02 July 2010

AIG Precious Metal Manipulator?

Further to this Zero Hedge post note the following from CPM Group's Mr Christian:

Bullion Banking Explained (dated Feb 2000):

Many banks use factor loadings of 5 to 10 for their gold and silver, meaning that they will loan or sell 5 to 10 times as much metal as they have either purchased or committed to buy. One dealer we know uses a leverage factor of 40. (Long Term Capital Management had a leverage factor of 100 when it nearly collapsed in 1998.)

So CPM Group knew of a 40:1 precious metals leveraged firm in 2000, who were they? Mr Christian tells us in his April 10 2010 interview with Jim Puplava of Financial Sense at the 44 minute mark:

AIG was not a bank, was not a commercial bank, and under the US laws non-commercial banks don't come under the law, the guidance of the office of the controller of the currency. AIG used a leverage factor of 40, so if people gave them a million ounces of gold to hold for them, they could lend out 40. I mean, I have friends who are metals traders who were looking for job years ago and, you know, they went to AIG and AIG said “we use a leverage factor of 40” and the trader is a seasoned guy and he's worked at major banks and investment banks, he said “I can't operate at that level of leverage its just too risky more me” and AIG trading said “well this is what we do”, right, so there is a loophole in our regulatory system, its doesn't really have anything to do with gold and silver per se but it allows non-banks to participate in banking activities in a way that skirts banking regulations that are designed to promote stability in the banking system.

Interesting that in 2000 CPM Group could publicly talk about “one dealer we know” having 40:1 leverage and it was not considered an issue (although he didn’t publicly mention is was via a "loophole") – sign of those times I suppose. Question is, has anything changed?

5 comments:

Jayson said...

Between the 2 sides of the manipulation argument is the simple fact that companies just want to make a profit. Mainly to pay huge bonuses to Management and directors. So they see a loophole/opportunity and take the 1,000,000 oz of gold held by them and 'lend'/sell it to 40 people. Great way to make lots of money. Until you find yourself with 41 groups each claiming 1,000,000 oz from you.
Maybe then GATA et al have a point that it is not what people expect with gold and that holding allocated gold is the only safe way. The Perth mint would never lend out leveraged gold would it Bronwyn?

Bron said...

Jayson, i'm actually a he! Anyone who is holding unallocated with a bullion bank should be aware that they are an unsecured counterparty.

Perth Mint is very clear on its website that it does not lend out any of its Depository unallocated metal, we use it purely to support our business operations.

Justin said...

Judging by this most recent 'washout' in gold, it would seem most people don't give a flying !@$* if their gold is leveraged 40 times!

Even when their annual yield seems to be about 0.8%.

costata said...

Bron,

Since you explained about the use of unallocated metal by the Perth Mint I have never been able to understand the hysteria from some quarters.

The ability to get your raw materials and most of the cost of holding stock funded by investors must be one of the Mint's biggest strengths. From a capital perspective, it's a great deal for the Mint.

IMO you'd have to be crazy to think management would put this at risk by speculating with the metal or using dodgy accounting.

That said, if the SHTF holding any kind of paper claim on metal would make me nervous, to say the least. No offence intended.

Bron said...

costata, there is nothing offensive about your statement. If you look at the Perth Mint's website on the page explaining unallocated vs allocated it has at the bottom a "three stage approach" which says that one should move from unallocated to allocated to physical in your posession depending upon your assessment of the environmental risks.

I wrote this many years ago when gold was still out in the cold and it is still valid.

I am not about pushing any particular way of holding gold, I just think it is important to cut through the misinformation so that investors can make a proper decision on the real risks involved in different ways of holding gold.