Forum Archive Index - February 2002

["Peter" <pmaiden@xtra.co.nz>]

The rise in gold prices over the last few weeks has raised the question whether the price has been held down (manipulated or whatever) by parties who cannot afford to see the price go up. Conspiracy theories abound. .

 

Desmond put a link on one of his recent posts that is very readable

http://www.gold-eagle.com/editorials_02/hathaway012502.html

 

One paragraph and chart summed it all up and makes one pretty compelling reason to believe that all is not well..

 

If the dollar gold price’s submissive behavior over the last five years has been the product of opportunistic interventions in the name of crisis management, admission of this would be unthinkable. In the context of world financial flows, gold is small and well within the resources of the US Treasury’s Exchange Stabilization Fund on its own, or in league with other governments and commercial interests, to manage. Undersecretary Summer’s scholarly work completed while a Harvard faculty member, “Gibson’s Paradox”, suggested that dollar gold prices would vary inversely with real interest rates as measured by 30-year bonds. However, this relationship broke down in 1996 during Summers’ tenure at the Treasury. To our thinking, there is no more powerful evidence to support the notion that the gold price has been rigged than the chart below depicting the relationship. Should the distortion of the gold market indicated by this chart come to an end, the subsequent rise in interest rates would severely undermine the viability of interest rate swap contracts. JP Morgan’s derivatives exposure of $30.4 trillion as of 9/30/01 and approximately 60% of the total for OCC reporting entities, is dominated by bets on interest rates. It is safe to assume that those bets don’t include interest rate levels that would accompany gold prices in excess of $400/oz.

 

 

 

 

Besides what this impact on the price of gold it suggests impending disasters for the likes of JP Morgan and other banks.

 

Quoting Gary North in another publication "In financial circles 10 to 1 leverage is considered very aggressive, 100 to 1 is considered to be in the kamikaze realm, but we don't ever recall hearing about large-scale leveraged operations exceeding 100 to 1 outside of the horrible example of the doomed super hedge fund Long Term Capital Management. JPM's management may have effectively created the most leveraged large hedge fund in the history of the world by using $42b worth of shareholders' equity to control derivatives representing a notional value of a staggering $26,276b"

 

And the US economy is in a far perilious state today then when the LTCM catasphophe happened.

 

.Cheers on this lovely sunny Saturday morning in paradise

 

Peter