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To: Jim Willie CB who wrote (9540)	11/18/2002 9:32:44 AM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Dollar Broadly Higher Against Yen on Japanese Bank Woes Dow Jones Newswires Monday November 18, 9:26 am ET NEW YORK -- The dollar was broadly higher against the yen, rising above the 121 yen mark for the first time in about 10 days, and modestly firmer against the euro and its other major rivals Monday in New York. The greenback's better tone was primarily driven by some weakness in the yen centering on the woes of Japan's banking sector. In morning trading, the dollar was at 121.25 yen, up from 120.45 yen late Friday in New York. The euro was trading at $1.0070, down from $1.0091 late Friday. Against the Swiss franc, the dollar was at 1.4571, up from 1.4525 late Friday, while sterling was at $1.5793, little changed from $1.5794. Mitigating the extent of the dollar's rally, the threat of geopolitical turmoil remains in the background that is potentially detrimental. Despite a lull as U.N. weapons inspectors attempt to establish the state of Iraq's military capacity, a low grade state of military confrontation persists. U.S.-led coalition warplanes Monday bombed an air defense site in northern Iraq after being fired upon, the U.S.-European Command said in a statement. Meanwhile, the foiled hijack attempt on an Israeli airliner over the weekend served as a reminder there are real security threats to air travel. In part, the dollar's gains also stemmed from the reflection that last week's U.S. economic releases were, on balance, better than expected, said Shahab Jalinoos, currency strategist with UBS Warburg in London. Short dollar positions -- effectively, bets that the dollar will decline -- are "at relatively extreme levels, while anecdotal evidence shows that much of the dollar's recent weakness has been driven by speculative money, which can be fickle and turn around quite quickly," Mr. Jalinoos said. A recent pickup in corporate debt issuance, which would tend to encourage inflows of portfolio investment into the U.S., could also prove to be supportive of the U.S. currency, he added. Sentiment surrounding the yen, by contrast, is poor, currency strategists said. The Japanese currency is expected to remain under pressure ahead of the Bank of Japan's latest policy meeting, which is expected to end Tuesday with more details of how it plans to provide increased liquidity. Shares in UFJ Holdings and other major Japanese banks fell Monday on rekindled fears about the country's financial system, though some analysts say the recent selling has been overdone. Early Monday in Asia, international credit rating agency Standard & Poor's placed its 'A-2' short-term ratings on UFJ Bank, UFJ Trust Bank, and their related entities (collectively UFJ Group) on CreditWatch with negative implications, reflecting growing concerns over the group's liquidity risks. The hammering of bank stocks underscores deep concerns in the market about the health of Japan's banks and growing expectations that -- with the nation's bad- loan mess still crippling lenders and the value of their shareholdings plunging -- the government will eventually have to formally nationalize or at least essentially take control as a major shareholder in a major bank. Japanese government bond prices were being weighed down by concern that Japanese banks, which hold some 81.4 trillion yen worth of JGBs, may sell them to raise cash. That, together with speculation about an increasingly larger supplemental budget from the government was dragging on the yen, wrote Marc Chandler, chief currency strategist with HSBC in New York. In the euro zone, the European Central Bank's monetary policy remains of key importance to the euro's performance. A higher than expected euro-zone consumer price index for October, accelerating to 2.3% from 2.1% in September, has raised the question of whether the ECB will go ahead and cut interest rates next month. Despite the central bank's hawkish record of defending an inflation target in order to guard against price pressures, many strategists still expect a rate cut at the ECB's Dec. 5 meeting, noted Mr. Chandler of HSBC. -John Parry, Natsuo Nishio and Nicholas Hastings of Dow Jones Newswires contributed to this report.

To: Jim Willie CB who wrote (9540)	11/18/2002 9:43:19 AM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Technical Scoop! War, Money and Oil! By David Chapman November 18, 2002 That the United States is the world's largest consumer of energy is indisputable. With less then 5% of the world's population the US consumes roughly 25% of the world's oil. An abundance of cheap oil is what has driven the US economy over the past century. Indeed the entire world has benefited from this abundance of cheap, readily available oil. But the US's insatiable demand has made them highly dependent upon a safe sure supply. Dependency upon an ensured supply has resulted in the maneuvering and conflicts, especially by the United States, that have dominated the world particularly over the past 30 years since the first oil shock in the early 1970's. The US consumes roughly 20 million barrels of oil a day. Of that, roughly 53% is imported and about 24% of that or roughly 13% of the total comes from the Persian Gulf states including Iraq. In 1950 the United States supplied roughly 52% of the world's oil production. Today it is has fallen to around 8%. The Persian Gulf States supply about 30% of the world's production most of which comes from Saudi Arabia. The Persian Gulf States also have about 67% of the world's reserves. The US, by comparison, only has about 3% of the world's proven reserves. This makes the Persian Gulf the most important area in the world when it comes to supplying the fuel that the US economy and indeed the rest of the world needs. Driving the US demand is the world's lowest price for gasoline. US consumers pay roughly 30 cents/litre at the pumps while here in Canada we pay around 45 cents/litre (all figures US$). In most of Europe the price is closer to $1/litre and can be even higher in other countries including third world countries. The vast differential in price says a lot about what drives the demand, the fuel efficiency of automobiles, and the size and type of car/van/SUV we drive. The demand for these products, particularly Vans and SUVs, is driven by the abundance of and a ready supply of cheap oil. The US has another distinction. Besides being the world's biggest consumers of oil, they have become the world's largest debtor. At one point in time the US was a major creditor to the rest of the world. No longer. The US net foreign indebtedness is estimated now to be approaching $3.0 trillion. This pales Argentina, who recently defaulted on its external debt and Brazil who many thought might default. This rising and mounting external debt is being driven by the annual current account deficit now in the area of $450 billion/year and over 4% of GDP. Many argue that none of this is a problem because the US has the ability to borrow its own currency, it is the world's reserve currency and foreigners are significant and steady holders of US stocks and bonds to finance these deficits. Money and Oil! These are two volatile areas that could potentially have a very negative impact on the United States. War in the Middle East, more specifically Iraq, could by some pundit's estimates under a worst-case scenario send the price of oil sky rocketing to $80 a barrel. At the height of the Gulf War oil prices peaked at above $40. A jump in oil prices to even $40 would have a negative impact on the already struggling global economy. A rise to $80 would be devastating. Some rise in the price of oil could be offset by production increases in Saudi Arabia or releases from the US's strategic reserves but nonetheless it would be very negative. But a war in Iraq is more than just about a potential huge jump in the price of oil. Iraq has around 10% of the world's reserves, the world's second largest behind Saudi Arabia. Iraq is also producing only about 2.5 million barrels per day well below potential capacity of around 7 million barrels per day. It has been claimed that the real agenda of the United States is to seize the oil. Bringing Iraq up to its potential would also put pressure on Saudi Arabia and possibly bring down the price of oil. Russia and France also have huge interests in Iraq. They were the two Security Council members that had to be placated in order to obtain the recent UN resolution against Iraq. But once a war starts there are no guarantees as to the direction it will take. A number of analysts claim it will be over in a few weeks and that once things get underway the Iraqi army will fold quickly in order to save its own skin. That may be. But war can also veer off in the wrong direction resulting in the deaths of hundreds of thousands of Iraqi's, mostly civilians; it could result in the destruction of the Iraqi oil wells or there could be attacks made on the oil wells in either Saudi Arabia or Kuwait setting them once again ablaze. War in the sensitive desert of Iraq would also result in massive environmental degradation as it did in the Gulf War a decade earlier. There is also no guarantee that whatever government replaced Saddam Hussein would be able to rule. There are fears that Iraq itself could be dismembered and destabilized with the 20% population Kurds in the North and the 60% Shiite Muslims in the South. The Kurds in the North are more interested in their own state and would stir up further problems with Kurdish minorities in Iran and particularly Turkey who would want to join them. Shiite Muslims are more generally aligned with Iran. Remember that Iraq was originally carved out of the Old Persian Empire by the British following WW1 and was created more for their convenience then it was with regard to the tribes and ethnic divisions of the day. Despite the ease with which Afghanistan fell a year earlier the US backed regime barely controls Kabul the capital while the rest of the country has fallen back into internecine fighting amongst warlords and the drug trade, which had been largely eradicated under the Taliban, is once again flourishing. Funds that were promised to rebuild Afghanistan have been only a trickle while Kabul the capital city lies largely in rubble. Resentment is growing in the country particularly against the United States who in leading the bombing campaign pulverized what remained of the country after years of civil war and the Taliban rule. Another wild card is Saudi Arabia. The Saudis are refusing to allow the US to use their land as a base for war with Iraq. Saudi Arabia is the home of Osama Bin Laden the alleged mastermind of the World Trade Center and Pentagon attacks. Numerous of the alleged hijackers also came from Saudi Arabia. There are hawks in the Bush administration that would also like to take out Saudi Arabia. By conquering Iraq the US would then have a string of military bases stretching from Saudi Arabia north to Georgia in the East and west into Central Asia in the former Russian republics and of course Afghanistan. It would also take pressure off the need for the bases in Saudi Arabia, which were the cause of Islamic objections in the first place. Iran, being surrounded, would according to theory now be acquiescent and cooperative. On the financial front the Saudis have threatened to sell their US securities and withdraw their funds and convert to Euros (and some say gold) if war broke out. The Muslim countries are also getting closer to the creation of a Gold Dinar - Gold Dinar: An Economic and Strategic Response to Chaos by Michael Billington from the November 15, 2002 Executive Intelligence Review, which would be intended for use as currency amongst Islamic countries. Even one of these acts would be extremely negative for the US Dollar (and by extension be very positive for gold). Both together could cause a collapse in the world's reserve currency and begin to bankrupt the US. Money and Oil! Is it any wonder that the US is anxious to move quickly to subdue Iraq and possibly Saudi Arabia as well before things get out of hand? By all indications it is not a question of will there be war against Iraq it is a question of when. The charts are telling us that the US dollar is going down irrespective. And a falling dollar is very negative to the United States and to the world economy. Rising oil prices are also negative to the world economy and war would exacerbate it if only for the duration of the war. Irrespective oil prices are going up long term as rising world demand and falling world reserves and supplies will put pressure on prices later in the decade and into the next decade. The world's largest economy China is growing rapidly and 1.2 billion Chinese want cars and scooters. We talked to Crude Ken, our man in the Calgary oil patch. Crude Ken also pointed out that the major oil companies cannot replace their current production. There have been no major discoveries for upwards now of thirty years and any new oil is hard to get at in the far North or under the sea. Crude Ken says that while he likes the integrated oils and some of the major seniors his favourites are some juniors. Crude Ken's top junior picks are: Bow Valley Energy Ltd. (BVX-TSX) (www.bvenergy.com, 403-232-0292) and Petrobank Energy and Resources Ltd. (PBG-TSX) (www.petrobank.com, 403-920-0135). Mid Cap picks are Bonavista Petroleum Ltd. (BNP-TSX) (403-213-4300) and Baytex Energy Ltd. (BTE-TSX (www.baytex.com, 403-267-0715). Amongst the large caps mentioned were EnCana Corp. (ECA-TSX) (www.encana.com, 403-645-2000) and Canadian Natural Resources Ltd. (CNQ-TSX) (www.cnrl.com, 403-517-7345). We both agreed that we liked Suncor Energy Inc. (SU-TSX) (www.suncor.com, 403-269-8151) amongst the integrateds. Amongst the drillers we favoured Precision Drilling Corp. (PD-TSX) (www.precisiondrilling.com, 403-716-4517) and Trican Well Service Ltd. (TWC-TSX) (www.trican.ca, 403-266-0202). David Chapman email david@davidchapman.com www.davidchapman.com November 18, 2002 The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund. -------------------------------------------------------------------------------- 321gold Inc Miami USA 321gold.com

To: Jim Willie CB who wrote (9540)	11/18/2002 9:45:02 AM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Precious Metals Report By Leonard Kaplan Prospector Asset Management For markets of Monday Nov 18, 2002 GENERAL COMMENTS: It was a wild ride in the precious metals markets last week as news events, terrorist warnings from the FBI, the unpredictability and concern over Iraqi disarmament, governmental reports on the economy, and fundamental news all rocked the markets. The gold price fell by 80 cents on the week but that belies the volatility seen during the week, with Wednesday seeing December gold futures as high as $325.40, only to crash to $317 just hours later when Iraq acceded to UN demands for inspection. This precipitous decline was almost certainly the result of large speculative commodity funds, who had previously aggressively built long positions, decided to exit the market en masse. These funds, who trade primarily on signals generated by their "black boxes," continue to be buyers at the tops and sellers at the bottom. It is a constant mystery to me why they continue their failed strategies when the results keep coming in poorly. As an aside, there is a school of thought that you knew everything you needed to know about trading by the age of 4. By then, you knew to touch a hot stove only once, and you knew that if something felt good, you wanted to do it again. It would appear that this lesson still has to be learned by some computer-guided technical trading systems. The gold market rallied back from the depths on Friday, when a governmental report indicated that the Producer Price Index rose 1.1% in October, far beyond market expectations, rekindling the specter of inevitable inflation. This is only as it should be, the US administration has been expanding the monetary supply at historic rates and has taken USD interest rates to 40 year lows. Also add to the plot, the burgeoning governmental deficit, and the current account deficit, the continuing deterioration in the value of the USD, and inflation seems inevitable to anyone who spent more than 10 minutes awake in their freshman economics class. It is only a matter of time. The gold rally on Friday was also aided, in small measure, to cautions by the FBI that Al Qaeda may be planning "spectacular" attacks within the United States. Silver, while shadowing gold's movements to a large extent, was largely restrained all last week and gained 5 cents in value. Silver continues to trade within a well-known trading range of $4.52 on the downside and perhaps $4.64 on the upside. Large speculative commodity funds continue to carry outsized short positions and in the words of UBS Warburg, "we continue to believe that a larger short covering rally may be in the offing and that silver remains poised for a move higher." I also sense such possibilities, but it is going to be very difficult for silver to surpass the $4.75 to $4.80 price levels unless gold is able to get through the "brick wall" of resistance at $330 per ounce. Silver is fundamentally hampered by the weak global economy and has, unfortunately, lost much of its "monetary" status or investor interest over the years, thereby limiting its potential. All in all, silver remains a trading market, where it is best to buy dips and sell rallies, unlike gold, where a case can be made for constantly maintaining long positions. Platinum and palladium were rocked last week by the release of the Johnson Matthey 2002 Interim review of these markets. I will spare you the details of their predictions, but the report expected the platinum supply deficit to widen to almost 500,000 ounces in 2002 as jewelry sales increase in the Far East while palladium demand would continue to fall to its lowest levels since 1994 as deteriorating global economic conditions, large inventories held by commercial users, and technological advances thrifting its use continue. The report, and some comments by their analysts, also cast some doubt that South African producers will be able to accomplish their most ambitious plans in ramping up production. As a result, platinum was up some $16 on the week, while palladium fell by almost $11 in value. I must admit that I see the sharp price movements experienced last week as exaggerated, most certainly in the case of platinum. If the bullishness of the market is banking on jewelry demand, then it makes sense that platinum would, much like gold, have a profile of being rather demand elastic, where offtake falls rapidly as prices rise. But, you cannot fight a trend forever, and if platinum maintains its $600 price level, I would recommend exiting all short positions. I am constantly irritated that futures trading is characterized by the financial press, and some analysts, as overtly and intrinsically "speculative" in all aspects. Their claim of "highly speculative" relates specifically to the awesome leverage available in these financial instruments. The key word here is "available." As an example, when trading gold futures, a margin deposit of $1350 (about 4% of the current value of the contract) is required, but there is nothing that prevents an investor, or speculator from depositing the full value of the contract, thereby dramatically lessening the risk/reward profile. An investor can buy a futures contract, pay for it in full and, take delivery. In other words, in futures, the investor has the choice of leverage employed in the marketplace and can take positions suitable to his preferred risk/reward profile. The futures and options market is what you make of it, and investments can vary from the very conservative to the wildly speculative. While, in my opinion, the gold market remains in a secular bull market which will last many years, where fundamental supply/demand characteristics force ever higher levels of support, it is still caught in, what I term, the "jewelry cycle." As about 90% of the demand for gold is for jewelry, and as this demand is highly elastic (where demand falls about 3% for every 1% increase in the gold price), the gold market seems doomed to a slow rise, with each successive trading range being higher than the previous one. (Please note that this is NOT a negative, as the predictability of a market is essential to successful trading). There are many analysts who still, even after years of being proven wrong, forecast a "moon shot" for gold prices. Intrinsic in their hypotheses is the given of investor and speculative demand, as only such buying could create market conditions to force a roaring bull market. But the truth be told, for reasons that I cannot understand, global investors still have not discovered the gold market, even though it is perhaps the performing asset class of the past several years. Rational analysis would indicate that the gold market will continue higher in the coming years, ratcheting up from one trading range to ever higher trading ranges, but that a roaring bull is still improbable unless gold regains the interest of investors and speculators, which simply has not happened as of yet and, frankly, looks unlikely. On to the Commitment of Traders reports, as of November 12th, for futures and options combined: Gold Long Speculative Short Speculative Long Commercial Short Commercial 57,696 16,799 74,490 160,221 +18,725 +579 -2,223 +21,245 Long Small Spec Short Small Spec . . 66,084 21,250 . . +8,796 +3,575 . . In the relevant week (please note before the massive sell-off on Wednesday), prices rose by $6 and open interest rose by 31,713 contracts as speculative interests piled into the market in force, rebuilding long positions sold out, most probably, at lower levels. Of the 27,500 contracts added by the large and small specs, commercials were most gracious sellers of 23,400. So, for the umpteenth time, we see the commercials profiting from the bullish exuberance of the speculative concerns. The historic analysis of the COTs in this market strongly recommend following the lead of the commercials, as they are most often right in this market, and going against the lead of the speculative concerns, as they are most often wrong. My view on this market is much unchanged. We remain within a well-traveled trading range of perhaps $315 on the downside to $325 on the upside. As such, the sale of out of the money puts and calls continues to be my favored strategy, while maintaining a core long position. The movements of the USD and the stock markets should continue to dominate the influence upon the gold market. Silver Long Speculative Short Speculative Long Commercial Short Commercial 29,590 16,029 25,940 59,777 +2,952 -6,271 -2,775 +5,536 During the reporting period, silver rose by about 10 cents in price as open interest DECLINED. Again, it is painfully clear that this rally is simply short covering. Historically, silver has not been able to mount a lasting rally on just short covering, which usually can only push price levels just so high. As in gold, commercials were sellers, another somewhat bearish feature. I look for silver to shadow gold to a great extent, and remain in a rather constricted trading range. The possibility of a significant short covering rally is much diminished as large speculative shorts covered about 25% of their positions already. Again, strategies should be employed to take advantage of this characterization, with options still most advantageous for some accounts. By the way, for those who believe that silver prices will be stable to higher over the next year, the December 2003 $4.25 silver put is trading at 15-16 cents, which seems a most "tasty" trade. If exercised, the investor would be long silver at about $4.10 per ounce, just fractionally above decade lows in the silver price. Please call our offices to discuss this recommendation, as it may not be appropriate for all accounts. GOLD RECOMMENDATIONS: Expected trading range $318.50 to $324.50 (positions and recommendations are available to clients and subscribers only). SILVER RECOMMENDATIONS: Expected trading range $4.54 to $4.64 (positions and recommendations are available to clients and subscribers only). PLATINUM RECOMMENDATIONS: Expected trading range $573 to $610 (positions and recommendations are available to clients and subscribers only). A complimentary subscription to the newsletter, with specific recommendations and positions, is available upon request for a one month period. send emailto: lkaplan@prospectorasset.com

To: Jim Willie CB who wrote (9540)	11/18/2002 9:46:26 AM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Oil firms draw the line on Kazakh demands By Sabrina Tavernise The New York Times Monday, November 18, 2002 MOSCOW - The government of Kazakhstan found out last week just how far it could push the foreign oil companies who are working to develop its immense oil and gas reserves, analysts said. When a consortium led by ChevronTexaco Corp. said Thursday that it was calling off a $3 billion expansion of production at the Tengiz oil field, one of the biggest and most important investment projects in any former Soviet republic, the official announcement cited an inability among the partners to agree on financing. But people close to the negotiations and analysts who follow oil development in Central Asia said Friday that the real problem was the Kazakhstan government's escalating efforts to rewrite its 1993 agreement with the consortium to develop the field. For example, a person close to the negotiations said, the government proposed changes in the way the project would account for depreciation, a technical issue that would nonetheless have "significantly affected the economics of the project." Much of the Kazakh economy is built on the fruits of an oil boom. In the 1990s, the government did its best to attract foreign capital and skill to develop its energy riches, and it had a reputation as the most welcoming country in the region for foreign energy investors. Over the past decade, it drew about $10 billion of foreign direct investment, far more than its much bigger and richer neighbor, Russia. ChevronTexaco bet heavily on Kazakhstan, and the Tengiz expansion project on the north shore of the Caspian Sea was hailed as an important part of the company's growth strategy. Building on a decade of work in the former Soviet Union, the consortium is known as TengizChevroil and includes Exxon Mobil Corp., LukArco of Russia and a Kazakh company, KazMunaiGaz, as junior partners. It is already the leading foreign-run oil operation in the country, pumping 270,000 barrels of oil a day. The new project would have stepped up output to 430,000 barrels a day over three years. But without an agreement on acceptable terms, "we had no option but to suspend all activity" on the expansion, Peter Robertson, vice chairman of ChevronTexaco, said. The friction with the government began after the discovery in 2000 of a huge oil reserve called Kashagan in the Kazakh portion of the Caspian Sea. Since then, analysts said, the Kazakh government has been trying to reopen the oil development agreements that it signed in the early 1990s to get better terms. "There's a sense that Kazakhstan has been pushing and squeezing investors to find out how hard they could squeeze," said Laurent Ruseckas, a Caspian specialist at Cambridge Energy Research Associates in Paris. "Now they know." Among other moves, the government has drafted legislation that would toughen conditions for foreign investors in Kazakhstan, including removing a clause in current law that specified tax and royalty rates for years into the future. As Kazakh officials became more confident in the country's reserves, their stance hardened, Ruseckas said. Economic successes "gave them a sense of complacency," said Julia Nanay, a director at Petroleum Finance Co., a Washington-based consulting firm. "They had the view that heaven was the limit." Kazakh officials say they are simply trying to bring their oil-sector laws, which now give foreign companies special treatment, into conformity with global standards. "We are taking international experience into account in the new laws," said Yerlan Abildayev, chairman of the investment committee in Kazakhstan's Ministry of Industry and Trade. "In no way will this infringe on the rights of investors." The TengizChevroil consortium has disagreed with the government in the past. An argument over tax payments was resolved last year. A $73 million fine imposed for storing sulfur near the field is being disputed in local courts. Copyright © 2002 The International Herald Tribune

To: Jim Willie CB who wrote (9540)	11/18/2002 9:48:48 AM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Gold's Midas touch leaves banks cold By Adrienne Roberts Financial Times Published: November 17 2002 21:10 Against a backdrop of corporate scandals and plunging stock markets, the price of gold has climbed by about 20 per cent in the past 18 months. Mining companies' profit margins have grown and anyone with a nest egg of bullion bars is feeling a little safer. Not everyone in the market is smiling, however. Business has never been tougher for the bullion banks and, while investors have a new-found enthusiasm for gold, the serious money has bypassed the metal itself, pouring instead into mining shares. Meanwhile, the bullion banks, which do business with the mining groups and central banks, have seen their profits dwindle. That is largely because of the fall in hedging business. When the outlook for gold prices is uncertain, mining companies might choose to manage the risk by locking in a future price for their gold. Bullion banks help make these forward sales possible, providing derivative products such as forwards and options. Hedging was good business for the banks during the 1990s as they designed increasingly sophisticated derivative structures for clients. But producers became more cautious after 1999 when the gold price spiked unexpectedly and Ashanti Goldfields of Ghana and Cambior of Canada's derivative positions brought them close to disaster. "By 2000 the producers were looking at much more 'plain vanilla'-type business: basic forwards, basic options," says one mining executive. "The really lucrative trades started drying up though there was continued volume in the bread and butter stuff." But as gold has pulled out of its decade-long slump, producers have stopped hedging. Some are letting contracts expire, others are buying themselves out of their positions. Conventional wisdom says this development, and gold's rally, were begun the US Federal Reserve. Falling dollar interest rates made it unprofitable for miners to hedge, or for speculators to sell the metal short. For forward sales to make commercial sense, the cost of borrowing gold must be less than the cost of borrowing money. In the mid 1990s one could have borrowed gold at 1 per cent, sold it and invested the proceeds at 7 per cent. But falling US interest rates have narrowed that gap. Not only is hedging no longer profitable, it has become anathema to investors seeking exposure to gold's rally. Investor sentiment has rewarded the unhedged miners, putting pressure on the non-hedgers to increase their price exposure. Shares in the unhedged South African producer Gold Fields have risen about 160 per cent in US dollar terms over the past year, compared with about 70 per cent for rival Anglogold, which does hedge (although Anglogold and other hedgers have significantly reduced their books). While producers continue reducing their hedge books, they continue to support bullion prices. Ironically, the suppliers themselves have become a key source of demand for the metal. "In 1999, producers were adding around 500 tonnes of gold a year to supply through hedging. They are now taking back around 500 tonnes through de-hedging," says Andy Smith, analyst at Mitsui in London. But once the producers have finished buying, will there be enough other demand to keep gold buoyant? Investment demand for bullion has risen - by 12 per cent in the first half of 2002 compared with that period in 2001, according to the World Gold Council. But recent data show that producer buybacks were mirrored by a fall in demand from jewellery makers as prices climbed. "If you take a very bearish view, once the crust of producer buying is finished then prices may slide alarmingly," says a banker. With US interest rates still low and the dollar floundering, however, it might be premature to call the end of gold's run just yet. news.ft.com