The prospects of using gold and silver as Post-Y2K money have been discussed in this forum, and from anecdotal evidence it appears that the sales of gold and silver coins are *way* up. This leads to some questions: Why haven't the commodity prices of these two metals risen in response the the increased demand? I have heard vague references to central banks "leasing" gold to dealers. Does this lead to "fractional gold reserves"? That is, are the central banks leasing more gold than they actually own? The whole precious metals situation is confusing. Thanks for any replys!

-- Ken D. (bozo@nogo.com), November 21, 1998

Answers

check this site out Ken D. I think it will answer your questions. www.the-privateer.com/gold4.html

-- MVI (vtoc@aol.com), November 21, 1998.

"Paper" (electronic) gold FULLY backed by coins and bullion. Check out http://www.e-gold.com (Please mention account 101034 if you open an account)

-- bugger (xspam@nospam.com), November 22, 1998.

" Why haven't the commodity prices of these two metals risen in response to the increased demand? "

Main reasons:

Precious metals producers have been selling forward. Central Banks have been 'dumping' gold reserves, especially in Europe. Speculation in the options/futures contracts of precious metals continues to put downward pressure on the metals. Gold leasing also plays a part. Many astute goldbugs feel that the price of the metals are being artificailly held down by the above, as well as other factors. There is a lot to this subject, and it can be confusing. Don't give up.Try the following goldbug site for general info about what I just posted: http://www.gold-eagle.com/

Try also the discussion forum for analysts and investors at kitco: http://www.kitcomm.com/cgi-bin/comments/gold/display_short.cgi This is the best gold forum on the net, IMHO.To help out a bit, if you lurk there you will most likely see referneces to: POG (price of gold) AG (Alan Greenspan) RR (Robert Rubin) PPT (plunge protection team) to name a few.

Both links are goldbug sites (pro-gold) and both have regular info/posts specific to precious metals and Y2K.

Hope this helps.

-- Robert Michaels (sonofdust@net.com), November 22, 1998.

Damn if I would trust anyone to hold precious metal in my name. Been WAY too many scandals in that business.

Gold is going down for two reasons - central govt's are selling gold - esp. Russia. It is kept very quiet because they want the best price possible. Second - most people are not buying gold. Would you rather have gold in a time of food shortages - or food? All the garbage I have heard about gold coin shortages is just that - garbage. The local dealers say they will get you all you can afford. Haven't noticed any shortages at coin shows and so on either. Now if you are buying from someone who bought a lot at a higher price, he may try to panic you into paying more than 4% or so over bullion ounce price - but that is not everyone's problem. Just say no.

Also, a lot of money is going to the Euro, a lot more is running to the US, and gold has been steady or dropping for years. There has been no time since I was born that the gold bugs were not yelling to buy gold - it was going up like a rocket. They have been right once in all that time. And they will never tell you that if you had bought high-tech stocks when I was born you would have about 50 times the profit over gold by now. "But you wouldn't have been hedged against disaster". Hummmph. Just why do you believe that if I have food and it is a time of starvation I would sell it to you for gold? I can't eat gold, can't drink it, can't smoke it, can't use it for fuel, can't write on it - all it does is sit there and look shiny. Barter economies run just fine on barter - you would be trying to reintroduce money. Better stick with food if you expect TEOTWAWKI.

-- Paul Davis (davisp1953@yahoo.com), November 22, 1998.

The spot price of gold is determined at Comex in NY and also twice daily in London. It is driven primarily by futures contract trading not by physical coin sales to the general public. Central Bank leasing of gold and producer forward selling, along with hedge funds shorting gold have pushed the spot price below $300 an ounce for about a year. One day, of course, this will reverse and no amount of news articles about "Central Bank of Zimbabwe dumping all their gold because it doesn't pay interest" will stop it. Why? Leverage. Comex now has almost one oz in the available (NOT registered, they're totally different, registered gold must be moved to the available side before it can be sold) stocks to cover each 100 oz contract. Oops. Also, the Jan launch of the Euro, backed 15% by gold, will be the $US first real challenge to the title of reserve currency of the world in a very long time. So, to sum it up, Comex futures trading is the dog and gold coin sales to the public is the tail and the tail most definitely does NOT wag the dog in this case. Look at it this way. The big money interests are keeping gold low to make it less attractive than things like Treasuries, corporate bonds, etc. I think we all suspect what will happen to most of those in 13 months. This makes bullion coin purchases for the little guys like us very cheap, almost to cost of production. Take advantage of it and buy coins to keep in your own personal possession. And, as always, INGOT WE TRUST. ;-)

-- bonham (led@zep.com), November 22, 1998.

Ken: Paul made several good points, one of which is about using gold coins as barter. This includes everything from using it during Y2K as a bribe to get through a Natiional Guard blockade or out of the country to using it for big ticket purchaes. None of us know what the usefulness of gold coins during Y2K will be, so look before you leap. First make your Y2K preparation priorities: the basics like food, water, shelter, etc.

After taking care of basics, if you decide to buy: As a start, consider purchasing some coins from a reputable dealer and always take physical delivery. This is not for speculating, rather, think of it as a type of 'insurance' that may protect your other financial assets (if any). There is an inverse relationship between the POG and prices of financial assets( historically). Most financial advisors think 10% of investable assets is enough. Gold bugs will disagree and think you need more. Just remeber that this is a core position, and not for 'making a killing'.

-- Robert Michaels (sonofdust@net.com), November 22, 1998.

Maybe Bonham or Robert could help me out here. I have limited resources (ahem, not much moola), and will be taking care of the basics in January when I cash out of my 401K (pension plan).

I do plan on buying some gold Eagle coins, there is a great article on Scott Olmsted's site, where basically he is saying that gold Eagles are effectively subsidised by the American Gubbmint at the moment due to their determination to manipulate the markets...

Take a look at this link:-

http://www.prepare4y2k.com/981018.htm

BTW Paul Davis, yes you're right about gold over the last twenty years or so, but that doesn't mean that the goldbugs are *wrong* _now_:-)) If nothing else, the law of averages (I'm joking:-))

Think about it, the circumstances we are facing over the next 13 months are truly unique and exceptional.

So this gets me to my two questions. Aside from buying a little physical gold I have a couple of other strategies, maybe they're dumb, but I'd like some feedback anyways.

I'm thinking of buying some gold call options expiring in December of '99. Gold is now $290. It has to hit $390 by November of '99 for me to shown any "profit". I expect gold to go well over $390 as Y2K draws nearer. My question is, what is the likelyhood of being able to sell these options if the markets (including commodities and futures etc.) implode pre-Y2K? Will there be any time to get out? Yeah fuggit it's a gamble, but so is life. From what Bonham and Robert said then it looks like I will never be able to collect even if I am right.

Plan B:-)))The other thing I thought about doing was buying some gold through MONEX in Newport Beach, California. They have an Atlas account which allows you to leverage gold at a 5 to 1 ratio. i.e. you buy $1000 worth of gold at $290 an ounce, in effect you are buying $5,000 dollars worth. The catch is they store the gold for you (of course!!!), if gold goes up to say $580 an ounce you have made $10,000 less your original $1000. You then take delivery of the original $5,000 worth, or cash out and simply buy coins. The gold is stored in Banks, you have title, but if there are Bank runs (when) your stuffed once again.

Again, like options, you don't have physical gold, but in this case at least you would have far more chance of taking delivery. Or is this a scam? Is MONEX reputable?

Any ideas greatly apprciated ladies and gents.

Cheers, Andy

P.S. My brother is a yellow cab driver and is in KISS-mode, he buys about one eagle every couple of weeks...

-- Andy (andy_rowland@msn.com), November 22, 1998.

I think I've just found the answer to my first question...

The Sunday NY Post, 11/22/1898, has an interesting article concerning some "bizarre" activity in gold call options.

Apparently, the December 1999 gold call options with a spot price of 390 have been issued in outrageous quantities. These options, each of which gives the buyer of the option (the "holder") the right to force the seller to sell them 100 ounces of gold at $390 an ounce, are now obligating in excess of 90 tons of gold. Worse, the total gold calls just for December, 1999 are over 180 tons.

What's the problem? If gold goes up, sellers will have to deliver. And where will they get the gold? The article says that such a large quantity could become "unhedgeable." To quote:

"Said one gold trader on the Comex floor,'if gold comes in $30 an ounce better [meaning it rises just $30 an ounce] it's going to be a T-Rex. Then it would be unhedgeable. The whole thing is weird. The date is all wrong. The size is all wrong. It looks random, erroneous.'"

Unhedgeable means that the risk could not be layed off on other gold market prticipants. (My thoughts--maybe it has already been layed off?)

The article mentions Y2K, significantly.

Very interesting.

Any comments?

-- Andy (andy_rowland@msn.com), November 22, 1998.

This is the link from The New York Post:-

http://www.nypostonline.com/business/7691.htm

I sent the author an e-mail to see if he would post to this group...

Now it seems that Y2K is helping to reignite speculative demand for gold.

Sorry, goldbugs, I mean "investment demand."

Some of this has been reflected in sales of gold coins. People out there in the country across the Hudson are buying them at an all time record rate. In the third quarter alone, sales of coins in the United States were up to 772,000 ounces, a 170 percent increase over the third quarter of 1997.

Presumably they get stored next to the assault rifles and canned goods that will see their owners through the financial market turmoil and general social disruption. Who knows? Maybe they'll be laughing at us, just before they pull the triggers.

But the prospect of millenarian mayhem may be causing a bizarre imbalance in the gold pit of the Comex exchange downtown.

The gold option contract with the largest open interest on the exchange is the December 1999 call, specifically the 390 call. A call contract gives the owner, in return for a premium, the right, but not the obligation, to take delivery of a commodity, in this case 100 ounces of gold.

The 390 call lets those owners acquire gold at a price of $390 an ounce, whatever the spot price is at that time. This promise is backed up by the AAA rating of the Commodity Exchange, Inc., which the millenarians might not believe will survive the New Year.

The December 1999 call will expire on the second Friday in November of the year. As of Nov. 18, the total amount of gold call options for that 390 contract was over 3,200,000 ounces, which is over 90 tonnes of gold. The total gold calls for the whole month is over 180 tonnes. That's a lot of gold.

To put that position in context, the January 1999 call options total a little over 660,000 ounces, or about 20 tonnes.

Said one gold trader on the Comex floor, "If gold comes in $30 an ounce better (it closed Friday at $296.05 spot) it's going to be a T- Rex. Then it would be unhedgeable. The whole thing is weird. The date is all wrong. The size is all wrong. It looks random, erroneous."

By "unhedgeable," our trader means that it would not be practical to lay off the risk on other gold market participants. When market makers on the floor of the exchange sell calls, they don't plan to go into their private vault and take out 100 ounce gold bars and hand them over to you if the price moves in your favor.

They buy some call options or futures on their own from other dealers or exchanges who can get the gold from mines or central banks who have the physical gold to sell.

But the Dec 1999 calls are such a big, odd position that it would be difficult to lay off the risk. Our trader has heard the talk that this position has been built up by individuals who are betting on Y2K problems. But he's skeptical.

"Maybe 10 percent of the volume on this exchange represents retail, on average. This is a professional market, not a retail market. This just doesn't make sense."

Because the Y2K position doesn't "make sense," right now it's created a lot of inefficiencies in the pricing of gold options before and after the Dec 99s.

And those inefficiencies are the source of profit for the floor traders.

By the way, for their own account, many if not most of them are dubious about gold as an investment. "It's been the worst investment in the universe," says our trader. "The cash costs of mining keep dropping, and the supply goes up."

So where's the possibility of $390 gold? Do the Y2K paranoids know something? Or is it just a small ring of buyers. There is some talk that this is a very small group doing this.

"This isn't going away," says the trader. "It's going to get bigger and it could become a magnetic issue."

*

-- Andy (andy_rowland@msn.com), November 22, 1998.

I have read the the USA outlawed private possession of gold in the 30's. If our economy goes south again what are the chances that gold will be called in.

PS, does anyone know if fair value was paid for the gold that was called in and, why was the gold called in.

thanks,ww

-- WAYNE WITCHER (WWITCHER@MVTEL.NET), November 22, 1998.

I bought 10 bullion coins a couple months ago. I didn't buy it for investment to make money on, only as one of many Y2K insurance, since I don't know, and couldn't find anyone who knew, what currency if any would work if SHTF. I bought it at $311 oz, as of right now, from the same dealer it's selling at $310. It really hasn't moved in 2 months on average. I have some cash in small denominations stashed up too, and looking into buying treasuries and perhaps some silver too. I don't think you can go wrong buying a moderate amount of gold as insurance, no one knows what will happen, so a bit of everything should cover me.

BTW, I bought my gold at Monex and was very pleased with the service. They try to sell gold futures, but if you say you just want your gold in your hand they are happy to oblige. Their webpage is http://www.monex.com. You can get live quotes there too.

If you buy and mention my account number, 119070450, they'll give me one free gold coin (couldn't resist the plug ;) ).

-- Chris (catsy@pond.com), November 22, 1998.

"does anyone know if fair value was paid for the gold that was called in and, why was the gold called in. "

Let's take the 'why' first:

After WWI, the dollar notes the U.S. gave Europe to help finance the war came back in the 1920's, and were redeemed for $20 gold pieces and smaller denominations of gold coins.Europe continued cashing in there notes until it became apparent, in the late twenties, that there were far more notes in circulation then available gold to back it. (Remember that back then we were still using paper currency backed by gold/silver, unlike mid 1960's - present). This condition continued and was made worse by way too many American coins going to Europe. So, President Roosevelt, in 1933, issued an Executive Order stating that Americans turn in bullion to the Federal Reserve, and also specified a date after which it would be illegal for Americans to own gold.

In 1934, gold rose to $35 an ounce to 'adjust' the value of paper notes that were circulating to the real supply of gold. This devalued the purchasing power of the existing paper by 59%.The reason for the devaluation was that the Federal Reserve nearly doubled the paper supply of money in WWI, with most of it going to the allied bankers in Europe, so when that money returned home afterwards, there wasn't nearly the amount of gold needed to back the paper currency anymore.

So, people did not get fair value, they got screwed. Citizens turned in their gold for $20.67 per ounce and the very next year saw the purchasing power of the paper they held devalued, in gold terms,since it was now worth $35 per ounce.

Regarding confiscation:

On April 5, 1933 the executive order was issued for "Complete Surrender of Gold Coins, Gold Bullion, and Gold Certificates" to the Federal. Reserve within 25 days. If you diid not comply it was punishable by a fine of $10,000 or 10 years in jail. This was the end of our 141 year history of using gold coins as part of our monetary system. One exemption was allowed for holding gold under special license for industry and professional use, and "Rare and Unusual Coins of Value to Collectors". On 8/9/1934 came the confiscation of silver.

Can they do it again? The government, to this day, has the power to seize gold. Period. Will they do it? Don't know. If I had to hazard a guess I would think that they would stop minitng eagles instead. But that's just my opinion.

-- Robert Michaels (sonofdust@net.com), November 22, 1998.

"I have limited resources (ahem, not much moola), and will be taking care of the basics in January when I cash out of my 401K (pension plan). "

Andy: Then why even mess with call options and leverage? Nine out of ten 'investors' loose their shirts. Unless you really know what you are doing, and have money you can afford to loose, stay away. Just get some nice shiny buillion coins, hide them, and forget about them. See my previous post to Ken. Take care of basics and forget about making a killing.

-- Robert Michaels (sonofdust@net.com), November 22, 1998.

Robert - thanks for the input, I will not be buying any options...

Details follow from another forum...

Looks like the biggest short squeeze in gold's history is upon us. I don't see any way that investors holding these Dec 99 calls will ever see their potential profit. The gold market would close way before the expiration. The speculative short position in gold is huge. Now we've got a date certain, that investors seem to have picked, where this short position must be unwound. My guess is that this position is starting to unwind now. The new currency out of Europe will put tremendous pressure on the US dollar. This can only help the dollar price of gold in which most of these contracts are denominated. Couple this with highly increased demand for physical and we've got the makings of an explosive market. Unfortunately, it may become 'too' explosive forcing the market to close from lack of liquidity. Contracts entered into or held today are highly speculative as to whether you'll get paid.

It will be interesting from this point forward to watch the more nearby contracts for increased activity on the call side. The options market generally leads all the other markets. If suddenly we see huge hedging of short positions say in the February contract, then it's probably time to count how much gold you've got in your pocket. This gold market at the Comex is a very thin market compared with the currency markets. Buyer beware!

Cheers, Andy

-- Andy (andy_rowland@msn.com), November 23, 1998.

Re options:

The vast majority of options (and futures contracts themselves) are liquidated by an offsetting transaction long before the expiration or due date. Most sellers of the 1999 Dec options will buy them back before December and so will not have to make delivery. Depending on how things go, they would make or lose money. If the price of the options go up, they will have to buy back at a higher price than they sold, and so will lose money. Vice versa, they would make money.

Most buyers of the options will also liquidate before expiration. The "market" matches these buyers and sellers exactly. So, if the seller makes money, the buyer loses, and vice versa. Relatively few contracts left -- few people actually take or make delivery.

So, you buy your $390 strike price option now, and cash it in, in Oct or Nov. If you win, you take your money and get your physical from a local coin dealer if you're small scale. You might take delivery if you're bigger.

A profit on a call is not a slam dunk. What if DEFLATION due to bank runs? Deflation meaning a contraction of money supply (not necessarily as the stupids think -- price levels). An oz of gold might buy the same amount of toilet paper, but the $ equivalent could be $100, not $500.

Also, remember, for every call bought, someone is selling. The sellers think the DOLLAR price is going down (so that they can buy back at a lower DOLLAR price).

Buy low, sell high. You can do either, first.

-- optioneer (bug@trader.com), November 23, 1998.

I haven't been reading many of the stock type posts but has anyone talked about selling short? Seems like a *guaranteed* money maker. What are the cons, if any? Other than what's the sense of making money. Me.

-- Floyd Baker (fbaker@wzrd.com), November 23, 1998.

Selling short is always in fashion for a seasoned investor. Newbies usually get clocked. All it takes is volatility (the traders best friend) and money you won't miss if what you're shorting goes the wrong way. That's when the phone rings with a margin call. There are also mutual funds that sell short like Rydex Ursa and Prudent Bear, if you are so inclined. They sometimes also take positions in gold.

-- Robert Michaels (sonofdust@net.com), November 23, 1998.

Paul Davis, what's this you're saying about a gold coin shortage?

Actually, the truth translates into something a bit more interesting: Demand is WAY up. So much so, that I could imagine some coin dealers having to turn customers away until the next shipment arrives. I have known a couple of friends who have experienced this.

Whilst the launch of a gold euro is a faint possibility, news of a more concrete nature was released this week. According to the World Gold Council ( WGC ) , sales of gold coins in the US surged in the third quarter of the year to 23.5 t, almost three times the record level seen in the same period in 1997.

http://www.mining-journal.com/mj/MJ/20nov98.htm

-- Goldi (goldilucks@yahoo.com), November 25, 1998.

Goldi: You're right about the demand being way up. Some of the larger buillion houses have already had waiting periods for coins and delays filling orders.

-- Rob Michaels (sonofdust@net.com), November 25, 1998.

Boy do the gold bugs come out with the least provocation. Lot of good answers to this question. Here is my advice. Get your y2k retreat, get it stocked with food and tools, then buy gold and silver.

How much did the Mexicans lose on their paper currency in the last week? 15%

3,000 years of history with gold. Indians and Asians know it's value. The FDIC plans to profile bank customers is another reason to accumulate physical gold.

Finally when Gilette sells for 40 times earnings and internet stocks are 500 times earnings and central banks controlling the gold market and bailing out LTCM to the tune of $4 Billion, there are no rules. The history of the world has never seen such manipulation. If gold costs $280 to get out of the ground, how can it only be worth $295? What if no gold can be produced because of embedded chips in 2000? What is the value of the gold in circulation? $3-5000 oz? Who knows?

25% of your assets should be in physical gold.

-- Rick Reilly (rreilly@shaw.wave.ca), November 26, 1998.

Rick Reilly;

A comment in regards to your gold coins.

You are in Canada, so I assume(I hate that too) that you are probably refering to your Maple Leaf coins, both gold and silver type.

Please remember that your gold Maple Leaf coins are .999 pure gold and are therefore very soft. They won't stand up to much in the way of handling. They are very beautiful coins and I have several, but the gold ones are too soft for general use. The silver coin is of course harder so it is no problem.

It's just a casual and friendly comment. Yours to do.

Are you sure we can't cut a deal in regards to swapping some territories? You guys have some very nice views that would fit in just about right down here. If the "dandruff" didn't get so deep up there at times it would be a lot better though.

S.O.B.

-- sweetolebob (buffgun@hotmail.com), November 26, 1998.

Rick: Enjoyed your post. Since you're saying 25%, I think you may like the following goldbug quotes:

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort." Antony C. Sutton

"Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state". William F. Rickenbacker

"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money". Daniel Webster

"If you don't trust gold, do you trust the logic of taking a beautiful pine tree, worth about $4000 - $5000, cutting it up, turning it into a pulp and then paper, putting some ink on it and then calling it one billion dollars?" Kenneth J. Gerbino

"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way os this insidiuos process. It stands as a protector of property rights". Alan Greenspan

-- Rob Michaels (sonofdust@net.com), November 26, 1998.

Note the name that started this thread.

-- (just@wonder.ing), September 28, 1999.