Reuters:
By Alden Bentley 04:13 p.m Apr 20, 1999 Eastern
By Alden Bentley NEW YORK ( Reuters ) - Some gold market players may be colluding to keep gold prices near their lowest levels in 18 years, an industry group claimed Tuesday, though there are also several economic factors that may account for the slide in gold prices since 1996, traders said. The gold market in New York was abuzz on Tuesday about an investigation into an alleged conspiracy by a cartel of Wall Street firms and bullion banks to suppress the price of gold, with the possible encouragement of the Federal Reserve and the U.S. Treasury, traders said. A industry group named the Gold Anti-trust Action Committee ( GATA ) , said it had retained Philadelphia anti-trust and securities law firm Berger & Montague to look into gold market manipulation. Telephone calls to the law firm by Reuters had not been returned by Tuesday afternoon.
''It's the duck story -- it looks like a duck it's quacking like a duck, we say it's a duck and we're gathering evidence to support the evidence that we already have about that,'' Bill Murphy, chairman of GATA, told Reuters. ''If it's not orchestrated and if it's trade that is one thing. But we're saying it's all being done by certain parties at the same time, in a concerted action,'' Murhy said. Spot gold prices hit a six-year high near $420 per ounce in early 1996, but has since fallen to an 18 year low in late 1998 around $270 an ounce, and bullion has failed to get above $300 per ounce this year. Large speculative traders, such as hedge funds and Commodity Trading Advisors ( CTAs ) , are now holding the biggest net short position ever in COMEX gold futures contracts, according to a recent report from the Commodity Futures Trading Commission ( CFTC ) , a government body which regulates U.S. commodity trading. The CFTC Commitments of Traders report showed a sharp increase in net short speculative positions to 91,690 COMEX contracts as of April 6, up 32,797 contracts in two weeks. Gold dealers, with the help of central banks eager to reap a return on gold monetary reserves that would otherwise realize no interest, have been facilitating the shorting of gold by lending the metal at low interest rates to speculators and hedgers who in turn sell it, expecting that they will later buy it back at a lower price for a profit. ''The known shorts are in the CFTC numbers that you see every two weeks. It looks to me, based on open interest, that they will be just as big or larger this time,'' said John Hathaway, who manages a gold fund at Tocqueville Asset Management.
''But that is just the tip of the iceberg. There is a lot going on in
derivatives, highly-structured products where the margins ( profits )
are for these bullion traders,'' he said. Some hedge funds have
reportedly been using these cheap gold leases, available at interest
rates as low as 1.0 percent, to fund investments in other higher-yielding assets, in a strategy known as a carry-trade. Murphy
said GATA is also asking the U.S. Congress to look at, among other
things, the implications for the gold market of last year's Federal
Reserve-directed bank bailout of hedge fund Long-Term Capital
Management. ''If they were let out of a 300-tonne ( gold ) position,
we're saying the real short position is 10 times that, and it's a
danger,'' Murphy said. With Asian markets on the mend and oil, and other commodity prices staging a comeback, many operators now fear that any big rise in the price of gold, which this month nearly retested last year's 18-year low at $270 per ounce, could spark a furious scramble to cover shorts. But ''philosophically, I have some problems about suing people just because the market has gone against you,'' said one gold dealer.
While demand for gold has outstripped mine supply in recent years,
leasing of gold by central banks and sales of reserves by European
central banks in particular, has forced prices lower, analysts said.
Low inflation and booming stock markets in developed countries have also provided little incentive for investors to hold gold.
''Then again, there are a lot of mysteries in the gold market and it
might very well be that a court or discovery action might turn up some
interesting things,'' the same dealer said. ( ( --Alden Bentley, New
York Commodity Desk, 212-859-1641, nyc.commods.newsroom+reuters.com ) )
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