GATA continues making Washington contacts


12:40p EDT Sunday, May 21, 2000

Dear Friend of GATA and Gold:

Reginald H. Howe of has done it

The other day he disclosed that J.P. Morgan and Co.'s
volume of gold derivatives had exploded recently. Now he
is disclosing the same situation with Deutsche Bank.

This means that the primary agents in capping the gold
price have been identified.

GATA will be pursuing this.

If, as I suspect, the chart material in this email doesn't
line up properly, you can view them at Reg's web site:

Please post this as seems useful.

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

* * *

Is Deutsche Bank Sabotaging Washington Agreement?

By Reginald H. Howe
May 20, 2000

In a prior commentary I suggested that the Swiss gold sales of 1,300 tonnes
over the next 4 1/2 are likely aimed at covering gold loans made by European
central banks and that the quid pro quo for the Swiss is effective inclusion
within the Euro Area even though Switzerland is not a formal member.

Suspecting that Swiss gold sales might also be intended to cover gold loans
Swiss banks, especially from the Bundesbank, which is reported to have loaned
out 10 percent of its total reserves of almost 3,500 tonnes, I made an online
search for further information on the gold derivatives of both the Swiss and
the German banks.


UBS, of course, has been a leading bullion bank for years. With a total
notional value at year-end 1999 of around US$74 billion, its derivatives
position in precious metals is huge, approaching the $87 billion in gold
derivatives of all U.S. commercial banks combined.

But the gold derivatives position of Deutsche Bank is just plain stunning in
the speed and magnitude of its growth, from almost nothing in 1996 to a total
notional value of over US$50 billion, or nearly 5,000 tonnes, at the end of

Even more amazing are the lengthening maturities and accelerating growth in
these derivatives during the last part of 1999, making it appear that
Bank is allied with Morgan in the same cabal to control the gold price.

Information on the precious metals derivatives of the Swiss banks is
at the website of the Swiss National Bank ( in a publication
entitled "Les banques suisse" (also available in German) at Schedule 34. The
great bulk of this business is done by UBS and can be tracked in Note 27 to
its 1999 annual report and Note 28 to its 1998 annual report, both of which
are available at its website (

Credit Suisse does a much smaller business in precious metals derivatives, on
which it also provides information in its annual reports, available online

All these derivatives reports provide figures on notional amounts comparable
to those in the OCC reports for U.S. commercial banks. But the Swiss reports
also use another measure: positive replacement value ("PRV") and negative
replacement value (NRV).

PRV, as described by UBS, "represents the cost ... of replacing all
transactions with a receivable amount if all ... counterparties were to
default." It is an asset on the bank's balance sheet.

NRV, which is a liability on the balance sheet, "is the cost to the [bank's]
counterparties of replacing all the [bank's] transactions ... if [the bank]
were to default." The difference between the two is net market value,
or negative.

Generally the net difference is quite small, and to simplify the table below,
PRV and NRV are averaged to make a single entry, which is given in Swiss
billions. Not being notional amounts, these figures do not add to the total
notional amounts stated. But since PRV and NRV are the only figures given by
maturity and line of business, I have used an average of the two to show the
general distribution of the business.

The following table, compiled from these sources, shows the precious metals
derivatives activities of the Swiss banks, of which more than 90 percent is
almost certainly gold. Annual totals for UBS and Credit Suisse are slightly
higher than the sums of their figures for over-the-counter forward contracts
and options because both banks additionally report very small amounts of
exchange-traded futures and options (almost all options). Additionally, the
figures reported by the SNB do not reconcile completely with the UBS and
Credit Suisse figures, but the apparent discrepancies are quite minor and
probably due to some netting or other form of consolidation. Conversions to
U.S. dollars and tonnes are at end of period rates and gold prices as shown
IMF, International Financial Statistics. Conversions to tonnes are discounted
by 10 percent to exclude precious metals derivatives that are not gold.

Maturity Total Total Tonnes @
<3mos 3-12mos 1-5yrs >5 yrs Notional Notional Gold Pr. Gold
Year (average of PRV and NRV) SwF bil. US$ bil. Notional Pr.

1999 UBS OTC
Forwards 1.08 .06 .07 .0 30.0 18.8 1809 290
Options .25 .53 1.12 .12 82.9 51.8 4998
Total 1.33 .59 1.19 .12 118.6 74.1 7151
1998 UBS OTC
Forwards 4.59 .26 .07 .01 47.7 34.7 3371 288
Options 2.88 .01 .0 .0 56.2 40.8 3971
Total 7.47 .28 .09 .01 110.2 80.1 7787
1999 Credit Suisse OTC
Forwards 17.5 10.9 1055 290
Options 11.2 7.0 675
Total 28.8 18.0 1736
1998 Credit Suisse OTC
Forwards 18.8 13.7 1328 288
Options 15.4 11.2 1088
Total 34.8 25.3 2459
1997 Credit Suisse OTC
Forwards 26.3 18.1 1758 290
Options 8.6 5.9 575
Total 36.7 25.2 2453
All Banks
1999 not yet available 290
1998 - Total 133.7 97.2 9450 288
Forward Contracts 59.9 43.5 4232
Options 65.5 47.6 4631
1997 - Total 144.8 99.5 9676 290
Forward Contracts 74.1 50.9 4954
Options 60.3 41.5 4032

Several important points emerge from this table. First, of course, is the
size of UBS's business, dwarfing that of Credit Suisse. Second, the size of
both banks' business has remained relatively stable over the past three
Credit Suisse showing small declines and UBS a slight increase as measured in
Swiss francs.

More interesting, however, is the shift in the mix between forward contracts
and options, with the former declining and the latter rising. This trend,
apparent for Credit Suisse in 1998, is very pronounced for UBS in 1999.

Finally, from the average PRV and NRV figures, which are the only figures
UBS provides by maturity, one can detect a shift in options in 1999 from
shorter to longer maturities, mostly from under 3 months to more than a year.

Deutsche Bank acquired Bankers Trust in June 1999. Deutsche Bank's annual
reports from 1996 through 1999 are available in English at its website
( and give detailed information about its off-
balance sheet derivatives, including precious metals, of which again more
90 percent must be gold. Dresdner Bank's 1998 and 1999 annual reports are
available online (

The following table is drawn from all these reports. Except as noted,
conversions to U.S. dollars and tonnes are at end of period rates and gold
prices as shown in IMF, International Financial Statistics. Conversions to
tonnes are discounted by 10 percent to exclude precious metals derivatives
that are not gold.

Year <1 yr 1-5 yrs >5 yrs Total Total Tonnes Gold
(All in Notional Amounts) US$ @Gold Price
Deutsche Bank in euros billion bil. Price
1999 21.8 21.8 7.3 50.9 51.2 4934 290
1999 average notional volume* 35.3 37.7 3738 282
in DM billion
1998 20.0 6.4 .8 27.2 16.2 1579 288
1997 21.8 1.0 .0 22.8 12.7 1226 290
1996 8.6 .1 .0 8.7 4.8 367 369
Dresdner Bank in euros billion
1999** 8.3 6.9*** 15.2 15.3 1472 290
in DM billion
1998 4.9 3.6 .6 9.2 5.5 534 288
1997 6.8 2.5 1.1 10.4 5.8 562 290

* Conversions to US$ and tonnes at average 1999 rates and prices.

** Separately stated trading and investment portfolios summed.

***Includes over 1-5 years and later.

This table portrays a disturbing picture. Deutsche Bank, the largest German
bank, which had precious metals derivatives at the end of 1996 with a total
notional value under US$5 billion, by the end of 1999 had grown this business
to a total notional value in excess of $50 billion, or by more than 10 times
in three years. What is more, a huge amount of this growth came in 1999,
especially in the last half, as can be seen by comparing the average notional
value for 1999 ($37.7 billion) with the year-end notional value ($51.2
billion). Note also that this growth was almost all in the longer maturities.

Nor can the 1999 growth in Deutsche Bank's precious metals derivatives be
ascribed in any major way to its acquistion of Bankers Trust. Its Office of
the Comptroller of the Currency report for March 31, 1999, listed precious
metals derivatives with a total notional value of around $6 billion, which by
June 30 were just over $1 billion.

The 1999 figures for Dresdner Bank make it appear like the little brother
aping his older sibling. There is the same surge in precious metals
derivatives, with a similar move into the longer maturities. At a total
notional value of $15.3 billion, only the absolute scale is smaller.
in tonnes with a 10 percent reduction (probably too much) to exclude precious
metals derivatives not related to gold, the total combined notional amount of
the two German banks' gold derivatives at the end of 1999 exceeded 6,400
tonnes, approaching twice the Bundesbank's stated gold reserves of 3,470

The growth profile of Deutsche Bank's precious metals derivatives in 1999
closely matches that of Morgan Guaranty Trust, described in my prior
commentary on Morgan. (See also John Hathaway's article, "J.P. Morgan To The
Rescue," My Morgan
commentary contains several paragraphs devoted to explaining the meaning of
notional value in the context of gold derivatives and the risks implicit in
large notional totals, particularly in a gold market that appears far out of
equilibrium. Because this subject is a complicated one, I am planning to
address it further in a future commentary.

But the reports of the European banks contain data on replacement or market
values that I have not yet found in the OCC data for U.S. commercial banks
(though I believe it should be there somewhere). These values often but not
always seem to move in a contrary direction from notional values.

For example, the average PRV/NRV for Credit Suisse's total precious metals
derivatives moved from SwF1.7 billion in 1998 to SwF2 billion in 1999 while
total notional value declined. In contrast, the same number for UBS went from
SwF7.8 billion in 1998 to SwF3.2 billion in 1999 while total notional value
rose slightly. At the end of 1999, the total notional value of UBS's precious
metals derivatives was four times that of Credit Suisse, but its replacement
values were less than twice as great.

Deutsche Bank's replacement values are even more difficult to fathom, with
average values over 1999 (PRV, E888 million; NRV, E818 million) more than
times year-end values (PRV, E201 million; NRV, E153 million), notwithstanding
that total notional value at year-end exceeded average notional value by more
than 40 percent. Anyone familiar with the pricing of options knows how
volatile the prices can be, and looking at gold prices in 1999 it is possible
to hypothesize various scenarios to explain the apparently odd movements of
replacement values versus notional values. But the real question is whether
some of these seemingly low replacement values are suggesting that certain
notional values may be misleadingly inflated.

Again, as with the hedge books of mining companies, it is almost impossible
reach sound conclusions without access to the underlying data. But three
considerations suggest that the high notional values for banks like Deutsche
Bank and Morgan are more than insignificant fluff.

First, other large bullion banks did not experience the same extraordinary
growth in their gold derivatives in the last half of 1999. If market events
themselves had caused this explosion of notional values, one would expect to
see some evidence of the phenomenon in the books of other bullion banks like
Chase or Credit Suisse.

Second, replacement values appear principally intended as a measure of
counterparty risk, not position risk. A footnote in Deutsche Bank's 1998 and
earlier reports states: "Since exchange-traded products and short positions
options do not involve counterparty risk, no replacement costs are to be
here." Several prior commentaries have addressed the possibility that certain
bullion banks, most likely with some form of official support, have been
writing unhedged calls with specific intent to control the gold price. This
note suggests the possibility that any such calls might not be included in
replacement values even though included in notional values.

Finally, and perhaps most importantly, these figures are generated as a
of capital risk adequacy standards adopted under Bank for International
Settlements sponsorship for all major banks and dealers in the G-10
Positions that do not require risk capital are typically netted out, since no
bank wants to burden its risk capital any more than necessary. What is more,
all these derivatives reports are consolidated semi-annually in reports
available at the BIS website (, click on Regular Publications,
on Regular OTC Derivatives Market Statistics).

Under commodity contracts, gold is broken out separately, and notional
and gross market values are given. The figures for gold in the most recent
report as of Dec. 31, 1999, are shown in the following table, with
to tonnes at the corresponding end of period gold prices except as noted.

Gold Notional Notional Gross Market Gold
Contracts Amounts Amounts Values Price
US$ bil. tonnes US$ bil.

Dec. 31, 1999 243 26,063 23 290
June 30, 1999 189 22,524 23 261
20,846 282*
Dec. 31, 1998 182 19,656 13 288
June 30, 1998 193 20,281 10 296

*Conversion of $189 billion at average 1999 gold price of $282.

Here again, a large increase in notional values in the last half of 1999 is
accompanied by flat gross market values. Footnote 1 to the BIS press release
accompanying the report states:

"The notional amount, which is generally used as a reference to calculate
flows under individual contracts, provides a comparison of market size
related cash and derivatives markets. Gross market value is defined as the
(in absolute terms) of the positive market value of all reporters' contracts
and the negative market value of their contracts with non-reporters (as a
proxy for the positive market value of non-reporters' positions). It measures
the replacement cost of all outstanding contracts had they been settled on 31
December 1999. The use of notional amounts and gross market values produces
widely divergent estimates of the size of the overall market and of the
various market segments."

The press release itself goes on to say: "Transactions involving gold, the
largest single component of the commodity derivatives market, were
particularly buoyant." It then notes the sharp rise in the gold price
following the Washington Agreement, but makes no effort to relate the effect
of this rally on notional values or gross market values. What is clear,
however, from other footnotes is that the BIS attempts to adjust for double-
counting, including halving notional values between reporting entities, and
that it estimates some of these adjustments for the gold category.

Talking in tonnes in round figures, the BIS report shows a notional increase
in gold derivatives of 4,000 tonnes in the last half of 1999. According to
OCC figures, Morgan's gold derivatives increased by almost 1,900 tonnes in
same period. There are no mid-1999 figures for Deutsche Bank, but with a year-
over-year increase of more than 3,200 tonnes, close to 2,000 tonnes in the
last half is not an unreasonable estimate. Add in Citibank (485 tonnes) and
Dresdner Bank (more than 900 tonnes on the year), allow for excluding some
double-counting between the four, and it is not unreasonable to attribute
virtually the entire increase in the last half of the year to these four
banks, principally Morgan and Deutsche Bank.

The only major gold fund manager I know who never owned a single share of Bre-
X told me that he never bought the stock because: 1) even if you believed the
company's story, the stock almost always looked too expensive; and 2) however
great the ore deposit, large gold reserves are not built as quickly or as
easily as Bre-X claimed to do. So too, the amazing emergence of Deutsche Bank
from almost no gold derivatives business in 1996 to a book with a notional
value approaching 5,000 tonnes, larger by far than the book of any of the
three principal U.S. commercial banks in this business, does not pass the
smell test. Indeed, it is hard to see any reason for the rapid creation of
this huge position in gold derivatives other than to try to manipulate and
control gold prices.

With gold closing strongly at $289.10 on May 6, 1999, up $2.10 on the day,
threatening $300 as the IMF's proposed gold sales sailed into trouble, Bill
Murphy of the Gold Anti-Trust Action Committee reported on Deutsche Bank the
same evening in his "Midas" column at "Their bullion
desk is calling their clients saying that the gold market is stopping at
$290." [Emphasis in original, copy at]

The British gold sales were announced the next day, May 7, 1999.

Why would Deutsche Bank participate in a cabal to cap the gold price, and far
worse, continue to do so after the Washington Agreement? The Bundesbank is
only a signatory to this agreement but also is said to have played a leading
role in its adoption. For the Bundesbank to permit Deutsche Bank to act in
this way, with Dresdner Bank doing the same thing but on a smaller scale,
suggests that long-term monetary policy in the Euro Area, particularly as it
relates to gold, is in utter disarray and that monetary cooperation between
France and Germany is far more mirage than real.

Indeed, the implications of the gold derivatives activities of these two big
German banks in 1999 are so mind-boggling that further analysis must await
another commentary. Their actions threaten not merely to sabotage the
Washington Agreement but also, and much more seriously, to jeopardize the
itself. Those who believe in sound money look to the Bundesbank as a light in
the darkness. For it to conspire against gold is as unthinkable as the act of
the great baseball player that brought forth this plea from one of his young
fans: "Say it ain't so, Joe. Say it ain't so."