By Boudewijn Wegerif

Today's financial establishment and its empty-headed lackeys insist that gold
carries no weight in today's digitized world. Gold is dismissed as just another
commodity, and one that we can well do without now. Yet as the fiat (from the
Latin "let it be") dollars, yen, marks, and as of late ECUs rush around the
world through the computer lines instantly without any backing, only the big
cats are purring along with the electronic purr of computers.

The fact is that the more supposedly liberated the world has become from the
discipline of a gold standard, the more gold has been driven underground -- not
back into the rock from which it came but into cellars of a kind where central
bankers and investment house officials gather to make what they can out of this
precious metal, which is still the security of last resort. As if in
confirmation of a truth known to all psychologists, the gold that has been
denied has been taken up by mean forces to serve greedy ends in a caricature of
its first purpose.


In international finance today, the "gold carry" is a cheap source of money to
fuel the derivatives market. Over the last three years increasing quantities of
gold have been loaned to brokers and sold by them so as to gain on the short
position. That is, as repayment of the gold loan comes due, the borrower
repurchases the gold at a lower price. The profits on the short positions have
been used to buy various securities, and these have been used in turn as
leverage for various other derivatives of high risk and considerable potential
though not always actual return.

Thus the loan and sale of one ton of gold can generate $8 million (at $280 an
ounce) with which to buy securities and, with those securities, derivatives to
an amount a hundred or so times the value of the underlying gold. But a
requirement to buy back that ton of gold at a higher price, instead of a lower
one -- say, $10 million ($350 an ounce) instead of under $8 million -- can put
the financial system at risk of collapse if, as is believed, the gold loans now
have risen to a level far beyond the annual production of gold.

"It is very hard to find out what the facts are in the gold market, especially
about the gold loans," says Bill Murphy, chairman of Gold Anti-Trust Action.
"The best work on this subject was done by Frank Veneroso of Veneroso
Associates. He has concluded that the gold loans have risen to 8,000 tons or so.
This is a big deal, as annual gold mine production in 1998 was only 2,529 tons.
If the shorts had to cover in a short time, they would not have a chance to do
so. What is worse, until recently many of the borrowers may have had no idea how
large the gold loans have grown."

The use of gold to fuel the derivatives market began in earnest when the yen
strengthened from a low of 80 yen to the dollar in 1995. For up to that time,
cheap international borrowing of a declining yen had served the underhanded
purposes of derivatives speculation very well. And note the extent of the yen's
decline, from highs of 360 to the dollar in 1971 and 260 in 1985. What a pot of
honey for the bears who know how to get at it, through turning it upside down.
They scored early and big with the yen, and when there was no more honey to suck
out of the yen, they thought, 'If it can be done with with the yen, why not

"The gold loans were similar to the yen loans in borrowing costs. As long as the
price of gold did not take off (so that the principal did not have to be paid
back as a result of a much higher gold price, thus making the loan expensive),
it was a winner," Murphy says. "All has been well for those playing this game --
until now. The price of gold has been trading around $290 for about a year and a
half now. Deflationary forces have taken hold and the bears have fostered the
notion that there is no reason to own gold. 'Look how lousy it acts and look at
its lowly price' has been the comment to the financial press. But behind the
scenes there is an entirely comment."


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Boudewijn Wegerif,
Moderator Gata egroup.