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Gold/Mining/Energy : Epic EAS.v (formerly Epic ERB.v and Safari SIR.v)

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To: CLK who wrote (1711)	3/26/1998 10:59:00 PM
From: Henry Volquardsen	of 3335

Off Topic to CLK Nice to hear from you again. Hope all is well. As background let me first say that I am no longer bearish on gold. I think I posted a while back that I thought we had seen the bottom of the move and that we would eventually move back to equilibrium between $350 and $400. However I still believe the trend toward the demonitization of gold is inevitable. I don't believe there is a golden trap being set for the dollar. You bring up a very interesting point with the statement from the head of the Italian Central Bank. We also had recent developments from the Belgian Central Bank which impact this as well. First let me state clearly that we are dealing with Central Bankers here. They may be European but they studied at the same school of public speaking and political positioning as our own Alan Greenspan. When listening to these guys it is as important to look for what they don't say. I'll break this up into two parts. First discussing the political situation and then I'll try to deconstruct exactly what they have said and what they didn't publicize. Politically this is a very important period for Italy. Within the next two months Europe will decide exactly who will be in the first stage of the Euro. The dirty secret is that, other than Finland and Luxembourg, no one actually meets all the criteria. This will not stop them but will make it an intensely political process. One of the big debates is Italy. Italy intensely wants in. The lower rates that the Euro will have will help Italy drastically reduce their debt and the growth prospects for Italy will be excellent. The French also have a strong interest in having the Italians in. The French economy has always been the most vulnerable to Lire weakness and the Euro will stop that game once and for all. The French also count the Italians as their most likely allies in coming debates over common monetary policy. The Germans have not been as eager. The Italians have the largest outstanding debt of any of the Euro aspirants. The Germans don't want to pay the bill for paying off Italian debt. The German public has already seen the impact of an ill-designed currency union first hand. The reunification has had very high costs to West Germany. So the German public is very nervous about losing the strong deutschemark. The German public also likes gold behind the currency. This is a long way of setting up the following point. When the Italian Central Bank made these statements there were acting very deliberately and the target of their remarks was German public opinion. In the run up to Euro selection they are trying to assure the Germans that they also support a strong currency. Now exactly what did the Central Bankers say. I said the Belgians did something. They sold gold to five other central banks. The buyers were all characterized as emerging economies. However they also made comments to the effect that the Euro would have about 30% gold backing. Very interesting statement. Currently the soon to be Euro currencies as a group report gold at 20% of reserves. However several value gold at historic prices and if revalued that gets you to @27%. That still appears to give room for gold purchases. However you have to look very carefully at what they have been saying and what they haven't been saying. First they have only said that the Euro would have about 30% gold backing. The Euro will have much lower backing than the current Euro Currencies. The reserves held by the EMI, which will back the Euro, will be barely more than 50% of the current reserves for Germany alone. The individual European Central Banks will continue to exist and hold their own assets (they will no longer really be reserves). No one has said what the weighting of these assets will be. How much gold they will hold. Also the current reserves of all the European central banks include significant amounts of other European currencies. When these are converted to Euros they will no longer be reserves and gold's percentage of reserves will automatically rise. SO the central bankers are being precise in what they are say but misleading in what they are implying.

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