What's behind the end of gold price's 15-yr flatlinegreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
OT (??) - WHAT'S THE NASTY SECRET BEHIND GOLD PRICES, AND FUTURES AND OPTIONS?
Strictly speaking this post is off topic. But unstrictly speaking it will be relevant to some who frequent this forum. For it speaks to high crime (altho white collar) in high Washington circles and in major American financial institutions. For those of us who have watched the degradation in American leadership over the decades, and seen it explode in the Y2K spin coming from the Beltline in the past year, the material presented here fits into a pattern no longer surprising. And for those of us who have those kinds of concerns, even Y2K is not seen as the be-all and end-all of survival in the 21st Century. Rather we see the issues looming large enough to threaten our society -- with or without a technical Donnybrook in the next couple months -- to have as much as anything else to do with the presence or absence of a respect for age-old virtues. I rest my case.
An Amazing Article by Ted Butler: "I Accuse."
My first exposure to Ted's article was several weeks ago, and I just about passed it right by. In any case I didn't stop long enough to read it; you know -- I just did a quick 'soundbite' glance at it (very popular habit with sophisticates nowadays in their study of 'the news.') That treatment was abetted by what I recollect now in retrospect to be a quite flippant and superficial set of comments on the article (I can't remember where I initially read the article and the comments -- thought it was here on TB2K, but apparently not.) Fortunately my finance/commodities friend relayed the article to me in an email last week (and subsequently sent me his 'Culprit' comments on the article.) Finally, after 15 years of precious metals prices staying almost totally flat (disregarding the fluctuating supply and demand of the metals), I found the only explanation that makes any sense whatsoever.
Before I cut/paste Ted's article let me give you a newbie intro to it. The content is rather technical. If you've never studied precious metals futures and options (which is a different ballgame than stockmarket options, BTW), it will seem like Greek to you. So let me give you a rough analogy of the fraud involved (probably the largest financial fraud of this century, and involving a cabinet level appointee of your friend and mine, Slick Willie, along with many of the MAJOR financial houses in the U.S.)
You decide to sell your $100K residence, in a 'buyer's market,' i.e., too many houses, not enough buyers. You know a little about real estate so you do a 'FSBO' (For Sale By Owner.) You find a buyer but his credit isn't the greatest so you say "OK, I'll be your banker -- you give me $10K down and then make your monthly payments to me instead of the mortgage company." You figure that's not that risky a deal 'cause if the new owner goes belly up you foreclose and you've got your underlying physical asset, your house, back and you can re-sell to another buyer. Everything seems to be going hunkydory -- the owner makes his monthly payments on schedule for six months. Then he completely misses a payment. No phone call, no nothin'.
You wait a week and then decide to drive over crosstown to make a friendly visit to your debtor. When you arrive at your old street address you find to your amazement WHAT WAS ONCE A NICE LITTLE SURBURBAN BUNGALOW IS NOW NOTHING BUT A HOLE IN THE GROUND SURROUNDED BY A PARTIALLY REMAINING FOUNDATION. After recovering from the initial shock you ring the doorbell of the house next door for a reality check.
"Yes, Joe certainly did a great job of dismantling that house -- saved every piece of lumber and trim, and said he was moving it all up to the mountains somewhere, I forgot which state. Sure was a hard-worker that Joe!"
You were just HooDoo-d out of your "underlying physical asset." Keep this in mind when you read what happened to people who were making gold futures and options deals, using the underlying physical asset, the actual gold, as collateral, as a worst-case guarantee, to protect the risk the other end of the deals were making.
One other comment. Ted's exposi in this article is so razor sharp and profound that I kept wondering why he hasn't been taken out by some hit man working for UknowWho, given how high up his findings track the crimes involved. In an email exchange with Ted (wherein I got his permission to post it here) he acknowledged the thought had passed through his mind, but figured the issues are so technical that most people won't be able to follow his analysis, and thus he poses little threat to the major players involved in the scheme. Hope you can follow his analysis. Here's the cut/paste (with a little intro comment by a friend, Mr. "X")
REmeber my statement that when the dealers were positioned to make a huge sum of money on gold, then the market would move up? The huge sum is to pay for the dealers' huge loss on having *leased* gold which must be returned, then having sold it into the market where it was melted down and impossible to return. Also, not mentioned here is that the dealers knew months in advance about the Sept announcement that 15 European banks would limit gold leases and sales to already existing commitments, as negotiations for that policy announcement took many months, during which Goldman Sachs' boy, Rubin, was U.S. Treasury Secty. Politically, the Clinton Admin is in the center of this. Also remember that in Aug Goldman Sachs bought 85% of the then available gold supply in the market, while telling the mining companies gold was going down. This is a massive fraud, historic in nature, that we are living through. God help our currency systems. Of course, the dollar is going way down anyway due to a trillion of trade deficit and another trillion of domestic debt, all in the last five years. This created the perceived economic prosperity which got Clinton relected in 1996 and defeated his impeachment. Our domestic debt and trade deficit have about quadrupled annually for several years in its growth over what existed annually during the early 1990's.
I ACCUSE In this article, I attempt to raise and level new specific accusations in the ongoing gold and silver manipulation. Before I articulate my new allegations, let me summarize what I've said to date. Starting over three years ago, on a number of public forums, I tried to present my analysis of why gold and silver were so consistently depressed in price, and what the likely outcome of that manipulation would be. Let's face it - there was, and is, widespread awareness that gold and silver have been depressed in price. The only question is whether the low price levels are due to the legitimate forces of supply and demand, or for some other obvious reason. You know where I stand. Tangible commodities can not be in protracted supply/demand deficits at historic low prices without an apparent explanation, this has never happened in the history of the world. The practice of the leasing of physical commodities, in which the underlying collateral of the lease is immediately sold or consumed, has also never existed in the history of the world. That the universally observed price depression of gold and silver has occurred for the exact same 15 year existence of metal leasing, can't possibly be coincidental. You just can't run down inventories of any commodity for years and years without rising prices under what we all know to be are the free markets and the laws of supply and demand. There would have to be an obvious over-riding influence. I've tried to document and explain that the only explanation is leasing/forward selling. That the price of gold exploded at the mere announcement that leasing might end, cements the depressed price/leasing connection. While trying to explain leasing and its effect on the markets, I repeatedly invoked that leasing was fraudulent and manipulative in its very nature. Basically, the manipulation rests with the non-economic, unrecognized sale, not loan, of material. The fraud is the promise of repayment where no repayment is possible. While I am gratified to see leasing/forward selling finally getting the attention it deserves, I am taken back by not one analyst or commentator making the inherent fraud and manipulation connection. That will surely come. What has come is the realization that there is a profound difference between a miner who is hedged and one who isn't. Before Sept 26, that realization was not widespread. Lost in the sudden lurch in price, is the recognition that prior to that date, leasing had manipulated the price to artificially depressed levels for years. In yet another proof of the century's greatest financial fraud, here is the new allegation, the reasons will follow. I claim that some of the leading dealers and financial firms in the metals business are guilty of actions that are fraudulent, manipulative and collusive in nature as defined by the RICO (racketeering) statutes. Those firms include (but are not limited to) Goldman Sachs, American International Group (AIG), JP Morgan, Republic National Bank, Chase Manhattan Bank, and Union Bank Of Switzerland (UBS). Prior to the release of this article, I notified the legal departments of each of these firms of this allegation, giving them a draft of this article and the opportunity to refute my claims. I offered to remove specific reference to their company if they would state in writing that they did not participate in the transactions in question. While I personally made sure that the information was delivered, none chose to respond. While some huffed and puffed when I first informed them of the nature of the material, there was no huffing and puffing once they received it. So be it. I am not a lawyer, but I recognize that you can't publicly libel and defame anyone without repercussions. If what I claim is not true, I expect to feel their wrath. If what I claim is true, I hope they feel the wrath of public condemnation and criminal prosecution. I do not make these serious allegations lightly. The reason I publicly make these serious charges now, is because of just-released third quarter earnings reports by the publicly held mining companies. I am not dealing in what-ifs or innuendoes. I base my claim solely on public information. The information contained in these earnings statements is so damning to the dealers that I have mentioned, that there can be no doubt that what I allege is true. I am confident that I will be able to prove these allegations before an impartial third party. Let's see if I can convince you. Before giving my proof, let me just put the whole scene into proper perspective. That there is such a thing as leasing/forward selling is self-evident. That very many gold mining companies around the globe have embraced the concept of selling years of production forward is self-evident. That this has never happened in history in any other commodity (since the central banks only had precious metals to "lend") is a simple statement of fact. That the metal "lent" is actually sold, is fact. That the dealers serve as the middle-men between the mining companies and the central banks in the leasing/forward selling transaction is fact. That we have seen mining companies go into immediate financial difficulties as a result of the jump in price of their main product is plainly observable. That virtually all of the mining companies who are subject to recently required Financial Accounting Standards Board (FASB) reporting guidelines have all reported deterioration in their mark to market positions as a result of the recent price jump is there for all to see. It is based upon the recent FASB mark to market pronouncements that I base my allegations of racketeering against the above mentioned dealers. While I have long suspected that the dealers were up to their eyeballs in manipulation and fraud in gold and silver, it is only now that I feel I have the proof to make the claim publicly. The proof revolves around the mining companies earnings reports and common sense. Please indulge me as I explain. For the sake of explanation, I want you keep in mind that hundreds of millions of ounces of gold and silver have been forward sold. That this very act has foreclosed on the possibility of big profits to the shareholders of the short selling miners is separate and distinct from my new allegations. That this massive forward selling is at the heart of the manipulation and fraud is intact. I want to add something new. That something new is the sudden outbreak and rash of dangerous option derivatives on the books of the mining companies, compliments of the crooked dealers. FASB pronouncements target these options. It is the required reporting of these options which proves the dealers guilt. For this proof, I'll confine the discussion to four NYSE listed mining companies - Barrick Gold, Newmont Mining, Placer Dome, and Coeur d' Alene, but please remember this is somewhat random and is certainly not confined to these companies - the dealers crooked hand can be seen in hundreds of mining companies. Also, let me state clearly for the record that I have no personal financial interest in any of these companies, nor in any of the dealers I am accusing of criminal activity. Not long or short, not in the past (for at least 10 years anyway), not now, and not in the future. My motivation is to end the manipulation. Two of these companies are American , two (Barrick and Placer) are Canadian. Three are major gold producers, one (Coeur is thought of primarily as a silver producer) is small. Barrick and Placer are major forward sellers, committing years of production (Barrick four years and Placer two plus years of current production). Newmont is considered a light-hedger, Coeur medium - with less than six months production forward sold. Now, let's talk about the options and why the dealers are crooks. It is my understanding that FASB relates to US companies, so we have detailed information for Newmont and Coeur d'Alene. Fortunately, Placer provides detail for its hedge program. Barrick gives the totals, but I have been unable to dig up the details. All four companies have aggressively sold call options on gold. Newmont has sold 2.35 million ounces of long dated (5+ years) calls, equal to about 7 months production. Placer has sold 2 million ounces of long dated calls, or 9 months production. Remember, we're talking about options only - forwards are being ignored in this exercise. Coeur has sold 370 thousand ounces of long dated calls, or over two additional years of production. Barrick has sold 4 million ounces of calls or over one and a quarter years production, in addition to the 14 million ounces sold forward. All told, these four miners sold collectively almost a years worth of their production in calls alone. This in addition to the years and years of production that some have sold in forwards. For the companies on which we have details (excluding Barrick), we see another similarity in their options program. All three bought various short dated put options with the proceeds of the long dated call options sales. (When you buy an option you pay the premium, a sale results in the seller getting the premium). So here we have four separate and distinct companies selling aggressively long dated call options. At least three, and maybe the fourth, bought put options with the proceeds, with an undesirable maturity mismatch - the limited liability purchases expire before the unlimited liability sales expire. Also, due to the long term nature of the calls, we can safely conclude that these are OTC (over the counter) options as distinguished from exchange traded, clearinghouse guaranteed options (like the kind traded on the COMEX). What this means is that the dealers who sold the mining companies these calls, actually purchased the calls from the miners as a principal, rather than just facilitating the transaction as a broker. (We can't tell if the dealers were acting for an in-house proprietary account or a favored client, but the safe bet is the dealers own what was sold to the miners). We can say this about OTC options - they are generally customized and because they are not openly traded are therefore nowhere near as liquid as the exchange traded variety. Let's take a moment and look at one company, Newmont Mining, in detail. For the record, I think Newmont is a fine company and in no way in the same class as, say Barrick Gold, who I have written about before. This does not change the fact that Newmont was defrauded by their bankers in their options transactions. In talking with the company, and from their press releases of Oct 13 and Nov 10 (www.newmont.com), a clear picture emerges as to what I am basically alleging. Leaving their forward sale positions aside, Newmont bought put options for 2.85 million ounces of gold with a less than 2 year maturity and a strike price of $270. The cost of the puts ($37 million) was exactly defrayed by the sale of 2.35 million ounces of naked calls with an almost 10 year maturity and strike prices averaging around $375. This transaction took place in August. It's clear from the record, and Newmont admits, that they sold the calls to pay for the puts. Unfortunately for Newmont, roughly 40% of the puts have already been canceled due to an exotic 'knock-out provision' on the price rise after Sept 26, thereby negating 40% of the very reason that prompted their actions in August. The naked call position, also unfortunately, remains in full force. At the mark to market on Sep 30, Newmont acknowledged a loss of over $50 million on their option position, primarily from the calls increasing in value, but also from the write down and forced abandonment of a big chunk of the puts. While Newmont is quick to point out that this was not a 'cash' loss, and they claim no margin liability, it's hard to imagine how a trade could go so bad so quickly, no matter what the accounting methodology. And with the naked call position still intact, further large mark to market losses loom in the future. Sadly, Newmont now feels married to the trade, not willing, or unable, to spend the cash to buy back a bad short position. Newmont insists that they were not forced into these trades. I agree - they were tricked. Chase is said to be the main dealer, with a piece done by UBS. To put this trade in perspective, Newmont basically received roughly $2 per ounce per year premium, to give away any upside over $375 on 2.35 million ounces of future production for up to 9 years. And 40% of the proceeds from the call sales has gone up in smoke with the put 'knock-out' - but the full call liability remains. And the damage took place in a bit more than a month from when the transaction was established. All for 2 bucks an ounce. What else do we know about these calls in general? Well, we know that most were sold this year. We know that the gold price was mostly at 20 year lows for the bulk of this year - hardly the opportune time to sell calls. We know that, in addition, the volatility premium on gold was at multi-year lows during the time of the option sales. It's hard to imagine a worse time to sell call option premium - when the absolute price of The underlying asset is at record lows, and at the same time, volatility premiums are low. Or conversely, a better time to purchase call options. Some will argue that this is only obvious in hindsight. To that I say nuts - hedging at or below the cost of production is guaranteed to bring disastrous results. The dealers knew, or should have known, this elemental precept. Here's where the common sense comes in. We've just witnessed a time period (up through Sep 26) this year that was a uniquely bad time to sell calls on gold and an especially good time to purchase calls. We know now that call option premiums have exploded after Sep 26, richly rewarding call owners and harshly punishing call sellers. Let me state the obvious - there is no way in God's world that the miners all rushed, for the first time in their history, to the dead wrong side of the equation and the dealers to the home-run right side of the equation by coincidence. This year is the first time that many mining companies ever even did an options trade. I state this clearly - the dealers tricked the miners into going short these calls. It is not possible that the brain-dead miners could have found their way into this universally bad position on their own. It is not possible that the dealers accidentally just found themselves in such a rewarding position. I am stating that Chase and the others are criminally guilty of fraud, collusion, conspiracy, manipulation and price fixing. They should be driven out of the metal business. The RICO statutes were written with their actions in mind. The dealers' behavior is outrageous. But I'm not done. What the dealers did to the miners is beyond the extremes of avarice common to the dealer world. They didn't just intentionally give bad advice to the miners and dump a bad investment in their laps, to profit on a one time basis. The dealers positioned themselves to profit, dollar for dollar, off the miner's misfortune on an ongoing basis. Only when the mining victims have no more blood to drain, like currently at Ashanti and Cambior, do the dealers forget about draining cash and then concentrate on seeking ownership. And let me clarify further what I'm saying. It is not the miners who are in the bad position - it is the shareholders of the miners who have been royally screwed. You see, this is the problem with all this forward and naked call selling. It isn't for the shareholders' protection - it's for management and director job protection. Most mine managements couldn't care less about the real owners. Hedging years of production at unattractive prices is all about management job protection - to keep things rolling. How does the shareholder benefit by the depletion of resources at depressed prices? If prices are low, gold and silver miners should shut down and preserve assets like all other mineral producers do, not participate in uneconomic gimmicks for preserving their own jobs. But this piece isn't about the stupidity or selfishness of mine management, it's about the criminality of the dealers. To that end, let's look at how big this buy put, sell call scam might be, and why the dealers have done this. The evidence suggests that this was a significant campaign on the part of the dealers. On Wall Street, the trade where the sale of one class of options pays for the purchase of another class is usually referred to as an "alligator spread" - one that eats you alive. It is normally done to make a questionable transaction seem more attractive. In the case of the miners buying puts in the first place, the dealers had to convince them that the price was going down big. But I'm sure the miners were reluctant because buying puts requires cold cash, something most miners don't have plenty of. So the dealers did the miners a big favor and explained how, if you sell calls, you get premium. And since we all know the price is going down, what difference does it make if the miners sell calls to pay for the puts? Well the difference is this - when you buy options you only lose the premium at worst. When you sell options (particularly calls in a cheap market) you can lose hundreds, possibly many hundreds, of multiples of the premium in a price rise. This was no accidental alligator spread. This was the con of a lifetime. What the dealers did was trick the miners into a position that guaranteed great wealth to the dealers. Let's look at this transaction from the dealers' side. They are on exactly the opposite side of the miners. The dealers are long calls and short puts. In essence, the dealers picked up what are now valuable call options for free (the purchase of the calls was paid for by the sale of the soon to be worthless puts). No real cash changed hands between the dealers and the miners, it's just that one ended up with a home run position for free, and one ended with a nightmare liability for zero basic consideration. In total, the dealers look like they have picked up around 50-100 million ounces in free, home run gold calls. I repeat, this was no accident. The miners who sold these calls will find that they have bet the company on a fraudulent transaction that is guaranteed to suck every ounce of their blood. Or, to be more correct, the shareholders have just been bled dry. The dealers basically bought out the shareholders for free - that is, the call selling miners have transferred the real owners' interest for zero consideration and without their knowledge. The only factor needed to ratify this evil done deal is the inevitable further price rise in gold and silver. And the dealers are as well positioned for a price rise just as the miners are poorly positioned. With their ill-gotten call option position, the dealers stand to profit for upwards of a hundred million dollars per each one dollar move in gold - and the hapless mining shareholders are on the hook for that tab. It makes no difference whether the calls are held by the dealers or favored clients - the position was established on a systematic and fraudulent basis. It matters not if the dealers' position was assembled as a hedge to protect themselves against massive short obligations in the lease market - the assembly still was based on misrepresentation to the miners. No wonder the push to abolish any oversight in the institutional derivatives market. The whole scene is preposterous - money center banks and insurance companies and blue chip investment firms manipulating the metals market like cheap bucket shops. Get the bullion bank vermin out of these markets and we will have free markets once again. The irony and shame are overwhelming. Innocent shareholders have put their money into companies that they thought that would prosper on higher metals prices. Instead, their investment is being squandered by incompetent management and criminal financial firms due to the recent gold price rise and the certain gold and silver price rise to come. It doesn't get more corrupt than this. I'm tired of waiting for our see-no-evil regulators to take action in an obvious mega fraud. It's not bad enough for the dealers to have manipulated the price of gold and silver for years, now they turn around and make the miners indentured slaves with a sham option transaction, and leave the shareholders completely disenfranchised. The solution isn't there ought to be a law - there already is a strong body of law. The solution is to enforce that law. Let's see how the regulators weasel out of this one, and how the arrogant corrupt dealers pretend that the laws don't apply to them. It's time for the manipulation and shenanigans to end. Shareholders should not rest until mine management has forced the banksters to rescind these fraudulent derivatives and for the dealers to return the stolen loot.
Ted Butler November 22, 1999
Comments, anyone ---
-- William J. Schenker, MD (email@example.com), November 29, 1999
Formatting problem: Ted's article begins with the words, "I ACCUSE In this article...." Sorry for the confusion.
Also here's some followup email excerpts from my friend Mr. "X":
To: "Bill Schenker"
Subject: Fed selling gold calls? Date: Fri, 26 Nov 1999 19:53:50 -0700
Concerning the alleged fraud practiced on the gold mining companies by Goldman Sachs and various huge Wall Street banks and stock brokerage firms (Culprits): I have no direct information, but I wonder if the Fed has not been selling gold call options to reduce the price of gold? I bought options at $.30 per ounce last July, sold at $10, $7 and $6.50, took out cash, and then bought double the original number of contracts at $2.50 and $3. This for $400 strike, June 2000 contracts. I know the risk of digital assets. I don't touch futures, because the margins on winning positions get doubled and tripled, taking out many investors, as happened last fall with the stock market and in Sept with gold. Of course, futures amount to borrowing, which I avoid. I would prefer to buy options contracts that were a couple of years out if they were available, but only the culprits named in the "I Charge" posting can do that. It would be a real joke in my favor if the Fed is manipulating the market and making the price of options contracts temporarily cheap so the Culprits could buy cheaply. Do you suppose that the Culprits might be allowed to buy gold option contracts directly from the Fed, since the banks own the Fed? Might the Banks and others be allowed to buy options from the Treasury, based on whatever portion of the supposed gold supply is not already obligated to the Fed as collateral for the Fed buying U.S. bond indebtedness? I expect the Fed to manipulate in any way to increase the wealth of the Culprits named in the "I Charge" posting, that is why I am so concerned to track the positions of the Culprits. When gold option prices permit I will take out more cash and extend the maturity of the options positions, as I promptly did in Sept, by selling Dec 1999 option contracts. My hunch is that in 1994 when the GOP took over the Congress and the occupant in the WH looked like he would lose the 1996 election, part of his counter offensive was to get a new Treasury Secty from one of the most aggressive of the Wall Street predators, Goldman Sachs, with the understanding that in exchange for Wall Street campaign contributions and suppression of critical news of the Administration from the news media controlled by mega corporations, that our financial system would be run to please the profit takers of Wall Street. Graphs show a pronounced acceleration of price increases in the stock market starting at that time, unsupported by earnings of the companies or growth of the economy. As a consequence of political influence, we can expect zero enforcement action from the Dept of Justice among the Culprit firms. However, in nature we see predators who kill such excessive numbers of their prey that a population crash of the prey occurs, followed by a crash of the predators. In other words, unlimited greed becomes so excessive that the economy is destroyed. Think of $90 trillion of derivatives, of which the Comptroller of the Currency reports that the seven major Wall Street Banks have more than $12 trillion UNHEDGED. What more do brokerages, "hedge funds" and foreigners have unhedged? Their speculations are all predicated on the assumption that the economy is safely controlled by the manipulators. I think Y2K will be a nudge, or China, Japan or Russia will nudge this house of cards maybe by selling dollars for gold, or a terrorist will set something off in a critical spot, or a natural disaster (solar storms?) will be a nudge, but the system is brittle and can collapse with a small nudge. Biology, history and Schumpter (creative destruction) suggest that instability is actually normal. If so, we simply await the collapse. Subsequent to the stock market collapse last fall, it appears the Fed spent upwards of a $ billion on a weekly basis to recapitalize the markets, both by coupon passes (buying U.S. Govt bonds with cash, to monetize the debt) and by having various of the Culprits every other day buy 1,000 contract lots of S & P 500 futures, to monetize the stock market. On a number of days the purchase was 2,000 S & P 500 futures contracts. [This tactic also was followed with S & P 500 stock options starting Thursday after Black Monday in 1987.] This caused a quick, large increase in M3 money supply, for a while a 15% expansion on an annual basis. Now the growth has been down around 6%. This is the real measure of our inflation on a monetary basis. However, the bubble markets bounced and interest rates were kept low. Huge sums of middle class America's money was sucked into the fee-and-commission maw of Wall Street and the stock market's mutual funds. This monetization maneuver only worked because the rest of the world was in deflation, to which we could export the huge increase in our Dollar supply, witness our now having over one trillion in trade deficit since 1994. This house of cards is doomed, inevitably, but we don't know the timing. Incidentally, besides the other abuses, funny accounting is going on in reported earnings. Stock options to employees are not charged to accounting earnings (over-stating earnings), but are still tax deductible (increasing cash flow after taxes) at the expense of diluting preexisting shareholders' values. Further, stock market paper profits are used to eliminate cash contributions otherwise required to pension plans, thus indirectly increasing corporate accounting earnings by the paper stock gains in pension plans. This pyramiding of paper stock gains was characteristic of Japan's stock market bubble in 1988, and we do the same. In 1989-90 Japan's stock market lost 80% of its price. In an example of another type of predation, IBM consistently has been buying back more IBM stock on the open market with borrowed money than its own annual cash earnings, pushing up its own stock price by company demand funded by borrowed money. The stock options of the IBM insiders who made these decisions rocketed in market value, in spite of indifferent company earnings. The Wall Street Journal did not trumpet the details of these activities, wonder who owns the Wall Street Journal and who buys most of the advertizing the WSJ sells? All these contribute to the house of cards and the predation practiced by Wall Street. Have a good day. X
To: "Bill Schenker"
Subject: Re: Fed selling gold calls? Date: Sat, 27 Nov 1999 14:38:26 -0700
The information about the coupon passes, etc., comes from a news service for stock brokers that cost me $700 per year, so I did not renew it last month. I checked the accuracy by having my broker at Lind Waldock check with their people on the trading floor to see if these transactions really were happening as described, and they were.
I have been careful of my language due to my career as a CPA and my vulnerability to suit. I have testified publicly about IRS abuses so I do not really want to volunteer to be on another list. The manner in which I wrote suggests credibility compared to much on the internet, so I don't think my name would add much. If I were to take attribution I suppose I should get permission of the copyrighted "inside" news service since I am using their information. Publish or forward it anywhere you wish, but please do eliminate my name.
I usually do not read internet discussions because so much is off point, instead relying on news sources to point out the most important news. Please let me know the thread you will use. I replied in a similar vein on a utilities thread last spring, Roleigh Martin I think, but received only one or two responses. I think the reason is that most techies do not relate to the financial field.
Best to you, X
The plot thickens,
-- William J. Schenker, MD (firstname.lastname@example.org), November 29, 1999.
Talking to a ham buddy of mine tonight, who mentioned he was in Switzerland last April. Talking to a banker person there he mentioned the gold contract leasing fraud going on, and the banker said, "Oh, yes, we know all about it --- the biggest crime in the financial market this century."
-- William J. Schenker, MD (email@example.com), November 29, 1999.
From the usa gold forum
Aristotle (11/22/99; 14:09:18MDT - Msg ID:19520) To Ulysses and SteveH, and others Ulysses, thanks for the encouraging words. Alaways appreciated.
Steve, thanks for the providing your additional comments. I liked your point here--"If these folks did threaten or did lower credit ratings to miners unless they hedged and then become owners upon hedging debacles, I would have to side with Ted. Clearly that is a conflict of interest or extortion: you pick." Truly a valid issue. I can see it going either way. It is too easy to appreciate the bank's concern that Gold prices looked to have no where to go but down. It would be quite understandable for them to be nervous about the future viability of a business that owed them money and would take necesary steps to persuade the mining co to take appropriate action to mitigate against a prolonged condition of declining prices. As Gold prices reached production levels, it would be quite understandable for this pressure to heat up. That's the innocent view. Where corruption could be claimed is if these banks truly new the price would rebound soon, and if they themselves took the other side of the mining co's hedges. The simple fact that these banks may have brokered the hedging deals means nothing. We would really need to see who took the counterparty position to the miners hedges since it was the counterparty who stood to make the big gains during the price rebound, not the hedge broker (bank).
Could you further explain this comment please? "Ted is again correct that to use the term lease for a loan is, at best, deceitful, and at worst fraudulent." Are you claiming that the distinction in terms is important, and if so, what is the distinction? Why is it important? A person simply needs to adapt and roll with the language. Just as we know it's inappropriate for a President to lie, none of us have a problem with sleeping dogs who do it. Similarly, leasing a car should immediately be recognized and understood to be incomparable to leasing Gold.
Personally, it doesn't matter to me whether it's called a lease or a loan--the mechanics of the deal remain the same. I could strike a specialized deal with a banker in Peru to borrow and repay anything (currency, metal, fig trees, etc) under carefully contracted conditions. That I have a right to do so shouldn't be in question, and shouldn't be of concern or consequence to anyone outside of the tight group that entered into this contract--me as the borrower, the bank who brokered the deal, and the party who risked the item it is that I borrowed under the hope that he would receive interest for his bravery. Whether we call our private affair a loan, a lease, or apple pie should be of even lesser consequence than nature of the deal itself.
As I've tried to make clear so many times now, the "fraud" is in the notion perpetrated by the lending institution that the borrower and lender (the one who originally deposited the money/Gold) may both at the same time believe they have use of this same money/Gold. This is completely different that the healthy situation where your brother borrows $100, which you hand to him out of your wallet. There is no artificial expansion of the money (or Gold) supply because you are out of that cash until it is returned, at which point your brother would then be out of that cash. Either one can have it, but not both.
Ted Butler is a person of exceptional energy. That's why I'd love to see him focus his efforts toward some of these issues we've touched on. Arguing the semantics of "loan" versus "lease" won't make tomorrow a better day for anyone, but educating the masses of the seemingly simple fact that a Gold coin can't be in two pockets at once, although banking practices thrive on creating that exact illusion. That's what propelled us into fiat currencies. Mass produceable dollars made it easy to physically "back" the claims and maintain the illusion. In the old days, bank runs--and the inevitable shortfall of Gold coins--threatened the continued tolerance of frational reserve banking.
As far as the banks are concerned, they are thrilled that most people are contentedly using an inferior currency--fiat dollars. However, there remains a sector of important players (and really little guys like me) who are not so deceived, and we use Gold as our monetary asset. Anyone is free to join our ranks. Small guys like me are often content with Gold's natural stability and its ratcheting up to new plateaus--as we've already seen several times since 1971 when the world's currency went totally to floating paper. Here's the key point to keep in mind--these price rises happened even as governments and the IMF were working their very best magic to keep Gold off of center stage, maintaining the illusion that it was no longer in important use in the monetary system. As discussed here in days past, we all know the truth of the matter. The vital point is now to recognize that this governmental effort at maintaining the false illusion is being wound down. We have official 15 European central banks and the most recent Nobel laureate in Economics making pronouncements to that effect. We also have the IMF abandoning their lost cause, and moving to mark their Gold reserves to market prices, whatever those market prices might become, up from their old illusion of about $47 per ounce as carried all these years on their books (35 Special Drawing Rights to be exact).
Further, we have clear evidence that the fractional reserves of the Gold sector of banking is threatened. That's why we have seen the Bank of England do a seemingly irrational thing--selling Gold at the bottom of the market. It's a bailout only different than the Fed's orchestrated bailout of LTCM in the regard that only physical Gold could satisfy the needs of the bailout. There's no point in standing around smiling when you see this ahead of the masses--that physical Gold has no substitute and is in imminent threat of forever separating from these illusionary low prices. I'd suggest you calmly walk to "Gold teller" and get your desired share before the lines form, or worse, before the situation changes without any such Gold-rush warning signs at all. It doesn't take panicky masses for Gold to take that next leg up.
Gold. Get you some. ---Aristotle
-- dave (firstname.lastname@example.org), November 29, 1999.
---an amazingly good post and thread. It's only off topic to those who can't see at least part of the big picture. Thank you all.
-- zog (email@example.com), November 29, 1999.
Thanks to Gary North, I bought gold coins for Y2K. I could not of timed it any better. I bought French Roosters when Gold was at $260 an ounce in August. A week later it goes up to $330 an ounce. What was scary was no one in the media, CNN or the SO Called experts brought it up. The price of Gold had not seen such an increase in nearly 15 years. If Gold had rallied the big institutions that had shorted Gold would have been screwed. What a coincidence that the Kuwati's decided to sell 47 Million ounces shortly there after. Greenspan and the boys must have called in there I Owe You's for bailing them out during the Iraq War. Welcome to the New World Order.
-- otis (firstname.lastname@example.org), November 29, 1999.
Here's another article, somewhat long (again) -- but sheds some more light and shows more interconnections of 'the web we weave.'
11:55p EST Thursday, December 2, 1999
Dear Friend of GATA and Gold:
Our old friend Reginald H. Howe, the Harvard-trained lawyer and former mining company executive, sounds more like GATA than GATA itself in another brilliant essay he has posted at his web site, www.goldensextant.com. I think that Reg may get closer to anyone else to what is really happening behind government doors on both sides of the Atlantic.
Please post this as seems useful.
CHRIS POWELL, Secretary Gold Anti-Trust Action Committee Inc.
* * *
Fed Options: The Plot Thickens
By Reginald H. Howe www.goldensextant.com December 1, 1999
My commentary of September 20 suggested the possibility that the Bank of England's gold sales were triggered by a plea from Washington aimed at rescuing the Fed from potential big losses on the writing of gold call options. Nothing that has happened since is inconsistent with this suggestion, and what new evidence there is supports it.
But to go back, an initial question -- on which I accepted the opinion of others -- was whether the Fed has statutory authority to write (sell) call options on gold. In my opinion, it clearly does. What is now codified as 12 U.S.C. Section 354 provides in relevant part:
"Every Federal reserve bank shall have power to deal in gold coin and bullion at home or abroad, to make loans thereon, exchange federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security...."
This provision, included in the original Federal Reserve Act (Dec. 23, 1913, c. 6, s. 14(a), 38 Stat. 264), has remained unchanged and in force ever since. While it does not specifically mention writing call options, the broad grant of authority "to deal" in gold and to make or receive gold loans can readily be construed to include writing or purchasing options.
This authority, it should be noted, addresses only what the Fed can do for its own account. It has nothing whatever to do with buying, selling, or otherwise dealing with the official gold reserves of the United States, which are under the control of the secretary of the treasury acting with the approval of the president (31 U.S.C. ss. 5116-5118). Whether the Fed's authority to deal in gold for its own account may in some respects be limited by other statutes is a question that I will leave to others, but under Section 6a(d) of the Commodity Futures Trading Act, any transactions for its account are expressly exempt from trading or position limits.
Testifying in July 1998 before the House Banking Committee looking into the regulation of over-the- counter derivatives, Fed Chairman Alan Greenspan distinguished financial derivatives from agricultural derivatives, saying that it would be impossible to corner a market in financial futures where the underlying asset (e.g., a paper currency) is of unlimited supply. The same point, he continued, also applied to certain commodity derivatives where the supply was also very large, such as oil.
Greenspan further volunteered: "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the- counter, where central banks stand ready to lease gold in increasing quantities should the price rise."
In other words, the Fed Chairman opposed any action by Congress aimed at greater regulation of over-the- counter derivatives, specifically including gold derivatives. One reason -- left unstated -- for this opposition may well have been concern that any new legislation might interfere with the Fed's own activities in the derivatives markets, particularly in the gold area.
Why might the Fed have engaged in writing call options on gold?
The Fed's immediate purpose and effect would be to facilitate gold leasing by enabling the bullion banks to hedge more easily short positions resulting from the sale of leased gold. Indeed, as the so-called gold carry trade grew, demand for this sort of hedging by bullion banks likely strengthened, since here, unlike in mining finance, their customers were not themselves producers of gold. More generally, by thus exercising control over the amount of leasing and resulting short sales, the Fed could have achieved considerable influence over the gold price.
Indeed, perhaps it was just this kind of activity that led a former Fed governor to claim on CNN's "Moneyline" in October 1998: "The Fed has precise control over the price of gold and therefore over commodities such as crude oil. No inflation, therefore no need to raise rates."
A recent analysis by Ted Butler faults the Commodities Futures Trading Commission for not taking action against certain bullion bankers over the option strategies foisted on certain mining companies. The basic strategy to which Butler refers is the sale by mining companies of long-dated call options to finance the purchase of relatively short-dated put options -- that is, the strategy that crippled Ashanti and Cambior. In all that has been written or disclosed about this strategy in recent weeks, two facts stand out.
First, the risks were not fully or widely understood.
Second, the strategy experienced a surge in use right after announcement of the Bank of England's gold sales program.
No doubt, as many have suggested, this sudden spurt of options hedging reflected the gloom that descended over the gold market in the wake of the Band of England's announcement. But to the extent that the bullion banks actively pushed the strategy onto their mining customers, it may also have represented an effort by them to replace Fed call options that were in process of drying up.
Efforts at market manipulation almost always come to a bad end because ultimately market fundamentals will assert themselves. Central bankers tend to have a better appreciation of this than politicians, which is almost certainly why the Bank of England's gold sales program was ordered by the British government over the objection of bank officials. If the BOE's gold sales were originally intended to rescue the Fed from a losing options position as gold threatened to move over $300/oz. last May, it has probably largely achieved that narrow goal by now. But the cost has been enormous, not only in British gold but also in undermining continued central bank control of the gold price.
Neither the BOE nor its political masters foresaw that their attack on gold would trigger the Washington Agreement, announced Sept. 26, 1999, which overnight caused an almost complete reversal in negative attitudes toward gold created by several years of highly publicized central bank sales and huge increases in their gold leasing activities.
The resulting spikes in the gold price and in already high lease rates effectively killed the gold carry trade and forced far more prudent use of hedging by mining companies. While the troubles of certain mining companies caught wrong-footed have been widely noted, the damage to the bullion banks themselves, not to mention certain hedge funds, has yet to be fully disclosed.
The Bank of England's reputation for prudent oversight of the international gold market, long based in London, is badly tarnished. Kuwait's release of its entire official gold reserves for loan through the BOE has only underscored the parlous condition into which that market has fallen.
The BOE itself now appears locked into a gold sales program that amounts to a fire sale of British gold, so much so that two of the world's largest mining companies have successfully used the last two auctions to cover some of their own forward sales. Whether wholly unsubstantiated or floated as a trial balloon, the mere rumor -- quickly denied -- that the BOE might cancel future planned gold sales caused an almost immediate $10/oz. spike in the gold price a couple of weeks ago. Charges fly that the BOE's sales are part of a government plot to join the European Monetary Union. If so, it's a pretty dumb plot.
By not joining the first round of the EMU, Britain regained possession of 173 metric tons of gold previously deposited with the EMI (predecessor to the EMU) and increased its total gold reserves to 715 tons, which its gold sales program when completed will reduce to around 300 tons. Should Britain join the EMU, it will probably have to allocate about 140 tons to the European Central Bank, leaving national gold reserves of around 160 tons. Britain would thus be the only major EMU member without substantial gold reserves, and thus the only one not to benefit from any future upward revaluation of gold.
Beyond these direct consequences, some believe that the Fed responded to the October gold banking crisis and presumed problems of the bullion banks by adding liquidity to the banking system, thus providing much of the fuel for the November stock market rally. In this connection, it is worth noting that the bullion banks with apparently the greatest exposure to Ashanti's problems are among those most often associated with suspected Fed activities in the gold market.
So too the question of whether and to what extent short gold positions may have played a role in last year's Long-Term Capital Management affair remains shrouded in mystery.
What does appear, however, is that the Fed is very reluctant to allow the U.S. stock market to progress from a correction into a true bear market, adding credence to the growing belief that the stock market, however overvalued, is too big and too important to be allowed to fail.
There is a certain irony in the fact that since Alan Greenspan assured Congress in July 1998 that over-the- counter financial and gold derivatives required no further regulation, these very same derivatives have twice presented the Fed with an opportunity to allow a stock market correction to turn into a bear market for which it could escape much of the blame. In each case the Fed may properly have been concerned that the decline might cascade into a disorderly rout. But by intervening to head off these stock market declines, the Fed may also have undercut the credibility of its own interest rate weapon. Searching for a way to freeze the bubble or at least to let the air out slowly, and unwilling to let market forces have their way, the Fed has steered the whole American economy into uncharted waters.
The Fed was founded to stabilize the gold value of the dollar on the theory that central banking could achieve this goal better than free banking. Having utterly botched that mission, it has accepted a new one: guardian of the American economy's paper wealth.
The Fed has never had nor will it ever have "precise control" over the gold price. The question now is whether its control over the stock market will prove equally illusory. No doubt, should its traditional monetary tools or suspected derivatives activities appear inadequate to the task, the Fed will unveil some new weapon. But if the Bank of England ever announces a plan to achieve greater diversification of its dollar assets by investing proceeds from its gold sales in U.S. blue chip stocks, beware. For if the first rule of investing is "don't fight the Fed," the second is "bet against the Bank of England."
-- William J. Schenker, MD (email@example.com), December 05, 1999.