Gold price suppression summarized, documented by Howe


By Bill Murphy, Chairman
Gold Anti-Trust Action Committee
June 10, 2000

Neil Behrman of called me last week
about a story he was doing on the recently revealed
gold derivative positions. Here's what Behrman

* * *

Bullion Banks' $190 Billion Derivatives Position

By Neil Behrman
June 8, 2000

Gold bulls have been thwarted again.

An extensive $20 short covering rally by commodity
funds and market participants failed to drive the price
decisively through a critical resistance of $295 an

Physical demand, which was buoyant when bullion traded
between $270 and $280, faltered and yet again gold
appears to be stuck in a narrow trading band.

Unexpected dollar weakness contributed to the rally.
But the Gold Anti-trust Action Committee (GATA), a gold
bug pressure group, is also claiming credit for the
spurt. A week ago it presented a document to John
Silvia, chief economist of the Senate Banking
Committee; U.S. Rep. Spencer Bachus, chairman of the
Subcommittee on Domestic and International Monetary
Policy; and other Washington politicians. The document,
"Gold Derivative Banking Crisis," published on the web
at the same time, claims that a "cabal of bullion
banks, with the probable assistance of the New York
Fed" and other official bodies, are "repressing the
true equilibrium price of gold by hundreds of dollars."

There's little point in wasting space on the allegation
of central bank collusion. For a start it doesn't wash
with last September's Washington central bank accord to
cut gold loans and supplies. But is there any truth in
the claim that bullion banks have a massive bear
position which they will cover and drive the price into

GATA has extracted March 2000 figures from the U.S.
Office of the Controller of Currency and estimates that
derivatives positions of U.S. bullion banks amount to
$91 billion, equivalent to 319 million ounces or
several years' production. Bank of International
Settlements figures, which are dated, estimate that
total global over-the-counter gold derivatives
positions were unchanged at $190 billion (667 million
ounces) in the past three years.

So what do these figures mean? Jessica Cross,
Johannesburg based head of Virtual Metals Research and
Consulting, is skeptical. She received a doctorate for
a thesis on derivatives and wrote an excellent book on
the subject for the lay person, "The Derivatives
Revolution" (Rosendale Press).

She confirms what bullion managers, analysts, and World
Gold Council executives report. She is married to a
deputy governor of the South African Reserve bank and
is objective and analytical.

Jessica's comment about the GATA thesis is: "One plus
one equals 20." Say a mining company sells 10 tons
forward on the derivatives market. The counterparty
(i.e., bank) takes on to its book a long position of 10
tons, which it immediately offsets by selling forward
10 tons. The net position of the bank is zero, but the
turnover is 20 tons and is reflected in the OCC
numbers. A few weeks later the mining company elects to
buy back 5 tons of its forward sale and the bank, which
now has a 5-ton short position, offsets it by
purchasing 5 tons from another bullion bank. The
commercial bank's derivatives exposure is zero, but the
OCC position is 30 tons and so on. Options deals result
in even more paper trading, which clocks up OCC and BIS

Let's also put the bullion derivatives position in
perspective. According to the BIS, gold bullion's $190
billion notional global outstanding derivatives
position compares with foreign exchange contracts of
$15 trillion, interest rate contracts $54 trillion, and
equity-linked contracts of $1.5 trillion. Examining
"gross market values" that take into account bilateral
netting agreements, the BIS estimates that global gold
open positions doubled to $22 billion in June 1999 from
$13 billion in June 1998. Gold, in the financial scheme
of things, is a small market, illustrating the paranoia
of conspiracy theories. It is way down on the
international financial and economic agenda.

This doesn't mean that banks don't get overexposed from
time to time. That's precisely what happened in the
third quarter of last year. Although the World Gold
Council and African producers are claiming credit for
the Washington Accord, it is more likely that the Fed
and other central banks shortened the lending book to
control excess bear positions in the market, says an
experienced derivatives trader. There was the
inevitable market spike and several bullion banks and
producers (like Ashanti) were badly burnt.

The derivatives market does accentuate moves,
especially when the price breaks through trigger
points. Options traders through software programmes
known as "delta hedging" buy or sell gold to cover
short or long positions. Longer term, it is physical
demand and supply that matters. Gold is cheap, and if
producers spend more on marketing, they should raise
demand and hence the price.

* * *

This kind of a story is no surprise to GATA, as it is
exactly what we said would happen. It is a pretty weak
response by the disinformation camp, and when the price
of gold soars, they are going to have to try to explain
their lack of forthrightness.

An extremely knowledgeable African in the gold industry
had the following to say:

"Did you read the section headed 'The Peculiar Views Of
Jessica Cross'? In your 'Gold Derivative Banking
Crisis" report, Page 22, Paragraph 2, you made mention
of Jessica Cross and a survey she is conducting for the
World Gold Council. I wish to reiterate that she earns
her living from persuading mines to hedge. It is in her
absolute interest to underplay the effects of hedging
on prices and set low estimates for the open short
position in gold. To emphasize where she is coming from
I have pasted below an e-mail sent from a friend in
which a London-based commentator called Neil Behrman
uses the views of Cross to trash your GATA report. The
World Gold Council would be well-advised to employ a
different consultant. I trust this helps you."

This African is right. That is very good advice for the
World Gold Council. This is the same Jessica Cross who
commented publicly to the media last year that the $84
gold runup last September was one of the worst events
in the history of the gold market.

Behrman also does not report that he spoke with gold
dealer honcho Martin Stokes of J.P. Morgan in London.
"Martin was very cool to me," Behrman told me on the
phone. Stokes is the same bullion dealer who would make
no comment when an industry pro confronted him after
the recent World Gold Council meeting about the
disclosure of Morgan's $38 billion off-balance-sheet
derivative position.

Who is right about the gold derivative explosion?

For an answer, why not try using some common sense. We
know there is record gold demand, the CRB is making new
highs all the time, the oil price has gone up 250
percent in 16 months, and gold producers such as
Normandy are delivering into their hedges, which is
restricting heretofore gold supply that was hitting the

Yet the price of gold is beaten down below $290 every
times it makes a run above that.

While all these bullish factors for the price of gold
are kicking in, the number of gold derivatives just
happens to explode on the books of bullion banks that
MUST disclose their positions. J.P. Morgan went from
$18 billion to $38 billion the last half of 1999 alone.

The gold derivative numbers on the books of Deutsche
Bank have gone bonkers too.

From's Reg Howe and his May
essay, "Deutsche Bank: Sabotaging the Washington

"This table portrays a very 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."

It took Chase Bank 14 years to get to $22 billion. It
was just disclosed the other day in the new OCC gold
derivative numbers that Chase's gold derivative
position exploded up to $31 billion -- a $9 billion
increase in only three months. Chase: What gives? Is
this just another meaningless number on your books?

How can the bullion dealer camp get away with saying
this does not mean anything, that is just a bunch of
double counting? That just not hold up. The numbers
affect the banks' capital requirements.

Regarding the BIS numbers derivative numbers, Reg Howe
had this to say in May in his essay, "Gold: Can't Bank
With It, And Can't Bank Without It":

"Three points about the BIS figures should be
emphasized. First, under the Basel Capital Accord, all
off-balance-sheet exposures, specifically including
gold derivatives, are subject to the capital adequacy
standards. Second, the Basel Committee on Banking
Supervision has adopted a number of recommendations "to
encourage banks and securities firms to provide market
participants with sufficient information to understand
the risks inherent in their trading and derivatives
activities." And third, the statistics released semi-
annually by the BIS on the global OTC derivatives
market are an integral part of this risk assessment and
disclosure process.

"Turning specifically to the derivatives market
statistics, the consolidation of notional value at the
BIS level is intended to eliminate double-counting
between reporting banks and dealers so that the total
notional figure is in effect a measure of market size
at a point in time. It is not turnover such as reported
by the LBMA. For commodities and gold, the closest
analogue would appear to be open interest on a
commodities exchange. But OTC contracts being non-
standard, counting the number of contracts obviously
does not work. Accordingly, the best way to measure
them is by underlying contract amounts or face values,
halving those between reporting parties and taking
other steps, as the BIS does, to avoid double-

It is too bad that Behrman did not take the time to
carefully read the "Gold Derivative Banking Crisis"
report. Everyone I know who has done so is just stunned
and has acknowledged that the gold market is a ticking
time bomb that could explode at any time. Regardless of
the exact details of the meaning of the gold derivative
numbers, it is a FACT that they have increased
dramatically over the past year. It is very clear that
the bullion banking camp has taken to gold derivatives
(or paper gold) to try and hold down the gold price.
They are being found out.