Urban Legends and Gold
by Bob Moriarty
There are urban
legends that have been around for years. Most gold bugs accept them
without the least question. The most endearing and enduring is the
mythical GOLD SHORT position, first of Long Term Capital
Management and now of JP Morgan.
lost a lot of money in copper and was without employment and came
up with a brilliant idea back in 1999. He would start two websites.
One would champion the GOLD IS MANIPULATED theory and was the base
for GATA. That was a public service
site. He had a companion paid website called La
Metropole Café where he will share his wit and wisdom
with you for a mere $299 per year.
Basic to his
loudly proclaimed theory that the world faced an imminent GOLD DERIVATIVES
TIME BOMB that could go off at any moment was his claim that he
was in Central Park in New York in mid-1998 and overheard someone
talking about a 400 ton gold short position held by LTCM and thats
why the company
went bankrupt and collapsed in September of 1998 after the Russian
variation of the same urban legend has emerged but now its
Pascoe of the Telegraph mumbling on about how JP Morgan
was short some mythical two tons of gold in early 1999 and thats
why the Bank of England sold their 400 tons of gold, to bail out
the mythical short position of two tons.
of the most popular trading plays of the late 1990s was the carry
trade, particularly the gold carry trade.
In this a
bank would borrow gold from another financial institution for
a set period, and pay a token sum relative to the overall value
of that gold for the privilege.
of the gold had been passed over, the bank would then immediately
sell it for its full market value. The proceeds would be invested
in an alternative product which was predicted to generate a better
return over the period than gold which was enduring a spell of
relative price stability, even decline.
At the end
of the allotted period, the bank would sell its investment and
use the proceeds to buy back the amount of gold it had originally
borrowed. This gold would be returned to the lender. The borrowing
bank would trouser the difference between the two prices.
worked brilliantly when gold fell and the other asset for
the bank at the heart of this case, yen-backed securities
rose. When the prices moved the other way, the banks were in trouble.
This is what
had happened on an enormous scale by early 1999. One globally
significant US bank in particular is understood to have been heavily
short on two tonnes of gold, enough to call into question its
solvency if redemption occurred at the prevailing price.
You have to
wonder why Pascoe would be worried about JP Morgan and any $20 million
dollar investment. Thats all a couple of tons of gold was
worth in 1999. $20 million is what JP Morgan tips the shoeshine
boy; they dont get the BOE dumping hundreds of tons of gold
on their behalf. Im not even sure how anyone can be heavily
short. You are either short or long; you cant be a little
short or a lot short. JP Morgan doesnt give a rats ass
about any $20 million dollar investment.
and this is going to make me really unpopular, its simply
not true that either LTCM or JP Morgan was hurt by a gold short
position. If they held a gold short position either in September
of 1998 for LTCM or early 1999 for JP Morgan the positions would
have had to be profitable. For whatever reason the BOE sold gold,
it had nothing at all to do with JP Morgan in a money losing gold
Itís an urban
legend. No one that I know of besides me ever worked out the math
or even thought about it and that includes some of the biggest names
in the business. Being gold short in Sept of 1999 or early 1999
mathematically had to have been profitable in any time frame from
1985 on. Actually it would have been profitable for any timeframe
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