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Section: Daily Dispatches

12:55a EST Wednesday, February 2, 2000

Dear Friend of GATA and Gold:

Reginald H. Howe, Harvard-trained lawyer, former mining
executive, and proprietor of, has
summarized brilliantly the analysis of the gold market and
its likely manipulators that GATA and its chairman, Bill
quot;Midasquot; Murphy of, have been
making dispatch by dispatch for months now.

Howe's commentary is attached. We at GATA think we
have identified the lead culprits -- the U.S. Treasury
Department, its Exchange Stabilization Fund, and
several bullion bankers, foremost among them Goldman
Sachs, the former firm of the recently resigned U.S.
treasury secretary, Robert Rubin. Now, with the help of
members of Congress, we're going to force their activities
into the light of day and thereby end them.

Please post this as seems useful.

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

* * *

Two Bills: Scandal and Opportunity in Gold?

By Reginald H. Howe
February 1, 2000

Last week the world's movers and shakers held their
annual confab in Davos, Switzerland. Bill C. and Bill
G. were there. No doubt the scandal enveloping Helmut
Kohl, Europe's greatest statesman since Churchill and
De Gaulle, provided much grist for gossip. But here at
home some began to glimpse the outline of a possible
new Clinton scandal -- one that could ultimately
eclipse Watergate or Teapot Dome.

Evidence is accumulating that the administration of
Bill Clinton may have turned the Exchange Stabilization
Fund (the quot;ESFquot;) into a political slush fund to make
itself look good and simultaneously profit some of its
closest Wall Street friends and supporters.

Specifically, the known facts support credible
allegations that the Clinton administration has
effectively capped the gold price by using the ESF to
backstop the selling of gold futures and other gold
derivative products by politically well-connected
bullion banks. Such interference in the free market
price of gold would undermine its traditional role as a
leading indicator of inflation. And it would do so at
the same time that the administration's many
adjustments to the Consumer Price Index have rendered
that lagging indicator of inflation also suspect. Among
the bullion banks most heavily involved in selling gold
futures and purveying gold loans, forward sales, and
other derivatives that undercut its price is Goldman
Sachs, former Treasury Secretary Robert Rubin's old

These are serious allegations, but the current
administration scarcely merits much benefit of the doubt.
If these allegations are incorrect, Treasury Secretary
Summers can deny them in unequivocal language as
Fed Chairman Alan Greenspan did two weeks ago with
regard to similar allegations of gold price manipulation by
the Fed. Indeed, in a formal letter to Sen. Joseph I.
Lieberman, D-Conn., the Fed chairman not only denied
that the Fed had intervened in the gold or gold derivatives
markets but added: quot;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.quot; Greenspan's letter
may be read at:

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The odd behavior of the gold price over the past five
years, including massive gold leasing and heavy bouts
of futures selling apparently timed to abort threatened
rallies, has generated considerable speculation
regarding intentional manipulation by governmental
authorities. What has made weakness in the gold price
all the more perplexing are mounting shortfalls of new
mine production relative to annual demand. Because most
nations deal in gold through their central banks, they
are prime suspects.

Clarifying remarks that he made to Congress in 1998,
Greenspan confirmed in his letter to Senator Lieberman
that some central banks other than the Fed do in fact
lease gold on occasion for the express purpose of
trying to contain its price. Gold leased by central
banks to bullion banks is typically sold by them into
the market in connection with arranging forward sales
by gold mining companies or making gold loans to mining
companies or others. The attraction of gold loans is
their typically low interest rates (known in the trade
as quot;lease ratesquot;) of around 2 percent.

The Fed and the Exchange Stabilization Fund are the
only arms of the U.S. government with broad statutory
authority quot;to deal in goldquot; and thus by reasonable
extension in gold futures and derivatives. Were the Fed
to engage in such activities, it would of necessity
have to do so subject to all the institutional
safeguards that govern its more important functions.

But unlike the Fed, the ESF is virtually without
institutional structure or safeguards. It is under the
exclusive control of the secretary of the treasury,
subject only to the approval of the president. Indeed,
direct control and custody of the ESF must rest at all
times with the president and the secretary. The statute
further provides (31 U.S.C. s. 5302(a)(2)): quot;Decisions
of the secretary are final and may not be reviewed by
another officer or employee of the government.quot;

Originally funded out of the profits from the 1934 gold
confiscation, the little-known ESF is available for
intervention in the foreign exchange markets. In the
absence of a congressional appropriation, the Clinton
administration used funds from the ESF to finance the
1995 U.S. bailout of Mexico. However, accepting the
Greenspan dictum that it quot;would be wholly
inappropriatequot; for the Fed ever to intervene in the
gold market to manipulate the price, it is hard to
imagine any situation in which such intervention would
be appropriate by the ESF, never mind one involving
large profits for the former investment bank of the
secretary himself.

Last week in response to an inquiry from Bridge News,
Secretary Summers quot;categorically deniedquot; that the
Treasury was selling gold. With all due respect to the
secretary, this is not the allegation that
knowledgeable gold market participants and observers
are making. Their allegation is that the ESF -- by
writing gold call options or otherwise -- is making
sufficient gold cover available to certain bullion
banks to allow them safely to take large short
positions in gold, thereby putting downward pressure on
the price and, in the process, making huge profits for

Two devices that have put the most pressure on the gold
price in recent years are sales of gold futures
contracts on certain public exchanges, the COMEX in New
York being the largest and most important, and sales of
leased gold in connection with gold loans and forward
selling by miners. Bullion banks that engage in these
activities must of necessity take short positions in
gold. While these positions can result in large profits
for them when the gold price declines, they can -- if
unhedged -- also result in large losses should the gold
price rise.

The most common tactic used by bullion banks to hedge
against such losses is the purchase of gold call
options, usually from gold producers, other large
holders of physical gold, or entities with sufficient
financial resources to guarantee cash settlement. In
the absence of such protection, bullion banks leasing
gold or selling large amounts of gold futures contracts
for their own account (or the accounts of any but the
strongest gold credits) would be forced to assume risky
net short positions on which they could sustain huge
losses in the event of an upward spike in the gold
price. At the same time, sellers (often called
quot;writersquot;) of gold call options also assume risk, for
they will be called upon to provide gold (or equivalent
cash settlement) to the bullion banks in the event that
the gold price rises above the strike prices of the

Given its own resources of something like $40 billion
and its connection to the U.S. Treasury, which controls
the nation's official gold reserves of about 8,150
metric tonnes, the ESF has the ability to write gold
call options in circumstances where private parties
would not. Should it do so, it can effectively permit
favored bullion banks to engage in gold futures selling
and gold leasing under conditions where they would
otherwise be forced to curtail these activities as
perceptions of increasing risk rendered call options
from private sources either too expensive or even
unavailable. What is more, the ESF can write these
options clandestinely so as to camouflage the true
source of what otherwise appears as inexplicable
downward pressure on gold, thereby creating market
uncertainty that itself augments bearish sentiment and
increases the profits of bullion banks privy to the

With the Fed's announcement that it, unlike some other
central banks, does not operate in the gold or gold
derivatives markets, the focus of suspicion naturally
shifted to the ESF. But to understand fully why gold
market participants and observers increasingly sense
market manipulation originating somewhere in the U.S.
government, it is necessary to recount and highlight
some recent history of the gold market, particularly
for those not fully conversant with it. And even for
those who are, Fed Chairman Greenspan's recent letter
requires reassessment of working hypotheses involving
assumptions of gold price manipulation by the Fed. More
detail on much of what follows can be found in earlier
essays and commentaries here at The Golden Sextant,
together with various links to supporting or
explanatory information.

The story begins in 1995. Gold is slumbering as it has
for some time around US$375/oz. Japan's economic
situation is worsening, and in mid-1995 the Japanese
cut interest rates sharply. Gold begins to stir,
jumping over $400 in early 1996, propelled in part by
Japanese interest rates so low that they force yen
denominated gold futures on the TOCOM into
backwardation (that is, when prices for future delivery
are lower than spot). The yen is falling; gold lease
rates are rising. From the U.S. perspective, an
economic collapse in Japan threatens to exacerbate the
U.S. trade deficit and possibly trigger massive
dishoarding of Japan's large holdings of dollar
denominated debt, including U.S. Treasuries.

From the European perspective, there is concern not
only about the obvious economic effects of a Japanese
collapse, but also that it might cause sufficient
disruption in the existing international payments
system to complicate severely or even prevent the
planned introduction of the euro in 1999. An
accelerating gold price responding to world financial
turmoil is hardly a propitious environment for the
introduction of a new and untested currency.

The G-7 central banks and finance ministers cobble
together a plan to support Japan, including a strategy
for controlling the gold price through anti-gold
propaganda backed by small but highly publicized
official gold sales augmented by leasing of official
gold in large quantities at concessionary rates. For
Belgium and the Netherlands, the largest European
sellers, gold sales also help to meet the Maastricht
Treaty's criteria for the euro.

Gold analysts, who at the beginning of 1996 were almost
unanimous in predicting a new bull market for gold, are
blindsided. Virtually none foresaw such a coordinated
official attack on gold, and many are slow to recognize
its broad scope. The gold price steadily declines from
more than $400 in early 1996 to well under $300 in
early 1998 and stays under $300 for most of 1998 and
into early 1999. Every time gold looks to rally, it is
slammed on the LBMA or COMEX by the same small
group of well-connected bullion banks. Particularly notable
in these attacks are Goldman Sachs, Chase, and Mitsui,
which regularly runs by far the largest net short position
on the TOCOM.

Scared by falling prices and encouraged to do so by
their bullion bankers who are also their lenders, many
gold mining companies respond by increasing their
hedging activities, expanding forward sales and buying
more gold put options. The forward sales, generally
made with gold leased from central banks through
bullion banks, add to the downward pressure on gold and
provide fees to the bullion banks, augmented by further
windfall profits on the loaned gold as the price
continues to fall. The bullion banks earn further fees
by selling put options to the mining companies, which
frequently are forced to finance buying shorted-dated
puts from the bullion banks by selling them long-dated

Trading around $280 in April 1999, gold is below the
total cost of production for many mines and not far
above the cash costs of quite a few. What is more,
annual gold demand is now almost 4,000 tonnes,
exceeding annual new mine production of 2,500 tonnes by
almost 1500 tonnes. This deficit, building over several
years, is largely filled by sales of gold leased from
central banks by the bullion banks. Analysts trying to
calculate the net short gold position of the bullion
banks in early 1999 are coming up with some astonishing
figures, some as high as 10,000 tonnes, equivalent to
four full years of production.

Since much of this leased gold is sold into the Asian
jewelry market, particularly to India, which regularly
absorbs 25-30 percent of annual world production, many
question where all the gold necessary for repayment
will be found. But at the beginning of 1999 some is
expected to come from the proposed sale of more than
300 tonnes by the International Monetary Fund to raise
funds for aid to heavily indebted poor countries, an
initiative strongly supported by the United States and

On May 6, 1999, gold again nears $290 and is
threatening to explode above $300 due in part to
increasing doubts that the proposed IMF gold sales will
be approved. Short positions are in grave peril. Then
comes a wholly unexpected bombshell which will have
even more unexpected consequences.

On May 7, 1999, the British announce that the Bank of
England on behalf of the British Treasury will sell 435
tonnes of gold in a series of public auctions
ostensibly to diversify its international monetary
reserves. The manner of the British sales -- periodic
public auctions instead of hidden sales through the
Bank for International Settlements -- belie any effort
to get top dollar and smack of intentional downward
manipulation of the gold price. All indications are
that these sales were ordered by the British government
over the objection of Bank of England officials.

Palpably spurious and inconsistent reasons for the
sales are offered, but no persuasive ones. There is
only one logical conclusion: the gold sales were
directly ordered by the prime minister for unknown
political or other reasons. What is more, his reasons
are unlikely to have been frivolous. As leading
supporters of the proposed IMF gold sales, the British
clumsily put themselves in the position of front-
running them, and ultimately the British sales are an
important catalyst in forcing the IMF to change tack.

For most knowledgeable gold market participants and
observers, the British announcement is the smoking gun
-- proof positive that the world gold market is being
manipulated with official connivance and support. But
what none yet suspects is that the BIS, the European
Central Bank, and the central banks of the European
Monetary Union countries are having serious second
thoughts about the gold manipulation scheme.

The British announcement quickly sends the gold price
into near freefall toward $250. Gold mining companies
panic. Urged on by the bullion banks, led again by
Goldman Sachs, the miners add to their hedge positions.
The very dangerous practice of financing short-dated
puts with long-dated calls expands exponentially as
financially strapped mining companies, threatened with
reduction or loss of credit lines by their bullion
bankers, are often left with little other choice. Then
comes an even larger bombshell that takes the bullion
bankers and their customers completely by surprise.
Indeed, it is likely a watershed event for the entire
world financial system, comparable only to the closing
of the gold window in 1971.

On September 26, 1999, 15 European central banks, led
by the ECB, announce that they will limit their total
combined gold sales over the next five years to 2,000
tonnes, not to exceed 400 tonnes in any one year, and
will not increase their gold lending or other gold
derivatives activities . Besides the ECB and the 11
members of the EMU, Britain, Switzerland, and Sweden
are parties. The 2,000 tonnes include the remaining 365
tonnes of British sales and 1,300 tonnes of previously
proposed Swiss sales, leaving only 335 tonnes of
possible new sales. The announcement, made in
Washington following the IMF/World Bank annual meeting,
is ironically christened the quot;Washington Agreement,quot;
although the government in Washington played no role.
However, the BIS, IMF, United States, and Japan are all
expected to abide by it, and the BIS is expected to
monitor it.

The effect in the gold market is quick and dramatic.
Within days, as some gold shorts rush to cover, the
gold price jumps from around $265 to almost $330 and
gold lease rates spike to more than 9 percent. By late
October gold retreats back under $300, and a month
later lease rates are almost back to normal levels. But
the hugely overextended net short position in the gold
market is clearly revealed and far from being resolved.

Two heavily hedged gold mining companies, Ashanti and
Cambior, are virtually bankrupt and in negotiations
with their bullion bankers. Indeed, soon the entire
rationale of hedging is under comprehensive review
throughout the gold mining industry as shareholders
rebel at practices that take away the upside of their
gold investments.

As the details of Ashanti's and Cambior's hedge books
are disclosed, the recklessness of gold hedging
strategies foisted onto to them by their bullion
bankers becomes all too apparent. Ashanti's lead
bullion banker, Goldman Sachs, is the subject of
scathing comment, including allegations of serious
conflicts of interest. See, among others, L. Barber amp;
G. O'Connor, quot;How Goldman Sachs Helped Ruin and then
Dismember Ashanti Gold,quot; Financial Times (London), Dec.
2, 1999, reprinted at:

Clearly the most aggressive bullion bankers have been
caught completely wrong-footed and totally unawares by
the Washington Agreement. Significantly, rumor is that
the agreement was hammered out secretly among the
members of the EMU, the BIS, and Switzerland, that the
British were given a chance to sign on after the fact,
and that the United States was not informed until just
before the Sunday announcement. For references to
European press commentary on the genesis of the
agreement, see W. Smith, quot;Operation Dollar Stormquot;:

Besides the three provisions relating directly to
central bank activities in the gold market and one
calling for review after five years, the Washington
Agreement contains this statement: quot;Gold will remain an
important element of global monetary reserves.quot; The ECB
and 11 EMU nations hold collectively around 12,500
tonnes of gold reserves (almost 1.4 ounces per
citizen), making the EMU as a whole by far the world's
largest official holder of gold. What is more, unlike
the United States, which values its gold stock of about
8150 tonnes (under 1 ounce per citizen) at an
unrealistic $42.22/oz., the EMU marks its gold reserves
to market quarterly.

The notion, shared by many, that the EMU would forever
acquiesce in the trashing of its gold reserves by
bullion banks operating in the largely paper gold
markets of London, New York, and Tokyo appears in
retrospect to have been incredibly naive. Indeed, a
careful reading of the 69th annual report of the BIS
issued in June 1999 suggests that European central
bankers were already questioning the effectiveness and
sustainability of Japan's low interest rate policy and
were very concerned about the implications of the Long-
Term Capital Management incident for the world payments
system. With the euro successfully launched, they
quickly lost reason to continue capping the gold price
and became much more concerned about the increasingly
parlous state of the gold banking system to which they
were lending.

Often referred to as the central banks' central bank,
the BIS is not only the principal forum for discussion
and cooperation among the world's central bankers but
also the world's top gold bank. Established under
international treaty in 1930 to facilitate payment of
German war reparations, the BIS from its founding has
kept its financial accounts in Swiss gold francs,
making conversions at designated or market rates as
appropriate. It holds approximately 200 tonnes of gold
for its own account and records on its balance sheet
separate gold deposit and gold liability accounts in
connection with the banking services it provides to
central banks and other international financial
institutions. That the BIS in early 1999 was not as
aware as gold analysts in the private sector of the
bullion banks' dangerously leveraged condition is
almost inconceivable.

Fed Chairman Greenspan's letter to Senator Lieberman is
highly significant in that it tends to negate the
impression gained by many, including myself, that a
rift had developed between the Anglo-American central
banks and those of the EMU over gold. Rather, the Fed's
position as expressed in the letter, together with the
Bank of England's position that the decision to sell
British gold came from Her Majesty's Treasury, implies
a rift not among the major central banks but between
them and the British and American governments operating
through their treasury departments. In this connection,
the Fed and the BOE labor under a handicap that does
not affect the Europeans, for whereas the central banks
of the EMU have direct legal responsibility for their
nations' gold reserves, in both Britain and the U.S.
this responsibility rest with their Treasury departments.

What is more, a quite plausible scenario now appears to
explain the British gold sales. Whether it is true or
not, only a few high officials in the British and
American governments and their bullion bankers are in a
position to know. But on known and reasonably inferred
facts, the following hypothesis can be constructed.

The Exchange Stabilization Fund was writing gold call
options for certain bullion bankers, principally those
most active in selling futures and arranging forward
sales: Goldman Sachs, Chase, et al. As of April 30,
1999, it had outstanding a sizable position at strike
prices in the $300 area. For writing these options in a
generally falling market, it had net earnings from
premiums, but in context these were not large amounts,
at most a very few dollars per ounce. In the ESF's
monthly financial reports required to be filed with the
Senate and House Banking Committees, these amounts
were listed as miscellaneous income.

When gold threatened to explode over $300 in early May,
and with IMF's proposed gold sales in trouble, the ESF
found itself in much the same position as that of
Ashanti and Cambior after announcement of the
Washington Agreement. Gold call options previously sold
for a few dollars an ounce threatened to cause losses
many multiples of these amounts if the gold price
jumped by $50 to $75. If settled in cash, exploding
volatility premiums would add hugely to the loss,
putting the effective strike price far above the
nominal one. On the other hand, if settled in gold at
the strike price, the ESF would have to deliver gold
from U.S. reserves or go into the market to cover,
adding more upward pressure to the gold price.

Worse, unlike the modest premium income from sales of
options, huge losses could not be hidden from Congress
in the monthly financial reports to the House and
Senate Banking Committees.

Not to panic. The ESF, being under the direct control
of the Treasury secretary and the president, has an
option not available to others. Call the British Prime
Minister and arrange for a very public official gold
sale designed to kill the incipient gold price rally.
And for God's sake don't let the Bank of England or the
Fed know what is really afoot. If some of their
inflation hawks knew the real situation in the gold
market, they might be more inclined to raise interest

The plan worked, sort of. The immediate crisis was
bridged. By now, depending on the maturity schedule of
its options, the ESF may have substantially worked off
its position. Indeed, a reduction in call options
available from the ESF after the BOE's announcement may
be what pushed the bullion banks to be so aggressive in
trying to secure similar options from mining companies
in the hedging panic that ensued. But if that was the
strategy, the Washington Agreement undid it and left
the bullion banks in dire peril. For an excellent
discussion of their continuing exposure, see John
Hathaway's latest essay, quot;Rich on Paper,quot; at:

If the foregoing hypothesis is correct, there will be
time enough at a later date to analyze the full
implications of a scandal of such magnitude. To do so
now would be to get too far ahead of the story.
Probably only an investigation by the U.S. Congress
could really uncover the truth.

But whether the hypothesis about manipulation of the
gold price by the ESF is correct or not, the incredible
overextension of the bullion banks is a fact that
ultimately will have to be faced. Currently the
European central banks through the BIS and within the
limits of the Washington Agreement are engaged in a
tightly controlled feed of modest amounts of gold into
the market. Of the 335 remaining tonnes under the
Washington Agreement, 300 tonnes at a rate of 100
tonnes annually over the next three years were
allocated to the Dutch on Dec. 6, of which 65 tonnes
have already been sold. Where this gold is going and to
whom is unknown, but most assume it is being used in
large measure to alleviate critical shortages among the
bullion banks. Some of these banks are divisions of
very large and important commercial or investment
banks, and thus may enjoy quot;too big to failquot; protection.

Plainly too, the American and British governments have
put pressure on friendly gold-holding countries outside
the Washington Agreement to supply gold to the market.
For example, Kuwait announced that it was making its
entire official reserve of 79 tonnes available to the
BOE for lease into the market. Soon afterwards further
new U.S. military aid to the country was disclosed.
With regard to the Kuwaiti announcement, a top BIS
official observed that it was so far outside normal
practice as to permit only one conclusion: Someone was
trying to manipulate the gold market.

The bottom line is that whether as the result of greed,
stupidity, breach of public trust, or some combination
thereof, the fate of the bullion banks and the gold
banking system itself has passed outside not only the
bankers' control but also the power of the American and
British governments. They are all hostages now:
hostages to the continued good will of the European
central banks, who could bury the exposed bullion banks
tomorrow should they choose to do so; and hostages to
events over which they have no control, whether as
major as a stock market crash or as minor as a
blockbuster bid at the next British auction.

Given a sharp spike to $370/oz. or thereabouts, many
believe the gold banking crisis would spiral out of
control. Each periodic British auction is for 25 tonnes
(803,750 ounces). At $370/oz. an entire auction could
be had for less than $300 million, a trifling sum in
modern finance. That may seem like a large premium to
current prices of around $280-$290 but many gold
analysts peg the true equilibrium price of gold today
at between $500 and $600. Add in rumors of difficulty
finding physical gold in size, and 25 tonnes of
deliverable physical gold at $370 could almost look
like a bargain.

In any event, anyone -- friend or foe -- with a spare
$300 million who cares to bid $370/oz. for the full
amount of the next British auction could more than
likely crash the gold banking system with consequences
far more serious than those threatened by the failure
of Long-Term Capital Management.

Not long ago Marc Faber publicly suggested to Bill
Gates the investment merits of switching his almost
$100 billion of Microsoft shares into gold. M. Faber,
quot;An Investment Tip for Bill G.,quot; Forbes, Nov. 29, 1999,
p. 248, also:

My advice to Gates would be a little different: Start
buying gold, leak that you are doing so, watch the
price rise and governments sweat, bid early and high at
the next British auction, and wait for a settlement
offer you really like. No reason not to have both
Microsoft shares and gold. Since the government likes
free, unfettered markets, give them one -- in gold.

The next auction is March 21, 2000, a date perhaps
uncomfortably close to the ides of March for bullion
bankers and would-be Caesars.