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Gold/Mining/Energy : Barrick Gold (ABX) -- Ignore unavailable to you. Want to Upgrade?

To: russet who wrote (2952)	5/21/2002 1:16:44 AM
From: FuzzFace	Read Replies (2) \| Respond to of 3558

You snowball quite well, Russett. But here's a more interesting piece written by Jim Sinclair and brought to you by our friends at Gata: S. N. writes: jim .as you may be aware, investment banks and their subs are not allowed to have major open positions in the derivatives markets that are not squared/hedged, where is this info about morgan emanating from? i have shown it to many colleagues including some of the best derivatives pros in canada who simply dont believe this type of position could exist.....any thoughts? This is a key point that needs to explained to GATA members and S.N.'s satisfaction as it is key to all the gold bank derivative dealers and the major gold producer derivative players REAL RISK. Morgan reports to the Controller of the Currency that in turn reports to the IMF & BIS. I can direct you to the appropriate web sites and pages for this information. The size of the Morgan position is given as a notional value of $60,000,000,000 Notional value today is not real value. As an example if you were to buy a 1000 ounce call on gold tonight for 3 months at $317 strike you might pay $7000. This would mean that you purchased a call on 1000 ounces which is the right to receive the 1000 ounces but not the obligation to receive 1000 ounces for 90 days at a fixed price of $317 for which you paid $7000. For you to make money on the strike price gold will have to sell at $324. Since this trades every day and will carry a premium daily and assuming gold goes to $324 tomorrow you will make $7000 and get back maybe $6000 premium as well. The writer of this has your $7000 to play with before he has risk of a loss. He also has a risk control program. Right now he might sell you that call and not cover it all, since he has your $7000 for risk coverage already as a result of your premium. There is no rule that mandates an investment banker cannot have any position they desire to take. The rule of reason says they should not have huge positions. Assuming the market moves higher the risk control program protecting the dealer who is the grantor/writer of the call you purchased, will be informed by the risk control program, if Gold moves up say $2 in three days to take certain action. The risk control program now tells him, he has to buy 300 ounces of gold to maintain the risk at less than the $7000 premium received from you. When this position was established by your purchase of a call on 1000 ounces of gold at a strike price of $317 the notional value of the position was $317,000 but all that was involved in it was your $7000. As the price of gold increases the risk control program would call for more long for the writer/grantor of the call he sold you, to cover the call obligation and prevent the dealer from losing money. Eventually the writer of your call at $317 strike price would have to be long 1000 ounces to cover the 1000 ounces owed to you on the call even before the call executed assuming gold sold at $325. At that time of your transaction to buy the call the notional value of $317,000 which at the beginning had a real value of only $7000. Now the value of this transaction has risen as a result of the risk control program that mandated buys to a REAL VALUE OF $317,000 less the premium or lets say $310,000. Now you see how notional value becomes real value. In this manner all the gold derivatives valued notionally at $280,000,000,000 on the books of 48 countries commerical banks will become REAL VALUE at $354 due to risk control programs calling for more longs to offset the shorts. The $60,000,000,000 Morgan position will also become real value is just the same way but for much more complicated reason. It is the demand caused by the risk control program which mandates the long that has to meet the short on the gold derivative spreads as the price of gold rises. Assuming gold sells at $354 ,a full cover which will be called for by all risk control systems; and that is a functional impossibility because $280,000,000,000 = 26 years production. That amount of gold simply does not exist, not even in all the central banks of the world. It would be equal to 900,000,000 ounces of demand mandated by the world commerical banks risk control programs over $280,000,000,000 notional value today of all gold derivatives granted on their books. This is FACT. This is why all gold producer hedgers are in significant jeopardy. Even if there hedge contracts do function (they may not as they are subject to counter party risk) they will be severely damaged by the cost of money gold producer hedgers will incur financing forward many, many billions of dollars in unrealized losses. The gold producer hedger's in ground reserves produce no credits to offset the debits that will be produced by the now popular spot deferred forward gold sales. There is a locomotive of a derivative disaster coming down the tracks heading right for the complacent gold producer hedger and the gold banks. Do you follow and if not please ask me questions? I have used a simplified method to explain to you why the notional value of all gold derivatives will become real value and why the notional value presently held is a true short position due to risk control. Without risk control the positions would go bankrupt. All gold banks, commercial banks, Investment banks and arb dealers have risk control programs on their derivative positions.