Gold Derivative Banking Crisis report is on Internet


By Bill Murphy, Chairman
Gold Anti-Trust Action Committee Inc.
Wednesday, May 31, 2000

An astute member of, Ian Brain
of Australia, alerted me to the following essay by John
Hathaway of Toqueville Asset Management that should be
posted on the Tocqueville web site tomorrow.

Hathaway's commentary is titled, "Conspiracy And The
Gold Market: A Clarification."

Hathaway is a shining lights in the gold market. His
analysis has been brilliant, which is what I have been
saying for a long time.

Hathaway is a good family man and has stepped up to the
plate about the gold market while his gold money
manager brethren have dropped the ball.

Hatahaway is encumbered to a certain degree by his
affiliation with the establishment. His firm surely has
significant banking connections and lawyers pondering
his every word, and it goes on from there.

I have none of those and am free to be a Howard Cosell
type. Hathaway does not have that luxury.

I once had lunch with Cosell at the "21" club in New
York. I will never forget his words about my infamous
Boston Patriots quarterback, King Corcoran: "Ah, The
King," Cosell said, "Glamorous failure."

That is a long story, but before the fifth or sixth
Super Bowl, CBS did a 15-minute special called "The
King Wore Alligator Shoes." What would that be worth

I will have more to say on Hathway's latest, which is a
response to the Dallas Morning News story about GATA.

What is important now is that our camp of fighters is
thin. All people in camps like ours have differences of
opinions. It is as clear as could be to my unencumbered
soul that there is a conspiracy in the gold market.
Hence, the Bank of England's gold sale, Kuwait's
sending its gold to London, etc.

No matter. Hathaway is a beacon in the gold world.

I salue him as a fellow gold warrior.

* * *

Conspiracy And The Gold Market: A Clarification

By John Hathaway
Tocqueville Asset Management
May 31, 2000

Over the Memorial Day weekend, a story in the Dallas
Morning News discussed the activities of the Gold Anti-
Trust Action Committee (GATA). Reporter Bill Deener, who
seemed to have some difficulty grasping the subject,
interviewed me at great length for the article.

Unfortunately, my contributions were used selectively
and out of context in a way that would seem to
discredit GATA. That was certainly not my intent, and
it appears that the reporter either did not understand
my point of view, or used what I said to prove a point
that he was trying to make that did not reflect my

It is impossible to regard the behavior of the gold
market without raising questions as to whether it is
totally free. For example, in September 1999 the
anecdotal and circumstantial evidence of official
intervention to relieve the short squeeze is powerful.

In addition, the substantial expansion of derivative
positions by bullion dealers in the period subsequent
to the short squeeze, as detailed in my recent report,
"J.P. Morgan to the Rescue?," raises many questions
that remain unanswered.

Gold is a currency. Intervention in currency markets by
various governments is common and in some cases overt.
It should not come as a surprise that this sort of
activity exists in the gold market.

Currency dealers play games with their currency
positions. It should not be surprising if certain
bullion dealers do the same.

What is different about gold is that a structural short
position has arisen out of the desire of gold producers
to hedge forward prices. Compared to paper currencies,
the physical market for gold is very illiquid. Even
though derivative contracts settle for cash, they must
be delta-hedged in the physical markets.

The potential for an epic short squeeze rests largely
on the imbalances that have arisen between an illiquid
physical market and the rapid expansion of paper gold
or derivatives.

The commercial interests and position of the bullion
dealers originated as an accommodation of the desire of
the mining industry to hedge future gold prices. In the
Ashanti workout, it became clear that these positions
could not be extinguished easily and in all likelihood
would remain on the books pending future, and in some
cases, long-dated deliveries from mine production.

It goes without saying that these bullion dealer
positions could be damaged by another spike in gold
prices comparable to that of September 1999. It is
therefore possible to infer that certain dealers may
have an incentive to enter the market to keep the gold
price tame. Since the market is thin and the technical
chart points well-known, it would not be difficult to
keep the gold market in a prolonged state of being off-

Note that these possibilities for manipulation can
exist only in a thin, dispirited market lacking in
strong investment money inflows. Any such scheme would
be easily overwhelmed if the current sickly investment
flows turned positive.

So the overwhelming investment question to me is
whether and when such flows will occur, not whether or
not there is a certain amount of dirty pool going on
now or in the past. It is possible in a short-term
context that market manipulation can keep the market
off-balance for an unknown period simply by
discouraging investment flows.

Gold has so far been excluded from the party in
commodities, which has seen the CRB Index rally 20
percent over the last year. The dynamics of the gold
market appear different today than in similar past
commodity market cycles.

Can the aberration persist forever? Not if the
macroeconomic fundamentals say otherwise. If anything,
the delayed response should mean an adjustment of
greater, more violent magnitude than if unnatural
forces had never been at work in the gold market.

As for conspiracy, do the bullion dealers take regular,
coordinated instructions from U.S. or U.K. Treasury
agents? While nothing is impossible, it doesn't seem to
me that such activity would be necessary to explain why
the gold market is in a funk. Excessive producer
hedging (see my essay, "The Folly of Hedging") a bull
market in financial assets, and low reported inflation
would do just as well.

Does the Treasury intervene at crisis points? Such
intervention seems highly likely, as in the case of
Long-Term Capital Management, or the already mentioned
gold market rescue. Sporadic, reactionary intervention
could be taken as a signal by private parties such as
bullion dealers to continue to increase their
derivative activity in the expectation that future
intervention would occur in the event of market

This familiar pattern of behavior by the government in
the context of moral hazard is too obvious to be
debated. But one does not need to subscribe fully to
conspiracy theory to support GATA's activities. There
is too much strange, unexplained activity in the gold
market not to welcome energetic efforts to come up with
some answers.