Gst, sorry for not getting to the article. Here it is.
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September 30, 1999
There's a whiff of fall 1998 in the air: The big rise in gold has some hedge funds in trouble, according to rumors circulating on Wall Street.
Those hedge funds, and other speculators, have been shorting gold -- or betting on its decline -- by borrowing the metal at low interest rates and selling it. It is called the gold-carry trade.
The stunning rise in the metal to above $300 an ounce now has the speculators on the run, said Kennedy Gammage of La Jolla's Richland Report.
This week's announcement that European central banks will restrict gold sales to 400 tons a year for five years frightened the shorts, who scrambled to cover, sending gold's price soaring.
The speculators have been shorting gold by borrowing it from big investment banks that in turn borrow it from central banks, Gammage said.
"The central banks started to worry that the hedge funds have shorted more gold than the central banks have available," Gammage said.
Such fears led to the announcement that European central banks will be restricting sales of the metal. Then came the short squeeze that drove up the price.
Gold backed down yesterday to $302 an ounce, but that was to be expected, Gammage said.
American consumers do not seem to have jumped aboard gold yet: Business is slow, "not what you would expect a run to be," said Steve Last of La Mesa's Coin Country. "The action is in the United Kingdom."
But gold action is slopping over to Wall Street. Yesterday, the stock and bond markets got gooseflesh over rumors of the speculators dumping stocks and bonds to raise funds to cover their gold shorts.
E. James Welsh of Carlsbad's Welsh Money Management, who sometimes hedges his portfolio with gold, missed this run-up because it came so fast. Welsh will buy on a pullback because there are a lot of people sitting on the sidelines itching to buy it, he said.
"The pullback will be short-lived," Welsh said.
With Europe restricting sales, "gold should be able to move in accordance with market forces, without the hanky-panky," Gammage said. However, he said if it should get to $400, "there would be utter panic," and central banks would begin dumping it again.
"Gold is moving back toward real value, $500 or $600 (an ounce)," said Richard Russell of La Jolla's Dow Theory Letters.
But, Russell said, he thinks it will take some time to get there, and he would not buy it now.
A number of technical indicators, including the Dow Theory, are now giving off bearish signals on the stock market, he says, and that means the economy will weaken and deflationary forces will hold down gold -- and also hold down the stock market, Russell said.
Russell and Gammage agree the vast majority of stocks have been in a bear market since April of last year; about 100 blue chips are holding up popular averages.
Russell and Welsh say the bear market in stocks is already here. Gammage says stocks could recede irregularly until late October, when there will be a rally. By early next year, we may know if the popular averages are in a bear market, or are still in a bull market.
However, Gammage says, "we are seeing tremendous volatility, and that is symptomatic of a topping." Y2K fears could hurt stocks, but they could be bolstered by Federal Reserve-engineered buying, Gammage said. The Fed denies that happens.<< |
