Goldbugs - Gold rise imminent...

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GOLD BULL IMMINENT By Amanda Lang

Financial Post

NEW YORK -- If only gold behaved like other commodities, one could reasonably expect the price of bullion to rise.

Two separate industry groups this week painted a portrait of wonderful conditions for producers: rising demand coinciding with falling production.

According to the World Gold Council, demand for gold climbed 16 percent in second quarter, a record for any three-month period.

Meanwhile, the Gold Institute, a Washington industry group, said production of gold worldwide will decline this year for the first time in 20 years and be flat for the next four years.

That should produce a price increase. For gold bugs, who have watched the yellow metal slide in price from $420 an ounce in 1996 to around $260 now (all in U.S. dollars), such a demand increase appears as manna.

One signal of that dissonance is clear from the concern around central bank gold sales, said John Lutley, president of the Gold Institute. Central bank sales have captured headlines worldwide in recent years, but sales by banks were actually lower last year than, for instance, in 1996. And without those sales, the world would have faced a gold shortage last year.

"Demand for gold far exceeds mine production," said Mr. Lutley, with the difference made up by recycling or scrap and central bank sales.

The problem, said John Ing, president of Maison Placements Canada Inc. in Toronto, is that while the paper market obscures the true picture of supply and demand, it could also represent a pending threat.

Producers, led by Toronto-based Barrick Gold Corp., have learned to hedge their production output. In Barrick's case, it has sold forward about four years' worth of production, meaning it has sold at current prices gold it won't mine for years.

Hedging allows mining companies to offset production costs while locking in current prices, in the event bullion prices fall. It didn't take long for savvy investment bankers to realize they could borrow the gold for these hedging programs from central banks, which offered low lending rates. By borrowing at, say, 1.5 percent, bullion banks such as Goldman Sachs could then invest the capital in treasuries yielding 4 percent, and pocket the difference.

That "gold carry" is, like the yen carry used by hedge fund Long-Term Capital Management, a bet on "spreads."

This is fine in a static environment. But as the world learned when Long Term's yen bet turned sour, the world can be volatile.

A similar change in spreads on the gold carry would wreak havoc that could make LTCM -- which threatened the financial system down last year -- seem a minor incident, Mr. Ing said.

Goldman recently bought 4,700 futures contracts for bullion, Mr. Ing noted, which could be a sign the bank wants to get its hands on some actual gold.

"The paper market has flooded the physical market for gold," Mr. Ing said, "which is why we are close to a 20-year low."

Ultimately, the fundamentals for gold are bullish, experts said. While lowered production -- largely a result of cost-cutting driven by the low price of their product -- isn't the best scenario for mining companies' long-term results, higher prices might help gold companies jump back into exploration in a hurry.

Meanwhile, the huge short position on gold could get squeezed out of the market as fundamentals force the price upward, analysts said.

"These guys are sheep, when one moves, they all do," said Mr. Lutley. Any weakening in the U.S. dollar would be good news for gold.

And, he added, investors may have new-found interest in gold if stock markets fall sharply.

It is just a matter of time before gold will emerge roaring from its 20-year decline. Just like the CRB Commodity Index which is heavily weighted in agricultual food products. Gold is no more a "barbarous relic" than is food - that is to say the CRB Index which just a couple of weeks ago was groveling at 23-YEAR LOWS.

And gold's upward move will be ELECTRIFYING. Needless to say that as the bullion roars out of the chute, gold and silver stocks will literally soar - due to its extreme leverage. Historically, precious metals stocks appreciate 3 to 5 times more than the bullion.

Conceivably, the so-called Day-Traders and e-Traders will help propel gold and silver stocks into the ionesphere as they abandon the internet '.com' companies.



-- Andy (2000EOD@prodigy.net), August 23, 1999

Answers

By Martin Mann -- The Spotlight

New York City, New York - The White House is quietly assembling a task force of federal investigators to look into reports that a back- room syndicate of Wall Street's largest banks and hedge funds has been engaged in vast and risky speculative maneuvers that involved, among other tactics, RIGGING THE MARKET VALUE AND GLOBAL SUPPLY OF GOLD.

This vital precious metal has been bought and sold for more than a year in large quantities at unnaturally low and stagnant price levels in both of the world's principal gold trading centers, London and New York, sources noted.

When Federal Reserve Chairman Alan Greenspan engineered an emergency bailout worth billions last September for a foundering East Coast hedge fund, known as Long Term Capital Management ( LTCM ) , regulators found that the private investment firm had assumed large hidden trading positions in gold.

That was a disturbing discovery, sources say. LTCM was known for wheeling and dealing in the securities and currency markets, but not in commodities.

"They made enormous bets on stocks, bonds and even Asian currencies," says veteran financial analyst Ron Welker. "When they suddenly went bust in late August, they were in danger of defaulting on speculative forward contracts worth a staggering $200 billion. But gold was never supposed to be part of LTCM's portfolio.

"LTCM used gold merely as an instrument to finance its gambles," says Welker. "They found that they could borrow gold in any quantity at dirt-cheap interest rates, often amounting to no more that one and one-half percent. They immediately sold their borrowed bullion, and thus acquired funding on which they paid only minimal interest, far below the prevailing loan rates."

There was a catch, of course. "Gold prices had to be kept stagnant, otherwise LTCM would have incurred a loss, instead of a profit, when its gold-borrowing contracts expired and it had to buy back the bullion it had sold in order to return it to the lenders," Welker explained.

But LTCM was not alone in making mammoth speculative bets in the financial markets, regulators found. "Wall Street's largest commercial and investment banks are increasingly acting like hedge funds themselves," says Tracy Corrigan, who covers U.S. money markets for The Financial Times, the prestigious business daily based in England.

Behind the scenes were the Rockefeller dynasty's flagship, Chase Manhattan conglomerate, Citigroup, the largest U.S. financial services corporation, and Bankers Trust. They were all found to have turned to the sort of high- risk speculation characteristic of hedge funds.

"They all reported losses running into the billions after LTCM's collapse", says Welker. "Many of these megabanks were apparently also involved in borrowing and manipulating vast amounts of gold to finance their betting streaks."

SPECULATIVE RAIDS?

Was gold used to help fuel the speculative raids that wrecked the economies of half-a-dozen Asian countries last year? A group of regional leaders, led by Prime Minister Dr. Mahathir Mohamad, Malaysia's long-ruling nationalist strongman, wants to know.

-- Andy (2000EOD@prodigy.net), August 23, 1999.


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