Most Shorts Not Covered Yet.................
NEW YORK, Oct 7 (Reuters) - The world gold industry is anticipating huge losses after
the long-depressed metal's recent price jump but it will take time to sift through the
damaged balance sheets of bullion bears to see if the worst fears are borne out.
The fallout from the textbook ``short squeeze' following an explosive $59 gold rally last
week should emerge anecdotally, in third-quarter corporate financial statements or as players simply drop from sight, market
watchers said.
``Months from now you are going to see people restructuring departments and getting out of the business. But you are not
going to know anything until these things happen,' predicted one chief dealer at a bullion bank.
``You just don't know what to believe any longer. There is hardly a name I haven't heard,' he said.
HEAVY SHORT-SELLERS WRONG-FOOTED BY EUROPEAN CENTRAL BANKS
Gold rocketed over the $300 an ounce threshold last Tuesday, the biggest jump in almost two decades, after European central
banks stunned the market by announcing a cap on fresh sales and lending of monetary bullion for five years.
The news, at the end of International Monetary Fund meetings in Washington, lifted the major weight from a supply-heavy
market that struck 20-year lows of $251.70 in August on assumptions that the world would stay awash in gold.
The rally, just days before the close of the financial accounting period, pushed prices to fresh two-year highs this week as
more market players who had sold large amounts of futures contracts bought back contracts to cut growing losses.
Many bullion-trading banks, and customers like miners and speculators, got caught invested the wrong way, after months of
selling forward and using complicated and risky gold options to bet prices would fall below the 20-year low set in August.
``Everbody is talking about people getting hurt in this market,' said another bullion bank dealer. ``I think there have been
people that have probably gotten hurt, like people who have credit exposure (to these gold customers). But nothing is
crystalized yet so nobody really knows what the damage is going to be.'
COMMERCIAL BANKS EXPOSURE UNCERTAIN
On Wall Street, references to gold-related earnings hits, if any, would probably be obscured under general trading results in
third-quarter filings of commercial banks, due in about two weeks. But bullion operations are small sidelines for most big
banks, analysts said.
``If they had weakness in trading results they might come in and say broadly there was a move down that was caused by
matching their commodity risks,' said Stephen Biggar, bank analyst at Standard & Poor's equity group.
``But I don't think you'd get (individual market) exposures,' he added. ``All that stuff they keep fairly close to the vest for
competitive reasons.'
CAUGHT IN A TANGLED WEB OF OPTIONS
Booking a short gold position is usually done by borrowing metal from a bullion dealer or central bank then selling it forward,
expecting to buy it back cheaper at a later date and repay the loan at a profit.
But many ``shorted' the market via customized options, derivative contracts they may have barely understood, analysts said.
These can expose investors to ghastly losses, being tricky to manage, very illiquid and apt to magnify moves of the underlying
investment -- in this case gold.
Traders said this week's continued gold strength showed the market was still positioned the wrong way. Mining companies
were now acknowledging to having hedged or sold years of future production, leaving little leeway to take advantage of the
sudden spot price rise -- and big paper losses.
For example, Ghana's Ashanti Goldfields Co Ltd (NYSE:ASL - news) faces a liquidity crisis and has become a takeover
target for the world's biggest miners. On Wednesday its hedging counterparties agreed not to make margin calls on options
issued to Ashanti, as they all seek a way out of the jam.
The Toronto share price of Canada's Cambior Inc (Toronto:CBJ.TO - news) lost more than 40 percent on Wednesday after it
revealed that it had sold forward 2.7 million troy ounces of gold through the year 2007, compared to total diggings of 638,000
ounces in 1998.
Based on estimates of bullion lending by central banks, hedged and speculative ``shorts' may total from 4,000 to 8,000 metric
tonnes.
In comparison, global mine output was 2,600 tonnes in 1998, according to consulting service Gold Fields Mineral Services.
SORTING OUT THE MELEE, WITH FUNDS EYED
COMEX dealers said transaction records this week were still not all sorted out for the exhange to clear trades frantically
agreed to during the melee and begin arbitration of disputes and compliance procedures if necessary.
``If a firm becomes an inactive member firm that would appear in our newsletter a month later,' said a COMEX
spokeswoman.
Well-known hedge funds -- pools of speculative capital -- have been grist for the rumor mill about gold losses, especially those
which experienced high-profile losses during last fall's global market turmoil.
Long-Term Capital Management, the hedge fund bailed out a year ago by a consortium guided by the U.S. Federal Reserve,
has been dogged this year with talk that it was short several hundred tons of gold.
But a spokesman told Reuters: ``Long-Term has never had any position in gold, in any derivative, in anything--zero...I dont
even think they followed the price in the newspaper.'
Spot gold bullion Thursday afternoon was at $322.30/5.30 an ounce, down from its 23-month high of $338 on Tuesday. |
