(GATA News) ...to ask the rules governing the behaviour of consenting adults...
By Anthony Hilton
City Editor
Evening Standard
November 23, 1999
A few years back Merrill Lynch in the United States made a lot of money
selling derivatives to the financial controller of Orange County,
a municipal authority sandwiched appropriately enough between Los Angeles
and Disneyland. The problem with these derivatives was that they went
the wrong way and Orange County was effectively bankrupted by the exposure.
Subsequently there was much huffing and puffing by regulators and,
though no wrongdoing was admitted by Merrill Lynch that I can recall,
there was a widely- held view that the firm had been a bit overzealous
in selling sophisticated financial products to a relatively
unsophisticated local authority.
Orange County is being reenacted right now in London.
This time, the derivatives that have done the damage are gold futures
and options.
The sellers were the investing houses. The unsophisticated investors
were mining companies. No one has a definitive list of the firms
principally involved in the selling but the names that crop up most
frequently in industry newsletters include Goldman Sachs, Chase
Manhattan, Republic National Bank, American International Group,
JP Morgan, and UBS. The miners that have been caught allegedly
include Ashanti, Newmont, Barrick, and Placer Dome.
The financial derivatives these companies bought have at worst
bankrupted them and at best mortgaged their future production and
profits for months and years to come. Clearly, when the managements
bought these products they did not anticipate this outcome. But the
question is whether, as in the Orange County case, they had no idea that
such a disastrous outcome was possible, or whether they went knowingly
into the risk.
If the miners were ignorant, it raises the question of whether they were
being sold appropriate products. One then has to ask whether the rules
governing the behaviour of consenting adults in the wholesale markets
should apply to the investing houses, or whether they should meet more
demanding regulatory standards for dealing with the unsophisticated.
Regulators in London are, publicly at least, pretending nothing untoward
has happened. Good luck to them. But they should remember Murphy's Law.
This problem will not go away and will probably boil over just as the
Financial Services and Markets Bill, designed to legitimise the
financial Services Authority and protect the City from scandals,
is at a crucial stage in the Commons. The reaction of the Government
and the Opposition if and when that happens will be marvellous to behold,
though I doubt it will do the City much good.
The Long View - Barry Riley - Financial Times ; 27-Nov-1999
Battle of the bugs
Fringe Freddie can be a pest. But might he just be right about gold ?
Normally, I reckon that my Christmas party circuit is a Freddie-free
zone, but these are risky times. The hosts one evening this week seemed
to be a respectable firm of consultants, but either they had actually
invited Fringe Freddie or security had failed to screen him out at the
door. Champagne in hand, he advanced towards me. "Fancy seeing you
here!" he boomed. "I thought you would be spending all your time
writing articles early to beat the Y2K problem. But there's really
only one column that needs writing - about gold."
My heart sank. So, Freddie had acquired yet another investment passion,
this time for the yellow metal. "Don't tell me you are disillusioned
with bonds already," I responded. "When we met last year, you were
heavily into 2 1/2 per cent Consols.
"I know bonds have lost money in 1999 - but then, the gold bullion price
has advanced meanwhile only from Dollars 288 to Dollars 297 an ounce.
Gold may be glistening but it's not exactly blistering."
"Bonds?" snapped Freddie. "How boring!" He never remembered anything
about his mistakes but was always totally obsessed with his latest
craze. His voice rose to a familiar high pitch. "Gold has bounced up
15 per cent since it bottomed out at Dollars 255 in September. Now, with
people about to panic out of the US dollar, it will soar to Dollars 600
at least. And you've still got time to get in."
It was true, I conceded, that there had been a brief frenzy in the
bullion market late in September. But the gold price had stabilized
again and no new hedge book disasters had emerged. In fact, it was
healthy that the excessive overhang of forward selling had been cut
back.
Yet, some of the negative long-run factors, such as a decline in mining
costs, still applied. As for the dollar, there were absolutely no signs
of panic and it had bounced strongly back against the euro, for example.
"Don't be deceived by the central bankers' fraudulent antics," said
Freddie. "The US Federal Reserve, aided by the Bank of England, has been
manipulating gold again. The Americans are burying the world in dollars
through a trade deficit of Dollars 300bn (?186bn) a year, rising fast.
They're desperate to destroy the image of gold as a sounder long-run
store of value.
"The UK was paraded as Washington's stooge to make a series of high-profile
bullion sales totaling 415 tonnes, more than half our total stock,
and undermine the price. But the continental European central banks
rebelled in the late summer when they saw the value of their hoard
of 12,500 tonnes going down fast.
"They cut off the supply of metal to the market and undermined the vast
carry trade which was based on loaned gold. The Fed got a bloody nose
when it had to bail out the New York bullion sharks."
I protested that Freddie was being bamboozled by propaganda. The mining
industry had become desperate to restore its fortunes. Meanwhile, the
semi-religious cranks who were so seduced by the glamour and long
history of bullion had become vocal again.
This, though, was an age of globalization, information technology and
electronic money. We should not even consider retreating to the quaint
world of gold, in which heavy yellow metal was shuffled pointlesslynot
even consider retreating to the quain
"It's you who should watch out for propaganda, dear boy," answered
Freddie. "Politicians peddling worthless fiat money have for centuries
wanted to eliminate the honest competition from gold. But gold always
triumphs in the end. Bretton Woods lasted only 30 years.
"This time around, only an explosion of credit creation has kept the
US expansion going, and it's pure luck that the resulting inflation
has been confined to asset prices so far. But Alan Greenspan's hedge fund
supporters, greedily shorting gold until they were crunched by the
Europeans, have let him down by creating a crisis, just as the
Meriwether bunch did in the bond market last year."
It was true, I conceded, that the situation in bullion had become quite
murky. It had been curious to see mining bosses pleading publicly to the
Bank of England for honesty about market manipulation. Some hope!
And there was a bizarre contradiction in central banking attitudes.
The US Federal Reserve, in particular, had wanted to keep the gold price
low in order to maintain faith in the dollar and other paper currencies.
On the other hand, central banks around the globe also were huge gold
investors, to the tune of 30,000 tonnes worth nearly Dollars 300bn,
which seemed a pointless exercise if the price had to go down.
Of course, many gold bugs were convinced that the US didn't actually own
any gold at all. Fort Knox had been turned over to the custody business.
Freddie grabbed another glass of champagne and grinned. "You are seeing
sense after all," he said, condescendingly. "Time has almost run out for
the Fed. The most risky sectors of the Wall Street market have been
racing up again because speculators have understood that the Fed dares
not tighten money enough.
"But the valuations are completely insane and a market crash is getting
horribly close. That's when the rush out of paper into gold will happen,
just as in 1929."
I looked around anxiously for an escape route. "Perhaps I ought to get
back to work," I muttered, turning towards the door. "Even if I escape
the effects of the millennium bug, I do need to worry about gold bugs!"
Copyright The Financial Times Limited
Bill Murphy,
Chairman, Gold Anti Trust Action (GATA) gata.org
Le Patron, Le Metropole Cafe lemetropolecafe.com |
