Midas du Metropole
"The Gold Market and Precious Metals Commentary"
Q. Little Bear is in the 'doghouse'. Which table do you think he'd be under ?
A. Gold, of course. But he is hopeful.
February 16, 1999 - Spot Gold $285.40 down $3.70 - Spot Silver $5.47 down 21 cents
Technicals -
J.P. Morgan led a ferocious attack on the gold market as the bears drove the price down early and hard. As they have done in the past, they struck at a strategic time when gold was vulnerable. This time they picked the Chinese New Year.
We have believed for some time now that the bears are becoming desperate. They know that the specs are short 3,000 tonnes of gold and cannot get out easily on a gold price rally. Today's action leads us to believe they are more desperate than we thought.
They are definitely trying to break the back of the gold market and completely destroy morale. Of interest to us was that the volume on the down move early in the day was very large but lightened up later in the day as gold closed well off its lows. While this is no fun, they could not close spot gold below $285 which represents a very strong physical support area.
Here is a kicker for you. We received a report today that even the legendary bullion dealer, Rothschild, is baffled about what is going on in the precious metals markets. They are one of the bullion dealers that give us the London Fix twice a day. According to our sources, the European central banks and various regulatory agencies are going to start asking questions. This is so because the word is spreading that the market is clearly being manipulated by a small number of bullion banks ( several of whom have trillions of derivative positions on their books )- see report below. Word is that we might see some coming restrictions in the leasing activity to curtail this outrage. Time will tell.
We have told you before that we believe the two most notorious bears in recent years, the Union Bank of Swizterland and Merrill Lynch, exited the gold derivative business because they knew it was only a matter of time before the leasing game was scrutinized and they knew ( having been instrumental in creating these huge short positions ) that those that played this game too long would be destroyed. UBS and Merrill know better than anyone one else how large the short positions have become. We suggest the total short position is 8,000 tonnes ( 1998 mine supply was 2529 tonnes ).
We still see a big bounce up in the price of gold. As the word spreads of this collusive activity, we are likely to see some of the other big boys take them on. As you are well aware by now, GATA will be out there "saying it loud, saying it proud", "them boys are colluding and soon will be brooding".
The silver market still looks explosive. Maybe more so. As we have pointed out to you in the past two months, when silver sells off sharply, it is not closing on its lows. A bearish silver market would do that, then open a penny higher the next day, and then go tapioca. Today, silver again closed well off it lows-some 14 cents. That is a bullish sign. Some computer, trend following systems were knocked out of the game today. That is all.
We are hearing that silver is much tighter than you can tell by the price on Comex. Word to us is that you cannot buy physical silver in size EVEN AT $6. The silver lease rates are 15% and more. It was not long ago that they were 1%. What do you think that tells you? In addition, the press tells you that Indian silver demand is weak. Then why did the silver premiums in India shoot up some 20% today.?
In the last Midas we suggested it would be normal to see some backing and filling. We are getting it. Mr. Strong Hand is in full control of the silver market and the Martin Armstrong shorts of the world are indeed, in deep doo doo. $9.78 here we come.
Special Commentary
WHY THERE IS COLLUSION TO KEEP THE GOLD PRICE DOWN!!!!!!!
WHY WE ARE LOOKING AT THE LONG TERM CAPITAL MANAGEMENT BAILOUT AND THE COUNTERPARTY RISK MANAGEMENT GROUP!!!!!!!!
One of our www.lemetropolecafe.com members sent us this report that he received from the very highly regarded, market strategist, Larry Jeddeloh. Midas has taken excerpts from it for you:
"The OCC ( Office of the Comptroller of the Currency ) is one of the regulatory agencies that monitor U.S. banks. Every U.S. bank, whether nationally or state chartered, must submit a quarterly review of its operations to the OCC which includes how the banks earn its income and at the end of each quarter, a list of securities positions it hold-including derivatives.
Normally there is a three to six month lag between the time these reports are filed with the OCC and their dissemination. The numbers I present here are current as of the July 30, 1998 report.
The State of the Banking Industries Exposure to Derivatives
Derivatives in the OCC reports are said to include swaps, future, options, forward and structured debt obligations. According to the July 30,1998 reports, U. S. banks held a mind numbing $28.176 trillion in all forms of derivatives. Broken down, approximately $20 trillion is invested in interest rate contracts and $8 trillion is in FX. Interestingly, only $109 billion was involved in equity derivatives while an even punier $71 billion was committed to commodities. This was our first surprise- both the size of the derivative market and its concentration in interest rate and FX instruments.
Our second surprise came from talking to one of our bond experts, who tells me there is roughly $5 trillion in U. S. Treasury debt outstanding, $5 trillion in U.S. agency debt in the float and probably $2 trillion in corporate debt. Totaling $12 trillion to $13 trillion, this number is approximately the same as the $11 trillion in interest rate derivatives which are expiring over the next year. Assuming most of these were done to hedge interest rate risk, my greatest fear, that somewhere a giant speculative directional trade on, was somewhat assuaged. That statement my still be true, but on closer examination, there is another red flag in this market-in, who owns the vast majority of these derivative contracts.
More surprising than the gargantuan size of this market was the level of concentration. In just eight U.S. banks 95% of all reported derivative contracts were held. The Big Eight include Chase, Citigroup, J. P. Morgan, Nations Bank, Bank of America, Bankers Trust, First Chicago and Bank of New York. The first thing that struck me about this list was that 5 of the 8 banks were involved in merger activity over the past 18 months. First Chicago was purchased by NBD, Bankers Trust was purchased by Deutsche Bank, Citicorp and Travelers merged as did Nations Banks and Bank of America. I suspect there is a strong connection between the levels of derivative exposure at these banks and the subsequent level of M&A activity.
Two of the three unaffected banks, Chase and J.P. Morgan are also the most heavily exposed to interest rate derivatives. In the following table, we have identified the assets levels, derivative levels and the amounts of equity held on each of the Big Eight's balance Sheets.
Big Eight's Balance Sheets
Bank--------Equity($billions)-Assets($bil)-Derivatives($bil)-Due in 1 year($bil)
Chase------------$7.8----------------$367---------$8,299--------------$3,635
J.P. Morgan------$53.9---------------$281---------$7,447--------------$2,487
Citgroup---------$13.8---------------$331---------$3,299--------------$2,067
Nations Bank------$8.5----------------$308---------$2,325---------------$331
Bankers Trust-----$17.8---------------$172---------$2,203---------------$963
Bank of America--$00.4--------------$264----------1,709-----------------$781
First Chicago-----$4.5--------------$120----------$1,199----------------$469
Bank of New York--NA--------------$63------------$264--------------------$19
Aside from the massive amounts of leverage employed on equity, the levels of derivatives used are mind boggling. If you divide the amount of credit exposed by risk based capital, J. P. Morgan has exposure of 728%, Bankers Trust was at 373% before it was sold and Chase is at 334%.
You can do the arithmetic yourself. A 10% to 12 % loss in the derivative books at J. P. Morgan and Chase wipes out their capital base. Remember, most of their derivative exposure expires this year and is concentrated in interest rate contracts. As a result, a high level of volatility in bond or stocks is the last thing the U.S. banking system needs, but particularly so in bonds. This is why I believe the Fed cannot raise interest rates, at least for the time being. Another trade, another one way money making carry trade for the banks, a la the yen carry trade, is going to have to be put in place to allow the banks to earn their way out of this one. A one way decline in stocks or a sharp rise in interest rates, will wreck havoc in the U.S. financial system. Yet it is precisely this kind of leverage which produces such sharp price moves.
If you see a short ( in duration ), but sharp decline in either equities or bond this year, the derivative levels shown in the above table make a strong argument the Fed will have to intervene fast and cut rates again. The level of derivative exposure in U.S. banks must be one of the overriding factors if not the major factor, in setting Fed policy during 1999".
Le metropole members:
This is why we believe there has been collusion by financial institutions to keep the gold price down. They have substituted the gold carry trade for the yen carry trade and in doing so, cannot afford to let the price of gold rise above $300 per ounce. A rising yen ruined the yen carry trade. A sharply rising gold price would ruin the gold carry trade and its cheap borrowing cost; hence, collusion to keep the price down.
The gold carry trade has been going on for years now, but it's importance is growing, because the yen trade is no more and as Larry Jeddeloh says, major financial institutions could be in deep trouble because of derivative trade exposure. Midas has been reporting to you for months now that we have heard banks in the bullion business are in trouble because of their derivative exposure. Remember, Long Term Capital Management was bailed out because of potential of "systemic risk problems". The Central Bank of Italy invested in Long Term. Is it not just as likely that the financial institutions mentioned above had, and have, similar trades on as the Nobel Prize winners did? How do they get bailed out?
This is why we believe there was collusion by many of these same financial institutions in letting Long Term Capital Management out of their 300 tonnes, or so, borrowed gold position in an "off market transaction". Is this collusion picture becoming a bit more clear for you?
The scenario laid out here by Larry Jeddeloh is what we believe is the real reason that the Counterparty Risk Management Group, headed up by Goldman Sachs and J. P. Morgan, was formed. It was formed to control markets for their own greedy purposes. What Jeddolah is saying is that the interest rate trades that put Long Term Capital Management under, could do the same to these banking institutions. That is why they have banded together. But guess what?:
If these New York financial institutions formed the" Counterparty Risk Management Group, whose purpose seems frankly to manipulate the price of certain securities, particularly derivatives, some of which likely involve gold, in the name of preventing disruption of the market (and, of course, preventing, most of all, damage to the brokerages themselves)" it is illegal, according to GATA's Chris Powell.
Powell, "Antitrust laws protect economic competition. To quote the World Book Encyclopedia, "These laws prohibit price fixing, an agreement among business firms to control the price or supply of a product or service." The major federal antitrust laws are the Sherman and Clayton acts, but there are others, and all states have their own such laws. Whenever two or more parties cooperate in limiting prices or supplies of a product or service, the free market is defeated and antitrust law is broken. (There is an exemption for labor unions.)"
This how the Gold Anti-Trust Action Committee came to be.
Jeddolah is not alone in his views. Le Metropole's own Charles Peabody has warned of a banking crash for similar reasons. Here is what Charles said to Café readers earlier this year about his outlook for the banks:
Unintended Consequences Shifts Epicenter of Risks
As for the fundamental themes, I shifted my emphasis earlier this fall when the Fed began to ease in an effort to bail out the capital markets and when the world's government bodies set out to rescue Brazil. As I stated back then, significant changes in government policies will create unintended consequences and it is our job as analysts to anticipate where the next sea change will be. It is my belief that, as a result of the two previously stated actions, the epicenter for the next dislocations is going to shift both in terms of product and geographic orientation. On the product front, I have suggested that interest sensitive sources of income would be the next area of revenue disappoints. I'm anticipating the development of a "non-parallel" shift in yield curves in the developed countries. In short, a fall in short term rates will put a squeeze on net interest margins, while a simultaneous rise in longer term rates will create a host of disappointments within the agency security and mortgage banking marketplace.
Note the two key phrases- "non-parallel shift" and "unintended consequences".
Which takes us to Le Metropole's Neville Bennett, who has this to say in his commentary now served at the Man Ray Table:
"Moreover, several local governments had privately admitted that they are bankrupt. The veil is being pulled off a financial catastrophe as great as the indebtedness of the major banks. Repercussions may be delayed, but my Japanese sources believe that the FILP system is unsustainable and unravelling very quickly. Japan's fiscal system is extremely precarious and capable of producing some severe shocks and defaults."
The financial institutions that are colluding to hold down the price of gold are doing so because all is not well in the banking world. Pure and simple.
Now here is a surprise for you. Looks like the gauntlet has been thrown by the bullion banks to GATA. John Meyer, Vice-Chairman and Treasurer of GATA, has had a business and personal account at Republic National Bank in New York for 25 years. We have a local banking account for GATA in the Berkshires, but wanted a more well known make to make GATA contributors more comfortable.
REPUBLIC NATIONAL BANK TURNED GATA DOWN TODAY.
John Meyer sent me this note a few hours ago:
The lady from Republic National Bank of New York is Zuhaidah Papush. After saying that the account was out of state and likely to have a lot of wires she admitted that the bank felt "uncomfortable" as they were gold bullion dealers. The decision could not be appealed. She promised to send us a letter detailing THEIR POSITION.
You have got to be kidding me. This is the same bank that put this out on Bloomberg today:- Moscow, Feb. 16
"Republic National Bank Offers to Arrange Loans for Russian Gold"
"Republic National Bank of New York offered to arrange $100 million in loans for Russian gold mines that would be repaid with gold to be produced this year"
In other words, get the gold supply( via the defaulting Russians ) out there for the desperate bullion banks, but do not let a well established customer open a measly money market and checking account with the name, Gold Anti-Trust Action Committee.
This will not be the last Republic hears from us.
It is important to let Le Metropole members know that we are not trying to cause economic disruption. The gold colluders are doing so by devastating small gold mining companies, ruining gold mining shareholders that invested in those companies, not realizing the market would be manipulated, and that anti-trust laws were most likely violated in doing so. We only want justice and fair play for all of us.
If the gold price goes up $100 in a week because we expose the true size of their short positions, and they cannot get out until the price of gold goes up that $100 to $150 per ounce, so be it. Couldn't happen to a nicer group of guys.
The Long Term Capital Management problem could have led to a "systemic risk" problem. GATA did not cause that, nor did Larry Jeddeloh. We are just telling it like it is. It is these greedy financial institutions that are putting our financial system at risk. They must be exposed before they really do cause a financial mess.
GATA is moving right along. Thank you very much.
Midas
Bill Murphy ( Midas )
After graduating from Cornell University, Bill was a starting wide receiver with the Patriots of the old American Football League and has been around the financial and commodities markets ever since. He owned a futures firm in N. Y. that specialized in precious metals and was a contributor to Veneroso Associates, a global strategic investment firm and producer of the 1998 Gold Book Annual.
|
