NEW YORK (AFX) - JP Morgan Chase, answering charges by a pressure group that it may be facing excessive risks in the gold market but not disclosing them, said its exposure to gold including derivatives is less than 10 mln usd.
JP Morgan was responding to allegations by the two-person Gold Anti-Trust Action Committee (GATA), a pressure group which alleges bullion banks and central banks are conspiring to rig prices in the gold market.
The US Securities and Exchange Commission (SEC) is now being asked to arbitrate a long-running spat between JP Morgan and GATA which has generated a steady flow of conflicting claims, rumors, accusations and denials with few hard facts.
Both sides are calling on the securities regulator to investigate their claims about the other party. GATA asked the SEC last week to investigate its suspicion that JP Morgan has a higher risk exposure to fluctuations in the price of gold than what it has acknowledged publicly.
GATA's letter to the SEC spelling out its allegations followed JP Morgan's request to the regulator on Jan 3 that it investigate rumors the bank was trying to keep the price of gold down and covering up losses incurred from the recent rise in gold prices.
JP Morgan Chase has registered 41 bln usd in gold derivative contracts as of the third quarter last year in its filings with the US Office of the Comptroller of the Currency. This is the notional value, or the sum of the value of different contracts of the bank's clients holding different positions, long or short, on the contracts.
Derivatives are financial instruments that derive their value from another underlying asset, like gold. The most common derivatives are futures and options.
"On any given day, JP Morgan's exposure to the gold market including derivatives is less than 10 million dollars," a bank spokesman told AFX Global Ethics Monitor.
"The risk of contracts is held by our clients and we actually don't have any risk associated in the contracts."
Analysts said that sorting out the conflicting claims comes down to finding out for sure which contracts JP Morgan holds on gold, and if it is betting the price of the precious metal will rise or fall -- two facts hard to pin down.
Brock Vandervliet, vice president of equity research at Lehman Brothers said the amount in gold derivative contracts Morgan Chase has disclosed is not excessive for a large bank.
However, Vandervliet said the amount is larger than what HSBC and Citibank reported in the third quarter of last year. HSBC had notional amounts of 14.2 billion dollars in gold derivative contracts while Citibank had 12.9 billion dollars.
Vandervliet also said that gold is not a major part of JP Morgan's derivatives business and hence may not be that big a risk.
But analysts agreed the information provided by JP Morgan is not enough to understand the actual risk involved.
"There are two things that are absolutely critical to know which make it impossible to conclude anything really powerful," said Vandervliet.
"First, is the net trading position long or short? We don't know. Second, how much of these contracts are held by JPM versus held for customers supporting a trading book and therefore not presenting JPM with a material risk. This is a weakness of the disclosure and makes firm conclusions very difficult."
The dispute between JP Morgan and GATA, which gets funding from several small gold companies, goes back to late last year when GATA accused the bank of trying to run down the prices in the gold market.
GATA has in the past also accused the US Federal Reserve Bank, the International Monetary Fund and other bullion banks like Goldman Sachs of price rigging.
On Jan 6, GATA consultant James Turk wrote to the SEC asking for an inquiry.
"It's about time that we learn the truth regarding JP Morgan Chase's activity in the gold market, the full extent of its gold exposure, and whether it used gold loans to fund the so-called 'disguised loans' that it arranged for Enron," Turk said in the letter to the SEC.
A SEC spokesman said the organization does not comment on investigations, ongoing or otherwise.
Some analysts are also skeptical of the risk exposure disclosed by JP Morgan.
"They have to divulge only material risk that is a risk large enough to have impact on the company's assets," said Richard Bove, managing director, Hoefer and Arnett, a research group specializing in financial companies.
"We accept the amount disclosed as a matter of faith."
GATA disputed the 10 mln usd figure given the amount of gold derivative contracts booked by JP Morgan, citing the bank's alleged interest in keeping the price of gold down.
Gold prices are currently at their highest levels in six years and GATA claims JP Morgan could be losing money at current prices.
Some industry experts are questioning the veracity of GATA's claims.
"I think they (GATA) could have had long positions in gold and are always complaining when prices go down never up," said Randall Dodd, director of the Derivatives Study Center, a non-profit group researching on financial markets, AFX-GEM.
Investors who have a long position in gold derivatives profit when gold prices go up. GATA denies having a long position on gold.
anupama.chandrasekaran@afxnews.com
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