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--- Begin Message ----Caveat Lector- 12:09p ET Sunday, February 16, 2003Dear Friend of GATA and Gold: Sunday's New Orleans Times-Picayune, the biggest newspaper in Louisiana, has an excellent story about Blanchard & Co.'s lawsuit against Barrick Gold and Morgan Chase. The story describes very well the opportunity for collusion among Barrick, Morgan Chase, and the central banks for suppressing the gold price. The newspaper's business writer, Stewart Yerton, took a lot of time to understand the situation. This is a good one to distribute to other news organizations. Please help GATA do that. CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. * * * GOLDEN FLEECING? A New Orleans retailer is accusing a mining giant and one of the biggest names on Wall Street of illegally manipulating the price of gold By Stewart Yerton New Orleans Times-Picayune Sunday, February 16, 2003 http://www.nola.com/business/t-p/index.ssf?/base/money- 0/1045378910214960.xml In a David-and-Goliath antitrust battle that's drawing intense interest from the world of avid gold investors, a New Orleans retail gold dealer is going toe-to-toe in an increasingly pitched legal fight against one of Wall Street's oldest and most prestigious investment banks and a Canadian mining giant. The allegation: that the bank and the mining firm have colluded to drive down the price of gold to the detriment of individual investors. In the latest volley last week, Blanchard and Co. Inc. of New Orleans updated its complaint against Barrick Gold Corp. of Toronto and J.P. Morgan Chase & Co. of New York. Like its predecessor suit, the amended complaint filed in U.S. District Court in New Orleans asks the court to order Barrick to stop the alleged price manipulation. In a sign of just how heated the battle has become, each has accused the other of libel. Also last week, Barrick fired Chief Executive Randall Oliphant, who has been credited with devising the company's gold-hedging strategy, which is at the center of the lawsuit. Barrick is preparing a detailed response to Blanchard's complaint and expects to file it in court in New Orleans by month's end. In the meantime, the mining firm is addressing the allegations broadly, asserting, among other things, that Blanchard's complaint simply makes no sense. "Why would a company such as Barrick be interested in depressing the price of the only product it produces?" said Vincent Borg, a Barrick spokesman. "Why would we be interested in depressing the price of our product?" The answer, said Blanchard spokesman Neal Ryan, is that Barrick, with support from J.P. Morgan, has positioned itself to profit from lower gold prices -- and has taken steps to make sure the price goes down. "We believe we have found a specific instance where Barrick and J.P. Morgan have been colluding," Ryan said. "That's where we have a point of contention." A spokesman for J.P. Morgan declined to comment on the case. The dispute has surfaced as a major development in the world of avid gold investors, the so-called "gold bugs," who closely watch the precious metal, sometimes weaving elaborate, conspiracy-filled theories to explain price fluctuations. "In the gold world, the gold universe, the gold cult, it's a very big event," said Chris Powell, secretary-treasurer of the Gold Anti-Trust Action Committee Inc., an advocacy group set up to fight what it has alleged to be collusion to manipulate the price and supply of gold. The Blanchard suit, Powell said, "is a very big story." GATA, as Powell's group is known, previously brought an antitrust suit against a wide-ranging group of alleged conspirators, including Federal Reserve Chairman Alan Greenspan. That suit was dismissed by a federal judge in Boston, making the Blanchard litigation the best hope for the gold bugs who believe there's much more affecting the gold price than traditional market forces. "It is probably as promising a vehicle for getting at the truth of what's happening in the gold market as there is," said Powell. Not everyone who watches gold agrees. "It's totally ludicrous," said Leonard Kaplan, president of Prospector Asset Management, a commodity brokerage in Evanston, Ill. "The lawsuit is totally silly." Barrick has taken a particularly aggressive stance toward Blanchard, accusing the company of putting "myths ... out there in the market." "We'll use every recourse available under law to hold people accountable for the lies they spread," Barrick Chief Financial Officer Jaime Sokalsky said during a conference call with analysts last week. The 'ultimate win-win' Founded by James Blanchard III, an avid gold bug who lobbied national leaders to legalize the once-banned individual ownership of gold for investment purposes, Blanchard & Co. is the nation's largest retail gold coin and bullion dealer, with more than 90,000 clients. The company employs approximately 100 people locally and has brought thousands of gold investors to town over the years for the annual James Blanchard Investment Conference. Barrick's manipulation of the gold market has hurt Blanchard by eroding investor confidence in gold, Ryan claims. What's clear amid the two sides' divergent views is that Barrick has been masterful at trading gold on the commodities market. Whether the company violated antitrust laws in doing so is the central question. One of the world's largest gold mining companies, Barrick has 82.3 million ounces of gold in its reserves, which are on four continents. Mining companies routinely hedge their assets by betting at least part of them that the price of the commodity will go down, thus protecting themselves against a price drop. For Barrick, that has involved a form of short selling. According to an explanation outlined on the company's Internet site, Barrick takes the hedge positions by leasing gold from a central bank through an intermediary, such as J.P. Morgan Chase. For the sake of simplicity, Barrick poses a hypothetical gold price of $300 an ounce in the explanation. According to the explanation, Barrick first leases the gold at a rate of 1.5 percent. Then it sells the gold on the spot market. Finally, it deposits the proceeds into an account bearing, say, 5 percent interest. Barrick benefits by keeping the difference between the lease rate it must pay and the interest rate it receives from the bank. In addition, Barrick can make money another way. If the price of gold goes down, Barrick can buy it at a cheaper rate and repay the central bank. Thus, if the price drops to, say, $250 an ounce, Barrick can make $50 an ounce, plus the interest rate spread. Because of its arrangement with J.P. Morgan Chase, Barrick has managed to make it an almost risk-free endeavor. Short sellers typically face the risk that the price of a commodity might go up. In that case, they have to buy the commodity at the higher price to pay back whoever lent it to them. But J.P. Morgan Chase gives Barrick 15 years to pay back the gold, or "cover" its short position in trading parlance. That means Barrick has an extraordinary amount of time to ride out a price spike. At the same time, Barrick can make money by selling the gold it produces while the price is high. Furthermore, Barrick can pay back the leased gold with metal from its mines, thus paying what its owes in a low-cost way. The strategy has proved effective. According to the company's Internet site, the strategy has "generated a premium on Barrick gold sales over and above the spot price for 56 straight quarters." That premium between 1991 and 2001 amounted to $2 billion. To hear management explain it, Barrick can't lose -- whether the price goes up or down. "By managing risk, Barrick enjoys protection on downside with full participation on upside -- the ultimate win-win combination," Barrick says. Profiting from price declines Blanchard, however, says that Barrick is engaging in "far more than mere 'hedging' to defend against price fluctuations." Ryan, the Blanchard spokesman, notes that the 15-year period Barrick has to maintain its short position is unusually long if not unique in the industry, as is the quantity of gold that Barrick has in a short position, which totals 16.9 million ounces, according to Barrick's Internet site. The suit alleges that the process of borrowing gold from the vaults of central banks for extraordinary lengths of time and dumping it into the gold market naturally drives down the price of the commodity. Central banks are government banks, such as the Federal Reserve, which issue and back currency, set monetary policy and hold reserves for other banks. Central banks typically hold large supplies of gold; the Federal Reserve for instance, stores gold at Fort Knox, West Point, and at the Federal Reserve Bank of New York. The Blanchard suit has not named a central bank as a defendant, but has created an option to do so, Ryan said, by naming "ABC Companies" as defendants in the complaint. When Barrick began its hedging program in 1987, Blanchard said, the price of gold was $450 an ounce. By 2001, it had dropped to $271. To illustrate its allegations, Blanchard describes a series of steps Barrick took starting in 1997. According to the complaint, Barrick at that time spoke bullishly about the price of gold, saying that demand was 20 percent greater than new supply. At the same time, the suit says, Barrick increased its hedge position from 6.7 million to 18.8 million ounces, "effectively eliminating the purported 20 percent shortfall." "The average price of gold fell more than $100" -- along the way benefiting Barrick's newly expanded short position -- the suit says. "Over that same 14-year period (from 1987 to 2001)," the suit says, "as other producers struggled to survive the tremendous and unrelenting decline in price, Barrick grew exponentially by acquiring a number of gold mining and exploration firms." Essentially, Blanchard alleges that Barrick drove down the price of gold in part so it could buy troubled gold-mining firms cheaply. Barrick dismisses the assertions. The company is still in the business of "long" gold, meaning it benefits when the price of gold goes up. Its short position represents only a fraction of its reserves, Borg said. As for the arrangement with J.P. Morgan that gives Barrick 15 years to pay back the gold, Borg said Barrick has the highest debt rating and strongest balance sheet in its industry and therefore commands better bank terms than competitors. Just being 'savvy'? In a twist, Barrick has begun taking steps to lessen its short position. In a surprise announcement Wednesday, Barrick fired Oliphant, its chief executive, who was the architect of the hedging operation. The firing came as Barrick's stock price failed to rise, even as gold prices soared. A shaky stock market and fears of war have driven investors to gold as a safe haven. Gold has been trading around $370 an ounce in recent days; six months ago it was about $305. Barrick stock, meanwhile, has remained around $16 a share. During last week's conference call, Barrick Chairman Peter Munk said the company had failed to translate higher gold prices into benefits for the company's shareholders. "Underperformance," Munk said, "is not acceptable." During the call, Barrick's new chief executive, Gregory Wilkins, acknowledged the company's hedged position had been a "lightning rod" among investors and gold watchers and said the company would reduce it. "I can say the hedge book is a little larger than what we would like it to be right now," Wilkins said. In the meantime, Sokalsky said, the hedging program is working precisely as designed. Because Barrick can roll its hedge contracts forward for 15 years, it does not have to cover its short positions immediately but instead can sell the gold it produces on the market while the price is peaking. So far this year, Sokalsky said, the company has sold 100 percent of the gold it has produced at an average spot price of $360 an ounce. "Barrick is poised to benefit significantly" from rising gold prices, he said. For example, Kaplan said that Barrick has done nothing worse than fulfill its responsibility to shareholders by effectively managing risk. "What Blanchard is accusing is that Barrick was smart, was savvy, and made billions of dollars from it," Kaplan said. "Well gee, I never knew that being smart, that being savvy, was illegal." Ryan agrees that Barrick has been smart. "But just because something seems intelligent or smart or savvy from the outside doesn't make it the right thing to do," he said. "Five years ago everyone was saying the same thing about Enron." -END- Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/ <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. 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