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To: Roebear who wrote (90215)	4/18/2001 9:21:36 PM
From: SliderOnTheBlack	Read Replies (1) \| Respond to of 95453

Check out the Large Spec vs Commercial position in gold in this commitment of traders report: fyii.net Notice the last two weeks the Commercials are widening their net long position - just as the large speculators are widening their net short position.... given the positive shareprice action in golds during this timeframe - I think the Commercials are heading in the right direction here (VBG)~

To: Roebear who wrote (90215)	4/18/2001 9:45:38 PM
From: SliderOnTheBlack	Read Replies (1) \| Respond to of 95453

Inflation - the Cornerstone of our Monetary System gold-eagle.com (see link for money supply charts) As is often the case, the financial markets and the financial media are currently agonising over what the Fed's next move will be and when it will occur, as if a change to official interest rates will have a dramatic monetary effect. A Fed rate cut at this time would certainly have a big effect, particularly if it was an inter-meeting 'surprise' rate cut, but the effect would be psychological not monetary. The market has already taken short-term interest rates well below official interest rates and the financial sector has been adding liquidity at one of the fastest rates in decades, so a fully-fledged monetary easing has already happened. Whether the Fed slices a few more basis points from the Fed Funds Rate is neither here nor there. We don't, however, under-estimate the psychological effect of an 'official' cut, especially as far as the stock market is concerned. If enough people believe a Fed rate cut will be good for the stock market and the economy, it will have a positive effect on the stock market and the economy. As far as the monetary environment goes, US Government bond prices are more important than the Fed. As we've previously shown, the M2 growth rate follows the T-Bond such that major peaks in year-over-year M2 growth occur a few months after major peaks in the bond market. The below chart was included in a previous article and illustrates this point. Once the purchasers of long-term bonds begin to anticipate higher inflation they will demand compensation in the form of higher interest income. In other words, they will pay less for the bonds. We think we are close to the point of realisation, the point when the market begins to accept that one of the consequences of the explosive growth in the supply of dollars is that a dollar will be worth less. Inflation has happened and is happening, all that is left for the market to do is to account for the inflation in the prices of bonds and other investments. Inflation is not only happening at this time, it must continue to happen because that is the only way the existing monetary system can survive. A 'ponzi scheme' collapses as soon as the money coming in from new investors becomes insufficient to pay-off the earlier investors. A system in which money comes into existence through the creation of debt (our current monetary system) is similar. Firstly, each new dollar brings with it a liability in excess of one dollar (due to the obligation to pay interest). Secondly, the debt is backed by assets, so the general level of asset prices cannot be permitted to fall lest gaping holes appear in the balance sheets of the banks. The only way that old debts can be paid and asset prices supported is through an increase in the supply of money. Getting back to the relationship between T-Bonds and the M2 growth rate, if we are right and bonds have either peaked or are within a few weeks of peaking then the M2 growth rate will peak by August this year. If recent history is anything to go by the financial markets are going to run into difficulty whenever the M2 growth rate drops to around 6% (like a junkie needing higher and higher doses of a drug in order to get the desired effect, the US financial system now appears to need an M2 growth rate of at least 6%). The chart below shows the current situation. Our guess is that it will take approximately12 months of declining bond prices for the M2 growth rate to drop to this level. Therefore, around the middle of next year things will get very interesting because the evidence of inflation will be obvious to everyone, yet more monetary stimulus will be required at that time to keep the system ticking along. Gold - Physical versus Paper We occasionally read that the price of gold is being held down using derivative contracts, but this has never made any sense to us and no one has ever been able to explain to us how a derivative contract can be used to address a physical shortage. At the end of the day the price of gold (or any commodity, for that matter) must be determined by the supply of, and the demand for, the physical stuff. This is why a significant increase in the investment demand for physical gold would certainly lead to a substantial rally in the gold price, regardless of what was happening in the 'gold-derivatives' market. The only way the gold price can be prevented from rising is if the supply of physical gold is sufficient to meet the demand for physical gold, for two reasons. Firstly, the demand for physical gold from, for example, Indian jewelry manufacturers, cannot be satisfied using paper claims to gold. Secondly, those who are long the paper claims to gold (futures, call options) can always demand delivery of physical gold. Physical gold supply has been given a substantial boost over the past few years by central bank gold lending. The CBs have been prepared to accept a rather large default risk on their gold loans in exchange for a small amount of interest income. This is just another example of government intervention distorting price and creating disastrous long-term consequences. No private investor would lend a large quantity of gold at a sub-1% interest rate knowing the significant risk of default. Governments and their CBs have, however, been prepared to take such a risk with their nations' gold reserves. If commodity prices could be held in check using derivatives contracts then why have the CBs found it necessary to supply an additional 12000-15000 tonnes of physical gold to the market as part of their gold lending operations? Why take such a risk with official reserves if derivatives contracts could have done the trick? Why did the master-manipulators in the Clinton Administration feel the need to release oil from the Strategic Petroleum Reserve in an attempt to suppress the oil price last year? Surely a few discreet derivatives contracts would have been a better (safer) alternative from a political perspective. Furthermore, why wouldn't the large auto companies just employ a few smart derivatives experts in order to get the prices of palladium and platinum down to more 'reasonable' levels? The draw-down in COMEX gold inventories and the chronically-high gold lease rates over the past few months suggest that the supply of physical gold will soon be insufficient to meet demand at the current low gold price. Perhaps the risk of default has become so obvious that the CBs are no longer prepared to throw good gold after bad. Or maybe they are just running out of gold. Steve Saville Hong Kong 19 April 2001 The reader is invited to respond to Mr. Saville's wisdom via email: sas888@netvigator.com Regular financial market forecasts and analyses are provided at our web site: speculative-investor.com One-month free trial available.