Richard,
Seems we think the same way. bill
Midas du Metropole
"The Gold Market and Precious Metals Commentary"
Q. Little Bear is in the 'doghouse'. Which table do you think he'd be under ?
A. Gold, of course. But he is hopeful.
March 11, 1999 - Spot Gold $294 up $1.30 cents - Spot Silver $5.34 up 8 cents
Technicals -
6 days up in a row for gold. When was the last time that happened? It has closer higher every day since we put out our bulletin alert last Wednesday decreeing "major gold rally imminent", so be it! While Navarone was won and we are winning this battle, the big victory is far from over. The open interest has dropped about 20,000 contracts the past two days as most every technical system and indicator has turned bullish. This open interest drop to date is understandable, but the open interest must start increasing soon for the gold market to maintain a healthy technical underpinning. The bullish consensus is a very low 41, which is a nice plus.
We all know the recent gold market trading pattern of the past couple of years and the standard drill. As soon as the specs are done covering, other shorts come in and bash the market. It is hard to know the answer on this one and whether we have a repeat of the same coming. However, the Midas camp remains very bullish and believe that " a new gold era" is about to dawn.
Silver has been yo yoing up and down here, but appears to have bottomed at $5.10 and is now well off that low and seems ready to take on $6.00 on its way to $9.78. The silver open interest has dropped from a little less than 100,000 contracts to just above 85,000 contracts and that represents a decent liquidation. Could have some real silver fireworks lighting up this scoreboard - very soon!!
Fundamentals -
When silver was bopped from its lofty perch of around $5.80, we suggested that a good measure of the selling could be a big gold short ( Goldman Sachs type ) looking to smash silver down to give them some cover for the massive gold buying they wanted to effect to cover gold short positions. The silver lease rates a the time were a hefty 14%. Our thought was that the plan of this group ( that wanted to cover its gold shorts ) was to borrow all the silver they could find and hit the market with it to show supply entering the marketplace. They wanted to turn the technicals bearish and cause some spec longs to pitch their long positions. Theory being, an ugly silver market would distract from the gold buying that had to be done and, in general, continue the general precious metals malaise. We have suggested since then that these short silver positions would be bought back when they had their big gold short position covered or for some other strategic reason. As a result of this analysis, Midas has relayed his opinion to you that the price of silver would run right back up again with this short covering and new fresh buying.
The tip off to us that this analysis was spot on was to be if silver went up when the silver lease rates went down. Most analysts would see a softening of the lease rates as bearish. Short term, we thought the opposite would be true and a market event like that would be bullish if silver went up on that news. Why? It indicates to us that these game playing silver shorts were exiting their big short positions by buying them back. The return of their silver would soften the lease rates, which is EXACTLY what happened today. The silver lease rate dropped from 7% to 4%, yet silver shot about 8 cents and made a recovery high close.
We do not know if this Goldman type group covered all the gold that has to be purchased. We do know that Warren Buffet and the Berkshire Hathaway Group will be posting its silver position in its annual report on Saturday - www.berkshirehathaway.com. This Goldman type short would not want to have a big silver short position going into this announcement.
Reasoning: If Buffet has kept all his silver, the pundits should say it is bullish because Buffet is in for the long haul and he usually wins his big picture bets. If he sold all his silver, they should say the market took all in stride, which should also be bullish. An announcement that he sold part of his position could be construed bearishly. I cannot imagine him announcing that he sold part of his position ( knowing much of the investment world is looking on ) unless he wants the market to react that way and he really wants to buy more. Then there is Martin Armstrong's worst nightmare- Warren Buffet has added to his position in Mr. Strong Hand fashion. That news could send the price of silver skyrocketing. Thus, our Goldman type game prime time players would not want to go into that announcement with a big short silver position and want to buy ahead of this weekend.
Also announced today in a Dow Jones report from Mexico City. "Output of silver in Mexico, the world's largest producer, is forecast to remain almost flat around 85.96 million troy ounces for the next two years, Jeffrey Christian of the CPM Group said on Wednesday. "Christian went on to see there will be no big production increases for two years.
This is a positive for silver market as demand for silver coins and silver bars should take off going as Y2K time approaches.
This is what we like to hear. Bloomberg - March 11 - Perth, Australia: Lord Lawson of Blaby, a former U. K. chancellor of the exchequer, comments on possible gold sales by the European Central Bank and the strength of the Euro, at the 1999 Australian Gold Conference being held in Perth.
"There will be an effective veto while the Euro is establishing itself, and while the European Central Bank is establishing itself, on any remotely significant gold sales either by the bank itself or the central banks of France, Germany and the 11 countries that make up Euroland".
"The more instability there is the greater the concern not to do anything to rock the market's confidence by selling gold," he said.
The ECB has said all long that they would not be selling gold after Jan. 1, 1999, but the press continues to print central bank selling stories that creates negative sentiment towards gold buyers. This type of reinforcement and bullish story on gold is good to see in print. Of course, Midas would add that the Euro has been very weak since its inception and traded very poorly. The last thing the ECB should do under these conditions is pitch gold and the big boys in charge over there know it. "Gold sales would strengthen the U.S. dollar's role as the world's currency," Lord Lawson said.
More good news from German Finance Minister Oskar Lafontaine. He resigned today. Oskar has been the big proponent of IMF gold sales. It can only help us gold family people to have him out of the political scene in Germany.
More on the Goldman Sachs saga - First, 10 days ago we identified to you that they were very big buyers around the $285 area and ( for themselves or someone else ) heavily bought $300 two month dated gold calls while heavily selling the one year $340 calls. We also know they have an IPO coming. Before Goldman can go public, they have to file a prospectus that will list all long and short positions, and more; as of 7 days prior to the prospectus release they have to reveal those positions in the prospectus about the IPO, which might come in April. That might be a very good reason that they have been covering gold shorts.
We do not want to be to cute on this but everyone and their brother knows that Goldman Sachs was the big gold seller the past couple of days. They made that very obvious to all. We were not sure what to make of it. Our first thought was that the the price of gold had started up sooner than they thought it would and that they were not able to do all the gold buying that needed to be done. Thus, the visible display and to try and stop the market here to attract producer selling and weakness so that they could resume buying without running the market up.
That was sheer guess on our part. Today, however that hypothesis became more plausible. We were alerted by sources that Goldman was phoning around this morning telling certain producers that they should sell forward right here at these prices. At the same time, we heard they were looking to purchase physical gold in London. This will be an interesting one to sort out as time goes on.
Potpourri and the Gold Shares
The XAU closed at 66.55 and acts like some wayword soul. It is hardly reacting at all to the move up in gold. It just shows how demoralized the entire industry is. There are few believers that the price of gold can really move much higher. The mainstream gold analysts in New York and London are typically like Goldman Sachs who puts out $290 as its gold price for 1999 and a whopping $300 for next year. No wonder institutional money managers are not buying up the big cap gold stocks. Especially, with the general stock market setting records. Of course, we think this type of narrow vision thinking is what will give us gold and silver share buyers mega returns in the months and years come. The gold cap universe is a tiny one. By the time all these money managers want in ( as mainstream analysts belatedly turn bullish ) THEY WILL HAVE TO PAY UP, THEN WAY UP, just to get into the game.
Word is that the option writers of the big November call position on the Comex have been complaining that it is tying up to much of their capital and has restricted their trading activity of sorts. The shorts on Comex are what the casino is to a gambling establishment. The rules always go their way. Thus, we understand the capital requirements on writing calls for exchange members was just reduced. However, we hear that much of this big Y2K, way out of the money, call position has not been hedged. A sharp rise in the prize of gold would strike terror into the call writers and could produce some panic buying of gold coverage.
The latest from Café sources in various parts of the world: hedge funds are becoming increasingly nervous about their gold carry trades and are beginning to exit. Some are going back into the yen carry trade; there was a huge range trader present today in gold-buying and selling an 80 cent range. Have no idea what that was about. But it appears there was good money made.
More good news in the press. Almost too much to handle in one day.- Dow Jones - Zurich- Calls for more detailed disclosures of central bank reserves emerged in response to the Asian crisis, where the lack of disclosure on derivatives positions has been blamed for heightening market anxieties and accelerated an outflow of capital. As a result of these calls, The IMF will release a report in April on standards aimed at improving information on central bank reserves.
This is important because we believe the spec gold borrowings ( much of which are used in derivative trades ) exceed 3,000 tonnes which is greater than one year's mine supply. Greater transparency can only be a positive for if this becomes understood by the marketplace and bankers, there will be great pressure for the bankers to reign in these loans. They are a time bomb. If anything sets off the gold market in a big way, some of these loans will not be able to be repaid. There will be "force majeures", defaults of all kinds and counterparty risk will become a word used many times a day by the gold community.
Le Metropole's Charles Peabody warned us months ago that the next big derivative blow up would come in the spring. U. S. regulators must have an ear to Charles as they issued this bit of advice yesterday: Reuters - U.S. banks and thrift lending institutions were warned by federal regulators on Wednesday to prepare for higher losses because of weak international markets. "We recognize that today's instability in certain global markets, for example, is likely to increase loss inherent in affected institutions' portfolios and consequently require higher allowances for credit losses than were appropriate in more stable times," said the joint letter to lending institutions from the Federal Reserve and four other regulatory agencies.
Midas
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