GATA goes to Washington next week


11:15p EDT Wednesday, May 3, 2000

Dear Friend of GATA and Gold:

Reg Howe of has analyzed the gold
derivative position of Morgan Guaranty Trust Co. and
concludes that the firm has taken on so much exposure
as to suggest that it has done so with government
encouragement. Howe's essay follows but the columns in
the chart it contains may not line up properly in email
or on the GATA web site. If they don't, you can view
the chart at Howe's web site:

Please post this as seems useful.

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

* * *

House of Morgan: From Gold Bugs to Paper Hangers

By Reginald H. Howe
May 3, 2000

No bank is more intertwined in the great events of U.S.
financial history than the House of Morgan. More than
once J. Pierpont Morgan rode almost single-handedly to
the rescue of the U.S. financial system.

Never were the stakes higher, nor the outcome more
uncertain, than on Feb. 5, 1895. The U.S. Treasury
faced imminent default on its gold obligations. In
Morgan's view, widely shared on Wall Street and in
London, default threatened a complete collapse of the
national credit and the dollar. In a last-minute effort
to avert catastrophe, the great financier met with
President Cleveland to try to salvage a plan for the
issue of government gold bonds through a syndicate led
by his bank. Morgan's plan, based on an obscure Civil
War statute, faced heavy political opposition. But in a
tense White House meeting, Morgan carried the day. Not
until the deal was done did the president notice that
the cigar Morgan had pulled from his pocket upon
arrival lay in brown dust on his lap. It would be more
than century before another cigar played as famous a
role in a White House rendezvous.

No one fought harder for restoration and maintenance of
the gold standard after the Civil War than J. Pierpont
Morgan. "Gold is money," he thundered. "That's it." But
today the House of Morgan appears considerably more
ambivalent on the subject. Its participation in suggests some optimism about gold. On
the other hand, the derivatives business of Morgan
Guaranty Trust Co. of New York (hereinafter "Morgan"),
a wholly-owned subsidiary of J.P. Morgan & Co., gives
quite another picture.

Recent figures from the Office of the Comptroller of
the Currency on the off-balance sheet derivatives
contracts of U.S. commercial banks show that Morgan
continues to play an outsized role on the U.S.
financial scene, particularly in regard to gold. But
there is a difference. When a Morgan ran Morgan, the
dollar was as good as gold and the bank aimed to keep
it that way. Today's managers at Morgan seem to have
placed a huge bet AGAINST gold and on the paper dollar.

The following table is taken from the quarterly OCC
Bank Derivatives Reports, which can be accessed at Since these reports
cover only commercial banks, investment firms like
Goldman Sachs and Merrill Lynch are not included.
Neither, of course, are foreign banks. Data on
individual banks is reported only for the seven banks
having the largest total notional amounts of off-
balance sheet derivatives. Of these seven, only Morgan,
Chase Manhattan Bank, and Citibank NA reported any gold
derivatives at the end of 1999. The table gives the
total notional amounts of all gold derivatives for all
reporting banks in US$ billions from March 31, 1995,
together with Morgan's share in both dollars and
percent from June 30, 1998.

Maturity Tonnes @ Gold*
Tonnes @
Quarter <1 yr 1-5 yrs >5 yrs Total Gold Pr. Price

1999/4 46.5 27.8 13.3 87.6 9388 290 8333
Morgan 20.9 11.3 5.8 38.1 4082 3623
% 45% 41% 44% 43%
1999/3 52.3 22.4 8.7 83.4 8676 299 7933
Morgan 21.0 7.6 1.8 30.5 3171
% 40% 34% 21% 37%
1999/2 36.9 20.9 3.6 61.4 7317 261
Morgan 13.8 3.8 0.8 18.4 2188
% 37% 18% 21% 30%
1999/1 34.8 21.5 8.5 64.8 7213 279
Morgan 10.7 3.8 0.6 15.1 1677
% 31% 17% 7% 23%
1998/4 36.0 23.2 9.2 68.4 7392 288
Morgan 10.4 5.3 1.1 16.8 1811
% 29% 23% 12% 25%
1998/3 40.6 24.3 9.2 74.1 7844 294
Morgan 13.5 5.8 0.9 20.3 2148
% 33% 24% 10% 27%
1998/2 37.0 23.5 9.1 69.6 7306 296
Morgan 13.4 4.9 0.9 19.3 2026
% 36% 21% 10% 28%
1998/1 39.7 17.7 4.9 62.3 6438 301
1997/4 42.6 15.4 4.2 62.2 6667 290
1997/3 44.1 13.6 3.1 60.8 5694 332
1997/2 35.0 14.3 2.5 51.8 4816 335
1997/1 34.2 22.9 2.4 59.5 5317 348
1996/4 39.4 17.4 2.0 58.8 4953 369
1996/3 46.8 15.6 1.7 64.1 5261 379
1996/2 36.5 15.6 1.7 53.8 4381 382
1996/1 38.8 16.4 2.4 57.6 4520 396
1995/4 35.9 16.1 1.9 53.9 4335 387
1995/3 28.4 10.6 1.3 40.3 3264 384
1995/2 22.8 9.5 1.4 33.7 2708 387
1995/1 20.4 9.4 1.2 31.0 2515 383

* End of period, London, IMF International Financial Statistics.

** Average of Barrick's strike prices: $319 in 2000; $335 in 2001.

This table shows a pattern of generally rising gold
derivatives against generally falling gold prices. At
the beginning of 1995, the total notional amount of
gold derivatives converted to tonnes at market prices
equaled just slightly more than annual new mine
production of around 2,275 tonnes. Currently new mine
production is running at about 2,500 tonnes, but total
gold derivatives have increased to considerably more
than 3 times this amount whether converted at market
prices or the average price of Barrick's calls.
Morgan's position alone equals some 1 1/2 years of
total world gold production. Coincidentally or not, the
total position now exceeds total official U.S. gold
reserves of around 8,140 tonnes.

Especially striking are the increases in the last half
of 1999, and particularly in the last quarter. The
British gold sales were announced on May 7, 1999, and
the Washington Agreement on Sept. 26, 1999. Both
events, one presumably bearish for gold and the other
bullish, were followed by large increases in total gold
derivatives. In the third quarter these increases were
most pronounced in the under-one-year maturities. But
in the fourth there were large increases in the longer
maturities, with the over-five-years category rising by
more than 50 percent.

But even more extraordinary than the increases in total
gold derivatives in the last half of 1999 were their
increasing concentration in one bank: Morgan. Prior to
1999, Morgan had never held more than about $20 billion
in total gold derivatives, nor more than 28 percent of
the total outstanding for all banks. But in the second
quarter of 1999 Morgan took on a much larger role in
the under-one-year maturities, possibly presaging the
the British gold sales. Then, during the last half of
1999, Morgan more than doubled its total gold
derivatives, taking them from $18.4 billion to $38.1
billion, amounting to 43 percent of the total for all
banks. What is more, Morgan's over-40-percent dominance
stretched across all maturities. In the fourth quarter
alone, it increased its gold derivatives with
maturities over one year by more than 80 percent to
$17.1 billion from $9.4 billion, which may well answer
the question of who sold Barrick the calls.

Typically financial rescue operations carried out by
banks involve a sharing of the load and risk more or
less in proportion to exposure. Indeed, normally banks
strongly object to taking on more than their fair share
of a problem, or to giving another bank -- not to
mention a major rival -- a free ride. Until Morgan
passed it in the third quarter of 1999, Chase was the
largest provider of gold derivatives. Its total gold
derivatives were $23.7 billion on March 31, 1999,
falling to $20.5 billion by June 30. Thereafter they
rose just slightly to $22.6 billion on Sept. 30,
falling back to $22.1 billion at the end of the year.
This huge change in the relative positions of Morgan
and Chase during a period of extreme turbulence in the
gold market seems quite unusual unless Morgan acted
with some sort of official approbation.

Notional amounts are generally the underlying
contractual amounts from which derivative payments are
determined. They are not typically the amounts at risk.
Assessment of risk requires assumptions or estimates
about the magnitude, timing and volatility of
underlying price movements, the liquidity of the
relevant markets, especially as regards the
availability of appropriate hedge positions, and the
creditworthiness of counterparties. Particularly for
over-the-counter derivatives, which constitute more
than 90 percent of the total, risk assessment also
requires knowledge of the details of the relevant

For example, Barrick's calls on 6.8 million ounces
(211.5 tonnes) of gold at an average price of $327/oz.
have a notional value of around $2.2 billion. But this
amount could not really be deemed at risk unless one
assumed a doubling of the gold price to $654 before any
of the calls expired and with no opportunity to put
protective hedges in place. What is more, a provision
making the calls dischargeable in dollars rather than
bullion would further affect the risk calculation under
certain conditions.

Total notional amounts of all off-balance-sheet
derivatives for all reporting banks at the end of 1999
were $34.5 trillion, of which Chase accounted for $12.7
trillion and Morgan for $8.7 trillion. Approximately 80
percent of the total represents interest rate
contracts, 17 percent foreign exchange, and 3 percent
equities, commodities, and credit derivatives.

Obviously gold derivatives are a tiny proportion of the
total, about 0.25 percent. But not only do they exceed
annual new gold production by well over three times,
but also they are of significant size relative to bank
capital. At the end of 1999 Morgan reported total risk-
based capital of $12.1 billion, or $12.9 billion for
parent J.P. Morgan & Co. as a whole. The parent's total
market capitalization is around $22 billion (at
$135/share); total stockholders' equity at year end was
$11.4 billion. Against these numbers, Morgan's total
gold derivatives of more than $38 billion, equivalent
to roughly 3,600-4,000 tonnes of gold, are scarcely

How dangerous are these gold derivatives? Apart from
dwarfing annual new mine production, they must also be
viewed against: 1) reasonable estimates of a current
equilibrium gold price on a commodity basis of $500 to
$600/oz.; 2) a total net short gold derivatives
position estimated at anywhere between 7,000 and 14,000
tonnes; and 3) the possibility of a surge in Western
investment demand for gold caused by stock market
declines or other outside events. In these
circumstances, a swift upmove to $600/oz., with little
or no retracement, cannot be discounted. Assuming that
Morgan's book is equally divided between longs and
shorts, a move of this size could well create actual
liabilities equal to around 50 percent of the notional
value of its gold derivatives. Failure of 20 percent of
its counterparties to perform would imply losses to
Morgan equal to approximately 10 percent of the
notional value, or $3.8 billion, which is nearly a
third of its total capital.

Of course, the actual situation could be much worse. To
the extent Morgan or its counterparties had to deliver
physical bullion, it might not be available at all, or
only at much higher prices. The known facts already
point to a real possibility that in the wake of the
Washington Agreement Morgan may have served to
warehouse short gold positions of others, thereby
keeping those who wanted or needed to cover out of the
physical market and cutting short a potentially huge
rally toward equilibrium prices. In this event Morgan's
book is likely far more short than long, and
difficulties in securing physical bullion have already
manifested themselves. But as dangerous as Morgan's
gold derivatives may appear, it is very unlikely that
Morgan took on this position without the full knowledge
of the Federal Reserve.

Why did Morgan do so? What was the Fed's involvement?
Is there any connection between the gold derivatives
positions of the big U.S. banks and the Swiss gold
sales? What are the possible end games for Morgan and
the other U.S. banks?

Before tackling these intriguing questions, it is first
necessary to look at U.S. gold exports and reductions
in foreign-earmarked gold at the New York Fed. This
interesting subject will be the subject of my next
commentary. In the meantime, I recommend study of the
chart found at: