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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Alex who wrote (41546)	9/29/1999 4:34:00 PM
From: goldsnow	Respond to of 116770

Precious metal on knife edge amid chaos By Stephen Wyatt Gold bullion went on a rollercoaster ride on international markets yesterday as hedge funds tried to scramble out of potentially disastrous leveraged positions. Early yesterday in New York, bullion surged to a peak of $US328 ($500) an ounce - its highest level in two years. It retreated to below $US300 as buying evaporated in Asian trading before jumping back to $US317 in Europe last night. This sort of wild and unpredictable price action has not been seen in the gold market since the early 1980s. Volatility levels have leapt over the past few days from 12 per cent to 47 per cent and traders are referring to the market as "chaotic, wild and uncertain". Now, gold is on a knife edge. After losing 40 per cent of its value in the past three years, the question is whether this wild rally of $US70 an ounce, or 25 per cent, over the second half of this month is just a temporary correction from its continuing demise as a financial asset, or its rebirth. The key to the direction of the market in the short term is the extent to which hedge funds and other major holders of gold short (sold) positions have completed covering (buying back) these positions. And no-one knows because most of the trading occurs in the over-the-counter market as opposed to the exchange-traded market. No-one knows just how much financial trouble some big hedge funds could be in as result of the gold rally and whether these funds have a lot more buying back of sold positions (short covering) to do. Some commentators argue that there is plenty more hedge fund short covering to do because the "gold carry trade", a no-brainer for two years, has gone horribly wrong. No one knows just how much gold is involved in this type of transaction. Estimates range from a few hundred tonnes to a few thousand tonnes. The gold carry trade involves the leveraging of, say, $1 million into the gold market by borrowing $10 million worth of gold at the gold lease rate, say 2 per cent. The gold is then sold and the funds are invested at, say, 6 per cent and earn a net 4 per cent. This gives a return of $400,000 on the initial $1 million, or 40 per cent. But if the gold price rallies, the hedge funds get hurt. And that is what is happening now. "If short positions are anything close to the size some people have rumoured, then $US400/oz or even $US500 would not be unrealistic targets," said Mr Philip Klapwijk, managing director of Gold Fields Mineral Services Limited. But he adds that gold short positions are unlikely to be as large as some suggest and the rally won't be nearly this powerful. Also, he says, as the gold market rallies, demand will weaken considerably. Most analysts suggest there has been a fundamental change in the market. When the European Central Bank and 15 European national central banks agreed last Monday to cap gold sales at 2,000 tonnes over the next five years, this removed massive uncertainty from the market. While the question about the extent of short covering is critical to determining just how much higher the gold market might go in the short term, of greater longer-term significance is the cap the European banks have agreed to place on the amount of gold they will lend to the market. If lease rates rise as a consequence of this, then the carry trade will disappear, short selling will be less profitable and gold producer forward selling will become less attractive, says Salomon Smith Barney's Mr Alan Heap. But beware, says Mr Andy Smith, commodity analyst with Mitsui Busan in London. Of the 6,000 tonnes of gold currently being lent, these EU or "gold bloc" countries only lend 1,500 tonnes, and the other central banks have plenty more to lend and sell. Other analysts warn there remains too much gold in the vaults of central banks and this gold is going through a demonetisation process. Central banks are now net sellers, no longer buyers. afr.com.au