The Gold Market and Precious Metals Commentary

Technicals -

The leak in the bear dam is starting to create a flood. The dramatic tug of war continues, but the bears need more than someone sticking their hand in the dyke at this point. Besides, he is getting soaked. Our opinion of the technical makeup of the gold market is about a 10.

First, we had the killer move in which we made a slightly lower low on the right side of the base formation. That low (the killer move) buried many long term bulls and has them shaken to this day. Since then the price of gold has rallied and is in the very final stages of completing a massive base formation on a weekly basis. On a daily basis, chart wise, we have a powerful V formation, formed after the killer move low. We said weeks ago this was a very powerful technical signal, and that assessment has proved to be accurate. The base in gold can now support a strong, sustained move to the upside.

Second, we have very encouraging open interest patterns. Liquidation occurs on dips and the open interest is increasing on rallies (which indicates new buying and that is what we wanted to see). On Thursday, the open interest went up almost 10,000 contracts. Third, we made note to you in the past that we have had a pronounced tendency to come in higher the past few weeks in N.Y. after the early London fix. During the bear market, we would come in lower more often that not. That indicates to me that the big league central bank selling pressure out of Europe has really died down and is ending, or has ended.

And finally, there are very few real bulls. We are shocked at how timid everyone is in the analyst community. There are the bulls(looking for $305 gold) and the bears (the rally will fail). Most of them do not even know how to articulate the bull case - and that is as bullish as it gets. The point is: the lack of staunch bulls in the investment world is very bullish for the future price of gold. They will be converted to bulls down the road and that is where the future buying will come from.

After spiking up to $5.46 or so silver, sounded retreat. It is not a surprise and we are not alarmed. Silver producers, scared of a global meltdown, took advantage of the quick rally to lock in profits. Silver is an industrial metal too. As a result of that spike, silver may have some work to do before it regains its composure and soars. Also, you know we have noted in the past, silver is a mule. It goes when it wants to, not because of commotion outside the silver market - and that is what we had the past couple of days.

What is most important is that we received our second, third party confirmation that Warren Buffet was buying between $4.90 and $5.12 when everyone else was looking the other way. We repeat - second confirmation of that story. At $5.20 silver, he is still way in the money (as usual).

Fundamentals -

The news for us gold family people was always bad for a couple of years. Now it looks like it will be the opposite and the stage is set for a roaring bull market. At least that is what the vibes from Rubin, Clinton, and Greenspan are clearly indicating. They are coming across like a bunch of desperados in tone of voice (pleading for an IMF bailout) and in action (the Long Term Capital bailout). To actually admit there may be hundreds of hedge funds out there with big problems, says it all. You can read about this elsewhere. I have only one question, "Who pays for all this and with what"? Roll the presses. Print that paper.

With all the wailing that is going on, it is clear that interest rates are going to be adjusted downward. I am clearly shocked when I watch my boob toob and I listen to the answers to questions as to where should you put your money now as interest come down in the short term. "Stocks are scary, bonds have risen so much, and I am not used to piddly money market returns", is what I hear. Gold (gold shares) is rarely mentioned and not even on the radar screen in most cases. When the broadcaster does ask a guest about gold, it is usually," well, it had a blip of a rally, but that is it. Stay away from gold".

This may sound like mundane analysis, but, in my opinion, this is extremely bullish information. These same people will be screaming to buy gold $30 higher from here. I guarantee it. And there are so many of them!

Midas followers know that from day one (see the first posting thread in the commentary section called " Gold shortage may fuel price rise "), that we believe, and have been saying so for some time, there is a massive, unhedged short gold position out there. We believe that that these entities have borrowed gold (hedge funds and others) at low interest rates from bullion bankers. We know that some have covered, but many are still short and have not covered. Long Term Capital is probably short and so are others. They have not covered because, they need the money from that trade to bail them out in other losing derivative trades. As long as gold does not go way up in price, they can stay short and pay a low interest rate - say 1 1/2 percent. A lot better than an 8 1/2 prime.

We know from public statements that our government bailed out Long Term Capital because, if they did not, they feared its failure would threaten our economic system. One hedge fund! If that is the case(and it must be) then they have to save Long Term. We think Long Term (as a former trader of pork bellies, that misnomer still cracks me up) is short some 375 tonnes of gold. If the price of gold shoots up very fast, then what? What do the bail out boys, do? What do the bullion bankers do with their wake up call? I suggest this tug of war in gold is bigger than meets the eye. For example, J. Aron, bullion dealer and big bullion LENDER keeps posting lease rates higher than other dealers. I suggest they are part of the Rubin Wall Street cabal (and we know there is one now, so being a conspiracy advocate is mainstream thinking) and defending their short positions at all cost; therefore, they need to pay up to do so. They know, if gold zooms, the Long Terms of the world could really be in trouble because their cheap loans would suddenly be expensive ones. And that could affect their profitable business and maybe even expose them to some serious problems. But, there may be even a bigger problem looming out there. What if the hedge funds are short 1,000 tonnes of gold, or more, like we think they are? Where do they get the gold if the price of gold takes off? Yearly world production is only about 2400 hundred tonnes. This is the time bomb we have been talking about.

The story gets more intriguing. This came to me yesterday from Bloomberg News.

" Italy's Foreign Exchange Office said it invested $100 million in Long-Term Capital Management LP and lent another $150 million to the hedge fund". The exchange office ,or UIC, is a division of the Bank of Italy that sometimes invests the central bank's currency reserves. " This is the Central Bank of Italy we are talking about which also happens to have many hundreds of tonnes of gold as a reserve." Antonello Biegioli, the UIC's co-director, said the exchange office expects to see the full value of its investments returned". OK, fine.

In the same Bloomberg article, " Liechenstein Global Trust AG, the principality's biggest bank, yesterday said it expects its $30 million investment in the fund will be written off almost in full.

So what gives? Have any of you invested in a vehicle in which somebody gets paid back in full and your buddy loses everything? Give me a break Italy.

The story gets worse, or more intriguing, depending on how you look at it. Next day (yesterday) Bank of Italy Governor Antonio Fazio said he was unaware, until this week, of an investment by Italy's foreign exchange office, UIC, in Long-Term ". "I never heard about it." Fazio told reporters. Not so fast Fazio. Pierantonio Ciampicali, UIC's director, suggested in an interview with Daily La Republica this morning that Fazio might have been aware of the investment. He said the investment had been discussed by the board at the beginning of 1994, an no one had opposed it". Asked who was present at the board meeting Ciampicali said " either the chairman or the director general or both must be present at board meetings".

That brings me to the point of the story. We think there may be as much as 7,000 to 8,000 tonnes of gold loans out there to producers, hedge funds, fabricators etc. The hedge funds alone are short big time. The Central Bank of Italy (with its huge tonnage of gold reserves) appears to be clueless about what they were doing. Or they are liars? Or they are scared?

That is a central bank. We know from our own leaders, that our own bankers did not know what they were doing lending to hedge funds. This is public knowledge, discussed in Congress, etc. In essence, lenders had to be bailed out because of their ignorance.

Greenspan and others have suggested that controlling hedge funds in the U.S. is not the answer. If regulated, they will go off shore. Lending to hedge funds will be regulated in a defacto sense by cracking down on their sources of capital borrowings . That means that the scope of the gold loans, of which everyone but Frank Veneroso, Peter Hambro and a few others are aware of, are going to be looked at closely. Many operations that lend gold are going to have their books examined.

Da Dah! Now when the cabal, and the powers to be, find out how much gold is lent out, and then check it against yearly production, there will be a quiet panic. The gold loans will be called in. Lease rates could zoom as lenders call in their gold loans one by one. It will be every man for himself. That much gold, in a short period of time is not there, and there could be major defaults, a la the Drexel Burnham, Michael Milken, gogo, junk bond days. Several central banks such as the Bank of Portugal had lent some of their gold to Drexel and when Drexel went under they were stiffed for a long time. Lease rates soared to their highest peaks in history when the central banks tried to get their gold back. And the total gold loans then were a trifle compared to today. I suspect the cry will go out soon: Bring in the gold loans! Cover shorts and fast!

Now if I have figured this out, I can assure you, that some pretty savvy, big money guys, who are much more plugged in than I, have figured out the same thing. And in these predator days, they will attack. They do not need our heroes (David Niven, Anthony Quinn, Gregory Peck, and James Darren) that destroyed the Guns of Navarone at $2.90 gold. They have nuclear bombs to drop on these bullion bankers and "bail out" bureaucrats. I know for a fact that one of the biggest hedge funds, who is notorious for being a leader and taking on other big money, may know what I am telling you and quietly entered our offensive fray. This well known hedge fund loves to create havoc with other hedge funds and stick it to them. Their track record over the years says they win a great deal of the time and they are on our side of this trade.

I could go on forever. No point. I said this weeks ago. Buy, buy buy. Then: buy more, buy more, buy more. The party has just started and very few people get it yet. And that is the way I like it.

Potpourri and the Gold Shares -

The XAU closed at 82.89 up 3.60. Powerful stuff technically. Blew through the minor double top. Hot money came right back in. All of a sudden I love the momo boys. Thank you John Brimelow for your alerting me that they found us. The big picture chart on the XAU is awesome and the base that it has formed can support a move to 155 very easily.

LE METROPOLE MEMBERS TAKE OUT CONTRARIAN FUND. After our spiel on Golden Star Resources, the volume in GSR was the highest in years and made the highest volume lists. I have personal knowledge of the many, many hundreds of thousands of shares that you bought. Approaching the million number. The volume after our pep talk was Golden Star's highest since their diamond discovery days.

Many of you have asked me what to do because it got away from you. Should I buy here. Well, that is up to you. But let me tell you my thinking for me. I will buy up to 3 1/2 in the short term. Why not! I think the stock is going to $60 to $70 in 3 years. At some point in the future I will gladly pay $12 per share.

Most of the comments that I look at from investors in many forums are about money made and profit taking. All well and good, but in my humble opinion, this is the time to load the boat, not take profits. Carp Diem . Seize the day. Buy more of your favorite junior golds at these bargain basement prices. Example. Some of you that have followed some of my thoughts at the very professional Silicon Investor site (before Midas) know that I talked about Canarc Resource Corp when it was trading at 15 cents Cdn. I had to pay 18 cents Cdn. Monday, I intend to add to my position and will gladly buy some more at 50 cents or better. I believe it will be a $10 stock, U.S., in a few years. The shares are going into very strong hands and there should be some very positive news coming down the pike.

Tomorrow is the first day of the rest of my life. Is GSR a value at 1 7/8 or 2 or 2 1/2? It is a giveaway.

One of our other big picture holdings is our South African stock, Durban Deep. John Brimelow, one of our "economic dream team" members, is having dinner with Roger Kebble, their Chairman, on Monday who is flying in from South Africa. We will give you the latest and that will be our next gold stock that we present to Metropole members.