Why the Gold Cartel Will Fail To Hold The Price
Why the Gold Cartel Will Fail to Prevent a Primary Bull
Market in Gold:
And the Real Reason They're Trying to Prevent It Anyway
By James Sinclair and Harry Schultz
September 3, 2002
1. J.P. Morgan/Chase appears to be, by accident or intention, the main member of the gold dealers' short seller's club.
2. In our opinion central banks have given JPM lease agreements whereby JPM receives physical bullion by paying three-quarters of a percent annual interest. JPM and/or its clients are free to use or sell this gold however they want. JPM or its clients appear to have used this gold to sell violently at key technical points -- $312.50 to $314.80 (today) and $315 and $329.50-$330, thereby depressing the gold price.
3. Moody's credit rating service recently downgraded Morgan/Chase. Then Standard & Poor's rating service downgraded Morgan/Chase based on specific derivative positions.
4. The total derivative positions of Morgan/Chase can be found at the U.S. Office of the Controller of the Currency. The Controller of the Currency reports to the International Monetary Fund, which shares its data with the Bank for International Settlements.
5. So the positions carried by Morgan/Chase are public, but the public has no real idea on where to find the data.
6. The total of all derivatives on the books of Morgan/Chase on all underlying assets is $74 trillion. Yes, $74 trillion.
7. The size of the gold derivatives on Morgans/Chase's books is $46 billion to $60 billion, depending on valuation methods. Yes, $46 billion to $60 billion.
8. All gold derivative dealers use risk- control programs to manage their gold positions. These programs maintain the risk of the gold derivative to the dealers at the degree chosen by the trading management at the inception of the transactions.
9. All the gold derivatives on the books of Morgan/Chase are short spreads -- short of gold. If they were not short spreads, Morgan/Chase would be extraordinarily PLEASED by the rise in the gold price and bullish about gold.
10. The total of the international position of short spread gold derivatives is $300 billion, according to IMF and BIS reports. If you convert $300 billion into ounces of gold at the present price, you get more than 900 million ounces.
11. When the gold price hit $305, it triggered the risk-control programs of gold dealers to buy gold to maintain the risk exposure of the gold derivative short spreads for the dealer cabal/cartel, of which, in our opinion, Morgan/Chase is the major if not the main player. As gold, with the help of the cartel, dropped from the high $320s, the risk-control programs triggered selling of gold for the same reason. At $302-$305, risk- control programs returned to neutral. Now you can clearly understand the action of the gold market.
12. If gold closes above $330, the risk- control programs of gold dealers will start to demand that for each ounce of gold sold short in the short gold spreads, the dealers must own long about .623 ounces of gold.
13. At a gold price close at/or above $354, the gold dealer cartel's risk-control programs will call for approximately .986 ounces of gold long for each ounce short on the gold derivative short spreads.
14. That would be practically a 1-to-1 ratio, one ounce short to one ounce long required to maintain solvency under risk-control programs at $354 gold.
15. The demand in gold ounces that would be created among commercial banks, gold banks, and gold dealers under risk-control programs by a gold price at or above $354 would be about 886,325,000 ounces. That number exceeds all the gold that all the central banks have, including all the gold they have leased and not accounted for. So at a price of $354, gold will have to go ballistic or the greatest bankruptcy in history will occur for the gold derivative dealers.
16. It is not the gold derivative position that worries the major investment banks that have gold-dealing subsidiaries. It is not the $47 billion to $60 billion in gold derivatives on the books of Morgan/Chase that worries them. No, in our opinion what worries them is the effect that an explosion in gold derivatives would have on the $23.7 trillion in other derivatives on the books of Morgan/Chase.
17. This is why Morgan/Chase and the other gold cartel members are stopping gold at $312.50 to $314.80 today (as this is written) with the help, in our opinion, of central banks.
18. Such a manipulation to prevent the gold market from rising above $354 will fail because history tells us that no manipulation can stop a primary, fundamentally driven bull or bear market in anything.
18. The two greatest traders in history, the late Bertram J. Seligman and the late Jesse Livermore, taught that a successful manipulation must always be in the direction the market wants to take fundamentally and technically. Any other manipulation not only fails; a manipulation against the fundamental and technical desire of a market will create a coiled market that goes further in the direction of its intention than it would have gone in the first place. So the result of the attempt by the gold cartel to hold the market down will be to propel it higher than it would have gone on its own.
19. To complicate the problem, gold derviatives are as follows:
a. Not transparent.
d. Not clearinghouse-funded.
e. Not market-priced.
f. Generally non-transferable, as many are specific-performance obligations.
g. Without standard, so that closing can't be made at will.
i. Totally dependent on the balance sheet of the granting entity.
j. Approximately 89 percent of these transaction have been done with entities that have nothing to do with them mining industry as counterparty to the gold bank derivative dealer. So the gold market has come under continued selling by those entities (gold banks and gold dealers), which will suffer the most, assuming, as we do, that gold is in a primary fundamental bull market, based on five fundamental factors. Those factors are:
1. The U.S. current account must be in a position of growing deficit. This is indeed the present condition, and it shows no sign of reversing. This account measures U.S. dollars in the hands of non-U.S. entities. This money is usually invested primarily in U.S. federal debt instruments.
2. A negative trend in the U.S. dollar. It should have the characteristics of a bear market. This applies to the dollar today. We have a classic long-term top called a head- and-shoulders formation, which was confirmed by price and volume action. Even the dollar bulls now are looking only for the dollar to stabilize at lower levels.
3. The general commodity market is showing in many ways, fundamentally and technically, that it is in a base formation from which one can expect higher prices.
4. Trust in paper assets must be waning for gold to assume an investment role internationally. We see the recent problems with the Arthur Andersen accounting firm, and concerns about the accounting practices of major companies like General Electric, IBM, and Enron, which have turned investors away from belief that paper assets are storehouses of value.
5. The bond market must be weakening. We see this now.
As these factors strengthen, the underpinnings of a long-term market bull market in gold will strengthen too. The strenthening of these factors has caused the rise of gold from $260.
So the gold cartel is in harm's way. A bankruptcy of the derivative dealers that represent those $72 trillion in derivative positions (termed "sewage" by Warren Buffett), the greatest debt ever created, is why gold could go to $1,450 or even $1,700.
When gold reached $887.50 in March 1980, $900 was the price that would have balanced the balance sheet of the United States, defined as the comparison between federal asset gold and external debt obligations. If a derivative failure happens in the next five years, it would produce a gold price between $1,450 and $1,700 to balance the balance sheet of the United States.
Harry Schultz is
editor of the International Harry Schultz Letter ( HTTP://www.HSLetter.com) and
Gold Charts 'R' Us. He can be reached at
HSLmentor@racsa.co.cr. James Sinclair is chairman of Tan
Range Exploration (
HTTP://www.TanRange.com) and a veteran of the gold