"Banks: Pressure From Gold Derivative Positions"

Artikel vom 03.07.02 von Minesite

North American Banks Under Growing Pressure From Gold Derivative Positions.

When someone returns to the bosom of their family after a long spell in jail reactions range over the whole spectrum. Some relations reject that person on the grounds that shame has been brought on the family; some ignore him as they find the situation embarrassing; some are over- effusive; and some are constructive and welcoming. So it is with gold. It has been off the financial scene for fourteen years or so and, as Andy Smith of Mitsui Precious Metals pointed out recently, it is not easy to think of gold from a bullish perspective after being a bear for all that time.

Last Friday was a case in point. The price of gold fell sharply and there was a shrill ululation from bankers and analysts claiming that the whole performance by gold in recent months was nothing more than a spike. Few of them, presumably, read the sanity written by Rhona O'Connell in her daily gold commentary from the World Gold Council on the following Monday: "After a steady morning in London, and opening in New York in a reasonably buoyant condition, the mood changed in gold at the end of New York trading last Friday with a rapid fall in prices towards the close of trading. Dealers report that volume was light, but the move was extremely fast and involved some stop-loss selling as key technical levels were severed. Prices fell by $5/ounce and regained $3 in as many minutes, before further liquidation developed in the Far East. Physical demand is in evidence at prevailing levels and with the dollar again under pressure in London this morning, conditions have calmed."

No signs of panic here from Ms O'Connell, just a report on a volatile market. Nobody in their right mind expects the price of any commodity, be it gold or pork bellies, to go up in a straight line. Profit takers always make an appearance and a correction results. In the gold market there is the added influence of international official intervention against leading currencies. In her gold commentary Rhona O'Connell said that, " The Fed and the ECB are both reported to have intervened in the currency markets last Friday in order to bolster the dollar, which looked above ¥120, but is now again below that level and under some pressure." Those with longish memories will remember just how useless such intervention proved to be in the last currency crisis - if anything it provided fuel for the flames.

This interplay between gold and paper currencies may be of academic interest to commentators, but is life and death to banks who have been making money in derivatives all the time gold has been in a bear market. Now the game has changed and a fascinating article has been published on a website called 321gold.com which claims that JP Morgan Chase & Co had notional amounts of derivative contracts outstanding which amounted to US$23.5 trillion as at the end of December 2001. To put this in context, the GDP of the United States is roughly US$10 trillion. And according to the Office of the Comptroller of the Currency JP Morgan had over US$41 billion of gold derivatives in this figure which represents around 65 per cent of all the gold derivatives held by US banks.

It also represents 149 million ounces of gold based on the price of US$279/oz as it then was. This is more than ten times the amount of UK gold sold by our deluded Chancellor between July 1999 and March 2002. There is little doubt that his action helped to keep a lid on gold during the period, so what chance would JP Morgan have of retrieving its position without sending the price through the roof? The figures above are the gross outstandings and no one knows the exact the position. Common sense, however, dictates that they were running a short book and the squeals from JP Morgan analysts every time the gold price rises confirm this. If this is the case the derivatives book could implode if gold rises to a certain level and there are guesstimates circling the market that it is no more than US$340/oz.

Small wonder then that the Royal Bank of Canada got its knickers in a twist recently when John Embry, a senior director who runs its Royal Precious Metals Fund, issued a report suggesting that central banks have, indeed, conspired to keep the price of gold low. RBC's position is nowhere near as big as JP Morgan's as it had total outstanding derivatives of only US$1.2 trillion and is one third the size. Nevertheless an implosion would do serious damage on a scale that is reflected in its decision to retract this research report which suggested that the price of gold is set for further steep rises.

This was a remarkably naïve reaction as all it did was put the spotlight on RBC's vulnerability to gold. By so doing RBC raised memories of a certain Dinsa Mehta who was with JP Morgan for a long time and ran its gold book. Suddenly he was not there any more and the mystery of his departure led to rumours, doubtless wholly unjustified, that he had done a Keatley on the hedging position. Mark Keatley was the finance director who ran Ashanti's gold hedging programme which brought the company to its knees three years ago. In such circumstances these banks should take a lead from London stockbrokers Cazenove which simply closed ranks when under pressure during the Guinness fiasco. Panic is not a pretty sight.