Come at me, goldbugs: why Thomas Pascoe's Telegraph piece is wrong

Thomas Pascoe of the (London) Telegraph posted a conspiracy-theory-laden blog post last Thursday, insinuating that Gordon Brown’s decision to sell the majority of the UK’s gold holdings on a 200-buck handle (it’s now north of 1600) wasn’t just dumb and badly executed, it was motivated by an urgent need for a bailout! Read on:

_One of the most popular trading plays of the late 1990s was the carry trade, particularly the gold carry trade. In this a bank would borrow gold from another financial institution for a set period, and pay a token sum relative to the overall value of that gold for the privilege.

_Once control of the gold had been passed over, the bank would then immediately sell it for its full market value. The proceeds would be invested in an alternative product which was predicted to generate a better return over the period than gold which was enduring a spell of relative price stability, even decline.

_At the end of the allotted period, the bank would sell its investment and use the proceeds to buy back the amount of gold it had originally borrowed. This gold would be returned to the lender. The borrowing bank would trouser the difference between the two prices.

This plan worked brilliantly when gold fell and the other asset – for the bank at the heart of this case, yen-backed securities – rose. When the prices moved the other way, the banks were in trouble.

It also didn’t hurt that at the time, gold interest rates were zero but short-dated Treasuries were yielding five-and-a-bit. Shorting gold and buying UST with the proceeds was a bit of a no-brainer. But then, Pascoe goes wildly off the rails:

This is what had happened on an enormous scale by early 1999. One globally significant US bank in particular is understood to have been heavily short on two tonnes of gold, enough to call into question its solvency if redemption occurred at the prevailing price.

This is absolute crap, and it’s absolute crap for two reasons. 

Reason one: two tonnes of gold sounds like a lot, but back in the nineties it wasn’t. A ton of gold is near enough 32,000 troy ounces; at $290 an ounce, that’s only about $18.5 million USD. 

An $18.5 million position is decent size, but it’s not huge - and certainly not enough to blow a hole in the side of a bank. Compare that with the $9 billion in losses that Howie Hubler inflicted on Morgan Stanley; the £800 million in Nikkei futures losses that destroyed Barings; or the AUD 360 million blowup on NAB’s options desk. 

Reason two: You simply couldn’t lose that much money on gold in 199899

Here, from Kitco (I miss having Bloomberg; could some kind soul hook me up?), are the gold price charts for 1998 and 1999. 

XAU 1999

XAU 1998

The absolute worst entry point for a short gold position in 1998 would have been in late August, at $275. You’d have had a bit of a queasy moment when gold promptly rallied to $300 - but by May 6th 1999, the day before the UK’s gold sales program was announced, gold was trading at about $288. That’s only 4% higher than the 1998 low; on Pascoe’s vaunted “two-tonne short position”, it’s $800,000. 

There is simply no story here; the math doesn’t add up; and Pascoe’s printing unsourced rumours. He should be ashamed.