The sky darkens for bondholders as bets on derivatives backfire

Section:

1:53p ET Wednesday, May 11, 2005

Dear Friend of GATA and Gold:

Appended is an adaptation of an exchange
posted yesterday at the USAGold Forum --
http://www.usagold.com/cpmforum/ --
between your secretary/treasurer and the
forum's host, Michael Kosares, proprietor
of Centennial Precious Metals in Denver,
editor of the firm's client letter, and
a frequent contributor to GATA dispatches.
Since the exchange involves what seems to
be increasing turmoil in the financial
markets, it may be of timely interest.

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

* * *

By Michael Kosares
Centennial Precious Metals
www.USAGold.com
Tuesday, May 10, 2005

Thanks for the GATA dispatch with the article about the derivatives
crisis and General Motors, Ford, United, et al. There will be more
like this.

What "civilians" in the war on gold do not understand and will not be
told is that the crisis at hand is the result of an interlocking web
of counterparty agreements. This web, if I might employ a grisly
metaphor, is like a matrix of directly connected nuclear power
plants. In this web, if one goes off it touches off a reaction in the
next, and the next, and the next ... and so on. That is why you are
seeing this bewildering onslaught of rumors. It's because the rolling
crisis is in motion.

People, including some of our most illustrious pundits, think they
understand what is going on, but, in my view, most don't -- not
really.

In my last newsletter I tried to point out that I think Federal
Reserve Chairman Alan Greenspan understands this and he's trying to
beg off, saying that the "invisible hand," "chaos," and "creative
destruction" are all part of the market process. What he's really
saying is that there's not much he can do about it, so don't drop
this disaster at his door. What I've alluded to in my various
writings -- and emphasize now -- is that this may be something beyond
the control of the central banks and the government.

I started warning about this process (now engaged) years ago.
Greenspan knew the potentialities better than anyone and he refused
to recommend the regulation of derivatives. Now the dark angel is at
his and the financial markets' door. And this is just the beginning.

Let me say it again. If you do not own gold, you better get some. If
you don't own enough, buy more now. If you own enough, thank the good
Lord that you do.

* * *

By Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Tuesday, May 10, 2005

Mike, I agree with you that the "rolling crisis" seems to be in
motion but I'm not sure that Greenspan really thinks there's nothing
he can do about it. His recent remarks suggesting as much may be
meant just to exonerate himself in case of disaster.

Meanwhile, I get the sense that all the major markets are now being
very closely manipulated by the central banks -- equities, bonds,
gold, and commodities, at least oil.

When Greenspan first articulated the Fed's opposition to regulation
of derivatives -- his remarks to the House Banking Committee in July
1998 --

http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm

-- he was saying, explicitly about gold and implicitly about
everything else, that the derivatives markets didn't need regulation
because the Federal Reserve and/or the Treasury Department and other
central banks themselves were ALREADY the big players in the
derivatives markets. That is exactly what the Greenspan quote famous
among gold bugs is about:

"Nor can private counterparties restrict supplies of gold, another
commodity whose derivatives are often traded over-the-counter, where
central banks stand ready to lease gold in increasing quantities
should the price rise."

That is: "Don't worry, congressmen. We central bankers have the gold
market under control."

Further, this was Greenspan's proclamation, still hardly understood
today even among gold bugs, that the very purpose of gold leasing is
not what the central banks maintain -- to earn a tiny bit of revenue
on a supposedly dead asset -- but to control the gold price and, with
it, the rest of the currency market.

Why would the Fed, if it was concerned about systemic risk to the
financial markets, NOT want ordinary regulation of derivatives?

Perhaps because such regulation would disclose that the bigger
derivatives positions on the books of financial houses like
MorganChase and Citibank and Goldman Sachs were actually U.S.
government positions. (This really is no secret even now, since, in
the Blanchard lawsuit in U.S. District Court in New Orleans, Barrick
Gold -- the co-champion of derivatives, along with its banker,
MorganChase -- claimed exemption from suit on the grounds that it is
the agent of the central banks, helping to implement their policies
on gold.)

Upon any regulation of derivatives that exposed the true parties in
interest, the free markets being preached to the world by the United
States would be exposed as not merely phony but a vast aggressive and
imperialistic scheme, surreptitious economic war against the rest of
the world.

What was the Counterparty Risk Management Group, formed by the New
York Fed after it desperately arranged the orderly liquidation of the
Long-Term Capital Management hedge fund, if not another instrument of
market rigging, another evasion of anti-trust law, and the rescue of
the whole derivatives class?

No, far from being powerless to intervene as the fiat money colossus
superinflates and begins to topple over, the Fed and the Treasury may
be weakening precisely because they are intervening surreptitiously
in TOO MANY markets TOO OFTEN. We seem to be at the point where the
government of almost any country can pull the plug on the rigging at
any moment -- Saudi Arabia by not pumping enough oil; China, Japan,
even (yikes!) Taiwan and South Korea by not buying enough U.S.
government bonds; Russia by buying gold; Europe by not leasing enough
gold or by letting the euro get too strong; or even Cuba, by sending
the Havana police department to raid Grand Cayman and copy and
publish the records of the banks that lately have been buying the
U.S. government bonds that the usual buyers have started to decline.

The great scheme seems to have been to flood the world with mandatory
dollars while controlling and channeling the inevitable inflation --
capping gold with leasing, and commodity prices and interest rates
with derivatives. But now too much money is out there and it is
sloshing around crazily in pursuit of advantage through leverage that
was unimaginable just a few years ago. It's getting to be too much
for its creator to control -- it's Frankenstein or "Sorcerer's
Apprentice" time. Something is going to give.

Gold and silver have had their shortcomings as money but their virtue
has been that they never could get the world into the current danger,
never could become infinite money projected into infinity. I don't
know what is going to happen but it is hard to imagine a world in
which gold and silver will be worth less than they are now -- which
will not necessarily be such a great world for a while. But all we
can do is the best we can do by our own lights.

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