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

To: d:oug who wrote (41868)	10/2/1999 11:12:00 PM
From: goldsnow	Respond to of 116759

Gold has higher to go, and $A too By Trevor Sykes Gold took a breather on Thursday night after soaring 25 per cent in two weeks, but it's not going back to $US251. There are three good reasons why it should run higher yet. 1. The market had been scared that the International Monetary Fund was about to dump 10 million ounces to fund its debt relief commitment to the HIPCs (Heavily Indebted Poor Countries). Instead the IMF reached an agreement with some of its performing debtors who are making their scheduled repayments (such as Brazil, Korea and Mexico) that they would buy gold from the IMF at market prices which the IMF would then buy back in a simultaneous transaction. The cash will then go to the HIPCs while the gold stays exactly where it was except that it will have been marked up in the IMF's books from its Bretton Woods price of $US48 a ounce to market value. Why the IMF should have indulged in this piece of jiggery-pokery is understandable only by students of metaphysics. Don't worry about it. The important point is that the gold will never come near the open market. News of this began to leak out in mid-September. 2. The market had been disappointed with the first of the Bank of England's gold auctions in July when it sold 25 tonnes at slightly below market. But at the second auction on September 21 it moved the next 25 tonnes at a little better than market, which cheered everyone. On that day gold jagged upwards by $US6 to hit $US260. The market's fears of the impact of UK selling greatly diminished. 3. Wim Duisenberg, president of the European Central Bank, announced last Sunday that the European central banks would limit their gold sales over the next five years to no more than 400 tonnes a year - equivalent to the average rate at which the banks have been selling for the past seven years. That figure includes the planned sale of 1,300 tonnes by the Swiss and the remaining 365 tonnes to be sold by the Bank of England, which means the rest of the banks won't be selling much at all. The largest single factor behind the fall of gold prices over the past three years has been the fear of central bank selling. In one stroke, the Europeans have dispelled that. Further, the US Federal Reserve, the IMF, the Bank of Japan, the Bank of International Settlements and our own Reserve Bank all announced they wouldn't be selling either. Together with the Europeans, they account for 90 per cent of the world's official gold holdings. Duisenberg went further. He said the Europeans would not increase gold lending and derivative operations above current levels. It was the bit about lending that really put a bomb under the market. When a mining company sells gold forward, it begins by borrowing gold usually from a central bank. In the good old days a central bank used to charge leasing rates of about 1 per cent on gold. The mining company or its bank would sell the gold on the spot market and invest the cash in a riskless security, normally a US Treasury bond or bill. The differential between the T-bond rate (say, 6 per cent) and the leasing rate of 1 per cent was the contango on the gold hedge, which could run to high figures when it compounded over several years. The mining company dug up gold to replace the bars it had borrowed and pocketed the cash. A speculator shorting gold followed exactly the same procedure except that he did not have any gold in the ground. He profited as long as the gold price did not rise by more than the differential between his borrowing and lending rates. As long as gold kept falling - which seemed as though it would continue forever - the shorters made big profits. Note that physical supply and demand had absolutely nothing to do with the gold price. The entire world's mine supply is equivalent to only about 20 days' derivative trading on Comex in New York. What drove the market was the interest rate differential. Over the past year that differential has been shrinking. Central banks have been pumping up leasing rates, which were 2.4 per cent a month ago, while the short T-bond rate is 4.9 per cent. That's not much margin to play with in what is essentially a gamble. Meanwhile, the net short position on Comex reached record levels of 260 tonnes in early August. It looked like a disaster waiting to happen and it was. (Predicted by this column on August 21, in fact.) As soon as the price started bumping upwards, the shorters had to scramble to cover. The panic hit its height mid-week when gold touched $US327.30. Even worse, leasing rates rose, hitting 11 per cent at their peak. On Thursday's close in New York they had come back to 5 per cent. The shorters are being hung out to dry and the gold bulls are gloating. George Milling-Stanley, manager of gold market analysis for the World Gold Council, says the fear of central gold selling has been the primary bear factor driving the gold price down since the end of 1996. Before that, gold was around $US400. So with the fear of central bank selling quashed for the moment, gold could head for, say, $US350. With base metals also a little firmer, it should not be long before the forex traders remember that the $A is a commodity-driven currency, so the $A should be heading north soon as well. I'm calling US70½ before Christmas. afr.com.au