"Do not despise the day of small things."
-- Zechariah 4:10
By Peter George
May 25, 2001
As gold surged to a 15-month high of $298,50 Monday
morning, May 21st, market watchers were at a loss to
determine the reason. Some spoke of gold regaining its
"Safe Haven' role as inflation jitters moved investors
to switch from bonds to gold. Others pointed to growing
problems in the Middle East. We had also warned in
EM31, `Choosing the Russian Road', that Greenspan was
no longer targeting inflation. He is going all out to
prevent a bursting of the asset bubble. But none of
these reasons explained why gold prices suddenly spiked
$28 in less than fourteen days. The answer was instead
to be found in the courageous efforts of a little-known
and much-maligned organization called GATA, standing
for `Gold Anti-Trust Action Committee. Over recent
months we have struck up a good friendship with their
energetic and fearless Chairman, Bill Murphy. An ex-
copper trader, he long ago smelt a rat in the trading
patterns of gold. That's what led him to start
investigating.
On the eve of GATA's summit in Durban, Wednesday, May
9th, Dow Jones News Wires miraculously agreed to
publish GATA's summary list of their allegations of a
`gold price-fixing cartel'. This was the first time,
since the inception of the organization two years ago,
that they had gained a voice for their views in the
international mainstream press. Their prime claim was
that an agency of the US Treasury, in co-operation with
the Fed, the BIS and various well-known `Bullion
Banks', had been borrowing gold from Central Banks and
leaking it into the system to maintain a deliberate,
and constant, downward pressure on the price of gold.
Within minutes of the Dow Jones release, gold prices
jumped $6 to $270 on a rumour that "the US Treasury had
been caught illegally selling gold without
authorisation from Congress."
There could have been no other source for such
speculation than the GATA news release.
A week later, gold broke a 20-month downtrend, pushing
above $272. In direct confirmation of our view that
GATA's allegations had acted as a trigger, market
gossip took the story further. This time it was stated
that the Bush Administration and members of Congress
had been deluged by GATA supporters with information as
to how Clinton and his cronies had manipulated the gold
market, including recent information which implicated
Greenspan.
A year earlier the Fed Chairman had responded to a very
pointed letter from Senator Lieberman, a friend of
GATA's Chris Powell, denying his involvement in any
conspiracy to hold down gold prices. He went so far as
to describe the mere contemplation of such activities
as `wholly inappropriate'. Yet recently published
minutes of Federal Open Market Committee meetings
dating back to 1995, indicated his presence, and the
Fed's direct participation, in a meeting in which those
present discussed efforts by the Treasury's secret
Exchange Stabilization Fund to bail out Mexico, in
direct opposition to the wishes of Congress. At the
meeting, in an attempt to justify the ESF's authority
to act unilaterally, the Treasury's legal expert, a Mr
Mattingly, made reference to gold swaps conducted
previously by the ESF. This was to indicate the wide
powers historically exercised by the Treasury's secret
slush fund - they could even play the gold market.
Greenspan understood quite clearly what was being
referred to. He was well aware the `swaps' had been
used to manipulate the gold market. This critical new
evidence has been passed on to the Bush Administration
and to Senator Lieberman. The Senator has now woken up
to the fact that in Greenspan's sanctimonious response
of a year ago, the honourable Chairman of the Fed had
blatantly lied to him. No doubt the good Senator will
pursue the matter further.
With Rubin and Summers gone, Greenspan was the one
person still in office whom the Bush Administration
could nail with responsibility for the gross
misdemeanours committed under the Clinton watch. He was
told the new Administration was no longer prepared to
continue disposing of Treasury gold behind the back of
Congress. He was further instructed to contact the
Bullion Banks concerned and inform them that they had
`til the end of May to bring their derivative books
into balance. He was to warn them that the game was up
and they could no longer count on covert support from
the Fed and Treasury in their scheme to depress gold.
One of GATA's supporters, Bob Chapman, who writes The
International Forecaster, obtained a copy of
Greenspan's top secret instruction to the banks and
broadcast it over the internet. This was Wednesday a
week ago and gold was only $268. We have seen his e-
mail. This was no post facto "explanation" for what
subsequently happened.
Greenspan's letter was dynamite - no less shattering
than the Washington Agreement of September 1999. Except
the Fed Chairman had meant to keep it within the
"club." On publication, demand for the metal exploded.
The banks tried desperately to hold the line on bullion
below the critical $275 level. Once they folded, the
move triggered huge short covering by hedge funds
patterning their investment strategy on the seemingly
immutable powers of the Bullion Banks. In their panic,
the hedge fund scramble to cover drove gold prices to
within an inch of $300.
There is no doubt that full credit for the breaking of
the cartel's stranglehold goes to GATA. Hence our
scripture:
"Do not despise the day of small things."
With the coming of the Internet, truth is like an arrow
tipped with a hand grenade. It spreads like never
before, crushing the monopoly power of the
establishment press, opening doors, revealing secrets.
The internet itself may not always be profitable for
providers and suppliers, but its unrestrained and
increasing use by the public helps expose corruption in
high places.
1. GREENSPAN'S LAST HURRAH
Establishment financial media would have us believe
that the gold spike stemmed from exaggerated fears of
inflation - then ran out of steam and is over. Far from
it. Even with a phony and orchestrated announcement
about Russian selling -- which has temporarily driven
gold back to $276 -- the move has only begun.
We have learned that as gold prices threatened to break
the $300 barrier, the Bullion Banks panicked and
appealed to Greenspan. Without permission from the new
Treasury Secretary Paul O'Neill, the harassed Fed Chief
hastily arranged for the Bank of England to lend 100
tons of gold to help his friends at the Bullion Banks.
This they dumped on the market and the rally was
temporarily squelched. Interesting that, in a single
twenty four hour trading period, the market swallowed
FIVE times the gold available at an average BOE bi-
monthly auction. This was no `rally that ran out of
steam'. It has taken the last of the cartel's
ammunition. All that is left are `smoke and mirrors'
and bluff. From next week the game is up.
2. THEY CAME TO MOCK -- NOT FOR LONG
The eve of GATA's summit on May 9th was a sparse
affair. Although not open to the general public, the
pre-conference dinner at the Durban Hilton drew a mere
thirty people. Less than fifty turned up for the
sessions next day. There are 41 gold producing
countries in Africa. Each received an invitation. Four
came. Even the local delegation was slow to respond. A
week later, when replying to questions in parliament,
the South African Minister of Mines said it had been
hard to expect them to take GATA's seriously when major
mining houses had themselves refused to do so. They had
in fact advised the Mines Department not to waste their
time pursuing GATA'S `groundless' allegations.
The Press was invited. Few accepted. With one exception
all were `offish' and subsequently published negative
articles. One said : "Why hold it in Durban?". The
answer that GATA's PR lady was Durban-based cut no ice.
Yet who can deny that Durban's winter weather is the
best in South Africa? For those who went it was a
wonderful balmy day.
The Sunday Times' Julie Walker, inadvertently
overlooked when the invitations were issued, struck a
sour note in her column the following Sunday. She said
her sources reported that:
"It was like a Baptist Revival Meeting, except we
didn't hold hands."
As a Christian, one is entitled to retort by saying:
"More power if they had!"
Other members of the press commented on the fact that
none of the mining houses present would actively come
out in support of GATA's claims. They clearly hadn't
read Durban Deep's latest bold statement of open
encouragement for the work that GATA is doing. The
Chairman himself came to the meeting and confirmed his
financial support. He has since earned his reward. In
the fortnight following his shares have outperformed
the field and he has assured shareholders that, in line
with GATA recommendations, the group's remaining hedges
are being whittled away as fast as possible.
For mining houses still in the clutches of the Bullion
Banks, either needing finance or committed to further
hedging, open support for GATA requires a rare courage
which few are prepared to display. It could rile the
Bullion Banks and jeopardize long standing financial
arrangements. That could explain Harmony's rather limp
attitude to GATA's latest request for financial
support. Successful completion of their recently
announced rights issue ought to help them break free
from the shackles of fear and make it possible for them
to reassert their original brand of strident opposition
to hedging.
3. THE PREDICAMENT OF ANGLOGOLD
Anglo had different cause for complaint and it wasn't
fear of the Bullion Banks who are in fact their
friends. In court papers, GATA's Reg Howe had cited
Anglogold and Barrick as having had `material
knowledge' of the Bullion Banks alleged price fixing
scheme and having `used it to their benefit.' This has
been very embarrassing for Anglo. Whether true or not,
it was an allegation they had to counter but they faced
a problem. A senior director of JP Morgan, Frank
Arisman, sits on their Board. Therefore we ask the
question. If Morgan was party to the conspiracy to hold
down gold, and if they're one of the `counter-parties'
that Anglo admits to using when hedging future
production, would it not have been reasonable for
Arisman to explain to Anglo why hedging was such a sure
bet?
It would simply have occurred in the normal course of
business, over coffee and liqueurs in the boardroom.
Faced with an ongoing US need to support the dollar -
in light of continuing trade deficits and huge debts -
Anglo would have accepted the `fait accompli' of the
international community's need to suppress gold. Within
that framework, Anglo would have acted to maximize
profits by selling a major portion of production
forward. They would also have looked forward to buying
up as many ailing producers as possible, as prices slid
lower. This they have done, even if their recent
acquisition of Ashanti's Geita mine occurred for quite
the opposite reason. Ashanti was forced to dispose of
Geita because the price went UP when they were short.
In summary, as Anglogold's CEO Bobby Godsell stated
recently:
"For us hedging has been very profitable."
We are sure it has which is why Reg Howe has to stick
with the comments he made in his court papers, and why
Anglo will continue to mock GATA's findings in their
entirety, in an effort to diminish the credibility of
their case where the evidence points to their group's
involvement.
What if gold takes off? How can hedged producers
compete with those who are receiving full credit for
rising prices? Will they be able to retain their staff?
Will they be in a position to fund expansion? Will they
receive margin calls? Who will want shares with lagging
growth prospects? As happened with Ashanti in September
1999, the higher gold goes, the greater the risk of
financial implosion for those with hedges.
JP Morgan themselves were recently absorbed by Chase
with what appeared to be undue haste. There were
rumours at the time of financial difficulties arising
from their gold activities. To put it bluntly, it was
alleged they had built up a massive short position -
one which almost destroyed them when gold took off
after the announcement of the Washington Agreement in
September '99. As Banks are prone to do, Morgan
secretly nursed their hurts for a year before realizing
they weren't going to heal. If gold took off
permanently they were going to prove fatal. Hope of
salvation lay in having a future guarantee of physical
metal being supplied in an emergency. This they
arranged with the US Treasury's secret Exchange
Stabilization Fund. However, if that lifeline were ever
cut by a new administration, JP Morgan could still go
belly up. They were forced to seek a strong partner. It
could even have been the US Treasury who encouraged the
move. After initially speaking to Deutsche Bank, they
eventually tied with Chase.
In view of recent events and the imminent withdrawal of
the Treasury `backstop', Morgan may yet prove to have
been an extremely expensive acquisition for Chase. As
the Fed's historic `House Broker', no fate could be
more fitting for Morgan than an ignominious
disappearance in the not too distant future. It would
be no more than their just deserts for actively
participating in a major scheme to defraud investors in
gold, and shareholders and workers in the gold mining
industry.
We digress from our discussion of Anglogold. In a
recent survey of the group's prospects, their chief of
`Corporate Affairs', Steve Lenahan, spelled out their
principal strategic objectives. The first was:
"To create a corporate structure which appeals to both
the local and international investor market".
The second was:
`To pursue the goal of shareholder value, if necessary
at the expense of volume.'
Anglo interpreted this as going big, going global and
going for minimum cost per ounce. To finance growth
they sold a major portion of production forward and
took on debt. Yet in the sort of economic climate where
gold prices are expected to accelerate, debt is
anathema and hedging poison.
Consistent with this contradictory behaviour, it has to
be said that the corporation's attitude to gold mining
has historically demonstrated little evidence of a
desire to advance the cause of the metal's monetary
role. They could have done this by encouraging a return
to the Gold Standard and extolling its virtues as MONEY
or simply emphasising its role as the world's prime
STORE of VALUE. The group's own lack of belief in
gold's historic attributes is reflected in the way they
run the company. They focus is on promoting consumption
of gold for jewellery. Yet to protect markets,
jewellers require low gold prices. This is in conflict
with producers who want them up and running.
More destructive is Anglo's hedging policy. Far from
`enhancing shareholder value', it actually destroys it.
By adding future production to present supplies,
hedging depresses the price. Yet Jonathan Best,
Anglogold's executive director, finance, has the gall
to suggest that:
"The ideal scenario would be a market with fewer
producers, ( and ) lower supply."
They could instantaneously achieve lower supply by
reversing their hedging policy. They don't need to go
the route of shedding jobs to reach that goal. Failing
that, the interests of the industry would `best' be
served - no pun intended - by Anglogold themselves
being one of those who disappears. Maybe it should
rather be Goldfields, with their strong stance against
hedging, who gets to take over the rump of a visionless
Anglogold.
As the world's biggest producer, Anglo should be
setting a different example. Instead, the very act of
their hedging exudes doubt about gold's role as a store
of value and gives them a marketing policy, which is
self-destructive.
As the metal stands on the brink of a new bull market,
Anglogold's strategy towards its product and its
shareholders needs to be revised - turned on its head
even. The problem is, with a debt to equity ratio of
60%, Anglogold cannot afford to undo its hedges. They
have used the money to finance an acquisition
programme, depressing the price with every deal they
make. Even the sale of Elandsrand and Deelkraal to
Harmony, forced the latter to hedge production through
the purchase of `puts' which required the sale of
future gold at current prices.
In a rising gold environment, investors should stay
away from Anglogold. Rather switch to Goldfields and
Afrikander Lease which have no hedges whatsoever, or
Durban Deep, which is rapidly getting rid of them. The
`Roodepoort Rocket' as Durban is known to Americans,
has massive gearing should the price of gold rise, both
because of low present margins but also through having
access to millions of tons of marginal reserves which
can rapidly be brought on tap should prices rise.
Harmony will be worth looking at AFTER they go ex
rights and have money to close the hedges inherited
from Randfontein.
4. FIRM STAND SAVES GOLDFIELDS
At the tail end of Bob Chapman's dramatic revelations
about Greenspan's instructions to the Bullion Banks and
his plans to secure additional emergency supplies of
bullion to help them ward off a massive surge in the
metal, was a throw away comment to the effect that:
"We were also told that Anglogold will sell forward a
designated amount of gold to banks . specified by
Greenspan. Our source for this intelligence has been
very accurate in the past."
This suggests Anglogold has been playing a far more
pro-active role in the cartel's efforts to contain gold
prices than that for which we have so far given them
credit. It also helps to explain a somewhat ominous
motivation behind their increasingly desperate efforts
to grab Goldfields. Had they succeeded they could have
killed two birds with one stone. Consider these
numbers:
Goldfields annual production is 3,8 million ounces of
gold.
They have an issued capital of 440 million shares. At
their current price of $5 per share, that gives the
group a total capitalization of $2,2 billion.
If Anglogold were to acquire them and immediately sell
forward HALF of their annual production for 5 years, as
per their own mines, they would be able to sell 1,9
million ounces x 5 years. This amounts to 9,5 million
ounces or 300 tons of gold. At the current price of
$276 per ounce, it would realize $2,6 billion - more
than required to purchase the ENTIRE capitalization of
Goldfields. They would pick it up for nothing and the
cartel would be delighted. Another 300 tons could
safely be sold into the market to postpone the
inevitable for another few months.
Anglogold spokesmen claim that:
`Consolidation of the gold industry will benefit all
players'
It will certainly not benefit the shareholders of
Goldfields in the new environment of rising prices. Nor
will it benefit an industry hoping for higher prices.
The forward selling of an additional 300 tons would
further postpone the day of rising prices. It would
dash the hopes of miners hoping for more jobs and
greater security. It would substantially defer any
benefit South Africa may have hoped to receive from a
rapid and sustained surge in gold prices. Anglo's Best
himself said:
"There may be a price to pay in the form of job
losses."
He attempts to soften the blow by suggesting the losses
will not affect underground staff. He concludes by
warning, in a somewhat desperate tone:
"If people expect high premiums for their shares in
corporate deals, consolidation will not be viable."
If its on Anglogold's terms, South Africans need to be
grateful that the latest hike in gold prices has made
it almost impossible for Anglogold to put anything
attractive on the table. If change of direction is
maintained, Anglo will have nothing with which to tempt
the shareholders of Goldfields. Why should they sell
their future inheritance - with the possibility of much
higher prices - for a `mess of pottage' in today's
manipulated `low price' environment?
In the past 24 months Goldfields have ruthlessly
eliminated hedges as a point of principle. Some were
bought back in October '99 when prices spiked, only to
recede when the banks intervened to smash it back down.
Nevertheless, the effect on shareholder sentiment has
been radical. With the exception of Anglo, Goldfields
shareholders are delighted with their group's wholesale
commitment to GATA and gold. If those same shareholders
are sensible, they will also appreciate that both the
passage of time and the latest rise in prices have
together made it both unnecessary, if not impossible,
to pursue the deal with Franco Nevada. US assets are
invariably expensive in relation to others but if gold
rises strongly, confidence in South Africa and the Rand
will be restored. The ratings of our gold investments
will then catch up with those elsewhere.
As an aside, there are those who believe the Department
of Finance was less than even- handed in their
treatment of Goldfields merger proposals. In comparison
to the reception Anglo receives for whatever THEY wish
to do, it is hard not to draw this conclusion.
Nonetheless, even if there was collusion between Anglo
and the Department to keep Goldfields vulnerable to a
takeover, what the two may have intended as harmful is
happily turning out to Goldfields advantage. With
prices on the mend they are better off on their own. If
Franco can't have her, let no one.
5. THE CASH DRAIN OF SELLING A MINE THAT HAS HEDGED
In their last quarterly Anglogold announced they had
reduced their hedge book by 800,000 ounces. Lest one
should think that indicates a change of policy,
consider the following. It is group policy to hedge
half of its annual production up to five years forward.
Elandsrand and Deelkraal were together producing
500,000 ounces a year. The group would have hedged 50%
of these five years forward. That amounts to 250,000
ounces times five, equal to 1,250,000 ounces. If
originally concluded at current prices, the hedge would
have realized 1,25 million ounces x $280 per ounce.
This is equivalent to $350 million or R2,8 billion. In
order to keep their hedge ratios intact, this is what
Anglo needs to find in order to cancel the outstanding
hedges on the two mines it has just sold to Harmony. So
far they have only bought back 800,000 ounces at a cost
of R1,7 billion. All Harmony paid them was R1 billion.
No wonder they recently had to borrow an additional
$400 million. The money raised from hedging is
dangerously seductive. If the production is `marginal',
it is even more so. The Bullion banks are allowing
mines to `borrow' more monies than mines are worth.
6. THE DOMINOES HAVE STARTED TO TOPPLE
Some months ago we likened the position in the gold
market to a game of dominoes. If one were to fall, the
rest would follow. We were referring to break points in
the charts. It never happened because the price failed
to breach the first level of $285. Since then the
passage of time has dragged the break points lower.
Since GATA did its work, the first has given way and
the second breached temporarily. The dominoes have
started to topple. There are now built in targets on
the `daily', `weekly' and `monthly' charts
which, when
made, can carry this run all the way back to the 1980
intra-day peak of $850. Here is why.
The Daily. Take a `Daily high-low' chart of gold from
1999 to the present. Draw a trend line, starting from
the October '99 spike to $331, down through the
February 2000 peak of $318. It only required a move
through $272 to break the trend. It achieved this
Thursday a week ago. As with all `falling wedge'
formations, any penetration on the upside should
eventually take the price back to the starting point of
the formation - in this case the spike top of $331 in
October '99. In fact, a point and figure on the daily
high low chart gives an upside projection to $373. The
only danger with this picture is that there is a `break
away gap' between $272 and $275 which may first have to
be `closed' before the trend resumes in full. The
current pull back is threatening to do just that.
The Weekly. Take a `Weekly closing' chart of gold. Draw
a trend line, starting from the $415 peak in February
1996, down through the October '99 closing high of
$325, to the present. It required a move through $282
on a weekly close to reverse the trend. The price has
already been to an intra-day high of $298,50 but at
time of writing was swinging wildly between $287 and
$275. The crack down came on the heels of an
announcement by Russia's Putin that he was be prepared
to tap into gold and diamond stocks to help relieve
flood damage in Siberia. On the surface the story had
all the signs of a bullion bank `plant' designed to
derail the latest surge in prices. In this respect it
resembles the Bank of England's May '99 announcement
that they intended auctioning off their gold reserves.
What concern is it of Russians suffering from flood
damage how their Government intends funding the
assistance they have promised? If the British wish to
sell off their gold, why tell the world in advance,
unless their true intention is to use the sale to
depress the price? We watch with interest whether the
break in the `daily' above $272 can next week translate
into a break ABOVE $282 on the `weekly'. If it does the
game is on. Target $415, back to the '96 weekly high.
The Monthly. Once gold breaks above $300, it will
approach the most critical level of all - the 20-year
downtrend from the all time high of $850 and the
monthly closing high of $680. The line passes through
the `96 monthly peak of $400 and brings us down to a
present ceiling of $330. If the weekly closes above
$282, it becomes certain that, sooner rather than
later, gold will break $330. When it does the twenty-
year monthly downtrend will have been broken. Long term
there is an ultimate upside count to at least $2000.
Short term, expect a sharp spike to test the old intra-
day high of $850.
7. OUTLOOK FOR THE JSE GOLD INDEX
If one looks at a daily chart of the JSE Gold Index, it
has risen from 750 at the end of last year to this
week's intra-day high of 1368 - a move of 82%. No
wonder the erstwhile cynical talking heads on CNBC are
having to devote airtime to the issue of gold. They may
still choose the days when it is down but cannot deny
that, since January, the gold sector is leading the
international field. We think gold stocks will continue
to be star performers for the rest of the year as well.
The Daily Closing Chart of the JSE Gold Index has been
in a steep up-trend since the end of March. A short-
term pull back from this week's intra-day high of 1368
ought to stop at this week's close of 1188. Looks to be
an excellent buying time.
On a point and figure chart, the move from 900 on the
index has been so strong that there is now an extended
upside count to 2160. That suggests there will be a
further 80% appreciation in gold stocks from current
levels - probably by year end or sooner. That will
bring us back to the 1996 peak for the index when gold
traded as high as $418.
On the weekly there is likely to be resistance at 1740
but there is a firm possibility of the index pushing on
to the all time closing high of 2500, last reached in
1994. This means the JSE gold share index can easily
DOUBLE from current levels, long before the gold price
itself gets much past $400. If we speak of $850, the
shares could double again.
8. OLD MUTUAL GOLD FUND HITS ALL TIME NEW HIGH
Continuing its winning streak of the past 9 years, the
Old Mutual Gold Fund last week made an all time new
high at 286 from 70 in 1993. That's a 400% rise. Since
late '97 it has appreciated by 300%. Not bad,
considering there's been a `bear market' in the metal
throughout the entire period. No doubt `Rand Weakness'
has been a major contributory factor but even this will
reverse when the gold move accelerates. The chart of
the Old Mutual Gold Fund is presently giving an
straight upside count to over 400.
9. LATEST OPTION PRICES ON GOLD
The break above $272 ensures a gold run to $330. In due
course we will get a weekly close above $282. When we
do, gold's potential will improve to over $400. As it
pushes through the longterm downtrend at $330, it will
trigger a massive acceleration to eventual all time new
highs. This market looks set to roll. Buy aggressively
on the pull back. Allocate 2% of capital to an OPTION
COMBO on the metal itself. This would involve a 50%
split of funds between an option expiring in December
2001and one expiring in June 2002. Although a Comex
option is described as expiring in either `June' or
December', they are actually options on that particular
month's futures contract. Therefore the actual expiry
date is always the month preceding. |
