Hi Dr. Richard, how U doing? How sick is the XAU today? Always looking forward do your diagnosis <VBG>. Is Veneroso seeing a new good drug on the horizon for our sick gold? Here is what he said:
Gold Watch
Veneroso Associates
May 14,1998
Issue 05.03
Gold's Six Month Base May Be Near Completion
If the EMU related selling ( e.g. Belgium ) and
Asian liquidation ( e.g. Korea )
is over ( as we believe ) , the gold market is poised
to begin a major rally.
Our short run position on the gold market has been:
1 ) Sustained EMU related selling has continued to
cap the market. We hold to
this position despite growing comments to the
contrary. As long as this
persists gold will trade in a $290-$315 range.
2 ) Even though the funds have ample room to add
to their shorts, we doubt they
will do so sufficiently to take the market to its prior
lows. Speculator and
producer sentiment has improved and France,
Germany and Italy may be placing
pressure on any selling European central banks to
not "trash" the gold price.
Therefore, the impetus needed to take the market
to its prior lows should not
materialize.
3 ) Comex open interest patterns suggest a large
buyer has entered the market
below $300.
We concluded from the above that the gold market
may well bottom in the high
$290's and rally back to $315.
Since then we have had the following inputs:
1 ) Funds have continued to sell, presumably
adding to their shorts.
2 ) Good support persists in the high $290's ,
probably from producer buybacks
3 ) The Australian producers may have hedged 100
tonnes on a net basis in Q198.
That is more than we expected, and suggests
producer hedging has been greater
than we thought.
4 ) At a J. Aron conference in New York, Mr.
Terry Smeeton has said:
"ECB approval is going to be needed to allow
individual European central banks
to sell any more of their gold from January 1, 1999,
but even before then I
think it is improbable that we will see any more
European Central Bank sales
this year, because of the risks to EMU this would
entail." This comment
suggests that, if there has been undisclosed EMU
related official selling, it
has ended around May 1 or will end imminently.
Smeeton's comments suggest a possible end at
hand to the price resistance in
the gold market. Several formerly bearish dealers
have turned positive; this
suggests the same. This would explain producer
buybacks below $300, since the
largest producers would be informed of an end to
official supplies by their
bullion bankers. The odds are increasing that the
market will find support at
current levels, will rally, and may take out
resistance on the next rally and
go to new highs.
What if there have been no undisclosed EMU
related official sales?
Surprisingly, this points to a conclusion similar to
the one expressed above.
We can explain the bear market of 1997 without
such EMU related selling,
though it is a bit of a stretch. We estimate the deficit
in the gold market
last year was 1600 tonnes. We can construct the
following supplies that led
to that deficit:
1. Half the 299 tonne Belgian sale occurred late last
year. Of this 150
tonnes, one hundred tonnes went into the market.
This plus all recorded
official purchases and sales to date put net official
sales at roughly 300
tonnes in 1997.
2. Net producer hedging was 600 tonnes. This is
slightly above what we can
total up from the various broker surveys of
producer hedging. Most of these
surveys of producer hedging miss a few producers
who may hedge.
3. Net speculator short sales were 500 tonnes. (
Peter Munk has argued that
such sales were a major contributor to the 1997
bear market ) .
4. End use physical demand rose by more than
10% last year. Total inventories
of fabricators, wholesalers and retailers were two
times sales or 8000 tonnes
at year end 1997. One quarter of this was financed
by gold loans.
Inventories grew 10% with sales. This implies 200
tonnes of borrowed gold by
commercials. ( These inventory dynamics are
explained in detail in The Gold
Book Annual. )
Total Official Supplies
Net Official Sales 300
Producer hedging 600
Net Spec Shorts 500
Commercial Borrowings 200
Total 1600
Overall, this proposed composition to 1997's
official flows is a bit of a
stretch; the last three items all look a bit high. The
data would make more
sense if there was an additional 200-400 tonnes of
official sales last year.
Perhaps GFMS is right that the deficit in the gold
market was 1000 tonnes or
so, not 1600 tonnes, but, as we explain at length in
The Gold Book Annual, we
doubt this.
It is possible that there were other undisclosed
official sales in 1997; for
example we have heard that distressed Asian
central banks sold undisclosed
accumulated gold positions in the second half of last
year. We understand
that GFMS still believes that there were several
hundred tonnes of official
sales in 1997 that have not yet been disclosed, but
that the major EU
countries were not involved.
Let's assume that the above composition of
supplies crushed the gold price in
1997. What has happened in 1998? First, perhaps
100 tonnes of the Belgian
sale went into the market in early 1998. Second,
there was 250 tonnes of
Korean dishoarding in the first quarter. Lastly,
reports from Australia now
suggest there may have been 100 tonnes of hedging
by Australia's producers.
If so, it is possible that hedges and buybacks by
producers in the rest of the
world may have been offsetting, resulting in net
producer hedging globally of
100 tonnes. That comes to 450 tonnes of such
supplies in the first quarter,
which would explain a still deeply depressed gold
price, even with some net
fund buying.
April and May are more difficult to explain. It is
possible that it takes a
month or two for the sustained physical supplies of
1997 and early 1998 to be
absorbed. If this is so, the gold market met
resistance in April on scale up
producer selling and a short run abatement in
physical demand. It has
recently fallen on spec liquidation and renewed
shorting. If the EMU related
selling ( e.g. Belgium ) and Asian liquidation ( e.g.
Korea ) is over ( as we
believe ) , the gold market is poised to begin a
major rally. |
