Another blast from Frankfurt at market manipulators


By Reginald H. Howe
September 1, 2000

The German Bundesbank, or "Buba" as it sometimes called by
certain locals, is reputed to make its views known on occasion
through articles placed in the Frankfurter Allgemeine Zeitung,
one of Germany's leading newspapers. On August 25, 2000, the FAZ
ran an article about gold that featured GATA and suggested that
its allegations about recent manipulation of gold prices --
likely orchestrated by the lame duck big Bubba in Washington --
deserve serious hearing. In a follow-up article on August 30, the
FAZ discussed GATA's theories in more detail, focusing on gold
derivatives and naming all the major players and suspects except
one: Deutsche Bank. English translations of both articles are
available at

It is hard to believe that a major German newspaper, having
delved this deeply into the gold story, plans to leave it without
mentioning the principal German connection. Accordingly, my guess
is that there will be at least one more FAZ article to address
the role of Deutsche Bank, including the recent huge growth of
its gold derivatives, especially during the last half of 1999,
and its apparent advance knowledge of the May 7, 1999,
announcement of British gold sales. In short, the Bundesbank may
be about to answer the question posed at the conclusion of
Deutsche Bank: Sabotaging the Washington Agreement?, and unlike
Shoeless Joe, this Buba may not have to disappoint its fans.

Before speculating on the possible significance of the FAZ
articles, a few other facts may be relevant. First, on July 25,
2000, the BIS published in the Review section of its website the
speech by Herv Hannoun, First Deputy Governor of the Banque de
France, to guests of Goldman Sachs at its dinner party at Les
Invalides during the FT World Gold Conference in Paris last June.
In discussing the conservative views of the Banque de France on
gold, Mr. Hannoun identified the Banque de France and the
Bundesbank as "a driving force" behind the Washington Agreement,
which, in his words, "has re-emphasized the role of gold." He

"It is true, however, that initial market reaction to the joint
statement was extreme. The immediate impact of the Washington
Agreement was all the more dramatic as a number of market
participants (gold mines, hedge funds) had accumulated big and, I
would say in some cases, excessive short positions. The fact that
the short sellers had to rapidly square their positions induced a
brief period of higher volatility, but also created the
conditions for a more orderly market and thus, during the last
months, gold prices have fluctuated in a relatively narrow

Second, on June 30, 2000, Hans Meyer, chairman of the Governing
Board of the Swiss National Bank, unexpectedly announced that he
would retire at the end of the year. The SNB's press release on
his retirement states: "The reason he gave for his decision was
that he was certain it would be in the overall interest if the
new Governing Board could begin its work already at the beginning
of next year." Mr. Meyer is closely identified with the Swiss
gold sales. His early retirement would be consistent with a
concern that sharply rising gold prices might soon make these
sales an embarrassment to the SNB, which in the eyes of many has
been less than candid with the Swiss people about the reasons for

Third, Deutsche Bank apparently continued to build up its gold
derivatives in the first half of this year. Its mid-year
financial report does not give the same level of detail on its
precious metals derivatives as its annual report. In the mid-year
report, precious metals derivatives are put in the "other"
category, for which the total notional value is E67.5 billion,
broken down by maturity as follows: greater than one year, E27
billion; 1-5 years, E33.3 billion; greater than 5 years, E7.1
billion. By way of comparison, at year-end 1999, adding E50.9
billion total notional value of precious metals derivatives to
E9.5 billion of other commodity derivatives gives a total other
category of E60.4 billion.

Because the non-precious metals component of the other category
has been in sharp decline over several quarters, a reasonable
estimate is that this number is now down to E6.5 billion or less,
which suggests a total notional value of precious metals
derivatives at June 30 of roughly E61 billion, up E10 billion
since year-end, or 20 percent in euro terms. Due to the decline
of the euro against the dollar, the increases in dollar terms
would be roughly 10 percent less.

Fourth, moving in the opposite direction from Deutsche Bank, UBS
has apparently reduced its gold derivatives quite sharply during
the first half of 2000. In the case of UBS, the mid-year report
does not give any figures on notional or replacement values. What
it does give are 10-day 99 percent confidence Value at Risk
numbers for precious metals. Comparable numbers also appear in
its 1999 annual report. The following table gives a comparison
for the four time periods identified in the two reports. All
amounts are in SwF millions.

Period Minimum Maximum Average Period-End

7/1/98-12/31/98 16 48 32 19
1/1/99-12/31/99 5 36 21 28
1/1/00-3/31/00 7.1 27.4 15.1 13.5
4/1/00-6/30/00 4.3 15.3 9.4 12.1

Interestingly, at the FT World Gold Conference in Paris,
representatives of UBS were almost alone among the bullion
bankers in wanting to engage in serious discussion with Bill
Murphy and me about our interpretation of the reported figures on
gold derivatives. At the end of 1999, based on total notional
value, UBS's gold derivatives business was by far the largest of
any bank, but in contrast to that of big competitors like J.P.
Morgan and Deutsche Bank, had remained flat rather than surged in
the last half of the year.

Shortly after Deutsche Bank: Sabotaging the Washington Agreement?
was posted here on May 20, GATA added it to the online version of
Gold Derivative Banking Crisis, which several friends of GATA
brought to the attention of top officials at the Bank for
International Settlements. What is more, given the seriousness of
the issues raised by Deutsche Bank's gold derivatives as
discussed in that commentary, concurrently with posting it here,
I sent a copy to Andrew Crockett, General Manager of the BIS,
together with a request that he forward a copy to the Banque de
France. A Swiss banker whom I used as a reference in my
communication with Mr. Crockett also sent a copy of the
commentary to a friend in a senior position at the the
Bundesbank, who replied only that it had acted "responsibly."

Facts are always preferable to speculation, but interpreting the
gold market requires more than the usual amount guessing since
transparency in this market is so limited. This special Labor Day
update to my recent essay, Gold or Dross? Political Derivatives
in Campaign 2000, posted only a couple of days ago, sets forth my
current working hypothesis on the significance of the FAZ
articles and what they may suggest for the future.

Upon initial review by the BIS, GATA's document must have created
sufficient concern to warrant some further investigation. The BIS
has a great deal more information on gold derivatives than what
it publishes, including breakdowns between forwards and options
and between contracts with other reporting financial institutions
and contracts with non-reporting institutions, e.g., gold mining
companies, fabricators, hedge funds, speculators, etc. It has a
highly competent research staff quite knowledgeable in the most
sophisticated mathematical and statistical modeling techniques,
backed by first-rate technology and equipment. And it has its own
considerable knowledge of the gold market plus what must be an
unrivaled web of contacts at the highest levels of international

As a result of this new investigation, the BIS along with the
other major central banks of continental Europe, particularly the
Bundesbank, the Banque de France and the SNB, likely concluded
that the gold market had in fact fallen victim to a much larger
degree of manipulation than they had previously suspected. This
new information also helped to explain why the gold market's
reaction to the Washington Agreement had been more extreme than
they had anticipated. And it suggested that the Bundesbank's gold
leasing, most of it carried out initially through Deutsche Bank,
had probably resulted in a much larger negative impact on gold
prices than previously appreciated. Indeed, both the Bundesbank
and the SNB may now feel somewhat duped by the bullion banks that
advised them on their extensive gold lending programs.

Within the Euro Area, the Bundesbank immediately aligned itself
with the pro-gold views of the other two major gold holders, the
Banque de France and the Bank of Italy. Of course, neither of
them has engaged in any significant gold lending, so within the
Euro Area, the Bundesbank now carries principal responsibility
for resolving the problem of excessive gold lending and gold
derivatives activities. The FAZ articles are Buba's first shot
across the bows of the bullion banks, especially Deutsche Bank.

With respect to the Swiss, their gold sales continue at the
maximum permissible rate under the Washington Agreement for
substantially the reasons discussed in prior commentaries. See
Gold: Unchained by the Swiss; Ready to Rock! and Central Banks
vs. Gold: Winning Battles but Losing the War? Swiss sales also
are likely directed toward assisting UBS to reduce its gold
borrowings, just what it appears to be doing. Even if the SNB
wanted to speed up this process, it is constrained by the limits
in the Washington Agreement. Although the SNB will be embarrassed
by any large rise in gold prices on the heels of its sales, by
investing the proceeds in euros, it expects to be in the currency
that will benefit most from higher gold prices.

In his talk to Goldman Sachs and its guests, the shorts that Mr.
Hannoun mentioned were gold mining companies and hedge funds. At
least some of this group have used the period since last
September to reduce or eliminate their short positions. Mr.
Hannoun did not mention bullion banks, and among the largest,
only UBS seems to have taken the hint. But then, among this same
group and whatever its role prior to 1999, UBS is quite clearly
not a party to the continuing Anglo-American scheme to manipulate
gold prices that began in May 1999 with the British announcement
of gold sales.

The FAZ articles suggest that the Euro Area central banks,
together with the BIS and SNB, are now prepared for a showdown
over gold. Whether these articles are also aimed at boosting the
foreign exchange value of the euro is harder to say. Exacerbated
by high dollar oil prices, inflation is becoming a more
significant problem for the Euro Area. Whether by design or not,
the Anglo-American war on gold is effectively an attack on the
euro as well. In any event, a strong rally in gold should help
the euro vis-a-vis both the dollar and the yen.

If another FAZ article is planned, and especially if the
Bundesbank is behind these articles, the next article is likely
to come out over the long Labor Day weekend. In that event, and
maybe even without it, the FAZ articles could well do for the
gold market this year what the Washington Agreement did last
year. This year, however, the European central banks are unlikely
to lose their nerve as quickly as before. They almost certainly
will turn a deaf ear to cries of pain from overexposed bullion

The danger, of course, is that soaring gold prices could trigger
sharp and mutually reinforcing sell offs in stocks, bonds and the
U.S. dollar. But with the future of the euro ever more visibly at
stake, and the manipulation of gold prices growing increasingly
blatant, the central banks of the Euro Area may no longer feel
that they have a choice. If little Buba, weakened but still
dangerous, really is about to blow the whistle on big Bubba's
gold manipulators, Labor Day 2000 may mark the sunset of
unchallenged dollar dominance in the world financial system and
the dawn of a new golden millennium.

Final thought for Monday, September 4, 2000. Daniel Webster never
spoke to a Labor Day gathering. The holiday did not exist in his
time. Probably people were working too hard. But he did speak to
the occasion: "Of all the contrivances for cheating the laboring
classes of mankind, none has been more effective than that which
deludes them with paper money."