latest volley last week, Blanchard and Co. Inc.
of New Orleans updated its complaint against Barrick
Gold Corp. of Toronto and J.P. Morgan Chase & Co.
of New York.

Like its predecessor suit, the amended complaint filed
in U.S. District Court in New Orleans asks the court to
order Barrick to stop the alleged price manipulation.

In a sign of just how heated the battle has become,
each has accused the other of libel.

Also last week, Barrick fired Chief Executive Randall
Oliphant, who has been credited with devising the
company's gold-hedging strategy, which is at the center
of the lawsuit.

Barrick is preparing a detailed response to Blanchard's
complaint and expects to file it in court in New Orleans
by month's end. In the meantime, the mining firm is
addressing the allegations broadly, asserting, among
other things, that Blanchard's complaint simply makes
no sense.

"Why would a company such as Barrick be interested
in depressing the price of the only product it produces?"
said Vincent Borg, a Barrick spokesman. "Why would
we be interested in depressing the price of our product?"

The answer, said Blanchard spokesman Neal Ryan, is
that Barrick, with support from J.P. Morgan, has
positioned itself to profit from lower gold prices -- and
has taken steps to make sure the price goes down.

"We believe we have found a specific instance where
Barrick and J.P. Morgan have been colluding," Ryan
said. "That's where we have a point of contention."

A spokesman for J.P. Morgan declined to comment
on the case.

The dispute has surfaced as a major development in
the world of avid gold investors, the so-called "gold
bugs," who closely watch the precious metal,
sometimes weaving elaborate, conspiracy-filled theories
to explain price fluctuations.

"In the gold world, the gold universe, the gold cult, it's
a very big event," said Chris Powell, secretary-treasurer
of the Gold Anti-Trust Action Committee Inc., an advocacy
group set up to fight what it has alleged to be collusion to
manipulate the price and supply of gold. The Blanchard
suit, Powell said, "is a very big story."

GATA, as Powell's group is known, previously brought
an antitrust suit against a wide-ranging group of alleged
conspirators, including Federal Reserve Chairman Alan
Greenspan. That suit was dismissed by a federal judge
in Boston, making the Blanchard litigation the best hope
for the gold bugs who believe there's much more affecting
the gold price than traditional market forces.

"It is probably as promising a vehicle for getting at the
truth of what's happening in the gold market as there
is," said Powell.

Not everyone who watches gold agrees.

"It's totally ludicrous," said Leonard Kaplan, president of
Prospector Asset Management, a commodity brokerage
in Evanston, Ill. "The lawsuit is totally silly."

Barrick has taken a particularly aggressive stance toward
Blanchard, accusing the company of putting "myths ...
out there in the market."

"We'll use every recourse available under law to hold people
accountable for the lies they spread," Barrick Chief Financial
Officer Jaime Sokalsky said during a conference call with
analysts last week.

The 'ultimate win-win'

Founded by James Blanchard III, an avid gold bug who
lobbied national leaders to legalize the once-banned
individual ownership of gold for investment purposes,
Blanchard & Co. is the nation's largest retail gold coin
and bullion dealer, with more than 90,000 clients.

The company employs approximately 100 people
locally and has brought thousands of gold investors to
town over the years for the annual James Blanchard
Investment Conference.

Barrick's manipulation of the gold market has hurt
Blanchard by eroding investor confidence in gold, Ryan

What's clear amid the two sides' divergent views is that
Barrick has been masterful at trading gold on the
commodities market. Whether the company violated
antitrust laws in doing so is the central question.

One of the world's largest gold mining companies,
Barrick has 82.3 million ounces of gold in its reserves,
which are on four continents.

Mining companies routinely hedge their assets by
betting at least part of them that the price of the
commodity will go down, thus protecting themselves
against a price drop. For Barrick, that has involved a
form of short selling.

According to an explanation outlined on the company's
Internet site, Barrick takes the hedge positions by
leasing gold from a central bank through an intermediary,
such as J.P. Morgan Chase. For the sake of simplicity,
Barrick poses a hypothetical gold price of $300 an ounce
in the explanation.

According to the explanation, Barrick first leases the gold
at a rate of 1.5 percent. Then it sells the gold on the spot
market. Finally, it deposits the proceeds into an account
bearing, say, 5 percent interest.

Barrick benefits by keeping the difference between the
lease rate it must pay and the interest rate it receives
from the bank.

In addition, Barrick can make money another way. If the
price of gold goes down, Barrick can buy it at a cheaper
rate and repay the central bank. Thus, if the price drops
to, say, $250 an ounce, Barrick can make $50 an ounce,
plus the interest rate spread.

Because of its arrangement with J.P. Morgan Chase,
Barrick has managed to make it an almost risk-free
endeavor. Short sellers typically face the risk that the
price of a commodity might go up. In that case, they
have to buy the commodity at the higher price to pay
back whoever lent it to them. But J.P. Morgan Chase
gives Barrick 15 years to pay back the gold, or "cover"
its short position in trading parlance. That means
Barrick has an extraordinary amount of time to ride
out a price spike. At the same time, Barrick can make
money by selling the gold it produces while the price is

Furthermore, Barrick can pay back the leased gold with
metal from its mines, thus paying what its owes in a
low-cost way.

The strategy has proved effective.

According to the company's Internet site, the strategy
has "generated a premium on Barrick gold sales over
and above the spot price for 56 straight quarters." That
premium between 1991 and 2001 amounted to $2 billion.

To hear management explain it, Barrick can't lose --
whether the price goes up or down.

"By managing risk, Barrick enjoys protection on
downside with full participation on upside -- the ultimate
win-win combination," Barrick says.

Profiting from price declines

Blanchard, however, says that Barrick is engaging in
"far more than mere 'hedging' to defend against price

Ryan, the Blanchard spokesman, notes that the
15-year period Barrick has to maintain its short position
is unusually long if not unique in the industry, as is the
quantity of gold that Barrick has in a short position,
which totals 16.9 million ounces, according to Barrick's
Internet site.

The suit alleges that the process of borrowing gold from
the vaults of central banks for extraordinary lengths of
time and dumping it into the gold market naturally drives
down the price of the commodity.

Central banks are government banks, such as the
Federal Reserve, which issue and back currency, set
monetary policy and hold reserves for other banks.
Central banks typically hold large supplies of gold;
the Federal Reserve for instance, stores gold at Fort
Knox, West Point, and at the Federal Reserve Bank
of New York.

The Blanchard suit has not named a central bank as
a defendant, but has created an option to do so, Ryan
said, by naming "ABC Companies" as defendants in
the complaint.

When Barrick began its hedging program in 1987,
Blanchard said, the price of gold was $450 an ounce.
By 2001, it had dropped to $271.

To illustrate its allegations, Blanchard describes a
series of steps Barrick took starting in 1997. According
to the complaint, Barrick at that time spoke bullishly
about the price of gold, saying that demand was 20
percent greater than new supply. At the same time,
the suit says, Barrick increased its hedge position from
6.7 million to 18.8 million ounces, "effectively eliminating
the purported 20 percent shortfall."

"The average price of gold fell more than $100" -- along
the way benefiting Barrick's newly expanded short
position -- the suit says.

"Over that same 14-year period (from 1987 to 2001),"
the suit says, "as other producers struggled to survive
the tremendous and unrelenting decline in price, Barrick
grew exponentially by acquiring a number of gold mining
and exploration firms."

Essentially, Blanchard alleges that Barrick drove down
the price of gold in part so it could buy troubled gold-mining
firms cheaply.

Barrick dismisses the assertions. The company is still
in the business of "long" gold, meaning it benefits when
the price of gold goes up. Its short position represents
only a fraction of its reserves, Borg said.

As for the arrangement with J.P. Morgan that gives
Barrick 15 years to pay back the gold, Borg said
Barrick has the highest debt rating and strongest
balance sheet in its industry and therefore commands
better bank terms than competitors.

Just being 'savvy'?

In a twist, Barrick has begun taking steps to lessen
its short position. In a surprise announcement
Wednesday, Barrick fired Oliphant, its chief executive,
who was the architect of the hedging operation.

The firing came as Barrick's stock price failed to rise,
even as gold prices soared. A shaky stock market
and fears of war have driven investors to gold as a safe
haven. Gold has been trading around $370 an ounce
in recent days; six months ago it was about $305.
Barrick stock, meanwhile, has remained around $16
a share.

During last week's conference call, Barrick Chairman
Peter Munk said the company had failed to translate
higher gold prices into benefits for the company's

"Underperformance," Munk said, "is not acceptable."

During the call, Barrick's new chief executive, Gregory
Wilkins, acknowledged the company's hedged position
had been a "lightning rod" among investors and gold
watchers and said the company would reduce it.

"I can say the hedge book is a little larger than what
we would like it to be right now," Wilkins said.

In the meantime, Sokalsky said, the hedging program
is working precisely as designed. Because Barrick can
roll its hedge contracts forward for 15 years, it does
not have to cover its short positions immediately but
instead can sell the gold it produces on the market
while the price is peaking.

So far this year, Sokalsky said, the company has
sold 100 percent of the gold it has produced at an
average spot price of $360 an ounce.

"Barrick is poised to benefit significantly" from rising
gold prices, he said.

For example, Kaplan said that Barrick has done
nothing worse than fulfill its responsibility to shareholders
by effectively managing risk.

"What Blanchard is accusing is that Barrick was smart,
was savvy, and made billions of dollars from it," Kaplan
said. "Well gee, I never knew that being smart, that
being savvy, was illegal."

Ryan agrees that Barrick has been smart.

"But just because something seems intelligent or smart
or savvy from the outside doesn't make it the right thing
to do," he said. "Five years ago everyone was saying the
same thing about Enron."