Little Joe,
I have no credentials for analyzing the article. However, from a common sense perspective, I think the article you posted, along with this one from this morning, have a lot of merit. I hope they are both correct.
Have you ever seen the write-ups from a group called GATA? gata.org
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For Monday, August 30, 1999
Gold less tarnished than it seems
Latest fall simply a bear squeeze in the making
By PATRICK BLOOMFIELD
The Financial Post
Don't write off gold quite yet -- for two good reasons.
The first is that buying any investment that everybody else loves to hate can eventually be an effective means of making money.
The second is that no market is exactly what it appears to be on the surface. CIBC World Markets economist Jeffrey Rubin may have been quoted in this column recently that central banks hold the equivalent of 12 years of global gold output and some are willing sellers.
But how much of that gold is readily available for delivery, free of paper claims against it? If there is far from enough to meet market circumstances at any time, you have a bear squeeze.
For this thought I am indebted to Doug Pollitt, of Toronto Stock Exchange member firm Pollitt & Co. Inc., for sending me, not only his thoughts on this potential, but those of John Hathaway, the fund manager of New York-based Toqueville Asset Management Limited Partnership.
As Mr. Hathaway sets out in a piece called "Anatomy of a Bear Trap," there was once a time when the relationship of gold to paper assets was in the form of a pyramid, being currencies issued by governments, backed by physical gold held by the central banks.
That relationship has long since been abandoned, and replaced in recent years by a currency/gold pyramid that is much less stable.
Mr. Hathaway stresses that there are few published figures for the new pyramid, no reserve requirement, no supervision or regulation and no accountability. It is the private domain of bullion dealers, central bankers and mining companies. Its creditworthiness, says Mr. Hathaway, can only be an educated guess and his guess is that it is bankrupt.
In his view, it has become a trap from which few short sellers will escape, because "paper claims in the form of derivatives far exceed the physical metal on which they are based."
As Mr. Hathaway sees it, there is the paradox that the further the gold price falls, the stronger the consumer demand, which has already been rising, and the greater the pressure on the availability of gold for immediate delivery.
In his view, central bank and official sector selling represents only a "small percentage of the excess supply of gold." Far more meaningful, but much less publicized, has been the selling pressure from gold borrowed or leased from central banks, and resold for the accounts of mining companies or financial institutions.
Central bankers apparently report leased gold as "gold receivable" and lump it together with gold on hand. In his view, much of this borrowed gold has already been melted down and sold into the physical markets, and no longer exists in physical and deliverable form. "Aided by poor information and worse governance, physical gold borrowed from the central banks has been sold over and over again in multiple transactions."
Mr. Hathaway suggests that the "short-cover" ratio rivals the most overvalued Internet shares.
He talks of a 6,000 ton to 10,000 ton physical short interest. As at year-end 1998, 3,600 tons had been sold short by mining companies against future production, possibly 1,500 to 2,000 tons would be payables of jewellery fabricators, and the 1,000-ton to 3,000-ton balance speaks for speculative positions held by commodity funds, hedge funds and financial institutions.
The mining companies' role speaks for a further paradox. The more the price falls, the lower the value of producers' reserves (against which they have sold forward) and the lesser the creditworthiness of their forward sales.
Mr. Hathaway makes a convincing case for an aggregate short position that, in his view, represents $40-billion to $80-billion (all figures in U.S. dollars) of capital at risk. Thus, a short covering rally of $50 to $100 an ounce (which he clearly regards as possible) would cost $8-billion to $16-billion.
I have to admit to knowing dangerously little about the bullion market. But I have witnessed my share of bear squeezes. They can be powerful price propellants.
Come any significant increase in financial market tensions, which have already sent gold lease rates upward (and thus eroded gold's role as a source of cheap finance), a further sharp rise in lease rates could wipe out the profitable spread that has helped propel gold prices lower.
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