(on topic, article on gold) San Francisco Chronicle
Subj: Rick Ackerman - San Francisco Chronicle: "Score one round for the little guys"
Date: 10/4/99 0:06:43 AM EST
From: LePatron@LeMetropoleCafe.com
To: dougak
Le Metropole members,
The "Left Flank" is indeed picking up steam in the
mainstream press. Our effort has been relentless and
will continue to be so!
This article was in today's San Francisco Chronicle.
This is one sharp journalist. He knows his stuff.
"Score one round for the little guys"
With gold on a bullish rampage last week, small
investors racked up impressive gains on dirt-cheap
mining stocks while many hedge funds and bullion bankers
got caught with their pants down around their
ankles.
Equity portfolio managers and other institutional
investors have been largely out of gold stocks for
more than a decade, mainly because mining shares
have been too depressed and too illiquid to
buy or sell in size.
But the diehards who held them last week feasted
as spot bullion prices rocketed from below $270 to
above $320 in just a few days. Echo Bay shares, which
earlier this month had sold for $1.18, shot up to $2.62;
Durban Deep went from $1.69 to $2.50, and Placer Dome
soared from $10 to $17.
>Commodity speculators who were positioned with the
trend fared even better. "Some of my customers held
$180 call options that went to $3,500," said one
Chicago broker, Rob Rosenberg. "The market was
sold down so hard that it was ready for a bounce."
Call it sweet justice.
For years the institutional leviathans have been
raking in easy money by betting on gold's continued
decline. Their strategy has been to borrow, or "short,
" gold with the expectation of replacing it at lower prices.
With bullion's value in practically ceaseless decline
since the late 1970s, this has been the sweetest game
in town.
It works like this: First, the hedgers borrow gold
from the central banks of Europe or the U.S. for a
nominal rate of 1% to 2%; then, they sell it for cash
and park the proceeds in risk-free Treasury
paper yielding anywhere between 4% to 6%.
The spread is profitable by itself, but many pushed
the leveraging a step further, using the Treasurys as
collateral to speculate in the stock market.
For a while this strategy simulated a kind of
financial perpetual motion machine whereby everything
that the hedgers owned moved up in
value while all that they owed moved down.
This borrow-yourself-rich gambit is known as a
"carry trade," and it is the same trick the pinstripe
crowd once performed to spectacular excess using the
Japanese yen, which can still be borrowed for next
to nothing.
Even so, the high-octane money-machine seized when
the yen began to appreciate sharply against the dollar
13 months ago, making it more costly for carry-trade
operators to pay back their yen-denominated debt.
It wasn't long before the Japanese currency's
precipitous and wholly unexpected rally put some
massively leveraged U.S. hedge funds on
the ropes, necessitating a strident easing of credit
by the Federal Reserve to prevent a systemic
financial collapse.
Now, it's possible the Fed will have a new crisis
on its hands, since some very big institutional
players who have been using borrowed gold for
carry-trade leverage are rumored to be in way over
their heads.
One reason is that gold lease rates have skyrocketed.
While just a few months ago the hedgers were able to
rent gold for 2% or less, the rate spiked last week to 11%.
Even if rates fall by half it will be prohibitively
expensive for >gold shorts to maintain their positions.
Moreover, there is not enough physical gold readily
available to replace what they have borrowed.
The problem boiled up on Tuesday, when Europe's central
banks said they would restrict bullion sales to 400 tons
a year for the next five years.
Before the announcement the central banks had been the
gold hedgers' best friends, lending more or less
unlimited quantities of bullion on demand, and at
bargain-basement rates.
Moreover, by frequently announcing sales of large
quantities of gold from their inventories, the central
banks helped to keep a lid on gold prices to the further
benefit of gold borrowers.
How much bullion are the hedgers short? Just four of
them alone account for at least 70 million ounces,
according to estimates published at
www.lemetropolecafe.com
LeMetropole's sick-ward list includes Tiger Fund,
Tudor Capital, Moore Capital, and that notorious
troublemaker of recent memory, Long Term Capital
Management.
Some big banks as well are reportedly short gold
in quantity, including Chase, J.P. Morgan and Citigroup.
Ironically, even a few gold producers could be in big
trouble, since they have been among the most
enthusiastic players in the carry-trade game.
LeMetropole's owner, Bill Murphy, has been warning
stridently for months that the gold carry-trade
would trigger a squeeze on bullion inventories that
would cause the metal's price to soar.
At the same time, acting through a group called
the Gold Antitrust Action Committee (GATA), Murphy
and his partners have pursued the indictment of
banking's international elite and the hedgers, who he
says colluded to suppress gold prices.
For now, though, precious metal prices are quite
buoyant, portending problems of a higher order of
magnitude than those faced by mere bullion bankers
and hedge funds.
For it can only be at the expense of a strong dollar
that Europe's central banks would choose implicitly
to support the price of gold. In declaring to the
world that they plan to limit bullion sales,
Euroland has affirmed a willingness to give gold
a monetary role.
This is a direct assault on the greenback, since
the dollar is backed by nothing of substance, much
less gold. By deigning to support a standard which
implies the dollar's inferiority, Europe is
clearly seeking to elevate the value and utility of
its euro while diminishing the dollar's role in world
trade and its dominance as a global reserve currency.
Clearly the Europeans are scared of a world
manifestly awash in dollars, just as they are fed up
with the obligation of supporting a
global financial system that conducts most of its
business in dollars.
Japan may be thinking along the same lines, since
its central bank recently rejected the idea of easing
credit to slow the yen's steep rise against the dollar.
If Europe and Japan succeed in breaking the world's
dependency on dollars, it will surely spell trouble
for the U.S. economy. For, a weaker dollar would
diminish investment by foreigners in our
Treasury bonds, raise interest rates and curtail
the ability of our consumer-oriented economy to
function effectively without savings.
It would also increase the cost of the many
things we now buy abroad, the bill for which has
been running at a monthly clip approaching $25 billion.
If the threat to the U.S. economy of a weaker dollar
and higher interest rates is real, the stock market
has so far failed to acknowledge it. Share prices are
only slightly below their levels prior to gold's surge
and by week's end looked to be firming.
While I will not hazard a prediction concerning
gold's course, I seriously doubt that U.S. share prices
can make much headway in the coming months, given the
weakness in the dollar.
If there are any stocks that can buck the trend,
they will most likely be found in the mining sector.
Some of them, particularly the still-depressed shares
of South African gold producers, look like they
can't lose.
Before you take the plunge in any of them, though,
make certain their profits come from selling gold
they extract from the ground rather than from their
successful exploitation of the carry-trade.
Le Metropole Cafe
All the best,
Bill Murphy
Le Patron
www.LeMetropoleCafe.com |
