There's something about gold that makes otherwise rational people — well, kind of loopy. Gold-rush miners risked life and limb in their quest for the yellow metal, and even though gold mining has become just another vast industrial machine run by globe-spanning corporations, it is still home to those who see deceit and conspiracy theories around every corner. At the center of many theories is Canada's own Barrick Gold.
The latest twist in the gold-price saga is a lawsuit against Barrick Gold and financial giant J.P. Morgan, a suit launched this week by Blanchard & Co. The New Orleans-based gold dealer is alleging the two companies depressed the price of gold through the use of derivative strategies, the true nature of which Blanchard claims is unknown because they involved a variety of "off balance sheet" transactions between the two.
The suit accuses the two firms of "unlawfully combining to actively manipulate the price of gold" and of making $2-billion (U.S.) or more in profits by selling gold short (that is, selling borrowed gold hoping the price will drop, then repaying the debt and pocketing the difference). According to Blanchard CEO Donald Doyle Jr., "the growth of global income and wealth would have lifted the gold price to approximately $740 if the price had been able to respond to the normal laws of supply and demand."
None of the claims has been proven, and Barrick said the suit is "ludicrous" and contains "numerous factual inaccuracies and defamatory statements." The case marks the second gold-plated conspiracy theory to make it to court in the past year — although it isn't quite as ambitious as the one launched last year by the Gold Anti-Trust Action Committee (GATA). That one named Federal Reserve Board chairman Alan Greenspan and the Bank for International Settlements, the central bank of all central banks.
Although they are targeted at different parts of the gold market, both the GATA suit and the Blanchard suit stem from the same source, namely the sense of righteous outrage some gold bugs feel about the fact that the price of bullion has been so low for so long — unjustly, they feel. And if that low price is a wrong that has been done, which they clearly believe it is, someone must be to blame. And who is one of the largest gold miners in the world, one whose name is synonymous with hedging? Barrick.
Barrick's aggressive hedging program — which involves forward contracts and other derivative instruments — made the company millions of dollars that it wouldn't have made otherwise when the price of gold was low. But it also produced some fierce criticism within the gold community. Why? Not just because of good old-fashioned jealousy, but also because hedging was seen as almost an act of treason against the industry, since it was based on the idea that prices would fall (heresy to a gold bug).
Similar sentiments have been expressed in the oil and gas business — in private at least — about companies that hedge their future crude or natural gas production. Despite the fact that such risk-aversion is in many cases a sound business practice, it is often seen as a lack of faith in the business, and many producers silently rejoice when aggressive hedgers get caught on the wrong side of a major price swing. In fact, Barrick is seeing some of that now as the price of gold has climbed higher.
Adding to this perception is the fact that large-scale hedging of gold can help to depress the current price, since a futures contract is effectively a promise to supply a certain amount of gold at a certain price at some point in the future. Depending on what the price is and the amount, that future supply can have a dampening effect on current demand, at least in a small way — although large sales of gold by central banks has also put significant pressure on the price in the past few years.
Part of what gets the conspiracy theorists' blood going is the fact that the use of derivative contracts is poorly understood, particularly in the gold world, and also that the terms "derivatives" and "off balance sheet" are often associated with everything from the multibillion-dollar fall of hedge fund Long-Term Capital Management in 1998 to the scandal-plagued balance sheet of Enron. To add to the scent, J.P. Morgan took an almost $1-billion hit on some of its exposure to Enron's trading book.
Not surprisingly, one of the star exhibits in the gold conspiracy theorists' case is J.P. Morgan's exposure to gold contracts, which have a "notional" or theoretical value of about $45-billion — three times as much as some of its competitors. The implication, of course, is that at some point it will have to eat a big chunk of that exposure. J.P. Morgan, however, maintains that its exposure is not a problem, and that even if gold stays high it will not have to take a major hit to its bottom line.
In the end, the outcome of the lawsuit against Barrick and J.P. Morgan and of the GATA suit is almost irrelevant, because no matter what happens in either case, the real gold bugs will see it as more evidence that they are right, and that a shadowy cabal of politicians and corporate insiders is somehow pulling the strings in the bullion market.
A reader called my attention to an error in a column that appeared on Monday, Dec. 15 about Bombardier Inc. I referred to the controlling shareholders of the company as the Beaudoin family, but of course the family that controls the Montreal firm is the Bombardier family - the four children of founder Joseph-Armand Bombardier. One of those children, his daughter Claire, is married to Bombardier chairman Laurent Beaudoin. My apologies for the error.
E-mail Mathew Ingram at mingram@globeandmail.caLook for exclusive Mathew Ingram commentary at GlobeInvestorGold
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