fwiw
11:50a EDT Wednesday, May 24, 2000
Dear Friend of GATA and Gold:
I'm sharing with you below the daily market commentary of Michael Kosares, proprietor of www.USAGold.com, which I'm sure many of you read as religiously as I do but which may be new to some of you. It is a brilliant and comprehensive look at the gold market situation.
Please post this as seems useful.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
By Michael Kosares
www.USAGold.com
May 24, 2000
Against a backdrop of equities markets plunging globally, gold appeared essentially sidelined in Europe and Asia and awaiting direction from New York's COMEX. The worldwide equities markets sell- off began on Wall Street yesterday when NASDAQ shed almost 200 points and the Dow 120 points. Tokyo was down as much as 2.7% at one point yesterday before closing down 1.7%. Hong Kong,Singapore, Taipei,Sydney -- all followed suit. Europe didn't fare any better with Frankfurt down 1.6% and Paris down 1.9%. Technology stocks led the retreat with brokers worldwide complaining about a herd mentality at work. It seems that herds have this unpredictable tendency to run in either direction. "It's pretty crazy," said Louis Bernstone, European fund manager at Baring Asset Management Ltd. "Everyone's now saying, 'I don't know what's going on, but I'm going to sell it.' It's capitulation."
So far, we've had good volume at Centennial Precious Metals, as the stock market has weakened over the past 30 days, with many investors deciding to shore up their sagging portfolios with gold.
For months this website and others have implored investors to stay out of the gold paper markets -- options, futures and other derivatives -- so as not to serve as cannon fodder for the short-selling financial firms and hedge funds. It appears that this strategy is beginning to have an effect, not just because we and others have attuned investors, but because it has become apparent that something strange is going on in the gold market, and has been for some time.
Bridge News reports this morning that "Giant US managed futures fund John W. Henry & Company, which has around $2 billion under management, said that its financial and metals portfolio has reduced gold exposure to 60% of average position size to address liquidity issues. It has also temporarily eliminated trading in silver since the market has seen lower trading opportunities and reduced liquidity." One doubts seriously that John W. Henry was long the gold and silver markets. Note the reference to "liquidity issues." One always needs someone to sell to in order to make a short position a reality -- thus the reference to lack of liquidity. In other words, the gig is up.
On another subject, Bridge also runs this sketch on the Bank of England auction yesterday which elicited knowing chuckles in certain quarters:
"The Bank of England announced Tuesday that it sold 803,600 ounces of U.K. Treasury-auctioned gold at $275.25 per ounce. The bank received bids for 2,134,400 ounces of gold but allotted only the expected 803,600 ounces,or around 25 tonnes, at the "lowest accepted price" as planned."
Good plan.
Only the Blair government could find solace in selling an important reserve asset at the "lowest accepted price." If Britain's plan had been in reality to sell its gold and put the proceeds into euros and dollars as it publicly announced, then they could have done it in one or two sales based on the heavy response from the first auction on (note yesterday's auction was nearly three times oversubscribed). But they have dragged it out for reasons only Gordon Brown and the rest of the Blair government truly understand. Eddie George, Governor of the Bank of England, clung to this near-ridiculous proposition yesterday endorsing the auctions as a "sensible portfolio diversification." What he failed to mention is that the euro has plummeted roughly 20% since the sales began and Britain began replacing gold with that currency for its reserves. During the same period the price of gold in pounds has risen comfortably as well -- so much for the "sensible portfolio diversification" argument.
The World Gold Council, known for its general equanimity as the gold wars rage on, uncharacteristically slammed the aurophobic UK government for the sales saying "[the policy] suggests a degree of arrogance on the part of the British government in that it is now clearly flying in the face of majority wishes." The Council points to polls that show only 12% of the British public supports the sales, and 48% are opposed.
Prominent gold analysts like Reg Howe of the Golden Sextant and John Hathaway at DeToqueville are researching the theoretical possibility that these recent central bank sales are little more than bail out operations for financial firms which have already defaulted de facto on gold loans and need the gold to pay back demanding creditors. With the British and Swiss sales, we are seeing to what lengths central banks are now willing to go in fulfilling their lender of last resort function. In simple terms the theory goes like this: If one of the commercial banks in your system is in trouble on gold loans, you are required to bail that bank out even if you can't print yellow metal. You are required to do that in order to forestall a rolling default which might cripple the entire national banking structure. So because you can't print gold, you raid the national treasury to provide the liquidity, the commercial bank is saved from default, the system limps on floating in a sea of paper derivatives hoping against hope a gold-buying herd running in the other direction doesn't overtake it, and make it impossible to rectify the situation.
Just as an aside: If you back to the Daily Market Reports written when the British first announced their auctions, the theory outlined above was offered then. The weakness in the theory is that all we have is circumstantial evidence. We can smell the powder, but we don't have the gun. The strength of the theory is that it makes the most common sense under current market conditions, and that should be of value to current and prospective gold owners.
So what does all this mean for the ordinary gold owner?
It seems that creditors (both central bank and private) are fed up with running the risk of the gold carry trade. They have essentially been sold a bill of goods on gold loans. The argument that you can make a return on a moribund asset proffered by the bullion banks, does not hold water when you are in danger of losing your asset in a default because the speculating borrowers went overboard ala Long- Term Capital Management. The Washington Agreement is probably aligned to that realization.
As a result, it is unlikely that the lease pool will be growing any larger. Gold carry trade/forwarding departments are being closed down in financial firms around the world as reality sets it. It won't be long until investors small and large catch on that the greatest impediment to a rising gold price -- the gold carry/forward trade -- is in retrograde. Gold demand will increase markedly starting first with the big financiers who smell blood in the water and then spreading to the general public. The investor who gets in now by purchasing the physical metal itself without the trappings and dangers of leverage runs ahead of the crowd, and will be the most likely to benefit from the run-up when the carry trade is finally unwound.
The other side will not give up easily. The building positions at JP Morgan are just more evidence of that. Stay away from futures, options -- gold derivatives of any kind. Own physical. Sit back and watch the show. It won't be long until the JP Morgan portfolio committee will be looking at the same set of criteria which caused John W. Henry to close down its operation. It may take some more time but gold will have its revenge. As a Rothschild spokesman recently said, "Gold will take no prisoners." That applies to Morgan as much as anybody. |
