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Gold/Mining/Energy : Gold Price Monitor

GDXJ 109.23

+3.7%

Nov 28 4:00 PM EST

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To: Ken Benes who wrote (48920)	2/13/2000 11:20:00 AM
From: russwinter	Read Replies (1) of 116788

Ken, you gave a good synopsis of the concerns. Equilibrium in the gold market has in the past been distorted by the fact that it is basically a nonconsumable asset with a huge amount already above ground in the hands of governments. As you suggest, this puts in place what I call the "hearing footsteps syndrome", whereby no player can be sure when the next Treasury will unload and distort the market again. My sentiment is that this footstep practice has changed from last September's announcement. I think the primary reason the CB's/Treasuries made the shift is to squelch the moral hazard (of gold only going down) that developed (the gold carry trade) among various speculators and financial institutions. This trade was another bubble the CB's/Treasuries (especially European- UK, and probably US as well) wanted to deal with. Unfortunately the process of correction involved controlling the spike that developed after the announcement. Otherwise some big institutions may have failed. So the moral hazard element was reinserted back into the trading system as the Treasuries stabilized (interfered with the spike). This left observers like you wondering if we are just slipping back into the old regime. I think the answer is no. The Treasuries have served notice on the gold carry trade speculators that the rules have changed. They also bought those speculators (and producers) a little time to adopt(at a loss)to the new environment. That time has largely past and now I think the trading system will shift closer to equilibrium. My guess is that any runaway price moves may be contained by interference but that the fundamental trend will be left alone. On your point about mining supply, I don't see any signs yet of a ramp up. If anything, new projects will be more difficult to finance now because the old tool of selling ahead years of production is being removed. The only way these projects can be financed now is through equity underwritings, and to do that, the stock prices of the gold producing companies need to move substantially higher. Right now the market is still sending the strong signal NOT TO DEVELOP NEW PROJECTS BY USING HEDGING. The need for new sources of capital and finance is putting the majors into the mode of focusing on getting stock prices back up (regaining the favor of investors: certainly a bullish scenario). That is why we are seeing these hedging announcements being made. I think they will continue to make those hedging changes until they "get it right" with investors. In the interim the next move by the majors will be to lock up (fill up the pipeline in preparation for the next financing cycle) those exploration projects that make sense in a 300-350 price climate. So I feel confident that market forces are back at work in gold and that the markets are moving towards equilibrium. It's not going to happen overnight, but the gold bull market is underway. The wild card is major new investment demand. I believe that kicks in above 350 and on towards 400 as most investors try to jump on after the train leaves the station.

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