Rob Kirby’s Nightmare!

Rob Kirby writes in The Anatomy of a Fictional Hedge Fund Collapse about a dream (nightmare) that in part involves Long Term Capital Management (LTCM) which went bust in 1998 and some say, almost brought the financial system down. In part of the article Kirby refers to a report NOT FREE, NOT FAIR: The Long Term Manipulation of the Gold Price by John Embry and Andrew Hepburn of Sprott Asset Management. According to Embry and Hepburn there were

claims that gold market was being actively managed. A few large bullion dealers consistently appeared as strong sellers on the COMEX and stopped promising rallies dead in their tracks. Word emerged that LTCM was short approximately 400 tonnes of gold. Covering this position wouyld have sent gold soaring, harming the balance sheets of LTCM and other significant gold shorts.

For those who haven’t followed the gold marjket, a little history. Gold peaked in the 70’s at $850 to $900 per ounce, and had been in a bear market ever since. Oh there had been rallies in those 25 years, but basically it was down and down, until it bottomed in 1999 at $250 per ounce. Gold doesn’t pay any interest. Some bright guy or gal got the terrific idea of borrowing the gold from the central banks or leasing it (carry-trade), and presto the central banks would get some income. The borrowers sold the gold and invested the money elsewhere, and probably got huge bonuses for their idea. Where’s the risk? Gold is a dead investment. It always goes down. Central Banks had 30,000 tonnes of gold.

After languishing near $260 an ounce, gold awoke in dramatic fashion following the September 1999 Washington Agreement On Gold. 15 European central banks agreed to limit gold sales over 5 years and curtail lending activities. The price exploded, climbing almost $80 in two weeks as panicked shorts rushed to cover. The gold “carry-trade” had turned dangerously unprofitable.

It is alleged:
1. that the Central Banks intervened in the Gold Market to prevent a gold derivative crisis brought on by LTCM and the Washinton Agreement
2. that the Central Banks had loaned out gold far in excess of annual production.
3. that LTCM was short 300-400 tonnes of gold
4. that the announced gold sales of England were not really sold into the market, but a political decision to manage the price of gold. See, if I lease something to you and you sell it and then I want it back, you have to buy a replacement to satisfy me. What if it isn’t available anymore or it is available but at double or triple the price. The leasee or borrower is in deep trouble.

Back to Rob Kirby’s nightmare. What if the central banks leased 15,000 tonnes of their 30,000 tonnes, and the leasee’s sold it. The price of gold has moved from $250 to $420. What if the Central banks have managed the price by selling physical gold and used derivatives, all to keep the price down. I have posted before that there is a relationship between oil and gold of 15:1. What if the relationship reasserts itself back to 15:1. Gold is then $765! Somebody is in big trouble. This time it’s not a short position of 300-400 ounces, it’s 15,000 tonnes. That’s the nightmare of Rob Kirby.

One Response to “Rob Kirby’s Nightmare!”

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