hedging / swaps / réserves or du fmi et autres tragies comédies , brillamment mises en scène par Adrian Douglas .. www.lemetropolecafe.com
Gold as Theater!
In this article I want to bring some light entertainment your way by analyzing in a different way some of the key issues that have dogged the bullish case for gold for at least the last 10 years. I hope this will highlight how screamingly hilarious and ridiculous much of the fodder that has been fed to the market has really been, but has been taken as deadly serious throughout the years.“The Stupidity of Hedging Gold” – A Modern Day Tragedy
The play opens in the office of a gold mining company ABC. The Chairman is Peter Wonk and the CEO is Greg Munchkins. This is a fictitious company and any resemblance to any real company or people is coincidental. Peter:
Greg, Good Morning! What have you done with all the fire extinguishers that were in the office? I don’t see any.Greg:
Ah, I had a great idea. I buried them all outside at the back of the car park. Peter:
You did what? Are you crazy? What did you do that for?Greg:
Hear me out on this. I realized that we had protected ourselves against the building burning down, but then I suddenly had this shocking thought. What if the fire extinguishers were to spontaneously explode and catch fire? We would be ruined. So I hedged the risk and buried all the fire extinguishers in the yard. That way if the office catches fire we can dig them up and put out the fire, but if the fire extinguishers spontaneously explode they will be buried underground and will not cause any damage. Isn’t that smart?Peter:
That is simply brilliant! It is so brilliant it gives me the idea we could do the same thing with our gold mining operation. Gold is a store of wealth and a hedge against inflation. It is like those fire extinguishers; it protects you against the “fires of inflation” that can send your wealth up in smoke if you hold fiat money. In 6000 years of history gold production has been limited yet fiat money production never has been. Sooner or later your fiat money wealth catches fire!
But just like with those fire extinguishers you have got to hedge the hedge! What if suddenly fiat money becomes scarce and there is a flood of gold? Oh boy, just imagine that, we could be ruined!Greg:
I had never thought of that. You are right. How about we sell all the gold in the ground right now at $300/oz. Then if the ultimate safe haven investment goes down relative to dollars we are laughing because we will have already sold it. If gold goes up we can just buy it back. Peter:
That is so smart. That means if gold goes down someone else already owns it and if it goes up we will buy it back and we will own it. Greg:
What’s more we can use the money we get from selling the gold forward to play with those new fangled derivative instruments and make even more money through leverage.Peter:
So we have 100 million shares outstanding. We can sell 10 million ozs of gold forward and we can net $3 billion. We don’t even have to mine the gold. We can make a deal with a bullion bank and they can borrow 10 million ozs of gold from the Central Bank and sell that into the market and give us the $3 billion. We will then owe our future production to the bank.Greg:
Excellent! I can see we will be viewed as the smartest and coolest people in the industry because we can not lose. Imagine that, and no one has ever thought of this before.
ACT 2 – The following week in the ABC officePeter:
Hey, Greg! There is a group of conspiracy nuts called the Gold Anti-Trust Action Committee (GATA) who say we are morons and that our really smart hedging program of hedging the hedge will just bring down the price of gold!Greg:
Those guys don’t know anything. They don’t realize we have already thought about that and if the price goes down we are protected so we are geniuses and they are morons!
ACT 3 –Ten years later.Peter:
Can you believe the price of gold is over $1000? No one out there predicted that!Greg:
Well except those guys at GATA who made a lucky call and got it right.Peter:
We are in deep trouble. Greg:
We can buy our gold back, can’t we?Peter:
We don’t have any money.Greg:
What happened to the 3 B$ we got for selling our gold ten years ago?Peter:
We spent it or lost it on those new fangled highly leveraged derivatives!Greg:
We can issue 300 million shares at $33 each and raise 10 billion dollars and buy back 10 million ozs. Peter:
Good idea. We are going to have to spin it right to the markets and the shareholders.Greg:
Why is that?Peter:
We will have 400 million shares which will be huge dilution. Each share will be 0.025 ozs of gold in the ground where as 10 years ago each share was 0.1 ozs of gold in the ground. If we don’t handle this right our stock price could plummet!Greg:
Oh My God! I had better dig up those fire extinguishers.Peter:
When the shareholders find out what we have done they will come and burn down our freakin’ office!Peter:
How could we have been so stupid?
***********************THE INTERNATIONAL MONTY PYTHON’S FLYING MONETARY FUND
The play opens in the head office of the IMPFMF. The President, Dominic So-Stressed-I-Kant is talking to his Chief Investment Strategist, Mustapha Better-job.Dominic:
Hey, Mustapha we managed to get approval to sell 400 tonnes of gold although God only knows who will be stupid enough to buy the stuff because it is such an outdated asset by modern standards.Mustapha:
Oh, that’s really good news.Dominic:
Now did you do some research as to how we can invest the proceeds to make the best returns for our endowment fund?Mustapha:
I sure did. The best investment I have found would return us 17% per year, and has done so for the last 10 years but will probably do better than that in the future.Dominic:
Wow! 17% minimum returns each year; that is amazing! That must be some really exotic type of high risk derivative investment where we could lose our shirts but we could make 17% per year if everything goes OK. Am I right?Mustapha:
No Sir! Actually it’s a very, very conservative investment.Dominic:
What is it?Mustapha:
Aaaaahhh! You mean we just sold the world’s best performing asset for the last 10 years to invest in something that will give us a better return? Mustapha:
It would seem so! Who told you to sell the gold?Dominic:
It was that buffoon, Alan Greenspan!Mustapha:
It looks like he stands ready to sell IMPFMF gold in ever increasing quantities should the price rise!
********************NO GOLD PLEASE, WE’RE BRITISH!
This remarkably funny stage comedy was nominated for a Golden Globe Award but it had to be changed to a Bronze Globe Award because there wasn’t any gold left in Britain!
The play opens in the Office of the Governor of the Bank of England, Robin Banks. He is talking to a junior bank employee Lewis Change. Robin:
Gordon wants us to sell 395 tonnes of gold.Lewis:
Because we need to rebalance our reservesLewis:
No, I mean what are we going to get for it?Robin:
Well it will be pounds or dollars or Euros, of course!Lewis:
But we can print pounds ourselves! Why sell our gold for pounds? Robin:
I will let you into a secret: As a Central Banker I hate gold! We have tried hard to make our paper money look pretty. We use sumptuously thick paper that is so nice to touch. We use absolutely fabulous tones of color on our notes. We even put Lizzie’s face on them, but still people prefer that horrid metal. We don’t think we can make our notes any prettier unless we replace Lizzie with Pamela Anderson. I mean only her picture on the pound; I don’t think we want Pamela Anderson as the Queen of England. So if we can’t make the pound note anymore pretty we need to make gold look “ugly”. We need to goddam smack it around a bit to teach it a lesson. Kick it in the nuts, knife it in the back, punch it in the face…Lewis:
Are you feeling alright Sir? You are foaming at the mouth and spitting when you speak!Robin:
I’m sorry I got carried away. I’ll be okay in a little while. You see Gordon Brown wants us to dump our gold now that gold is $255/oz because he thinks if we can drive it down to $50/oz then gold will be out for the count and investors will have such a bloody experience they will puke anytime you just mention the four letter word. He is a pretty smart chap, our Gordon; they should make him Prime Minster, because his genius is wasted as Chancellor of the Exchequer!Lewis:
Will there be any way that the Bank Staff can buy any of the gold?Robin:
Lewis, you are a good man. Don’t even think of owning that evil stuff. It will poison your mind and if you are caught with any your career will be finished. We have a zero tolerance policy here for substance abuse. If any employee is caught in “possession” of an illegal substance they will be terminated. Stay clean, Lewis, and you will have a long and fruitful career at the Bank.
A fringe film about consenting bankers swapping barbarous relics.
The film opens in a smoke filled room at the Federal Reserve. The background music is playing Dire Straits “Money for Nothing and your Checks for Free”. The Chairman of the Federal Reserve, Mosley Crooked, is talking to the Legal Counsel, Moseley Garbled.Mosley C:
Hey, Moseley we need to do some “swaps”Moseley G:
What do you mean “swaps”?Mosley C:
We want to swap our 400 oz gold bars with the 400 ozs gold bars of the Bundesbank.Moseley G:
What do you want to do that for? All 400 ozs bars are identical. Why would you swap one identical bar for the other? Am I missing something here?Mosley C:
Well, Moseley if we swap our 400oz bars for theirs they can then sell our bars, which now belong to them because we swapped them, and we can claim that “The Federal Reserve has not sold a single ounce of its gold”..which will be true because the Bundesbank will have sold it. Then we can sell the Bundesbank gold which we now have because we swapped it for ours and then the Bundesbank can claim “The Bundesbank has not sold a single ounce of its gold” which will also be true because we sold it! This way we can both sell our gold into the market and both parties can claim it didn’t sell any of its own gold. Moreover both banks can still book the gold as being an asset in the vault because under the swap agreement it has to be returned at some indefinite time in the future.Moseley G:
Wow! That is really smart. I think even us scummy lawyers would have to take our hats off to the shear genius of that plan!
I hope now you will just have a fat laugh at the propaganda emanating from the gold cartel and their cronies instead of being intimidated because it really is side-splittingly funny. How the main stream press and the spin masters manage to keep a straight face while they put out this stuff is beyond me!
November 12, 2009www.marketforceanalysis.com
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