Updated from 3:42 p.m. ESTJ.P. Morgan Chase ( JPM) and Barrick Gold ( ABX) were named in an antitrust lawsuit Wednesday, accused of conspiring to hold the price of gold down. The lawsuit, filed by the nation's largest retail gold dealer, Blanchard & Co., and its clients, alleged that Barrick and Morgan unlawfully combined to actively manipulate the price of gold, making short-selling profits of $2 billion in the process. Shares of J.P. Morgan fell 4% to $23.97 while Barrick was down 1% to $15.68. Blanchard said it is seeking to terminate trading agreements between Barrick and J.P. Morgan and other unnamed bullion banks. The firm is also seeking damages to pay for losses suffered by its clients as the alleged result of what it called "unlawful price manipulation, anti-trust violations and unfair trade practices." "Since the end of 1987, when the collaboration between Barrick Gold Corp. and J.P. Morgan Chase & Co. began, the growth of global income and wealth would have lifted the gold price to approximately $740 if the price had been able to respond to the normal laws of supply and demand. If gold had kept pace with inflation, the price today would be approximately $760," Blanchard claimed. In the past five years, Barrick and J.P. Morgan Chase brought "millions of additional ounces of gold into the market - additions that were several times as great as the annual production of every gold mine in South Africa, the largest gold producing nation in the world," according to Blanchard. "By using privately negotiated derivative contracts and concealing the addition of billions of dollars worth of (physical) gold with off-balance sheet accounting, Barrick was able to make it virtually impossible for gold analysts and investors to determine the size and the market impact of its trading positions" Blanchard added. J.P. Morgan declined to comment. Barrick dismissed the allegations as "ludicrous and totally without merit." The firm said it will "vigorously pursue its legal rights and remedies." "Although Barrick has not had an opportunity to review the complaint in detail...the press release contains numerous factual inaccuracies and inflamatory statements," a spokesman said.
Blanchard alleges that J.P. Morgan "financed Barrick's repeated short selling with remarkably advantageous terms not available to others, including deferred repayments and no margin calls." Here's how the manipulation is alleged to have worked, according to the criminal complaint: Barrick signs a forward sales agreement with J.P. Morgan or another bullion bank, promising to deliver gold at a certain date in the future. The arrangements are designed to protect the company from losses should the price of gold go down. The bullion bank then borrows gold from the vaults of a central bank and sells it into the spot market. The bank takes the money raised by the sale of the borrowed gold and deposits it in the bank where it can earn interest (say, 5%.) The bullion bank then pays the central bank a lower "gold lease rate" for the borrowed gold (for example, 1.5%.) The difference between the two rates is called contango. When Barrick delivers the gold as arranged in the forward contract, the bullion bank sends it to the central bank in satisfaction of the outstanding gold loan. Barrick then receives the proceeds from the spot sale of the borrowed gold, plus the contango. The suit alleges that this process flooded the market with gold, sending prices down. It also claims that Barrick was able to sell forward "tremendous quantities of gold with minimal risk." For example, Barrick could postpone indefinitely the date on which it was required to provide gold to the banks. Furthermore, Barrick's spot deferred contracts do not allow bullion banks to make margin calls, even if the price of gold collapsed or skyrocketed. "Barrick has done far more than make advance arrangements to protect itself from losses?instead, the very program that ostensibly exists to protect Barrick's downside exposure serves as a means of locking in guaranteed minimum gold prices for years' worth of Barrick's production while suppressing the price of gold in order to weaken competitors."