(1) Who Sold Barrick the Calls? (w/note) (2) Greatest Con: The Rubin Dollar
THE GOLDEN SEXTANT
Reginald H. Howe
goldensextant.com
The subtitle of this site is MPEG, standing here for Money, Politics,
Economics and Gold. It offers commentary by the proprietor on these
topics and occasionally on other subjects. But its raison d'ˆtre is to
carry on the fight for sound, constitutional money.
2/10/2000 - Who Sold Barrick the Calls (w/ note)?
2/8/2000 - The Greatest Con: The Rubin Dollar
Copyright 1999, 2000 - Reginald H. Howe
All rights reserved. Any republication without permission prohibited.
MPEG COMMENTARY - Page 8
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February 10, 2000. Who Sold Barrick the Calls?
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[Note:]
This commentary, originally posted February 8, is in process of substantial
extension, revision and rewriting. Another important feature of Barrick's
new purchased calls is that reportedly they are cash settlement only,
meaning that they do not even net physical against its written calls.
Anyway, the revised version will focus on more than just Barrick,
and the working title is The New Dimension: Running for Cover. [Note End]
Yesterday Barrick made its much anticipated announcement on hedging.....
... Thus Barrick's hedging program, according to the release,
"has been reduced from 18.8 million ounces at the end of the
third quarter to a net 9.8 million ounces at year-end 1999."
While the numbers do not fully jibe with..... here is how this
announcement was interpreted by one gold analyst:
[T]he fact that Barrick was able to close nearly half of its huge hedged
position in the fourth quarter of 1999 (a total of 280 tonnes of gold
were closed out by Barrick in less than two months) without pushing the
gold price up by even a penny must have come as a shock to a substantial
portion of current gold long-side speculators, many of whom assumed that
Barrick was "trapped" because it couldn't possibly lift its hedges (so
this argument went) without causing a sharp spike in the gold price.
If Barrick had closed out its forward contracts by the amount of its new
purchased calls (6.8 million ounces or 212 tonnes), it most certainly
would have caused a spike in gold because Barrick would have had to buy
physical gold. That is not what it did. It bought paper gold -- virtual
gold -- from someone who is either crazy or possessed of deep pockets
and a strong desire to cap gold. Frankly, under current circumstances in
the gold market, it is difficult to imagine anyone but the.....
... As for investing in Barrick, my advice would be to identify the
counterparties to those calls first. For every $100 over the strike
price, they are looking at a $680 million loss.
In this connection, it has been reported that the astute John Hathaway
asked Barrick, in the course of yesterday's conference call, who the
seller of the call options was, and that Barrick claimed the information
was confidential but that it was one or more bullion banks.
No self-respecting bullion bank is going to sell naked call options,
particularly in these amounts and given the current excess of gold
demand over new production. There has to be a backstop, very rich
or with a lot of gold or both.
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February 8, 2000. The Greatest Con: The Rubin Dollar
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When Robert Rubin resigned last year as Secretary of the Treasury.....
... My guess is that history will judge Mr. Rubin rather more harshly
than Mr. Mellon, and at the other end of the scale from the man who
purged Continental paper with the Hamilton gold dollar. For it now
appears that the Rubin dollar was based not on real gold but on a
new creation of the Exchange Stabilization Fund [ESF]: virtual gold.
Virtual gold has little to do with virtue.....
Since the ESF's inception [1934], the Federal Reserve Bank of New York has
been its officially designated agent for the ESF intervention operations.
In 1962, the Federal Reserve System's Federal Open Market Committee (FOMC)
authorized open-market transactions in foreign currencies for the account
of the Fed, and since then, the Federal Reserve Bank of New York has acted
as agent for both the Fed and the ESF in such transactions. Starting in 1976,
the ESF and the Fed have almost always intervened jointly.
Although the decision to intervene is usually made jointly by the Treasury
and the Fed, it falls primarily under the Treasury's purview. While the two
entities routinely intervene in the same direction and amounts for their
individual accounts, formal independence is maintained. In other words,
the Treasury can instruct the Fed to intervene on behalf of the ESF but it
cannot force the Fed to intervene for the Fed's own account.
The Congress has thus established a system, ostensibly to..... this sort of
modus operandi to the dollar and gold raises all sorts of questions.
Before turning to them, however, a review of.....
Accordingly, Mr. Summers' continued silence on this question should be
construed as an admission that the ESF does in fact trade in gold call
options. Indeed, whatever he may now say, particularly after last week's
disruption in the bond market and spike in gold, cannot be given much
credence, even if it's as clear as, for example, "I never had sex with
that woman."
My last commentary noted that any downward manipulation of the gold price
would impair its role as a leading indicator of inflation, misleading in
particular those members of the FOMC who regard it as such. But the gold
price is far more than a sensitive indicator of domestic U.S. inflation.
It is among the best indicators of the true health of the U.S. dollar
because, at least until the 1999 introduction of the euro, gold was easily
the dollar's most important competition as international money. A rising gold
price in 1997 or 1998 almost certainly would have forced a general decline in
the dollar, pressured U.S. interest rates higher, slowed growth of the U.S.
trade deficit, and in all probability capped the U.S. stock market at
considerably lower levels than now exist.
Secret or clandestine interventions today are quite different from.....
... Today covert interventions in the gold market, particularly through
derivatives that backstop gold lending, do not merely hide problems.
They augment them while an apparently quiescent gold market engenders
a false sense of confidence that all is well.
"Laissez les bon temps roulez"
[sic, cajun] may be fine on Bourbon Street in New Orleans;
it should not be the policy of the ESF.
Anyone possessing the least familiarity with gold banking ought to know
just how dangerous a scheme to facilitate too much gold lending can be.
In essence, it is no different than gold banking on an ever shrinking
percentage of gold reserves. It amounts to the exponential creation of
virtual gold, which -- unlike real gold -- depends on another's promise
to deliver. The con is as old as gold banking itself, as the victims of
banking panics throughout the centuries have learned to their distress.
This time will be no different,
except that the resurrection of gold could well spell
the demise of the currency built on -- and billed as -- virtual gold.
Broadly speaking, the ESF has misled everyone who holds dollars as to
their true value relative to gold. As a result, the world is awash in
dollars -- both dollar currency and dollar-denominated debt. Should a
rush to convert all these dollars to gold ever begin, it is unlikely to
end until an expression known too well to Alexander Hamilton and the
other Founding Fathers takes a new form: Not worth a Rubin. |
