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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: goldsnow who wrote (53605)	6/2/2000 5:49:00 PM
From: Alex	Read Replies (2) \| Respond to of 116764

Conspiracy and The Gold Market: A Clarification By John Hathaway Over the Memorial Day weekend, a story in the Dallas Morning News discussed the activities of the Gold Anti-Trust Action Committee (GATA). The reporter interviewed me at great length for the article. Unfortunately, my contributions were used selectively and out of context in a way that would seem to discredit the activities of GATA. That was certainly not my intent, and it appears that the reporter either did not understand my point of view, or used some of what I said to support an argument that he was trying to make, that did not reflect my views. It is impossible to regard the behavior of the gold market without raising questions as to whether it is totally free. For example, in September of 1999, the anecdotal and circumstantial evidence of official intervention to relieve the short squeeze is powerful. In addition, the substantial expansion of derivative positions by bullion dealers in the period subsequent to the short squeeze, as detailed in my recent report "JP Morgan to the Rescue?" raises many questions that still remain unanswered. Gold is a currency. Intervention in currency markets by various governments is common and, in some cases, overt. It should not come as a surprise that this sort of activity exists in the gold market. Currency dealers play games with their currency positions. It should not be surprising if certain bullion dealers do the same. What is different about gold is that a structural short position has arisen out of the desire of gold producers to hedge forward prices. Compared to paper currencies, the physical market for gold is very illiquid. Even though derivative contracts settle for cash, they must be delta hedged in the physical markets. The potential for an epic short squeeze rests largely on the imbalances that have arisen between an illiquid physical market and the rapid expansion of paper gold or derivatives. The commercial interests and position of the bullion dealers originated as an accommodation of desire of the mining industry to hedge future gold prices. In the Ashanti workout, it became clear that these positions could not be extinguished easily and would in all likelihood remain on the books pending future, and in some cases, long-dated deliveries from mine production. It goes without saying that these bullion dealer positions could be damaged by another spike in gold prices comparable to September 1999. It is therefore possible to infer that certain dealers may have an incentive to enter the market to keep the gold price tame. Since the market is thin, and the technical chart points well known, it would not be difficult to keep the gold market in a prolonged state of being off balance. Note that these possibilities for manipulation can exist only in a thin, dispirited market lacking in strong investment money inflows. Any such scheme would be easily overwhelmed if the current sickly investment flows turned positive. Therefore, the paramount investment question for me is whether and when such flows will occur, not whether or not there is a certain amount of dirty pool going on now or in the past. It is possible in a short-term context that market manipulation can keep the market off balance for an unknown period simply by discouraging investment flows. Gold has so far been excluded from the party in commodities, which has seen the CRB Index rally 20% over the last year. The dynamics of the gold market appear different today than in similar past commodity market cycles. Can the aberration persist forever? Not if the macroeconomic fundamentals say otherwise. If anything, the delayed response should mean an adjustment of greater, more violent magnitude than if unnatural forces had never been at work in the gold market. As for conspiracy, do the bullion dealers take regular, coordinated instructions from US or UK Treasury agents? While nothing is impossible, it doesn?t seem to me that such activity would be necessary to explain why the gold market is in a funk. Excessive producer hedging (see The Folly of Hedging,) a bull market in financial assets and low reported inflation would do just as well. Does the Treasury intervene at crisis points? Such intervention seems highly likely, as in the case of LTCM, or the already mentioned gold market rescue. Sporadic, reactionary intervention could be taken as a signal by private parties such as bullion dealers to continue to increase their derivative activity in the expectation that future intervention would occur in the event of market adversity. This familiar pattern of behavior by the government in the context of moral hazard is too obvious to be debated. One does not need to subscribe fully to conspiracy theory to support the activities of GATA, however. There is too much strange, unexplained activity in the gold market not to welcome energetic efforts to come up with some answers. John Hathaway June 1, 2000 tocqueville.com