Gold Market and Precious Metals Commentary

Technicals -

The quiet before the storm. Spot gold continues to tread water, but bullish storm clouds continue to build on the horizon. The 200 day moving average which is right below $295 has checked retreats and the 50 day moving average could cross it to the upside at the end of the week, while Comex is closed. This technical event in the gold market is known as the "golden cross" and is usually very bullish.

We understand a substantial option position is being defended again by the bears which is contributing to the gold softness. The open interest fell to new recent lows to 152,167 contracts. The specs are bored so they are exiting and the trade does not (in an overall, general technical sense) ant to be short any more, so we have a dwindling open interest. When this occurs and you have a huge base, it is normally a bullish sign.

The silver technical structure differs from gold. Silver is below its key moving averages and it testing key support in the mid $4.80's. The bears ( with slightly increasing Comex stocks ) are probing the downside, looking to hit stops. So far the move above $5 and the move down to this level has been all noise. We remain bullish and watch the silver base get larger.

Fundamentals -

We have insinuated in the past that "Something is Rotten in the State of Denmark" regarding the precious metals action. We are not the only ones that smell something is afoul. Nick Moore, is a very highly regarded base metals analyst for Flemings (Ord Minnett) in London. We heard that he was in N.Y. last week and was also not disinclined to say that the gold market was being controlled. This is not one of the gold family people like the Midas squad, so we were curious and gave him a buzz in London. What we heard about his comments were true according to Eric. Some of the "buzz" that he had heard was that the US was now leasing gold, but he made it clear that he had no confirmation of that.

This fit into what we have heard over the past several months: 1) an off market transaction was arranged to let Long Term Capital out of their 300 tonne plus short position, 2) unheard of easy credit terms were being offered to producers to sell forward, 3) a known credit squeeze was on by the lending community, except for the gold lending community. Carte blanche was the word for gold borrowers, fostered by the rather well connected Goldman Sachs. Makes sense when you think about it ( we will touch on this a bit more later ). Lend gold till the cows come home appears to be the cry of the day from officialdom. Right now the cows are trying to catch up to the stampeding stock market bulls so home seems like a long way away to some.

IF the wink is on (Fort Knox is lending), why not take out a 1 -1/2% gold loan from a bullion banker. The borrowers have big smiles on their faces. Especially if they did what Uncle Sam wanted them to do: keep the price of gold subdued by taking the borrowed gold and selling it into the market place for cash. The smiles are from taking the cash and investing the money in the likes of Yahoo, EBAY, Intel, Amazon.com, etc.

What was of more interest to us about the Nick Moore conversation was that even with all this gold control chat, he is very bullish on gold now, and Nick has been known not to be in the past. His reason: the euro. For 53 years the dollar has been the big enchilada. . Gold was its only competition. That will all start to change in the months to come, according to Eric. As time goes by, and the euro is accepted more and more, the dollar will lose its monopoly as a reserve currency. Lessened demand for "king dollar" can only be bullish for gold as gold is priced in dollars.

Which just happens to bring me to the euro gold coin. More news. Reuters (Nov 23) - European Union finance ministers issued on Monday the following statement on the issue of a euro collector coin after the launch of the bloc's single currency: " The Council and the Ministers meeting in the Council approved ….. euro collector coin, defined as commemorative and bullion coin which has legal tender status but which is not produced with a view to its entry into circulation". How this will actually play out in the end is still being sorted out.

Then there are the Russians doing what they can to spur gold consumption. Reuters (Moscow) Nov. 24- " We have supported the proposal of some (parliamentary) deputies on scrapping VAT on gold sales to individuals by commercial banks,"Finance Minister Mikhail Zadornov said. This is more bullish demand news as this tax was considered an obstacle for Russian's plans to start minting gold coins next year. This is not insignificant news. Instead of paying $360 for $300 gold. He (or she Russian) will pay $300. A big difference, obviously.

So what is the US really up to? Too much conspiracy innuendo on our part?

House Banking Committee, July 24, Alan Greenspan: " central banks stand ready to lease (i.e. lend) gold in increasing quantities should the price rise". Our Fed appears to be true to their word - except, they won't even let the gold price rise at all. The market acts like a 500 pound gorilla is sitting on it. It is eerie the way the price of gold suffocates around $300. $300 - not $400, or $500. And it has been kept down here for over a year. It is important not to forget, however, that there is a very big natural supply/demand deficit that must be met by gold borrowings or sales. The addition of added above ground supply has to be relentlessly fed into the marketplace. Otherwise, the price has to rise to ration the natural mine supply that is not sufficient for current demand.

If Uncle Sam has the red light on, it might look like the deck is stacked against us. Why play the gold game or the gold and silver share game at all? We all probably have a myriad of our own reasons. The Midas motive is to make a lot of money. And that is why we have said buy, buy, buy in the past two months.

As we see it, there is an inevitable monster bull move in gold and silver that should commence very soon. The tide is changing. Just as the stock market bubble looks like it is reaching epic bubble gum bubble size proportions, the gold pressure cooker is also about to explode at some point in the near future. The stocks market bursting will propel stocks down. The gold pressure cooker will propel bullion, silver and the shares up.

Gold bends but does not break under the lending scheme. There are good reasons why the price of gold is steady and does not break. Asian central banks are buyers. Public demand for gold in Asia is resurgent. Increased gold coin demand in Europe and the euro gold coin news, captures headlines. Coin demand in the US is at 11 year highs. Major, official pre EMU gold sales should be fading into the history books in ,and for, the near future. The future strength of the dollar is suspect with the euro coming on stream and an asian backlash against the dollar growing (Vice President Gore's insult to the Malaysians won few plaudits) and here is the kicker: we hear that several bullion banks are in "trouble".

By trouble we mean they know they are too exposed to an unexpected gold rally. The borrowers of large tonnage of gold may not be so lucky as Long Term Capital was to have a central bank bail them out with an off market settlement if they have to find hundreds of tonnes very quickly to pay back a loan.

These concerned bullion bankers know that it is likely that gold lending entities are going to break ranks soon and start to seriously restrict gold borrowings (Merrill Lynch has already done so). Therefore, the pool of gold available for borrowing purposes should tighten up (Uncle Sam can only lend so much - if they are in fact doing so - and the US cannot actually sell the gold without an Act of Congress) Therefore, the only way the natural supply demand deficit can be satisfied, aided by a suddenly reduced above ground supply, is by a price rise. A very sharp price rise. It is most likely a herd mentality will develop among bullion bankers once the breaking of the lending ranks starts in earnest. The supply of gold available to the marketplace will then contract further and the price will rise that much faster. That is why we see gold reaching $400 in 1999 and why we stay the course - and why we are so bullish on the gold and silver shares.

Just about the time all that is happening, Y2K fears should come into prominence. We have already been alerted to the increasing corporate costs of the conversion problem by our own Charles Peabody. And we know that the major reason given by buyers of gold coins in the recent boom in sales is Y2K fears.

John Brimelow's friend, John Dizard, had a scintillating Y2K-gold piece in the New York Post on Sunday. The essence of the story is that gold coin sales are booming because of that fear of a nightmare Y2K problem. But the tip off of things to come may be Dizard's revelation that there is a 3.2 million ounce (90 tonne) call position ( option ) for the December 390 gold contract. To put this in perspective, the coming January call options in toto are about 20 tonnes. We are talking about $390 gold here- not $290. Someone (s) is expecting a substantial gold rally for some reason before the end of 1999. We know that the reason is fear of a Y2K disaster brewing. And these fears should grow and grow as 1999 matures.

Potpourri and the Gold Shares -

XAU closed at 76.18 down 2.08 today and appears to be marking time.

More on Asian gold demand. Reuters (Nov. 24) - China newspaper urges increase in gold reserves. China should increase gold reserves to help diversify the nation's foreign exchange holdings, the official Financial News said on Tuesday. "If there are problems with the dollar, there will be an international catastrophe, " said the newspaper which is published by the People's Bank of China, the central bank." Reducing reliance on the dollar and maintaining greater variety in foreign exchange reserves is the only way to reduce the risk," it said. "As a result increase in our country's gold reserves is necessary."

We have been telling you for months now that the official sector in Asia has been buying gold. They usually never announce so this is may be about as close to an official proclamation as to what they are up to as we will see for some time, if ever. This is very good news and confirms that this one veteran source of ours knows what he is talking about.

Greg Pickup, our commodities man in Chicago, noted that the CRB is close to making new lows and a breakdown, yet, the price of gold is $20 off its late August lows and is not too far away from making recovery highs. To both of us it is an indication that gold's monetary role is slowly, but surely, making a comeback.

How about Bankers Trust! A couple of months ago we stated that they were " toast" and would not survive as is. Right about that, but never thought the stock would go so much higher. Part of these strange market times.

Some tax loss selling of the junior gold shares not helping things. Combine that with a soaring stock market and the junior shares have been pummeled the past 10 days. Big percentage losses. They will rebound just as quickly.

The incredible comeback of the stock market and the explosion of the internet stocks has been breathtaking. I have noted that striking slowdown in gold commentaries on the internet while the gold price action is a big snooze and other stocks soar. Let's face it. It is frustrating. But take heart. We have a massive bull move that will last for many years right ahead of us. The buyers of gold and silver shares at these levels will be very happy campers in the months and years to come. If we are right, 3 or 4 years from today, the gold and silver share mania will make "the internet mania" of today look subdued.

In the meantime here is a pondering for you:

Courtesy of a Le Metropole member -The Great Crash of 1929 by John Kenneth Galbraith

"The causes of the crash were all in the speculative orgy that preceded it. These speculative episodes have occurred at intervals throughout history, and the length of the interval is perhaps roughly related to the time that it takes for me to forget what happened before.

Even in such time of madness as the late twenties, a great many men in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise man in Wall Street are nearly always silent. The fools have the field to themselves.

The striking thing about the stock market speculation of 1929 was not the massiveness of the participation. Rather, it was the way it became central to the culture.

Perhaps it was worth being poor for a long time to be so rich for just a little while."

We wish all of you US members a happy Thanksgiving and we wish the rest of the membership a great week. P.S. The Café will be open.