Rumblings in the Gold Market
By Ron Taylor
8/16/2002 2:13 PM ET
The gold story is getting out. There have been two recent articles, one by John Waggoner in the USA Today and another today by Thom Calandra of CBS MarketWatch that discusses the rumored bank and government intervention in the gold market. For a while now, there have been rumblings that in an effort to support the U.S. Dollar during the Clinton administration, the price of gold was suppressed by massive swap transactions conducted by the major U.S. banks (specifically J.P. Morgan (JPM: sentiment, chart, options) , Morgan Stanley Dean Witter (MWD: sentiment, chart, options) , Goldman Sachs (GS: sentiment, chart, options) , and a host of other usual suspects).
According to Bill Murphy, editor of LeMetropleCafe and founder of the Gold Anti-Trust Action Comittee (www.gata.org), JPM is a major culprit. The company has massive derivative exposure consisting in some part of these gold swaps to the tune of $23 trillion. I think it is safe to say that if even a fraction of this story is true, JPM could be in a severe pickle.
In fact, the ratings agencies are starting to look into just these issues. I believe the massive derivative exposure along with the banks deteriorating loan portfolios (think telecom debt, Enron, Worldcom, Argentina, Brazil, etc.) prompted Standard & Poors to place some of the major banks and brokers on credit watch negative. My colleague Bill Bruns recently wrote an observation on just this subject.
It seems that market forces are also lending some credence to this story. Shares of JPM have fallen 32 percent year-to-date relative to the S&P 500 Index (SPX – 930.30) decline of 19 percent, and the Philadelphia Banking Index's (BKX-779.71) year to date decline of 10%. Likewise, the price of gold has rallied nearly 13 percent year-to-date. This price action in combination with the recent credit downgrade by Standard & Poors seems to lend some support to the gold rumors.
If you are interested in reading more about this subject, below are some links that I have provided that will go into further detail about this developing situation. Included below are links to the recent USA Today article, and Thom Calandra's article mentioned above. These two articles in particular give a clearer picture of the banks and brokers massive derivative exposure. To what extent these rumors are true, I do not know. I do know that ultimately market forces will decide this matter, and I prefer to take in all available information in order to formulate my own trading decisions.
Stock Plunges a Sign of Worse to Come
In Uncertain Times, Gold Beckons Again
Bernie Schaeffer: Gold Still Precious in My Book
Banking on More Declines
Gold Anti-Trust Action Committee |
