-->Capsule Summary


Courtesy of John Brimelow


a paper presented on May 17 this year at the Fifth International Gold Symposium, in Lima, Peru, (jointly authored with his associate Declan Costelloe) Frank said:

"…some, (though not all) of the gold bug conspiracy talk on the internet seems to us to be more or less correct… We conclude…that, since the Long Term Capitol Management crisis in late 1998, the official sector has been managing the price of gold."

"The gold price has rallied from the mid $270’s to just over $310 and has traded in a stable fashion for about 2 months… For the market to not explode amid numerous bullish technical signals presumes strong offsetting selling. Since producers are covering hedges, we must assume this selling emanates from the official sector… Furthermore, the way in which the gold price initially met the psychologically important $300 level with a sharp drop in volatility suggests that such official selling is not due to uncoordinated one off large scale official sales. This would suggest that the gold price is being managed by the official sector."

"From our contacts in the hedge fund industry, we understand that some of the recent buying in the markets for gold futures, gold forwards and gold equities has been spurred by a growing belief that the gold market is being managed by the official sector and that this management will at some point fail…. We believe the official sector appreciates the challenge such thinking by market participants poses for management of the gold price… we would not be surprised by further official statements or actions that might be construed as part of an attempt to manage the gold price. One or more of these statements or actions may be so extreme as to shock the market."

Frank does make an issue in his paper of believing that much of the outstanding short has been taken over by the Central Banks

"the official sector has …quietly taken the gold shorts from private speculators and producers and transferred them to their books. In other words, the official sector intervened to prevent an explosive gold derivative crisis."

How much of the total short has really been transferred, given the"explosive" or"toxic" nature of many of the hedges (arising from hedgers undertaking to balloon their liabilities if gold should rise, in return for short run concessions on matters such as lease rates and margin requirements) is not actually known, either by Frank or the Central Banks. What is clear is that the Central Banks horribly misjudged the sensitivity of the derivative structure when they devised the Washington Accord, so their track record is poor. Given this week’s action we may be about to be enlightened! However, Frank’s Peruvian paper clearly demonstrates that he believes the gold market continues to be subject to Central Bank management.