Spot Gold $323.25 - Spot Silver $5.57
Like deer looking into headlights. Another extraordinary week for the gold market. That should be just about the norm for most of the coming weeks, months and years. The gold price moves more in an hour now than it used to in an entire quarter of a year.
For some time, I have suggested that the old axiom, "for every action there is an equal an opposite reaction," would apply to the gold market too. That is what is happening, and why the move up here is so violent. For years the gold market was manipulated by the New York bullion houses, et all, to serve their own scheming purposes. Cheap capital was borrowed via practically interest free 1% gold loans and invested elsewhere. As long as the price of gold did not rise, or went down, this play was a bonanza for the "in the know" players. Every time the price of gold tried to rally, these dealers, who I have labeled, "Hannibal the Cannibals," would make sure, via coordinated trading (done with a wink), that the price of gold never breached
certain price points to the upside. During this period, junior gold companies, gold shareholders, gold miners, and all of us associated with the gold industry in most any capacity were devastated.
One can go back just over the past year alone and see that the "Hannibals" defended price points were the $306 area, then the
$296 area, then $290 and a final ill-conceived attempt to hold $262. When the $290 area was about to be taken out to the upside and the "Hannibals" were running out of gold supply in May of this year, the Bank of England was called on May 7th to add supply and psychological devastation to a market that was battered for years, but was finally showing signs of life. It would appear that maneuver was orchestrated by "Hannibal Lecter" himself (Goldman Sachs) and the other "Hannibals" with some apparent help from the N.Y. Fed and/or the U.S Treasury.
All during this period, the supply demand deficit was growing and growing. Frank Veneroso, of Veneroso Associates, believes it rose to 160 to 180 tonnes per month this summer with gold trading in the $250's. At the same time, the "gold borrowings" by confident short speculators was growing too. After all, if the Wall Street big boys, the U.S. government and the bullion bankers momma, The Bank of England, were "dissing" gold, how could it ever go up? A sure winner.
The propaganda machine of these powerhouses relentlessly told the world that gold was a "mort" issue. Anyone who invested in gold, or spouted bullish commentary, was taunted. The "bullion boys," who had the money and the connections to the press, chided us for our views and told gold market reporters and financial journalists that we had no credibility.
To further anesthetize our camp and the investing world, the "The Hannibals" instituted a $2 rule in which they made sure that the gold price never closed more than $2 higher on any given single trading session. I do recall one day when they slipped up and gold closed $2.70 higher. Someone must have been bawled out as gold tanked the next day. Such enforced control over the gold market created "gold dullsville," literally putting to sleep the interest in the mainstream world about gold as an attractive investment vehicle.
That was the action. It was sustained, intense and universally expounded by the mouthpieces of the N.Y juggernaut, bullion house machine. It is either that, or the majority of the gold analysts in New York are just not very bright.
Now, we see the reaction. Again, I share the opinion of Frank Veneroso that the equilibrium price of gold today, free of manipulation, is a bit north of $600. The gold market was unnaturally "forced" to go down to $252. Thus, a "slingshot" mechanism has unwittingly been set in place by the maligned forces that pushed the price of gold so far down, for so long. The slingshot was stretched and stretched and stretched. Pushed to the limit. It was yinned and yinned and yinned. Now it is yanging.
The power behind the yanging and the thrust of the slingshot is beyond the comprehension of most and has surprised most all in the investment world. It has not surprised Reginald H. Howe (see Kiki Table), nor John Hathaway (see Dos Passos Table), nor Midas, nor GATA. All summer I told the Café, with gold staggering around $256, that investing in gold, silver and the gold shares was the best risk/reward investment that I had ever seen.
It is important to understand what kind of power is propelling the 'bullish ball" in the slingshot. It is of typhoon force. It can
propel the price of gold far higher than what the recognized gold establishment houses are telling anyone and, therefore, what the mainstream press is reporting.
The "Hannibal Cannibals" have suckered many of the gold producers into "over hedging." That has resulted in an irresponsible exposure by some of the gold producers to an upward thrust in the price of gold. An entire Midas could be devoted to this subject. The essence of what happened is that the self serving "Hannibals" sold many of the gold producers "structured deals" that involved derivative instruments known as puts and calls. These bullion dealers convinced these producers that the price of gold could never go up for some time, so why not get a higher hedging price with these "structured deal" plans. Gold producers are miners for the most part, not finance wizards. If Goldman Sachs, J.P Morgan, Chase Bank, Deutsche Bank, etc, all said it
was good, then it must be good.
Over and over, producers would come out and tell the press that they hedged "x" amount of forward gold production at a price that was way above the prevailing gold price. Such a deal! What brilliant management. Many of the gold producers became little more than glorified hedged funds. Unfortunately, many of them did know not what they were doing. Still don't.
And that brings us to the moment. The biggest gold producer in Africa, Ashanti, is reeling and while it has incredible assets and done a marvelous job of mining, it is caught in a derivative blow up. Their only way out of their predicament is for the gold price to go down. I repeat - they are hoping for the gold price to go down. Yes, this is the "Theater of the Absurd" revisited. Gold shareholders normally invest in gold producers because they believe in the value of gold, like it as an investment and want to profit from a rise in the price of gold and the enhanced asset value of the companies.
Ashanti is not alone. Cambior is on the ropes too. They are just the ones that have come public at this point in time with their problems. Sources tell me that Cambior is already in the hands of the banks and that management is still there only to keep things going. Ashanti's fate also belongs to the banks. They are in deep, deep trouble.
What is important to understand is that that many of the producers that have these derivative "structured deals" on their books want the price of gold to go down right now so that they can unwind them without too much pain. Many of them are telling money mangers that the option volatility has risen so high that now is not the time to unwind these time bombs.
Wrong again! Now is the time. These companies must stop acting like deer staring into the headlights of an oncoming car. Deer freeze and so have many of the gold producers.
It is a recipe for disaster.
If they cover now, they might have to admit to shareholders they blew it. They might get fired because their performance will be so poorly regarded. But, their companies will be saved and, as the gold price rises, shareholders will be rewarded for their gold investments, not annihilated. Travesty must be avoided, even if some management who acted irresponsibly must be axed.
I think it is very important not to trivialize the seriousness of the situation. A highly respected technician I know just got a sell signal on the XAU. How can that be? It can be because the XAU is loaded with North American gold producers that have had a love affair with the "Hannibal Cannibals."
Now for the gold technicals. They are extraordinarily BULLISH. The Comex Commitment of Trader Report issued after the close on Friday was the most stunning ever released. In 1993 the gold market rallied $80. At the end of that gold rally, the open interest rose to 221,000 contracts and the spec long position grew to 110,000 contracts. A big correction, then ensued.
Yesterday's report showed the large specs to be net SHORT 22,000 contracts. The small specs are only net long 9,500 contracts. This is mindboggling news. If 1993 is to be repeated (there is no reason it should not be), we have another $80 move up in the price coming - MINIMUM - since the open interest on Comex is already close to 221,000 again, yet the specs are short, not long 110,000 contracts.
That would suggest $400 gold is coming - MINIMUM!
The trading action the past 3 days has been superb as the bears tried to take gold down sharply early in each session, but the $315 area has held with strong support surfacing in that vicinity.
Here is how I see it. A bullion dealer told a source of mine that he did not see a great deal of covering yet by the big hedge funds. Time and time again, I have stressed to you how short "the gold borrowing crowd" are. AND MANY HAVE STILL NOT COVERED. That has to be so. The reason is: every technical black box trading system going has to be long. It is hard to fathom any that would have given a sell signal as of last Tuesday. Who is short this market? Has to be the hedge funds in good part and maybe one other big, big player.
After an $80 move, or big move of any kind like this, the commercials in the Comex Commitment report would normally be short. Yet, now they are long. Why? Doug Pollit, of Pollit & and Co. in Toronto, explains it well and offers one possible interpretation. Historically, after such a monster move, the commercials would be short the board against their physical inventory. Because gold is in such tight supply now, the commercials are long Comex and the gold OTC market against physical delivery commitments. That tells you they don't have gold in their basements like they used to!
On top of all this, many of the large cap gold producers need to reduce their call exposure by buying them back or buying futures against them, or both. There is a big mismatch for producers at the moment. They owe money short (margin calls) against owning assets long. These margin calls can eat some companies alive if they tarry too much and do not act quickly. Those that wait for a "dip" will most likely be left standing at the alter. The train will leave the station without them. They will eventually be buying in a complete panic at much higher price levels.
So, we have the hedge funds that need to cover and the producers that need to unwind forward sale "structured deal" hedge programs. That represents powerful buying that has not hit the market yet. Lookout above!
The specs have been long silver all year and it still goes up. I see no reason for that to change until silver approaches $9.78 or so. As long time silver watchers now, the price of silver can rally $3 in a week, even in a day. Silver has a massive base that can support a move to much higher prices.
Fundamentals - Just as bullish as the technicals.
First, take a gander at the precious metals lease rates. They are 4 to 20 times normal as a group. That is an indication of tremendous physical tightness. There is just not a lot of precious metal supply out there.
Lease Rates (Expressed as an annual percentage rate)
Gold Silver Platinum Palladium
Oct 08 1999 Oct 07 1999 Oct 08 1999 Oct 08 1999
Bid Change Bid Change Bid Change Bid Change
1/M 4.4375% +0.5215 6.4160% 0.0000 75.4375% +20.0215 15.4375% +5.0215
2/M 4.5313% +0.4193 7.0120% 0.0000 55.5313% +15.0193 10.5313% +0.0193
3/M 5.1875% +0.0115 8.1760% 0.0000 46.1875% +12.0115 11.1875% +0.0115
6/M 4.8938% -0.0422 8.0860% 0.0000 24.0938% +3.0078 11.0938% +0.0078
Note the platinum lease rates! Will the gold lease rate go that high? The trapped gold shorts talk about new lending coming into market. Fine. Who wants to borrow gold in this environment? Why take a one way trip to the poor house? What producer is going to want to roll over its forward sales? Shareholders are already besieging corporate headquarters around the world trying to find out what their forward sale exposure is. I just got word that Newmont Mining is conducting a hurried conference call on Monday.
Allow me to give you a specific example of what is going on out there. Take Barrick Gold. I know of several money managers who have called them to get the lay of the land. Barrick tells them all is OK. Yap, yap, yap. One spent 20 minutes on the phone with them about all of this. I just happened to call him up after I learned that Barrick has written 3.2 million ounces of calls at a 360 strike price. 600,000 ounces for the year 2,000, 600,000 for 2001, 600,000 for the year 2002, and 1.4 million ounces beyond that. It would appear that this is in addition to their forward sale position of 13.3 million ounces of gold sold forward through 2001 at an average price of $385. This sharp money manager was unaware of this Barrick written call position.
The volatility on these calls has skyrocketed. The bottom line of that is that the prices of these calls that they have written has soared in price. To buy them back now will be prohibitive. Not to buy them back could be corporate suicide. Sources close to Barrick tell me that around $325, Barrick's hedge book is neutral at the moment. That number can fluctuate as it is partly a function of lease rates and call volatilities. A gold price move well north of $325 could start to stress the Barrick financial system. Every Barrick shareholder should know about this kind of exposure. I can assure you that many Barrick shareholders have no knowledge of their call position exposure. It is only fair to ask for disclosure - the truth told and dangers exposed. If you are a Barrick shareholder, I urge you to get on this fast before tragedy is the name of the game. Speak Barrick! Stop postponing your conference calls.
Bullion dealers are stressed out all over the world with margin call problems. How much margin extension can they extend to all these gold producers that are caught flatfooted? How many Ashantis might there be out there? The manipulation of the gold market is backfiring on the bullion dealers. They have boo booed. Corporate management of these bullion banks are now livid. Firings and rumors of coming layoffs are everywhere. The Board of Directors or CEO's are coming in and telling bullion dealers to begin clearing out their positions and exposure. The heat will only grow on these gold units. Then, who extends the margin call money to the producers?
Barrick Gold has done well over the years because of its hedging. They have flaunted that fact to the investment community. They may have arrogantly stayed at the party too long It says the following in the Wall Street Journal in an article about Barrick: " However, if the spot price does rise above $385, Mr. Sokalsky (Barrick's CFO) said Barrick has the luxury of deferring its forward contracts for as long as 15 years and instead selling its gold production at the spot price. That means the company can wait for spot prices to return to lower levels before returning its borrowed gold to the central banks.
I do not know exactly how all these deals work as they are very complicated. What I do know is I can't believe a responsible CFO of a gold producer can make a statement like this. If I owned Barrick gold, I would freak out.
Thus far, Midas du Metropole's assessment of the gold market and what should happen to the price of gold has been spot on. The proof is in the pudding. To verify that is so, all one needs to do is go to the James Joyce Library below and read all the past Midas commentary.
It is my opinion that the price of gold is headed for $600. What will Barrick gold do in that case? What will its stock price do? If you are a Barrick gold shareholder, it might be a good idea to ask that question, NOW.
I am not trying to intentionally bash Barrick. I am trying to get information out to the public domain so investors can be make their own judgments about investing in gold producers based on the facts. I have worked on this all year as long time Café members know all too well. The mainstream U.S. press has been loathe to tell our side of the story, yet have extolled the bearish gold market commentary of the "Hannibals Cannibals."
I just received this email from a Café member:
"Is there an article that discusses how to find the junior mining companies that have *not* sold their future production at give away prices?
By the way, I've conducted a multi-year, more intensive than average investigation into media manipulation, esp. as it applies to big, widely covered stories. Generally, it's a safe bet that the bigger the story and the more widely it's being covered, the more likely it is that the facts presented are 180 degrees wrong and there is manipulation involved. A handful of stories seeded at critical times can start a theme going and once started, these themes, like locomotives, become almost impossible to stop."Reporters don't report, they repeat. And investigators don't investigate, they elaborate."
Price changes, of course, have a nice way of cutting through this kind of news manipulation. Interestingly, if my reading and conversations are any indication, NO ONE seems realize what is behind what just happened and that the triggering conditions are still very much in play.
Though I trade futures, I'm not a particular student of gold, but this summer I detected an undeniable and very obvious media campaign to bash the metal. Finding the very intelligent analysis on your site - thanks to my friend Sam Smith, the most censored journalist in Washington - has filled in the blanks.
It's been a rare intellectual thrill. Thanks again."
Ken
Ken is right. Even now this disinformation campaign of the "Hannibal" camp continues to capture the attention of the media. Some excerpts from an article in yesterday's TheStreet.com:
The hopelessly bearish Peter Ward, mining analyst at Lehman Brothers. "I don't see this as a cause as great celebration." He forecasts the average price of gold to be $280 an ounce over the next three years. Long term, "nothing really changed here," he says.
The perplexing Doug Cohen, gold equity analyst at Morgan Stanley Dean Witter, said that the central banker's agreement will merely keep gold from retreating back to its lows, not push it to new highs.
"We believe a rally within the next 12 months toward gold's mid-1990's perch in the $375 area is unlikely," he writes in a recent report. "Our 2000 forecast goes to $305 an ounce from $295 an ounce."
Then there is J. Clarence Morrison, precious metals analyst with Prudential Securities. "It's a high-priced commodity having a certain amount of usage in the world."
The article ends with: "Your own portfolio probably isn't one of those uses. Just something to think about if you've been bitten by the gold bug."
I rest my case again. This is "out to lunch" commentary. No, it is "outer space" commentary.
OK. Let's get to some good stuff and another reason why the gold price is going to go uptown to a significant degree. During the summer, I reported to you that very well connected GATA supporters told me that serious "government to government" negotiations were going on about the gold market after the Bank of England gold sale announcement was made. They came about as a result of the collapse in the price.
Just recently, I related that the Germans, French and Italians were behind this decision with the Swiss and English told to sign on the bottom line. The door was locked on Gordon Brown, Chancellor of the Exchequer for Britain, as he was kept out of the deliberations.
Continued: |
