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

To: Crimson Ghost who wrote (64054)	2/19/2001 10:17:31 PM
From: russwinter	Read Replies (1) \| Respond to of 116950

Credit is seizing up in the paper gold (PaG)market. The reason you see 1 1/4% lease rates is that the business of leasing gold from the CB's is not expanding, and may even be in contraction. A look at the basic bullion dealer (BD)transaction is in order. The BD is the intermediary between the physical gold (PG) and the PaG markets. There are two primary transactions. The first is the carry trade, which takes proceeds from gold sales (supplies PG) and buys financial instruments. A conservative strategy (I suspect speculative ones as well) would be the 6 month lease/t-bill spread which in 1997-98 typically ran about 400 basis points differential. Today the spread is about 350 b.p (6 mo tb: 4.75/6 mo lease 1.25). I would surmise that because of the wide spread belief that Easy Al is going to (try) and lower rates, that the carry trade today is alive and well in the one-five year range. However if you look at the COT numbers I've been supplying, even the success of that trade is problematic. The specs are going to get it on all sides IMO. The other transaction was producer hedging, which was accelerated in 1996-98, and created an excessive and aberrant supply of "front loaded" gold. In otherwords, producers sold four years of production in only two years, killing POG. That's the liquidity I keep alluding too. Finally in 1998-1999 in particular, the bullion bankers resorted to lax sub-prime lending to weak mining companies to keep the liquidity coming. That's coming back to haunt them now (see my post regarding Centuar and McWatters). That brings us up to the 1999 Wash. Agree (WA), where the parties (85% of CB's) agreed to freeze leasing at current levels and restrain sales to 400 tons a year. To those that argue that CB's are dying to sell thousands of tons of gold on the first little run to $300, I say baloney. There is no evidence that extra Agreement gold has been sold, or will be. Indeed the twenty year average for all CB's is 400 tons a year. And why should they sell extra gold at these low prices, it's their reserve? Do you think they want more friggin dollars at this point? Nor is there evidence that non-Agreement CB's would either, as most has been leased. When the agreement created a dangerous spike (known to black boxers as the "gamma": remember that term when this happens again), the bullion bankers no doubt convinced players outside of the agreement to "take advantage" of the great lease rates. The Vatican and Kuwait accommodated them by leasing possibly all they had. Then after mid-2000, with the market stabilized the wheels started to come off the producer lease/hedge liquidity driver. Also basic underlying gold demand has remained pretty solid as well. On the first front of hedging, the producers have shot their wad, and many such as Ashanti and Cambior were overexposed. Post- WA, there is no way that producers were going to expand their aggregate hedge positions. In fact, I believe that some producers have begun to actually reduce them. As we go into 2001, there is evidence (which I have cited on SI) that more positions are being reduced. And as gradual production and hedging reductions take place, PG seeps back into the CB vault, drying up liquidity. The TOCOM and LBMA transfers I've also cited are smoking gun indicators that fresh gold lending is not coming out. So where does that leave the BD's? With enormous amounts of sub-prime producer obligations and shorted paper gold. What else is there to do, when your life blood starts draining out. Put on a tourniquet in the form of aggressive naked short sales as reported in the increasingly incredible COT smoking gun numbers. And crank out the propaganda whenever and whereever possible: India earthquakes, misreporting of new AU hedging, you name it, they try it. These guys are good as this crap, but they are licked. That's why I call this the Terminator phase. All the cards are now stacked against them. Gold bulls need to quit hearing footsteps and believing the nonsense. The reality is a more ancient truth: credit excess and reckless speculation gone awry. * BTW, if you see lease rates increasing, that's the sign that the CB's no longer wish to play the lending game. That will be evidence of a panic in the making. However, we don't need that doomday scenario to have a large rally here.