-----Original Message----- From: Bob Bartch <[EMAIL PROTECTED]> To: SNETNEWS <[EMAIL PROTECTED]> Date: Sunday, 27 June 1999 12:55 PM Subject: SNET: The death of hedging (important read for economics) > >-> SNETNEWS Mailing List > > > > > > > The Death of >Hedging > > Perhaps the greatest contributors to America's long-term economic >success and > consistently improving standard of living have been a strong >reliance on the free > markets and the rule of law. The United States has a rich tradition >in fostering > unfettered competition and in upholding a fair and impartial system >of justice. > > One of the premier U.S. systems of free markets is the commodities >futures market, > which is a marvel and the envy of the international business world. >With few > exceptions, the US dominates futures trading in most major >commodities. This futures > system is rooted in law and application which dates back well over >a hundred years. > The importance and benefit of the US futures system to all members >of society can > not be understated. Anything that threatens the integrity of this >free market system > must be dealt with immediately, as public trust in the system must >be preserved at > almost any cost. While some may view these markets as mere >gambling, it is the > transfer of already existing risk from the commercial hedger to the >speculator that > legitimizes the entire futures existence. Without hedging, futures >wouldn't exist. > > Specifically created to safeguard these commodity markets, there >exists a distinct > federal agency, the Commodity Futures Trading Commission (CFTC), >whose chief > responsibility is to prevent manipulation and fraud. It is the >unquestioned final arbiter > in the futures world. > > Unfortunately, the CFTC appears to be unable to come close to >fulfilling its prime > mandate, preventing manipulation. To be sure, the agency has been >effective in > feathering its own nest once a manipulation has been uncovered by >someone else or > some market event, by piling on fines after the fact. But, there is >no recent history of > manipulation uncovered by the CFTC. While parties guilty of >manipulation and fraud > should certainly be punished, my point is that the determinant for >judging the > effectiveness of the CFTC, compared to its mandate, should be how >well it does at > rooting out and exposing fraud, rather than how much money it >extorts from the guilty > once a manipulation is terminated and the damage has been done. The >CFTC should > be able to uncover a manipulation in progress, at least once in a >while. Especially > when it comes delivered gift-wrapped in a presentation that is well >documented and > explained in clear and concise language. > > Let me first explain to the CFTC (the intended recipient of this >piece) as clearly as > possible, what the gold and silver leasing manipulation is all >about, and how it violates > the very body of law that this agency is governed by. In fact, the >violations to > commodity law and common sense in the gold and silver leasing >manipulation are so > egregious, that the CFTC should have seen the tell tale signs eons >ago and acted > accordingly, thus saving innocent people years of needless >suffering. > > For the past 15 years, gold and silver have been leased from >central banks and then > sold on the open market by the recipients of the metal - bullion >banks, mining > companies, users and speculators. It is a pure short sale as the >metal is sold by the > recipient of the lease and must be paid back someday to the lending >central bank. It is > the interest rate on the lease that is all that matters to the >lending central bank, as a > result, metal is dumped on the market irrespective of price. The >resultant physical > short sale position has been growing for 15 years (as there has >never been a year of > net repayments), and can't possibly be paid back according to the >most basic laws > governing the world of physical properties. It is this uneconomic >selling of metal that is > flooding the market and depressing prices, in spite of the >existence of a well known > physical deficit in both gold and silver. The laws of supply and >demand have been > upended in the gold and silver markets, yet the CFTC pretends to >notice not. One > would think that this description of central bank leasing of gold >and silver would be > enough to get the CFTC rolling. But let me get a lot more specific >and lay out for them > just what laws and principles are being broken and offer up the >name of a specific > violator - the Barrick Gold Corporation. > > I contend that Barrick Gold has violated the most basic principles >of commodity law > and in turn, has contributed mightily to the manipulation in gold >and silver. The > principle violation revolves around an obvious and intentional >evasion of the rules and > laws of the CFTC. Specifically, by utilizing the leasing/forward >sale mechanism, > Barrick has been able to short sell many times what the legal limit >would be on a US > futures exchange, according to the clear intent of commodity law. > > Barrick's annual gold production is roughly 3.5 million ounces, or >approximately 5% of > total annual world production. As of March 31, 1999, the company >held a reported > physical short sale position of 12.5 million ounces, or >approximately 18% of world > annual production. This is gold borrowed from central banks >(additionally, Barrick is > short millions of paper ounces of gold and silver equivalents, as >well as a sizable > physical short silver position). The 3.5 million-ounce annual gold >production is equal > to 35,000 contracts on the COMEX; the world's leading precious >metals futures > exchange, or what would be the equivalent of 17% of total open >interest. The 12.5 > million-ounce physical gold short position of Barrick is the >equivalent of 125,000 > contracts on the COMEX, or an astounding 60% of total open >interest. That's right, > Barrick holds a short position that is the equivalent of 60% of the >total position of the > world's largest gold futures market - and it's been over 70%! (And >to think they called > the manipulative Sumitomo copper trader "Mr. 5%" for his reported >share of the > copper market - does that mean Peter Munk, Barrick CEO, should go >by "Mr. 60%"?) > > According to commodity law and the clear intent of that law, >Barrick Gold would never > have been able to amass a 125,000 contract short gold futures >position on the > COMEX. Even the brain-dead CFTC would have caught that. After all, >the CFTC is > guided by position limit laws dating back 60 years (source - >www.cftc.gov) that forbid > a commercial entity from hedging more than one year's production. >The reasoning > behind that law is that it is impossible to forecast, with >accuracy, beyond one year, > and more importantly, if a commercial entity hedged more than one >year's production, > it would have an undue influence on the market. In other words, if >a producer sold > (hedged) more than one year's production, the framers of commodity >law knew it > would artificially depress prices. Clearly, this is what Barrick >has done. But it is much, > much worse than that might appear. > > What Barrick has done, aided and abetted by the CFTC, is literally >destroy the very > nature of hedging - the very soul and justification for the entire >futures concept. Not > only has Barrick violated the original law's clear intent of not >selling more than one > year's production, it has additionally violated the intent of law >by positioning it's short > sales outside the apparent reach of commodity regulation. By >choosing the > leasing/forward sale mechanism, rather than a futures contract, >Barrick has escaped, > temporarily, CFTC oversight. > > It would be bad enough if Barrick had somehow been able to sell >12.5 million ounces > of paper gold on a licensed futures exchange, but the fact that >they have sold short > 12.5 million ounces of real, physical gold (borrowed from central >banks), makes it > much worse. While the framers of commodity law knew that excessive >paper sales > would depress prices of any commodity (hence the laws concerning >position limits), > they never imagined that someday someone would be stupid or >manipulative enough > to sell short excessive physical commodities. If excessive paper >short sales can > depress a market, how could a reasonable person deny that excessive >physical short > sales wouldn't have an even more pronounced effect? In a nutshell, >the physical > selling of leased metal has been screwing up the free market. >That's the problem with > this whole leasing/forward sale concept - it is so inherently >bankrupt, that it just flies > under everyone's radar. For the umpteenth time, you can't lease an >item, consume or > sell it, and pretend it can be returned in a deficit - that's >fraud. > > Barrick has additionally destroyed the concept of hedging by >adopting a policy of > never, ever covering a physical short sale. Look at their annual >statement or web > page (www.barrick.com), and you will see this clearly. Their short >position has never > been reduced, and they state clearly that they intend to increase >it. This is not > hedging; this is mindless manipulative short selling. Real hedges >are established and > liquidated according to the price of the underlying commodity. >Legitimate hedging > looks to lock in a favorable price and then close out the hedge >when the price is close > to cost of production. Barrick isn't hedging; it is short selling >massive quantities of > physical gold for a much different reason - to be able to speculate >with the proceeds > of their giant gold short position, some $4 billion. (And while >this speculative activity > accounts for the bulk of their total earnings, you have to wonder >how they are doing > on that speculation lately, now that interest rates have turned up >or how they will do in > the future). > > The most remarkable aspect to this whole line of thought is the >lack of response to my > allegations by both Barrick and the CFTC. Let's face it, I'm >accusing Barrick of some > pretty serious and quite specific violations, and the CFTC of >outrageous dereliction of > duty. If I were way off, they'd be all over me. Yet they both do >their best to ignore it, > hoping it will just go away. While Barrick can be excused for its >silence (it has already > said too much in its public reports), that the CFTC has yet to >issue one statement or > one word about the leasing of precious metals and its effect on the >market is > mind-boggling. The practice that has influenced (negatively) gold >and silver the most > during the past 15 years has drawn no comment from the chief >commodity watchdog. > That should explain to you how the recent copper manipulation could >have existed for > so many years under the close supervision of the CFTC. This dog >won't hunt. > > Because this agency can't or won't do its job, I think it is time >to give them a little help. > I think it is time to force the CFTC to address this issue. It is >too important to be > ignored. Please understand me, I'm not saying that the CFTC has to >agree with any or > all of my contentions. They just should go on record as saying >something, silence is > no longer an option. Too many regular people see that something is >wrong in gold > and silver. Hell, they can even say it's not in their jurisdiction >(but that would be hard > after piling on afterwards in the copper manipulation) - just tell >us whose job it is. > There appear to be as many as 500 million ounces of gold and over a >billion ounces > of silver sold short in the leasing scheme, by a wide variety of >financial institutions, > mining companies, users and hedge funds. Leasing is the prime >determinant for the > price of gold and silver. It is time for the CFTC to state what >impact leasing has on the > market. If there's something wrong, fix it. It's OK for them to >dismiss my allegations > about leasing in general or Barrick Gold in particular, but not >without saying why. > > To that end, if you agree that my contentions at least merit a >response, I respectfully > request that you let the CFTC know, either directly, or through an >appropriate political > representative, that you would like the issues above addressed (see >the above URL > for mailing and e-mail addresses). Please feel free to include this >article. We are > witnessing the destruction of a vital free market system, but there >is something we can > do about it. Although it appears they must be dragged, kicking and >screaming, to the > scene of a massive manipulation and fraud, we can force the CFTC to >do its job. > > > >Ted Butler > >June 27,1999 > > To inform the CFTC of suspicious activities or transactions, click >below: > http://www.cftc.gov/enf/form.html > > To complain directly to Barrick Gold, click below: > http://www.barrick.com > > > > >-> Send "subscribe snetnews " to [EMAIL PROTECTED] >-> Posted by: Bob Bartch <[EMAIL PROTECTED]> > ---------------------------------------------------------------- This is the Neither public email list, open for the public and general discussion. To unsubscribe click here Mailto:[EMAIL PROTECTED]?Subject=unsubscribe To subscribe click here Mailto:[EMAIL PROTECTED]?Subject=subscribe For information on [EMAIL PROTECTED] http://www.neither.org/lists/public-list.htm For archives http://www.mail-archive.com/public-list@neither.org
