In defense of GATA


9:50p EDT Saturday, September 9, 2000

Dear Friend of GATA and Gold:

Reginald H. Howe of has analyzed
the report on gold loans commissioned from Jessica
Cross by the World Gold Council and has found it not
simply terribly wrong but, more disturbing, dishonest.

Indeed, the Cross report may be taken as evidence of the
gold council's having gone over to the camp of the shorts
and the manipulators -- evidence of the council's betrayal
of the industry whose name it has taken.

It also is evidence that the situation in the gold market
is even more perilous than we've thought.

Reg's essay is below. Please post it as seems useful.

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

* * *

Jessica Double-Cross Study
Puts Q(uisling).E.D.
on the World Gold Council

By Reginald H. Howe
September 10, 2000

Where do the World Gold Council's first loyalties lie?

Are they with the gold mining industry that supports it
and needs higher gold prices just to survive?

Or is the WGC, like Gold Fields Minerals Services, now
little more than a shill for the big bullion banks and
their friends in the Clinton administration and the Blair

"Gold Derivatives: The market view," a study by Jessica
Cross sponsored and published last week by the WGC, puts
Q.E.D. -- Quisling Erat Demonstrandum -- to these
questions. In a stunning double-cross of the gold
mining industry, the study puts the WGC squarely on the
side of the bullion bankers and the political elite.
Even so, the study might still be defensible were it
intellectually honest. Sadly, it is not. Rather, it is
brazen disinformation aimed at neutralizing the impact
of publicly reported figures on notional values of
bullion banks' gold derivatives.

These figures and the reporting system under which they
are produced have been addressed in several prior
commentaries, including "House of Morgan: From Gold
Bugs to Paper Hangers," "Deutsche Bank: Sabotaging the
Washington Agreement?," and "Gold: Can't Bank with It;
Can't Bank without It!," all of which are also included
in the updated version of GATA's Gold Derivative
Banking Crisis. Another prior commentary ("Ah! tenez,
vous etes de la merde dans un bas de soie"), addresses
at considerable length some of the problems associated
with aggregating notional values and using them as
measures of exposure or risk. I have been asked by
several people whether Ms. Cross or the WGC contacted
me in connection with her study. The answer is no,
although I was informed by a top official of the WGC
that he at least is quite familiar with all these

In connection with implementing the Basle Capital
Accord and to provide greater transparency to
regulators, market participants and public
shareholders, the Bank for International Settlements
administers a regular reporting system for OTC
derivatives of the major banks and other financial
institutions in the G-10 countries. Established
pursuant to recommendations contained in the Yoshikuni
Report, issued by the BIS in June 1996 and available
online under the title Proposals for Improving Global
Derivatives Market Statistics, the system involves
three steps: 1) collecting at the head office of each
reporting firm all required derivatives data for its
operations worldwide; 2) transmitting the individual
firm data to the central bank or other relevant
national authority (e.g., the Comptroller of the
Currency -- OCC -- in the United States) in the country
where the home office is located; and 3) transmitting
assembled derivatives data for each country to the BIS.

The BIS issues regular semi-annual reports summarizing
this information. Available at its website
(, click on Regular Publications, then on
Regular OTC Derivatives Market Statistics), they
include figures for the total notional value of all
derivatives in each of several categories. As described
by the BIS in these reports (footnote 1): "The notional
amount, which is generally used as a reference to
calculate cash flows under individual contracts,
provides a comparison of market size between related
cash and derivatives markets." In preparing these
summary statistics, the BIS halves the notional values
of contracts between reporting institutions in order to
avoid double-counting.

Under the 1995 amendment to Basle Capital Accord, the
determination of capital adequacy requirements for OTC
derivatives involves the application of percentage
factors to notional values. These factors vary for
different types of derivatives, according to maturity,
and depending upon whether the current exposure method
or original exposure method is used. But in general,
for gold and foreign exchange contracts, the applicable
percentage factors run from 1 percent to more than 7
percent for the longest maturities. Under certain
circumstances capital requirements can be reduced by
netting, and in all circumstances there is every
incentive to avoid any unnecessary overstatement of
notional values since to do so would weigh on capital.

Some national authorities, such as the OCC and the
Swiss National Bank, also publish regular reports
summarizing the derivatives data for the banks based in
their countries. Through annual survey reports (e.g.,
Trading and Derivatives Disclosures of Banks and
Securities Firms), the BIS encourages individual firms
to provide in their annual and periodic reports
information about their OTC derivatives at an
appropriate level of detail for their particular

The WGC has consistently opposed the idea that changes
in the notional value of gold derivatives, either
collectively or for individual banks, provide any
meaningful information about the gold market. Ms.
Cross's study picks up where "Looking for a scapegoat,"
the lead article in the July edition of the WGC's Gold
in the Official Sector, left off. But her study does
more. It demonstrates beyond doubt that neither Ms.
Cross, nor anyone at the WGC who read her study before
publication, grasps the most elementary fact about
notional value figures: They are position data at a
point in time, not transaction data measuring sales or
turnover over a period of time.

Ms. Cross's most complete discussion of the notional
value figures appears at pages 95-96 of her study. She
makes no effort whatever to describe the design or
purposes of the reporting system that produces these
figures or to describe the relationship of the BIS
figures to those of the OCC. Nor does she mention that
some bullion banks, particularly the largest Swiss and
German banks, themselves report reasonably detailed
figures on their gold derivatives, including total
notional values by maturity category and, in the case
of the Swiss banks, separating forwards and options.
None of these banks, incidentally, describes notional
value in terms of turnover. They all use definitions of
notional value that track quite closely that used by
the BIS.

According to the BIS (Yoshikuni Report, A2.2): "[T]he
collection of turnover data is not envisaged as part of
the regular reporting framework." Nevertheless, Ms.
Cross asserts that notional value figures are "grossed-
up total turnover." According to the BIS, it decided to
require data on notional values because (Yoshikuni
Report, B3.1): "A sum of notional amounts outstanding
thus provides a rough approximation to the scale of
gross exposures to price risk transferred between the
contracting parties, just as adding the principal
amounts of a group of cash market assets offers a
picture of the price risk embedded in those assets."
Ms. Cross disagrees.

Speaking about the US$243 billion total notional value
of gold derivatives reported by the BIS for the major
banks and dealers in the G-10 at year-end 1999, Ms.
Cross asserts: "[W]e believe that this outstanding
position should not be described as 'exposure' as it
certainly could have negative if not alarmist
connotations. A more objective reference would be a
commercial banking presence in gold-based derivatives."
She is entitled to her (wrong) opinion, but it does not
change what the BIS and relevant national banking
authorities require. Then, trying to clarify her
position with an example, Ms. Cross proves her error.

A mining company sells 10 tonnes forward through a
bullion bank. Assuming that the bank covers the full
amount of its long exposure in this transaction, she
points to a total turnover counting both the long and
short legs of 20 tonnes, which presumably in her view
also represents 20 tonnes of notional value. Then the
mining company "elects to buy back 5 tonnes of its
forward sale," and the "bank will unwind the exposure
in both legs of the original transaction." As a result
of these two transactions of 5 tonnes, "the turnover
against the whole strategy in that quarter is now 30
tonnes." The reader is left to believe that the total
notional value at this point is 30 tonnes.

But in fact, the notional value is not more than 10
tonnes. As reported by the BIS, it would be even less
if some parts of the surviving position are with other
reporting institutions. But the surviving position is
at most a long and a short of 5 tonnes each, or a total
of 10 tonnes. In Ms. Cross's fictional world, this
position would count as 30 tonnes and require the same
bank capital as a new forward sale transaction by
another mining company of 15 tonnes, which including
both the long and short sides would equate to 30 tonnes
of notional value. Quite obviously, no rational person
would argue that the same amount of bank capital should
be required to carry these two positions, one a forward
sale of 5 tonnes and the other a forward sale of 15.

Finally, Ms. Cross suggests that the publicly reported
notional value figures "...are very similar to the
enormous trading volumes reported by Comex/Nymex where
we know one ounce of gold gets traded over and over
again but delivered or settled for only once." The
proper analogy, however, is not to volume but to open
interest. On an exchange with standardized contracts,
counting the number of open or outstanding contracts
gives a good measure of market size and individual
exposures at any given point in time. For custom-
tailored OTC derivative contracts, summing notional
values is an effort to do substantially the same thing.

So what explains Ms. Cross's flatly wrong assertions
about the concept of notional value? Why did no one at
the WGC catch her egregious error prior to publication?
"Worrying" and "alarming" are the words Ms. Cross uses
to describe the import of the notional value figures if
they are what they are rather than what she says they
are. And in this case, worried and alarmed is just what
the big bullion banks with their huge short gold
positions are. In a similar state of concern are
heavily hedged mining companies like Barrick, which as
one of the largest producers carries considerable
influence at the WGC since it is funded by assessments
on ounces produced. But most worried and alarmed of all
are the politicians. They know that soaring gold prices
mean collapsing political careers.


To be continued in my next commentary: WGC and Jessica
Double-Cross: Part 2 (title subject to change).