Re: Gold Derivative Market Accident Waiting to Happen
February 13, 2003
James Sinclair
tnxinvestor@tanrange.com

When is Enough, Enough? Now, As Far as I'm concerned!!

I'm going to open this piece with the conclusion for those of you who've had a long day. JES

In Conclusion:

You will see many more ferocious run ups in gold to prices like $414, $529 and $590 as gold derivatives cause their holders financial pain beyond belief! If, as I suspect, this derivative paper in its fundamental structural constructs proves to be fraudulent, the entire gold derivative market could crash and burn.

As an example, the entire energy market seems to have imploded and most all the public and private companies that were in it are no longer in it - in one way or another. The reason for this in my opinion is that the Energy Derivative market never existed in the first place. It was a money-laundering scheme upon which some legitimate dealers made trades.

When Enron and its 2000 international phony partnerships expired, there was no energy market left. Remember all money-laundering entities finally burn the restaurant down. That is for real. It has never been insurance fraud as the insurer thinks. It has always been the final burial ground of "money-laundering 101."

Now do you understand why Enron was destined to go broke from the beginning? Enron was the restaurant that had to be burned down. I suspect some major entity in the gold derivative gang will, before 2004 is over, have to be burned down. As a result, a few major producers will be thrown on the funeral bier as well -- creating smoke but without the mirrors if you get my gist.

Yesterday put me over the top! I am sick and tired of reading absolute ignorance where derivatives are concerned. One reason I am no longer posting on any web site other than my own is the action of certain sites that have refused articles I have written on derivatives because there primary income is from producer hedgers. Therefore, running my articles on derivatives might insult their sponsors. There is huge pressure not to utter the view that these instruments might be less than desirable.

Well, let me give it to you without any hedging (nice play on words). I suspect there is FRAUD in the basic construction of the gold derivative instruments. I believe that the more than 2000 phony international fake partnerships constructed by Enron represent the largest money-laundering operation in the history of man. I suspect that their trading losses were not losses in trading but rather a predetermined complex scheme to create losses at the corporate level and profits to offshore accounts. I wonder if the records that were destroyed by their accountants who had offices in the Enron building were in fact the phony international partnership trade transactions themselves. If they were, then there is no question that nothing was lost at Enron at all - rather it was simply transferred.

I know derivatives inside and out and to be truthful, I wish I did not.

The most comical of all comments comes from the Chairman of the Federal Reserve when he compliments the abilities of Banks to offset their risk in a difficult economic environment. Well, he can't be referring to interest rates because they have been on balance totally accommodative to the best interests of lending organizations. Of course he is referring to last risk insurance debt guarantees for potential corporate bankruptcies such as Enron, World Com and others. Last risk debt insurance is only another derivative salesman knocking on your door for the Big Four.

Here is the problem, Mr. Greenspan, with derivative insurance against debt defaults. You have said that the banks can spread their risk from the few (the banks that have loaned the money) to the many (others willing to accept the risk for a fee). Well, they can't. Where the risk is the greatest, the risk takers are the least. It is as simple as that! I wager that these cyberspace last risk derivatives will work as long as no one tries to cash them in. The apparent working of these instruments is the credits in the derivative chain claimed in accounting by the insured entity in last risk bond insurance derivatives.

Mr. Greenspan, ask your lady derivative expert on the Board of Governors to track every transaction and assume total closure. I believe you might find that the International SUBSIDIARY of the name brand international bank or investment bank holding company is not capitalized sufficiently to meet the obligation. Also, look for Chai Walla Inc. (Hindi for Tea Seller Inc.) behind the Horwith Station in Calcutta (the hut city now known as "The City of Joy"). That is the subsidiary's clients to which all the final risk is laid off. As such, the derivatives work only in cyberspace, not in the real hard dollar world. What makes you think the gold derivative is any different? Well it is. It is worse. A derivative's strength comes from the viability of the market for the underling asset item. Therefore, the soundest is interest-sensitive derivatives and currency derivatives. As you work your way down the line, the runt is the gold derivative. The gold market has the least viable market (low volume trading with high volatility) supporting in that sense the largest derivative structure. I believe there is a reasonable concern that the "Structural Derivatives" for gold could be the fraudulent constructs upon which a market could have developed. This could be done in the same vein but in a smaller proportion as I believe Enron was as a pure money-laundering scheme of Titanic proportions. It only requires straw partnerships of a total zero risk and one genius derivative trader making all the transaction for all the straw partnerships. Each one appears to have separate risk but, when taken as a whole, the straw partnerships had no risk whatsoever. They were a daisy chain. The paper being used by the gold producer hedger is now legitimate but weak and may stand on the pedestal of fraudulent contracts. However, my main concern has always been that the original 1991-1992 structural derivatives (those first created) upon which a market developed are fraudulent in nature. Yesterday, I had to read one more time that hedging is just a dandy thing to do when the price of a commodity is declining. This was in the article: "Barrick gives Mr. Hedge the Boot" which I posted on jsmineset.com (see further down) and emailed out last night Let me review what is wrong with over-the-counter gold derivatives - assuming they had no problem - as may exist if the structural transactions that gave life to this market were fraudulent. Today's contracts on the books of the gold producer hedger are 100% as follows:

1/ They are totally non-transparent.
2/ They are not clearing house funded which means their viability depends 100% on the balance sheet of the loser's side.
3/ They are marketed and created not by the good name international bank or investment bank but rather by a subsidiary of the same, normally in another country to the country of domicile of the good name.
4/ They are unlisted.
5/ They are totally unregulated.
6/ They are valued by various means of computer simulation.
7/ In the majority of cases, they are not transferable to others.
8/ They have no standards upon which an offsetting transaction can be made with another dealer to close.
9/ They are not commodity contracts in the true nature, but rather any specific performance agreement two parties wish to make.

Then how on earth can what Warren Buffet called a "Mountain of Garbage" continue business as usual?

I wrote a letter to the SEC some time ago and received a most polite brush off. This letter was copied to the agent of the FBI in charge of financial fraud where I was treated like a head case when I suggested that major US public corporation where headed for trouble in the fledgling energy derivatives market.

I personally ran an advertising campaign, which I paid for myself, in excess of six figures in an attempt to try and save my industry: namely gold exploration, development and mining. These advertisements were placed in South African publications and the mining trade publications.

When I concluded, based on the lack of response, that my industry was too stupid to know how to read, I constructed a cartoon that I hoped might communicate the message that at gold $248 the continuance of hedging would have caused gold to go back to levels guaranteeing the final bankruptcy of just those who were hedging. I believe hedging stopped only when gold reached the lows in which only bankruptcy could be guaranteed by hedging. The industry came within a hair's breadth of committing suicide. I wrote Letters to the Editor, which were published in the Mining Journal and the Financial Times, yet their effect was minimal at best.

Finally, there were changes in reporting requirements for derivatives that totally missed the mark, leading to additional confusion. For instance, if a company adopts the accounting method which declares it to be an arbitrageur and gold miner, then it no longer evaluates its derivatives and reports on a quarterly basis to stockholders. One can only discover the effect of the derivative by balance sheet examination, looking for a decline in cash and build-up of borrowing.

Although the comment made by the editorial in the CPA magazine focuses itself on interest-sensitive derivatives, it is exactly the same problem for gold derivative reporting.

Copyright (c) 2002 JIM SINCLAIR'S MINESET () All rights reserved.

For more information visit our website at http://www.jsmineset.com/ or send mailto:tnxinvestor@tanrange.com Message sent on Thu Feb 13, 2003 at 5:00:47 PM Pacific Time
James Sinclair
tnxinvestor@tanrange.com