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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: long-gone who wrote (4796)	3/25/1999 9:34:00 AM
From: Hawkmoon	Read Replies (1) \| Respond to of 82027

''Power is not a means; it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship. The object of persecution is persecution. The object of torture is torture. The object of power is power. Now do you begin to understand me?'' Richard, Let me express my great respect for your grasp of Realpolitik as well as your wonderful knack for the obvious(as restated via quotation..:0). Regards, Ron

To: long-gone who wrote (4796)	3/25/1999 12:41:00 PM
From: IngotWeTrust	Read Replies (1) \| Respond to of 82027

Richard, at the risk of arousing Bill's "arbor", pls read carefully the following private eMail from one of the defensive Gold Lease Game originators--*yes, he helped concoct this gold lease game 12 years ago* My questions are in boldface, his answers then follow. You may find it enlightening...bet ole bill prints this one out!!! 1) Why was it important, i.e., what was the primary motivation, to do the hard work [selling CBs on the gold leasing idea] to which you refer. You earlier wrote me and stated "Fwiw we spent a long time trying to educate the CBs to look at leases this way." Just good business practice. We make money on transactional volume i.e. earning the bid/offer spread. We saw this as an opportunity to build an ongoing business with decent volumes. There was also a need on both sides. Producers who needed an opportunity to hedge and central bankers who were concerned with their return on assets. We felt we could match up both needs. At that point it became an issue of educating both sides to the possibilities. BTW it is my opinion that by introducing the gold lease product to central banks we actually increased their propensity to hold gold. The reason for this being that now that they could actually earn a return on the asset they could more easily justify holding it. It also encourages mining. By giving producers a hedge it makes it more of a predictable business and less of a pure gamble. This encourages better business practices. There also is an opinion among a number of gold bugs that there is something insidious about gold leases and it is part of a 'plot' to suppress gold prices. Nothing could be further from the truth. This is an important part of our business. We earn a *lot of profit from gold trading.* If the price collapsed so would our margins. We are just as interested as anyone in the [gold] market prospering. 2) Was it purely transactional costs/profit motive on the part of you players? Was it a coincidental directive from the EURO to be players to get the currency launched? I assume the first question is also related to the Euro. The motivation was entirely transactional. There was never a directive from the Euro authorities and in fact there was no way they could force us. We supported Euro trading because it made good business sense for us. Personally I believe that 2 or 3 years from now the Euro will have some real teething problems but that is irrelevant from our current perspective. The only thing that matters is that there is a new currency, people were going to use it and therefore there would be trading opportunities. We responded entirely to the market. 3) Doesn't the bank have all KINDS of non-performing assets on their balance sheets? Such as gov't mandated cash reserves at all times, and considerable real estate just for starters, let alone employee pension obligations on their books? Is this referring to the central banks? And why they would be concerned about the return on gold when they have other low return assets? If so, yes they do have assets that generate low returns. But if anything that only increases the pressure to earn a return on those assets on which they can earn a return. This "leased" gold, as I understand it, is, for all intents and purposes...gone, i.e., unavailable for 3rd world nations collateralized cash/currency loan usages in international circles. Yes the actual gold that is leased is often consummed but the CBs retain the gold as an asset because they have the obligation from the *counterparty* to replace the [missing] gold. The CBs are very credit sensitive and for the most part only deal with AAA firms. So yes the gold is gone but they have JP Morgan's (for example) commitment to replace the gold. And the AAA counterparts have more than sufficient capital to cover the gold if need be when the lease matures. 4) Doesn't this leave those very central bankers, vulnerable to virtual holographic gold bars, for all intents and purposes in those vaults? No. There is no holographic gold. As I pointed out above they have a promissory note. They know the gold has been consummed but they also know the counterpart is more than capable of supplying the gold when need be. How can gold be basically considered an electronic entry when it's very tangibility is the glue that holds the global banking system together? How can a gold future be considered a gold equivalent? The lease is just a gold derivative same as a future. The CBs know it does not represent physical gold but the promise to deliver gold. It then becomes an issue of credit risk. 5) If it was such a relic, why was it so darned important to "tweak it" inorder to improve D/A ratios to get EU launched... It wasn't their gold holdings they were trying to tweak, it was the level of debt. They needed to reduce debt as a percentage of GDP below a certain level. By selling gold they could take the cash and pay off debt thereby lowering their debt ratio. They could have accomplished the same thing by selling nationalized industries instead of gold. It was not the asset they were selling that was the issue. It was what they were using the proceeds for. I love a good idea as much as the next guy, but... this leased gold, for all practical purposes has been consumed, quite literally in the world of jewellery, coinage and electronic applications just to name the top 3 usages. Yes it has been consumed but it gets replaced. The banks who relend the gold lend it pretty tight credit standards to producers. When they produce the gold they use it to pay of the loan. So in effect all that happens is that you front load the sale of gold that is to be produced. So the real question becomes how much production has been sold and if at some point a shortage will develop. Total CB gold leases are currently equal to about 1 years supply, 4,000 tonnes. This total represents about 11% of total CB gold assets. As production pays off the loans the CB asset remains at it's previous level and they will be able to relend that gold. So where as technically you are correct in that the gold is consummed the reality is that when put in context of the way the market functions all that has happened is that one years supply has been presold and consummed. Does that change the equilibrium and price dynamics? That is more of a philosophical question. My own feeling is probably not. Most commodity markets function with a significant portion of future production presold. The only reason people get concerned that it happens with gold is because many people view gold in an emotional context. This is not unusual for a commodity market. 6) How can it still be on the "books" as an asset, when it is for all intents and purposes GONE? Technically the gold is no longer an asset. It is the promissory note that is now the asset. Think of it the context of cash. You think of the dollars in your pocket as an asset. If you took that money and lent it to General Motors what would they do with it? They would spend (consume) it. What would you have? You would have a promise from them to repay you those dollars at some point in the future. Would you consider that bond as any less of an asset than the cash simply because GM had already consummed the specific dollars you gave them? ************************************************************** My answer to the "GM/Bond Q he posited is "yes, I certainly do not view a bond as an asset class" by ANY stretch of the imagination!! I won't OWN any piece, portion, or derivative, or any fraction thereof, of ANYONE's debt, private, corporate, municipal or national!** O/49r