Didn't see this one here yet.
thestreet.com
Goldilocks Eats the Bears
By Aaron L. Task
Senior Writer
9/28/99 8:56 PM ET
SAN FRANCISCO -- Read my lips: The move in gold the past two days has nothing to do with inflation. Maybe inflation is coming back and maybe it's not, and maybe someday gold will reflect whatever is going on. But I'll leave that discussion to James Padhina.
What I can tell you is the move on the Comex December gold futures contract to $311.50 today from $267.80 Friday -- a 16.3% increase -- has everything to do with the fact the yellow metal has been a favorite target of short-sellers.
For the two weeks ended Sept. 21, noncommercial short interest in gold totaled 99,877 contracts, according to the Commodity Futures Trading Commission in Chicago. CFTC officials did not return calls seeking verification, but precious metals market participants say that is the highest level of short positions in history and represents just a fraction of total worldwide short interest.
"There's no doubt we're primarily seeing short covering," said George Milling-Stanley, managing director of gold market analysis at the World Gold Council. "I think the price has been artificially depressed by speculative selling, cheap leased gold and the widespread perception that central banks were about to unload gold. Now that you've eliminated the principal reasons why gold came down from $400, it doesn't surprise me we seem to be going back up again."
Milling-Stanley referred, of course, to the announcement late Sunday by 15 European central banks of a five-year moratorium on new gold sales. The central banks also announced limits on lending activities, he noted.
A recent increase in lease rates was a key reason Salomon Smith Barney analyst Leanne Baker upped her recommendation on the precious metals industry to outperform from market perform on Friday, a prescient call for sure.
"With lease rates typically ranging at 1% or lower, producer and speculator short-sellers have been able to add to short positions with impunity," Baker wrote.
Baker was traveling and thus unavailable for additional comment, but other sources said lease rates have risen to as high as 3% in recent weeks.
Meanwhile, John Hathaway, manager of the Tocqueville Gold fund, explained why those previously dirt-cheap lease rates were so alluring to speculators.
In a (chocolate-covered) nutshell, central banks lent gold to bullion banks -- the gold market's version of the primary government securities dealers -- who, in turn, lent it to hedge funds and gold mining companies, who then sold it in the over-the-counter market. Most producers put the proceeds in escrow-like accounts while hedge fund managers went searching for higher returns.
"You had all this bearishness [and] lease rates to borrow in the low 1% area," Hathaway said. "So you had an easy carry. You could buy 1-year euros and get a 4% to 5% spread [vs. the lease rate]. It would be hard to explain if you were a hotshot hedge fund guy why you weren't" doing this trade (which had come to replace the yen-carry trade that got many of them in deep doo-doo last summer.)
A shrewd trade for sure, that is until this weekend's announcement by the central banks. The short-sellers' dilemma was compounded by the fact that gold sold into the over-the-counter market had been broken up and resold for jewelry and other aspects of the "physical" market, the fund manager said.
"That gold is not available to repay margin calls that are going out all over the place," he said. "You can be sure there are severe margin pressures on any number of players. It's a vicious, vicious short squeeze."
Revenge of the Gold Bugs
Because of its international appeal and unregulated nature, the gold market is fertile ground for rumormongering. For one, Hathaway disavowed any knowledge of specific players caught, to paraphrase Warren Buffett, swimming naked when the tide goes out.
But, not surprisingly, the airways in and around Wall Street were abuzz today with speculation about who was short gold and getting their comeuppance. Speculation had it the gold short squeeze was pinching some of the biggest names in the hedge fund industry (as well as some of its most infamous participants).
"Odds are John Henry made a fortune shorting gold," said Hunt Taylor with Tremont Advisors, a hedge fund consultant in Rye, N.Y. "But this kind of a move could be very punishing" because of the dramatic speed at which spot gold prices spiked.
Vern Sadlacek, president of John Henry, a Westport, Conn., commodity trading adviser, said the firm "absolutely had no comment on the activity in the gold market, or on anything else." John Henry, as a CTA, trades currencies and commodities; CTAs are considered by Wall Street to be a sister class of hedge funds, or "alternative investments."
Similarly, representatives at Tiger Management and Tudor Investments declined to comment on their respective positions. A spokesman for Soros Fund Management said the hedge fund does not comment on rumors as a firm policy. (BTW, Soros is rumored to be long gold.) A spokesman for Long Term Capital Management said the firm "has never had any position in gold or exposure to that market over the entire history of its existence," reiterating a previous statement.
Perhaps most reflective of the somewhat curious nature of the rumoring is that Victor Niederhoffer was another name mentioned as being short the metal. Niederhoffer, you'll recall, was forced to liquidate his funds' positions in October 1997 because of the market's precipitous drop that month.
"I haven't traded gold in years," Niederhoffer said today. "That rumor is completely fallacious."
Asked what he's doing now, the once highly successful hedge fund manager said: "I'm slowly climbing up the stairs, trying to reach a stage where I can touch the toes of some of those great people that ascended while I was declining."
Niederhoffer may find those toes easier to reach if rumors about their positions prove true. The implications of gold's rise are believed to be so draconian that market players were seriously talking about seeing one or more hedge funds go out of business in the near term.
But I won't name those names because it's impossible to confirm any of that scuttlebutt. Moreover, avoiding litigation is one of my favorite hobbies.
Barring natural disaster (or a better story), tomorrow I'll address why central banks did what they did when they did it, and what investors should look for (and avoid) in gold stocks.
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