Henry's "cards on the table" Yeah, RIGHT. NOT!!!!!
Here's Henry's post to you this weekend: .."A little clarification on my background. First, I traded currency and bond derivatives. I have never traded gold directly and am not part of the gold market. As an interest rate derivative trader I got involved with the lease market in the 80s and have experience directly with trading the interest rate risk on leases ever since. But I have no direct professional exposure to trading spot gold. I reported some comments earlier that were observations from my friends in the markets. I have no direct knowledge as to whether they are right but I trust them and my perception of the way gold is trading jives with what they are saying.
#reply-11424095
Now, Richard, square that SPIN with this UNEDITED jewel from my harddrive: (my questions to him are bolded)
To: ole 49r (who wrote...)
From: Henry Volquardsen
Wednesday, Feb 3 1999 2:35PM ET
O/49er
Sorry to be so long in responding. Things have been very hectic and its been tough to
focus.
I will repost your question in mold in order to refresh you on the original question.
1) Why was it important, i.e., what was the primary motivation, to do the hard
work to which you refer in an earlier message, "Fwiw we spent a long time trying to educate the CBs to look at leases this way."
Just good business practice. We make money on transactional volume i.e. earning the
bid/offer spread. We saw this as an opportunity to build an ongoing business with
decent volumes. There was also a need on both sides. Producers who needed an
opportunity to hedge and central bankers who were concerned with their return on
assets. We felt we could match up both needs. At that point it became an issue of
educating both sides to the possibilities. BTW it is my opinion that by introducing the
gold lease product to central banks we actually increased their propensity to hold gold.
The reason for this being that now that they could actually earn a return on the asset
they could more easily justify holding it.
It also encourages mining. By giving producers a hedge it makes it more of a
predictable business and less of a pure gamble. This encourages better business
practices.
There also is an opinion among a number of gold bugs that there is something insidious
about gold leases and it is part of a 'plot' to supress gold prices. Nothing could be
further from the truth. This is an important part of our business. We earn a lot of profit
from gold trading. If the price collapsed so would our margins. We are just as
interested as anyone in the market prospering.
2) Was it purely transactional costs/profit motive on the part of you players?
Was it a directive from the EURO to be players to get the currency launched?
I assume the first question is also related to the Euro. The motivation was entirely
transactional. There was never a directive from the Euro authorities and in fact there
was no way they could force us. We supported Euro trading because it made good
business sense for us. Personally I believe that 2 or 3 years from now the Euro will
have some real teething problems but that is irrelevant from our current perspective.
The only thing that matters is that there is a new currency, people were going to use it
and therefore there would be trading opportunities. We responded entirely to the
market.
3) Doesn't the bank have all KINDS of non-performing assets on their balance
sheets? Such as gov't mandated cash reserves at all times, and considerable
real estate just for starters, let alone employee pension obligations on their
books?
Is this referring to the central banks? And why they would be concerned about the
return on gold when they have other low return assets? If so, yes they do have assets
that generate low returns. But if anything that only increases the pressure to earn a
return on those assets on which they can earn a return.
This gold, as I understand it, is for all intents and purposes...gone, unavailable
for collateral in international circles.
Yes the actual gold that is leased is often consummed but the CBs retain the gold as an
asset because they have the obligation from the counterpart to replace the gold. The
CBs are very credit sensitive and for the most part only deal with AAA firms. So yes
the gold is gone but they have JP Morgan's (for example) commitment to replace the
gold. And the AAA counterparts have more than sufficient capital to cover the gold if
need be when the lease matures.
4) Doesn't this leave those very central bankers, vulnerable to virtual
holographic gold bars, for all intents and purposes in those vaults?
No. There is no holographic gold. As I pointed out above they have a promissory
note. They know the gold has been consummed but they also know the counterpart is
more than capable of supplying the gold when need be.
How can gold be basically considered an electronic entry when it's very
tangibility is the glue that holds the global banking system together?
How can a gold future be considered a gold equivalent? The lease is just a gold
derivative same as a future. The CBs know it does not represent physical gold but the
promise to deliver gold. It then becomes an issue of credit risk.
5) If it was such a relic, why was it so darned important to "tweak it" inorder
to improve D/A ratios to get EU launched...
It wasn't their gold holdings they were trying to tweak, it was the level of debt. They
needed to reduce debt as a percentage of GDP below a certain level. By selling gold
they could take the cash and pay off debt thereby lowering their debt ratio. They could
have accomplished the same thing by selling nationalized industries instead of gold. It
was not the asset they were selling that was the issue. It was what they were using the
proceeds for.
I love a good idea as much as the next guy, but... this leased gold, for all
practical purposes has been consumed, quite literally in the world of jewellery,
coinage and electronic applications just to name the top 3 usages.
Yes it has been consumed but it gets replaced. The banks who relend the gold lend it
pretty tight credit standards to producers. When they produce the gold they use it to
pay of the loan. So in effect all that happens is that you front load the sale of gold that
is to be produced. So the real question becomes how much production has been sold
and if at some point a shortage will develop. Total CB gold leases are currently equal
to about 1 years supply, 4,000 tonnes. This total represents about 11% of total CB
gold assets. As production pays off the loans the CB asset remains at it's previous level
and they will be able to relend that gold. So where as technically you are correct in that
the gold is consummed the reality is that when put in context of the way the market
functions all that has happened is that one years supply has been presold and
consummed.
Does that change the equilibrium and price dynamics? That is more of a philosophical
question. By own feeling is probably not. Most commodity markets function with a
significant portion of future production presold. The only reason people get concerned
that it happens with gold is because many people view gold in an emotional context.
This is not unusual for a commodity market.
6) How can it still be on the "books" as an asset, when it is for all intents and
purposes GONE?
Technically the gold is no longer an asset. It is the promissory note that is now the
asset. Think of it the context of cash. You think of the dollars in your pocket as an
asset. If you took that money and lent it to General Motors what would they do with
it? They would spend (consume) it. What would you have? You would have a promise
from them to repay you those dollars at some point in the future. What you consider
that bond as any less of an asset than the cash simply because GM had already
consummed the specific dollars you gave them?
I hope these answers help. I really am sorry the response took so long. I usually have a
back log of PMs to respond to and sometimes it takes a while. I do, however, enjoy
answering these questions so please do not hesitate to ask questions in the future.
Warmest regards,
Henry
***************
Interesting, yes? Not near as interesting, (I'm willing to bet) as Henry's explanation is going to be.... unless he's going to ignore this one as well.
I've got a harddrive chock full of other interesting Henry Utterances re: his PERSONAL and PROFESSIONAL role in the gold leasing game.
I don't know 'bout you, Richard, but I get bored with those who SPIN ...unless they're spinning on a short rope from a tall tree. THEN I FIND THE WHOLE "SPINNING SPECTER" QUITE RIVETING.
Prodigy's "Ole Prospector" and SI's O/49r and YOU, Richard Harmon, YOUR Friend!
Aside to Paul Ross who demanded publically that I apologize to dear old HENRY: "Don't hold your breath, Paul." |
