Bugged byGold: A Simmering Debate on the Economics of Gold Has Taken a Turn

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By Jane Bussey, Miami Herald, June 9, 2002

As Gold Fields Ltd. moved up in the world last month -- debuting on the Big Board -- the South African mining company tapped anti-apartheid crusader Nelson Mandela to help ring in what they hope is a new era in the world of gold.

Once the source of the riches of kings, in recent years gold had ceded its spot as a
financial hedge in troubled times to the mighty dollar and bubbling Nasdaq. Those
championing gold were not the go-go traders on Wall Street but more like Mandela,
partisans fighting a long, uphill battle to shine the spotlight on the precious metal.
Enter the Gold Anti-Trust Action Committee, a group of financial advisors and gold market participants, who have waged a three-year effort to prove that the unusually low gold prices since 1995 were not the result of market forces, but instead the product of price rigging that included governments and big commercial banks.
The charges are hotly denied by those involved and dismissed by other analysts as
the stuff of conspiracy theorists.
GATA, as the group is known, lost a round when a lawsuit against the Bank of
International Settlements -- the central bank of central banks -- several Treasury and
Federal Reserve officials, and a number of commercial banks was dismissed in late March by U.S. District Judge Reginald Lindsay in Boston.
"This case involves allegations of `an unholy alliance of high public officials' and 'large
bullion banks,'" Lindsay wrote. But he dismissed the suit on the grounds that
Reginald H. Howe, the attorney who filed the GATA-supported complaint in December 2000, lacked antitrust standing and that Treasury and Fed officials had qualified immunity.
GATA has gained supporters and exposure on the Internet as well as mining, monetary and investment circles, where its chairman, former Miami entrepreneur turned financial analyst Bill Murphy, gives speeches.
Suddenly gold and the falling dollar have become hot issues -- talk for Main Street and not just Wall Street.
To the delight of gold partisans, gold prices are on the rise. The precious metal, which
hit a low of $252 an ounce in July 1999, has risen by 20 percent since Jan. 2, closing at $325.40 on Friday. Share prices in mining companies and gold funds have soared: an 81 percent jump in the Tocqueville Gold Fund and a fivefold increase in Durban Rooderpoort Deep's share price so far this year.
As a corollary to the rise in gold, the dollar has fallen, losing 7 percent against
the currencies of its major trading partners this year. The dollar index closed at 111.58
on Friday, still overvalued against other major currencies since 100 is considered par,
but down from former highs of 120.
Chief among those celebrating are companies like Gold Fields, which brought the 83-year-old Mandela to New York to ring the opening bell on May 9, the day the stock moved from the Nasdaq to the New York Stock Exchange.
"We believe the gold price was very undervalued. The dollar is overvalued," said
Cheryl Martin, vice president of North American investor relations for Gold Fields,
which has headquarters in Johannesburg, South Africa.
Martin said the company does not comment on "the conspiracy theories" in the market.
Unusual behavior
But few dispute that the gold market has behaved abnormally for several years.
Historically gold rises when interest rates go down, and vice versa. For seven years or
so, it has dropped along with the Fed rates.
The explanation given by many Wall Street analysts is that gold is a monetary relic and
simply stopped being the haven worried investors ran to as protection against price
inflation and political and economic uncertainty.
The listless gold price became a tenet of the New Economy, which said that inflation was a problem of the past, and the strong dollar and rising stock market offered higher
returns than a piece of metal better suited to jewelry.
The Howe lawsuit claims the low gold price stemmed from the practice by some central banks of leasing gold to commercial banks at low rates (around 1 percent), which then sold the borrowed gold and invested the proceeds.
Mining companies, faced with declining prices, sold future gold production on the
forward market to hedge against a price drop. They used leased gold to make up the short fall, flooding the market and driving down the price further.
But such hedging becomes risky when the market turns, as it appears to have now, and companies or banks are forced to buy gold at a higher price to fill contracts -- cover their shorts -- at a lower price. The Office of the Comptroller of the Currency reports that commercial banks and trusts held $63.3 billion in gold derivatives on their books as of Dec. 31, with two-thirds of this amount on the books at JP Morgan Chase.
The big banks deny there is evidence of such a pricing scheme.

"There is no basis to infer the existence of a conspiracy to fix gold prices from the
simplified statistics alleged by the complaint," said a court filing by Citigroup, one of the banks named in the suit.
The lawsuit alleged the gold price was manipulated to keep interest rates low and
the dollar strong.
Attracted to stocks
This attracted international funds to the United States, where the money poured into
the stock market, not only fueling the boom but also financing the ever widening trade
deficit and allowing Americans to live beyond their means.
"We're saying part of the strong dollar policy was to rig the gold price," said
Murphy, who lived in Miami from 1993 to 1996.
"They (government officials) wanted to have a strong dollar to get people to invest in
the United States, to keep Wall Street strong and to keep the interest rates here lower
than they would be," Murphy said.
Many on Wall Street disagree that gold prices are unusually low. Analyst Daniel McConvey of Goldman Sachs issued a report to clients last week predicting gold prices would not rise over $324 levels because the demand for gold jewelry was weak.
Some financial experts say they are intrigued by the lawsuit, but not totally convinced.
"It's undeniable that gold had strange price movements during its period of sub-$275
weakness," said Walker Todd, a monetary expert who formerly served with the Federal Reserve Bank of Cleveland.
"Every time during that period when gold seemed to make a move above $275 along came massive moves with selling into the market to bring down the price," Todd said.
"Did the government intervene in the market along the way?" Todd said. "It has not been proven to a certainty but the plaintiffs have some interesting evidence."
GATA argues that governments admitted they regulate the gold market with the
"Washington Agreement" in September 1999, when central bankers announced they would limit the amount of gold leased to 400 tons a year.
The Federal Reserve and the Treasury have insisted that the United States does not
lease or sell its gold reserves, the largest in the world, and this has been one of the
government's chief defenses against the lawsuit.
But Murphy insisted that the gold industry is finding it harder to dismiss their charges as wild claims.
"Over three years, not one person in the gold industry has analyzed our evidence and
said we are wrong," Murphy said. "Yes, they say that `it is conspiracy' and `you are
nuts.' But one of the big gold companies donated $70,000 to GATA. You don't donate that kind of money to conspiracy nuts."