Midas du Metropole
"The Gold Market and Precious Metals Commentary"
lemetropolecafe.com
Q. Little Bear is in the 'doghouse'. Which table do you think he'd be under ?
A. Gold, of course. But he is hopeful.
July 30, 1999 - Spot Gold $255.70 down 90 cents - Spot Silver $5.43 up cents
Technicals
The manipulator's mantra- no gold excitement...., no gold excitement - was in full chant today. After the biggest one day move up in some time ( $2.90 yesterday ), they beat gold down in this trading session. Midas still thinks we have a pretty good rally coming, but it is coming very begrudgingly. The "gold cartel" is only going to let the price of gold go up because of the political heat that is being drawn to what they have been up to. Their machinations are becoming too obvious.
The open interest is dwindling and now has contracted some 24,000 contracts to 189,459. Thus, a $2 up move in gold ( net ) is all 25,000 contracts of short covering has given us. Pathetic. Hannibal's scheme to get the gold price down and use the fall in the price as part of a partial exit strategy is working so far. Hannibal's crowd is covering some of their shorts and transerring these positions to some some producers and central banks (? ) who are selling.
While the cartel is loathe to let any excitement about the gold market gain any real steam, I still think we should see some good upside here. This sinister force may, or may not, bash us again. But first, they have to "seem" not to be the evil force that they are. Stops are building above $260.50 basis December. The Commitment of Traders report released after the close still shows the specs to be very short, albeit less so than reported in the last report. No surprise there. They still had a very large, net short position of 72,000 contracts as of last Tuesday.
We have been calling for a price move in silver to $9.78 all year. Three times we have had breakouts above $5.25 that have failed. Will this finally be the real move? Could be!
Yesterday ( on the 17 cent rally ), the open interest rose 7,242 contracts to 82,313 contracts. What is important to know is that a 75,000 contract open interest number in silver is practically rock bottom as it represents the hard core, long term silver position players that are not exiting their silver trade until we get the big move that many of us are looking for. The 75,000 number was given to us by Icarus' sources on the floor of the silver exchange- so it is reliable.
Therefore, yesterday's open interest boost is a big positive as that sort of buying is what it will take to give some significant oomph to the silver price. There is room for the silver open interest to expand another 70,000 contracts, so we do not in any way see yesterday's 10% jump to be a cause of concern. ( as in too many weak longs have entered the market)
You have heard me say many times that silver is one commodity that has had a tendency to go ballistic at times. I have been a part of $3 moves in silver in a week. It is a great pony to ride when it decides to gallop and the "stakes" are big. Techncially, a massive long term base has been completed and this recent break out has come out of a classic, bullish pennant formation. If we are right about the coming gold rally, what do you think the price of silver is headed to?
Fundamentals
$21 dollar oil, 6.11% long bonds in the U.S., certain credit spreads ( signifying liquidity problems ) at decade highs, and $30 billion worth of intervention fails to halt a yen surge. Had most market analysts been given those facts at the beginning of the year, I don't think a one would have predicted the 11,000 Dow we had a few days ago and the $256 gold we have today. You would have had predictions of a 7,000 Dow and $400 gold. These markets are still at psychological extremes with a big sea change, and reality check, about to kick in.
Gold lease rates eased a bit today, but they are 3 times normal and for the first time yesterday we saw commentary ( London - Dow Jones ) that attributed the higher lease rates due to pulling back of central bank lending supply - Y2K concerns were cited in the wire that came across my desk.
This morning one month rates dropped a sharp 60 basis points to 2.61% and the 6 month rate slid to 2.75%. We know specs were covering shorts yesterday on Comex. Perhaps some hedge funds, participating in the gold carry trade, closed out short term gold borrowing positions which would account for the sudden drop in the one month rate.
James Turk had some spot on commentary on that issue in his latest Freemarket Gold & Money Report about the lease rates. James was trying to determine whether the high, inverted gold lease rates were due to do much greater demand by borrowers who wanted to sell the gold or whether the increase in the rates was due to decreasing gold loan supply availability.
……"My sense of what is happening is that the central banks, which together are by far the major source of gold deposits in the bullion banks, are slowly but surely pulling out their deposits. The bullion banks have no lender of last resort to lend them metal to fund their gold loans - many of which now have 5, 10 or 15 year maturity - so the bullion banks must keep funded. It is a classic bank liquidity squeeze, arising because banks borrow short ( take 3 to 6 month deposits ) and lend long ( Barrick and Ashanti have 15 year gold loans for example ). Commercial banks have a central bank to bail them out of this type of liquidity squeeze, but there is no lender of last resort to bullion banks, so gold interest rates rise as a result. The bullion banks must borrow to fund their gold loans, no matter what the cost.
There is a good reason why the central banks may be withdrawing deposits from the bullion banks. Perhaps the central banks see the increased risk in the bullion banks, and are therefore pulling out their gold from the bullion banks for safety reasons. I'm sure the central banks remember how the central bank of Portugal lost 17 tonnes of gold that it had on loan to Drexel Burnham when that firm went under. The risk of the bullion banks is clear-because as the gold price falls, the mine cash-flow drops and the mines that the bullion banks had financed become vulnerable".
We have heard recently that the certain members of the bullion dealer cartel that have been manipulating the price of gold, recruited one, or more, very large hedge fund clients to borrow gold and sell it in the gold market possibly right before, but surely right after, The Bank of England gold sale announcement; we hear of very, very big numbers! That ( AND the reduction in CB gold supply availability ) can partly account for the big gold price drop as well as an increase in the gold loan lease rates.
Now this all fits in with GATA's understanding that the gold market has been manipulated, BUT in the not too distant future, this "collusion activity" is going to backfire on the some of the bullion dealers, some of their clients, and certain officialdoms. More on that below.
Here is a "hypothetical" of what just may have happened and why "what may have occurred" is going to contribute to an astonishing rise in the price of gold.
Say a large, macro hedge fund ( not Soros ) had invested heavily in securities in third world countries and in other illiquid securities. Then say, it was hit with massive redemptions in the billions from its partners. Now what if that firm's capital base was 4 to 7 times greater than Long Term Capital Management? If the hedge fund had to liquidate positions, both "the hypothetical hedge fund" and the entities that they have invested in would suffer terribly. And, who knows, maybe this would set off a "systemic risk" chain re-action which is what the Fed feared if Long Term Capital Management went down for the count and why the N.Y. Fed organized a bailout in that case.
The "hypothetical" hedge fund knows it has a big liquidity problem so it informs the Fed of its precarious financial condition. The Fed, knowing how fragile the leveraged financial system is at the moment, arranges another bailout, but The Fed cannot do it the same way as they did for Long Term Capital Management ( for fear of a backlash by free market proponents and for fear of having to reveal how they would accomplish this new bailout ), so they call their "ace in the hole", The Bank of England. After all, an official of the Bank of England stated the decision had been made for some time and they were waiting for something to implement that decision. The N.Y. Fed ( again ) then notifies its cronies, "The Goon Squad", led by Goldman Sachs of what is coming and notifies them that it will be safe to arrange a massive gold loan for the "hypothetical hedge fund" for the time being because they have made sure the price of gold will be going down for months to come.
Of course, all this will be kept hush hush. It has to be kept hush hush because the implications of this - once known to the world, would prove that the gold market is being manipulated and reveal who is involved in this outrage. The dirty deed is then arranged - dirty, to all of us that believe in fair play and free markets. Thus, the bullion dealers arranged to lend theis "hypothetical" hedge fund billions of dollars via gold loans ( perhaps 10 to 15 million ounces ). The gold is sold into the market, depressing the price of gold further after the BOE announcement. That tremendous supply shock attracts more supply and begins feeding on itself, eventually knocking the gold price down sharply. This helps out the nervous bullion dealers, solves the problem in the short term for the hedge fund, an eventually panics some central banks and producers into panic sales.
For sure, it is public knowledge that Goldman Sachs was selling gold just about every day after the BOE announcement. Maybe for this "hypothetical" hedge fund. Yet, the bullion dealers feed the press with stories of CB and producer selling to cover up the fact that it is really this "hypothetical hedge fund", among other nefarious types, doing the selling. We have already alluded to the N.Y. Fed selling gold right after the BOE announcement. Perhaps it was this "hypothetical" hedge fund doing so with the N.Y Fed's bailout blessing and orchestration.
How convenient ( this Abra Ka Dabra maneuvering ) for these genius' that brag about their winnings and then beg for help when they are about to go into the toilet and lose badly. Remember, this "hypo", hedge fund somehow managed to borrow gold right around the recent high price high as it was ready to take out $290 and put the gold borrowing positions of many financial institutions in jeopardy. Who,- who has carefully studied the commentary and evidence presented, could possibly not believe that our "officialdom", or "officialdom's henchman" did not call up Tony Blair and Co.- to set off that very peculiar gold sale announcement that buried the gold market these past months?
Potpourri and the Gold Shares
The XAU took it on the chin today and dropped 1.75 to 62.87. However, the long term XAU chart is very constructive and the 60 area still represents long term support.
Chase Bank has been a relentless seller of late, Goldman Sachs a buyer. Today, a large fund was actually the featured seller along with Deutsche Bank.
Arch Crawford, the well known astrologer, market technician, just told his followers that the worst stock market crash this century is underway. He has an outstanding reputation for making calls - unfortunately, we think he may just be right.
Newmont Mining Corp, the largest gold producer in North America, said on Thursday it sold forward 483,000 ounces of gold at $300 an ounce to reduce long term financing. The transaction netted Newmont $137 million and the proceeds of the sale will be used to pay down the company's revolving credit. Sources told us that the banks were putting pressure on them to undertake some sort of hedging activity.
Newmont President, Wayne Murdy said, " we feel that market has bottomed", but added that in light of recent central bank sales the action was prudent.
Three things strike me about Newmont's new action: I never saw anyone remark upon taking new action that it was "imprudent"; Hannibal Lechter, his banker, must have been salivating to have the most well known non-hedging gold producer adding gold supply to the market at "the bottom"; Newmont has been selling while "Honcho Hannibal Lechter" ( Goldman Sachs ) has been buying - thereby finding supply to cover gold short positions.
In South Africa, a methane gas explosion killed 18 miners drilling rock at the world's deepest gold mine, the Mponeng mine, on Friday morning.
On Wednesday, mines Ministers from the 71 African, Caribbean and Pacific group nations called for a moratorium on all central bank gold sales pending study of a "central mechanism" that would permit orderly gold sales. This is just one example of the "heat" that is being directed to the world's central bankers and guilty politicos and why we think a fairly decent gold rally is coming
Here is an irony: Basel ( Dow Jones ) -- "The Basle Committee on banking supervision has issued four papers on credit risk in an effort to bolster risk management at banks, The Bank for International Settlements said Tuesday.
"We know from experience that weak credit risk management practices and poor credit quality can pose a serious threat to the stability of banks and banking systems," said New York Federal Reserve President William McDonough, who also serves as Chairman of the Basle Committee.
The following is a list of the four papers prepared by the committee:
-Sound Practices for Loan Accounting and Disclosure
-Principles for the Management of Credit Risk
-Best Practices for Credit Risk Disclosure
-Supervisory Guidance for Managing Settlement Risk in Foreign Exchange Transactions
Talk about the Fox Guarding the Chicken Coop. This is the same William McDonough who arranged the LTCM bailout, hushed up the LTCM gold loan situation, and now sits all over the gold market ( if we are correct ) with a trading account at Goldman Sachs, run by number two N.Y. Fed Man, Peter Fisher.
Would some Café member please remind me about these 4 papers when the gold market is soaring and some bullion banks are going down for the count due to excessive gold lending, gold "force majeurs", lack of proper disclosures to counterparties, the deceptive utilization of calls to enhance forward sale prices ( hedges ), lack of supervision of gold loans, recklessly and publicly understating the size of the gold loans, and so on.
The bank index closed today down over 3% at 828.87, BELOW its 200 day moving average. As you well know, the hottest bank analyst in the U.S, the Café's Charles Peabody, is calling for a crash in the bank stocks. It is this unanticipated event which, when, and if, it occurs, is likely to shake the grip of the gold market manipulators of their strong armed control of the gold market.
The central banks, bullion dealers, financial institutions and hedge funds that are playing the reckless gold loan game are all lovey dovey right now, but that won't last too long when markets crash and financial horror stories flourish. One of the rats will desert the sinking ship and that will be the beginning of a quiet panic to call in the gold loans while one can. As stated in the last Midas, we now think the gold loans have risen to 10,000 to 14,000 tonnes. Yearly mine supply in 1998 was 2,529 tonnes. There is no room in those numbers in a banking crash.
That day is coming and as the calling in of the gold loans gains momentum, we are likely to see an incredible rally in the price of gold. My guess is that if there is enough market chaos in the credit world and liquidity problems are omnipresent, we could see a $150 per ounce gold price rally in a matter of weeks. Watch the bank index and the credit spreads! If the index really slides from here and the credit spreads widen, $400 gold might be much closer than you could every imagine.
Bill Murphy ( Midas )
After graduating from Cornell University, Bill was a starting wide receiver with the Patriots of the old American Football League and has been around the financial and commodities markets ever since. He owned a futures firm in N. Y. that specialized in precious metals and was a contributor to Veneroso Associates, a global strategic investment firm and producer of the 1998 Gold Book Annual.
Disclaimer notice: Midas du Metropole does not look like an investment advisor, nor is he one. Any comments about any gold and silver shares by Midas or any of the Cafe members are for your information and entertainment only. They should not be regarded as advice and should be treated like comments passed on at any other Cafe. We are only relating as to what we like for our own accounts. If you would like to start your own commentary (thread) or post comments on an existing one, click here.
If you would like to review past commentary in the Library, click here.
Send mail to lepatron@lemetropolecafe.com with questions or comments about the cafe.
Send mail to webmaster@lemetropolecafe.com with questions or comments about this web site.
Copyright © 1998 Le Metropole Cafe
|
