"Midas" commentary for September 19, 2000


1:50a EDT Monday, September 18, 2000

Dear Friend of GATA and Gold:

Reginald H. Howe of www.GoldenSextant.com identifies and analyzes
recent tremors in the world financial and gold markets in his
latest essay, which follows. This is another astoundingly
researched and detailed essay that instantly will become a
reference work, as so much of Reg's writing has become.

I cannot reproduce here the boldfacing in the charts that Reg
uses at his own web site. But you can go to www.GoldenSextant.com
for that.

Please post this as seems useful.

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

* * *

Snakes Writhing: More and Bigger Tremors

By Reginald H. Howe
September 17, 2000

Wow! Like snakes before an earthquake, heavyweights in the
gold/financial arena are behaving strangely as their world
experiences the first premonitory tremors of the coming financial
cataclysm. Now is a good time to reread a prior commentary: "Real
Gold, Paper Gold and Fool's Gold: The Pathology of Inflation."
Today's commentary hits the larger tremors of the past fortnight.
More detail on some may be provided in future commentaries.

Tremor 1. More Convulsions over the Euro.

After the European Central Bank meeting in Frankfurt on August
31, 2000, raising interest rates by 25 basis points, an obviously
concerned Jean Claude Trichet, Governor of the Banque de France,
charged at a news conference that the financial markets were
making "a flagrant underestimation" of the value of the euro.
Five days later, German Chancellor Gerhard Schroeder took quite a
different stance, saying that a weak euro was good for exports,
adding: "The current euro-dollar rate is more of a reason to be
happy than concerned."

Then, on September 14, rejecting another interest rate increase,
the ECB flirted for the first time with intervention. Announcing
a decision made two weeks previously, the ECB converted dollar
and yen interest rate income on its foreign exchange portfolio to
euros, giving a brief boost to the beleaguered currency.
Afterwards, Wim Duisenberg, head of the ECB, wryly observed: "I
was not disappointed in the market reaction."

Two points stand out: (1) the widening split between the Euro
Area's center-left governments, focused on continuing economic
growth even at the expense of the currency, and the ECB and other
EA central banks, intent on establishing the credibility of the
new currency as a worthy successor to the Deutschemark; and (2)
the continuing refusal by the ECB to play the gold card in any
way, probably out of fear of precipitating a worldwide financial
crisis stemming from uncontrollable dollar flight.

For an interesting recent speech by Mr. Duisenberg about the
euro, see The International Role of the Euro, given September 8,
2000, in Calgary.

Tremor 2. BIS to Buy Back Privately Held Shares.

In a press release issued September 11, 2000, the Bank for
International Settlements announced a compulsory withdrawal of
all privately held shares. A full discussion of the history of
these shares is beyond the scope of this commentary. The so-
called American tranche, which represented 15% of the BIS's
capital when it was created in 1930, was originally intended for
purchase by the U.S. Federal Reserve, but had to be privately
placed because the isolationist Congress of the era would not
allow purchase by the Fed. The American and Belgian tranches
trade on the Swiss Exchange; a French tranche trades in Paris.

The effective closing date for the buy back is January 8, 2001,
when the BIS will hold an extraordinary general meeting to amend
its articles to exclude private shareholders. An important asset
of the BIS, and what makes it a quasi-gold stock, is the
approximately 200 metric tonnes of gold that it holds for its own
account. Accordingly, any valuation of its shares depends
importantly on the gold price employed or in effect. The closing
date implies an expectation (or at least a wish) for relatively
stable gold prices until then.

Being a private shareholder of the BIS, I am not going to express
any opinion on the fairness of the proposed SwF16,000 buy out
price, which represents an approximate doubling of the market
price for the American tranche prior to the announcement.

However, I can make three comments on the valuation: (1) any
valuation dependent upon an assessment of the outlook for gold
prices is inherently suspect coming from J.P. Morgan,
particularly in light of the extraordinary increase in its gold
derivatives during 1999; (2) the BIS sold shares in 1999 to new
central bank members at prices that should be explained more
clearly than they are in its most recent annual report, where no
equivalent price in current Swiss francs is disclosed; and (3)
because the BIS is an active participant in the gold market and
privy to a great deal of non-public knowledge about official
activities and intentions with respect to gold, it is under a
duty to act with scrupulous fairness toward its private

There are at least three plausible but somewhat contradictory
hypotheses to explain the buy back, none of which is fully
disclosed in the public statement. Indeed, the problems mentioned
in the release with respect to low volume, lack of liquidity and
difficulties of transfer have existed for years, and if anything
are less troublesome now than earlier due to modern

One hypothesis is that the BIS and its member banks know what is
coming in the gold market and are just trying to buy back its
shares at what will prove a bargain price in future. In this
connection, the press release states that the withdrawn shares
will not be retired or canceled but instead "redistributed" to
central banks pursuant to a plan not yet unveiled. Could the Fed
now be planning to take its "rightful" 15%?

A second hypothesis is that the BIS expects to add still more
central banks as members, and that the private shares could
complicate this process if their market value on the Swiss
Exchange rises above their book value at market prices for gold
and currencies. In other words, when the private shares are
trading at a discount to net asset value, as they have been
during the gold bear market, there is no problem in bringing in
new central banks at book or appraised value. But if the private
shares go to a premium in a gold bull market, as they almost
surely will, then there is a significant dilution issue if new
central bank members come in at less than market.

The third hypothesis is that the BIS is actually planning to
invade, use or sell its own gold reserves, and in fairness to the
private shareholders, is pushing them out ahead of this
fundamental change. In this event, the situation in gold banking
must be critical and the BIS must be unusually concerned.

Historically, the BIS has usually acted with fair regard for its
fiduciary obligations to its private shareholders. In this
connection, it has almost always conducted its operations with
much more consideration for the bottom line than other public
institutions. Indeed, the existence of private shareholders may
not only have given its operations more discipline, but also on
occasion provided a convenient excuse for not participating in
otherwise questionable public interest activities, or requiring
higher levels of security than given to other public
participants. In this sense, the loss of private shareholders may
have long-term adverse consequences for the BIS that are not
fully appreciated.

Tremor 3. Chase to Acquire J.P. Morgan.

On September 13, 2000, Chase confirmed that it plans to buy J.P.
Morgan by exchanging 3.7 Chase shares for each Morgan share,
putting an approximate $30 billion price tag and market cap on
Morgan at the current Chase share price of about $50. Based on
the most recent OCC derivatives reports for the period ending
June 30, 2000, the new J.P. Morgan Chase will combine in one bank
what were formerly the big two in notional amounts of both total
derivatives and gold derivatives, as shown in the tables under
tremor 4 below.

Whether there is an anti-trust problem here depends on a number
of considerations, but key among them is the nature of the
current gold derivatives market. If the OCC figures actually
represent what is mostly hedging by gold mining companies, as
both Gold Fields Minerals Services and the World Gold Council
assert, there may well be a problem that should definitely
concern gold mining companies with active hedge books. A Reuters
story (reprinted at www.egroups.com/message/gata/536) dated
September 15, 2000, expressly flagged continuing consolidation
and contraction of counterparties in the gold lending market as
an unfavorable aspect of the Chase/Morgan marriage.

On the other hand, if these gold derivatives positions are
predominantly proprietary trading positions of the two banks
themselves, or largely represent a warehousing of short positions
with federal support (as I believe), any anti-trust problem is
greatly reduced. The reaction of the active hedgers in the gold
mining industry will say a lot about what they think these gold
derivatives really are, or whether companies like Barrick may be
among those protected by the use of these derivatives to hold
down gold prices.

Ironically, Chase is buying Morgan for almost exactly the total
notional amount of its gold derivatives at June 30. By way of
comparison, the total notional amount Chase's own gold
derivatives are now a little over half its market cap ($62
billion at $50/share). At Citicorp, the total notional amount of
gold derivatives is less than 5% of market cap ($250 billion @

Some market rumors hint that there may be a derivatives problem
at Morgan, and that Chase is effectively bailing Morgan out of
some positions gone sour. The premium price that Chase is paying
does not support these rumors, but contributing to them are two
unusual items: (1) Peter Hancock, Morgan's CFO and the person
with overall responsibility for its derivatives operations,
resigned unexpectedly on Friday, September 8, just a few days
before the merger was announced; and (2) assuming any substantive
basis for the earlier rumors that Deutsche Bank would acquire
Morgan, the Chase deal was done at warp speed after Deutsche Bank

If there are bad derivatives at Morgan, they could well include
gold derivatives, i.e., the derivatives that would be "alarming"
if they are what they are rather than what Jessica Cross, the WGC
and GFMS say they are. Indeed, as discussed in the next section,
the new OCC figures on gold derivatives as of June 30, 2000,
continue to raise questions about both Morgan and Chase, which
has now clearly joined the gold cabal.

Tremor 4. BIS Confirms that Cross/WGC Study Is Wrong.

Stating the obvious, a BIS official confirmed to a U.S. gold
analyst on September 13, 2000, that the data it reports on gold
derivatives is position data as set forth in a prior commentary,
Jessica Double-Cross Study Puts Q(uisling).E.D. on the WGC, not
turnover or transactions data as claimed by Jessica Cross in her
study for the WGC, Gold Derivatives: The market view. In June,
GFMS refused to debate GATA on gold derivatives. Now, in a press
release dated September 5, 2000, issued on the heels of the
fatally flawed Cross/WGC study, GFMS embraces it as proof that
the publicly reported gold derivatives data is essentially
meaningless and that its proprietary unreported and unverifiable
figures are correct.

One bite out of a rotten apple is usually enough. But
particularly in the financial world, when someone is trying to
pull the wool over your eyes, closer scrutiny is often indicated.
So it is with the Cross study, published by the WGC and embraced
by GFMS. Ms. Cross's explanation for the huge increases, both
absolutely and as a percent of prior levels, in the total
notional value of gold derivatives during the last part of 1999
at Chase, Morgan and Citicorp can be summarized in one word:
volatility. Like others who try to dismiss the publicly reported
data on gold derivatives as meaningless fluff, she makes no
attempt to analyze the gold derivatives of certain banks versus
those of others, or to try to account for the differences.

The following table shows the total gold derivatives, all
maturities, of Chase, Morgan, Citicorp (through Citibank) and
Other as reported by the OCC from December 1998 through June
2000. All amounts are in US$ billions. Columns do not add due to
rounding and exclusion of separately stated figures for Bankers
Trust prior to June 1999.

Bank 12/98 3/99 6/99 9/99 12/99 3/00 6/00

Chase 24.1 23.7 20.5 22.6 22.1 31.5 35.0
Morgan 16.8 15.1 18.4 30.5 38.1 36.3 29.7
Citibank 6.7 7.3 7.2 10.7 11.8 11.8 11.4
Other 15.0 13.5 14.2 19.3 15.7 15.9 15.7

Total 68.3 65.1 61.4 83.3 87.6 95.5 92.1

The largest relative and absolute increases are highlighted in
bold. The figures as of September 30, 1999, reflect positions as
of four trading days after announcement of the Washington
Agreement on September 26, during which period the gold price
moved from around $265/oz. to over $300. The rally continued into
October, with gold prices trading as high as $325 during the
first two weeks, and then generally declining to just under $300
by the end of the month. For the rest of 1999 and into February
2000, gold traded in a $20 dollar band under $300. In the second
week of February, a sharp rally took gold to over $315, but again
the price was quickly brought under control, and it remained
generally in the $280-290 range from the beginning of March
through June, although falling into the low $270's in May.

Mere volatility in gold prices cannot explain the variations in
these numbers. However, the variations themselves do suggest
strong reasons for trying to hide them under the "volatility"
smoke screen. Taking each line of the table, the following
picture emerges: (1) Chase's gold derivatives remained flat until
the first quarter of 2000, when they started to accelerate
sharply; (2) Morgan's gold derivatives almost doubled in the
third quarter of 1999, grew sharply in the fourth, leveled off in
the first quarter of 2000 and declined in the second back to the
September 1999 level; (3) Citibank's gold derivatives jumped
sharply in the third quarter of 1999, then remained stable at
this higher level over the next three quarters; and (4) the Other
category of gold derivatives, which includes all banks not
separately identified, also jumped sharply in the third quarter
of 1999, but returned in the fourth to prior levels, where they
have remained.

What can explain this variegated picture? Chase has a reputation
for doing a lot of producer business, and like the big Swiss
banks has long been active in gold derivatives. The notional
values of their gold derivatives, too, were flat to down in the
last half of 1999. The Washington Agreement thus does not appear
to have precipitated any large or immediate consequences in the
gold derivatives of the largest and most experienced players with
established gold banking clienteles of long standing.

Morgan has a reputation as the Fed's bank. Anecdotal reports
reliably attributed the highest sources indicate that the Fed was
heavily involved in trying to control the September/October 1999
rally. Morgan's sudden emergence in the third and fourth quarters
of 1999 as a veritable fountain of gold derivatives is consistent
with this role. The growth of Chase's gold derivatives in 2000 is
consistent with being pressed into service as gold derivatives
threatened to swamp Morgan, particularly as producers began to
try to reduce or cover forward positions put in place prior to
the Washington Agreement.

The notional amounts at Citibank and in Other are much smaller
than at Chase or Morgan. Also, for the institutions involved, the
risks of their gold derivatives are generally much smaller in
relation to their overall capital structures. Both Citibank and
Other appear to have responded to client demands immediately
following the Washington Agreement, and then to have quickly
brought their gold derivatives back under more normal control.
With the possible exception of Citicorp, where former treasury
secretary Robert Rubin now hangs his hat, it is unlikely that any
of them had official support to continue to maintain dangerous
positions in gold derivatives.

The next table, drawn from the same OCC reports, shows the
maturity structures of the gold derivatives for Chase, Morgan,
Citibank and Other from June 1999 through June 2000. Again, all
amounts are in US$ billions.

<1 yr 1-5 yrs >5 yrs Total

Chase (6/30/00) 12.0 16.6 6.5 35.0
(3/31/00) 11.3 14.1 6.2 31.5
(12/31/99) 9.1 9.1 3.9 22.1
(9/30/99) 10.6 8.4 3.6 22.6
(6/30/99) 7.9 12.3 0.4 20.5

Morgan (6/30/00) 9.2 17.7 2.8 29.7
(3/31/00) 24.5 8.0 3.8 36.3
(12/31/99) 20.9 11.3 5.8 38.1
(9/30/99) 21.0 7.6 1.8 30.5
(6/30/99) 13.8 3.8 0.8 18.4

Citibank (6/30/00) 4.6 4.0 2.9 11.4
(3/31/00) 4.7 4.3 2.8 11.8
(12/31/99) 5.0 3.6 3.2 11.8
9/30/99) 4.8 2.9 3.0 10.7
(6/30/99) 3.1 2.0 2.1 7.2

Other (6/30/00) 11.8 3.3 0.6 15.7
(3/31/00) 12.3 3.2 0.4 15.9
(12/31/99) 11.6 3.7 0.4 15.7
(9/30/99) 15.7 3.4 0.2 19.3
(6/30/99) 11.5 2.6 0.1 14.2

Total (6/30/00) 37.9 41.5 12.8 92.1
(3/31/00) 52.8 29.5 13.2 95.5
(12/31/99) 46.6 27.8 13.3 87.6
(9/30/99) 52.3 22.4 8.7 83.3
(6/30/99) 36.9 20.9 3.6 61.4

Examination of these maturity structures and the changes therein
reveals: (1) a very noticeable absolute and relative increase in
the longer maturities beginning with the last quarter of 1999 and
continuing through the first half of 2000; (2) virtually the
entire shift to longer maturities is encompassed in the figures
for Chase and Morgan, with Chase's over one year maturities
surging in the first quarter as Morgan's were cut back, and
Morgan's surging ahead again in the second while Chase's remained
flat; (3) a pretty much stable and unchanging maturity structure
at Citibank and in Other; and (4) a huge reduction of over $15
billion in Morgan's under one year maturities in the second
quarter of 2000, accounting for all of the total reduction in
this category for the quarter.

Again, the picture is one of relative normality at Citibank and
in Other, but very unusual activity and changes at the new J.P.
Morgan Chase. This unusual pattern, too, is consistent with: (1)
heavy selling through Morgan into the rally caused by the
Washington Agreement of September 26, 1999; and (2) massive
accommodation by Morgan and later Chase of gold mining companies
and others wanting to cover short positions and adjust maturity
structures due to changed expectations and perceptions of risk in
light of that agreement.

Tremor 5. Shattered Journalistic Standards at the FAZ.

The Chase/Morgan deal was announced less than two weeks after
market rumors suggested that Deutsche Bank would acquire Morgan.
In retrospect, it appears that the favorable August 25 and August
30 articles in the Frankfurter Allgemeine Zeitung about GATA may
have been the Bundesbank's way of killing that idea. The second
article, which expressly discussed Morgan's US$38 billion of gold
derivatives at the end of 1999 in the context of GATA's
allegations of gold price manipulation, contained an implicit
threat to focus similar attention in future on Deutsche Bank's
even larger gold derivatives position.

Deutsche Bank had precious metals derivatives (almost all are
gold derivatives) the end of 1996 with a total notional value
under US$5 billion. By the end of 1999, it had grown this
business to a total notional value in excess of $51 billion, or
by more than 10 times in three years. The increase in 1999 alone
amounted to $35 billion or more than 200%, most of which came in
the last half and in the longer maturities. Nor does this growth
reflect derivatives added by Deutsche Bank's mid-1999 acquisition
of Bankers Trust, for which the OCC reports showed precious
metals derivatives with a total notional value of just over $1
billion at June 30, 1999, down from $6 billion the prior quarter.

If Deutsche Bank had purchased Morgan, ultimate supervisory
responsibility for its gold derivatives would have shifted from
the Fed to the Bundesbank. It could well be a problem that Buba
did not want, particularly on top of Deutsche Bank's already huge
gold derivatives. If the FAZ does not publish GATA's response to
the slurs contained in the September 7 article by its London
correspondent, based on sources at GFMS, the WGC and the bullion
banks, it will definitely give the appearance that Buba used the
FAZ to send a message and then, having achieved its purpose,
directed the FAZ to close down the story with as little damage to
Deutsche Bank as possible.

The Bundesbank's possibly stiffening resistance to U.S. pressures
is also on display in an article, "Problems of international
comparisons of growth caused by dissimilar methods of deflation -
with IT equipment in Germany and the United States as a case in
point," in the August issue of the Bundesbank's Monthly Report.
Buba, it seems, is not falling for "hedonic" price deflators any
more than it is for the idea that large notional amounts of gold
derivatives are mere reflections of volatility with no further

Tremor 6. U.S. Treasury Responds to Query about the ESF.

By letter dated January 19, 2000, to Senator Joseph Lieberman
(Dem. Conn.), Fed Chairman Alan Greenspan, responding to
inquiries from GATA, denied any efforts by the Fed to manipulate
gold prices. GATA propounded similar inquiries to Treasury
Secretary Lawrence Summers regarding the Exchange Stabilization
Fund, but he has never responded. On September 14, 2000, a GATA
supporter received a letter dated September 6, 2000, from an
acting assistant secretary, with a copy to Senator Connie Mack
(R., Fla.), who had inquired on behalf of this constituent.

The letter, which appears quite carefully drafted, is reprinted
in full within a larger GATA message. The assistant secretary
makes a distinction in the first paragraph between the "Treasury"
and the "ESF," but nowhere indicates receipt of authority from
the Secretary or the President to speak for the ESF. Although the
GATA supporter specifically requested an explanation of the ESF's
huge trading loss in the last quarter of 1999, the assistant
secretary does not address it but does assert: "The ESF does not
engage in any transactions in the market for any metal such as
gold, either in spot markets or in any of its various derivative

On careful reading, this sentence certainly leaves open the issue
of whether the ESF is providing financial guarantees or other
backing to gold trading institutions. Depending on the meaning
given to "engage," it may also leave open the possibility that
the ESF is acting in the gold market through agents. But far more
noteworthy is the only other significant sentence: "I would like
to underline that Treasury does not seek to manipulate the price
of gold or any agricultural commodity by intervening in or
otherwise interfering with the market." Having both made the
distinction between the Treasury and the ESF and employed it as
quoted previously, this last sentence seems to suggest that
although the Treasury is not, the ESF is in fact intervening or
otherwise interfering in the gold market.

The last quoted sentence sort of echoes Fed Chairman Greenspan's
statement to Senator Lieberman: "Most importantly, the Federal
Reserve is in complete agreement with the proposition that any
such transactions on our part, aimed at manipulating the price of
gold or otherwise interfering in the free trade of gold, would be
wholly inappropriate." Notwithstanding this statement, which I
originally tended to credit, anecdotal evidence now shows in
virtually conclusive fashion that the Fed not only helped Long-
Term Capital Management out of a short gold position of 300 to
400 tonnes, but also supported massive intervention to halt and
turn the gold price rally triggered by the Washington Agreement.

Perhaps the most important point about these broad denials of
intervention in the gold market is that they reflect awareness by
the Fed and the Treasury/ESF that they should not be doing what
they almost certainly are: acting to control the price of gold.
Neither has asserted or even suggested that it has or may have
any power or right to act in the gold market as it does in the
foreign currency markets, where Fed and Treasury/ESF
interventions, although rare in recent years, are accepted as
within their normal powers.

This guilty behavior, coupled with the massive manipulation of
gold prices to which huge amounts of circumstantial and anecdotal
evidence now point, has important implications for the gold
mining industry, a topic that I plan to explore further in my
next commentary, tentatively entitled: "Gold Mining Companies:
Explorers Rolling on Firestone Tires."