Gold - Part - 2

The European central banks moratorium on gold sales limits aggregate sales to 2,000 tons over five years and 400 tons per year and specifically excludes "already decided sales." The ban includes the UK and Switzerland. The European banks' decision will restrict gold supply to the market, end leasing and make hedging and speculating more costly. Further relieving downward pressure on prices is the abandonment by the IMF of sales of part of its reserves, due to opposition in the U.S. Congress. These actions will allow gold to again provide a hedge against inflation and to assume its real identity and function as a safe store of value. The central banks of Europe, that have been clandestine sellers and leasers, are owners of 90% of official gold stocks if you add U.S. and IMF holdings. EU & UK central banks may not sell 400 tons a year and if the price of gold is higher sales won't have nearly the effect they would have otherwise. Nevertheless this is the first positive news gold has had since 1986. It is interesting that the news was Front Page in Tuesday's, September 28, 1999, issue of the Financial Times. It made section C of the WSJ.

As you can see in the article we wrote on Saturday, 9/25/99 just before this momentous announcement we felt something was in the works. The very important question is, why? The reasons are the public, even dolts, recognized with the blatant Bank of England sales, that the market was being manipulated. And, the risk central banks had assumed in lending gold was simply out of hand, particularly in view of climbing usage. They stopped selling and leasing so the public wouldn't recognize or remember the 15 years of manipulation or those banks didn't want to go under, fully realizing the systemic problems in the world financial system that were starting to come unglued.

This shift by central banks is momentous. On a par with the closure of the U.S. gold window on August 16, 1971. The ramifications are enormous. Central banks and those who control them have been helping create world liquidity by using hedge funds and others to sell gold for them (i.e..leasing). We don't know how much, but we know the minimum is 4,000 tons, the declared shorts are 3,200 tons, and it could be as high as 14,000 tons. We should take notice here that Barrick Gold was the biggest forward seller and short into the market over the past 15 years. They were flat 3 months ago, which means they probably knew this was coming. George Bush and Brian Mulrooney, a disgraced PM of Canada, both elitists, are on Barrick's Board of Directors. That money was used to provide liquidity for world stock and bond markets, particularly the U.S. markets. That source of liquidity is now dead. Next we expect the yen at 103 to be borrowed and sold, the carry-trade and the funds will be used to keep the stock market correction at 15%-20% and 30-year bond yields at 5 3/4% to 6%. That action and with the help of central banks the yen will be moved down to 118 again. We can assure you the Japanese were reamed at the G-7 meeting for acting unilaterally. Unless the yen goes lower, that game will end in a few months and two sources of world financial liquidity will be gone. The third, carry-trade in the Swiss franc is over. The currency should trade down to 1.55 and could go to 1.65, but that's it. Thus, if these three sources of liquidity dry up, the gold carry-trade finished and yen and franc carry-trade limited, then banks will be forced to create liquidity. They'll do this by monetizing debt. That is the Fed buying U.S. Treasury Paper, which is immediately inflationary. Otherwise they'll print money which will show up in inflation in 6-12 months. Gold went to $329 and corrected back to $309. It will consolidate between $300-$320, then by the end of January should be attacking $350 an ounce. The bad news is the stock market will trade between 9200 and 11,306 for 6 to 9 months, then head lower.

We'll be back with gold share buy recommendations soon. For now buy the big ones. Take profits in highly visible general stocks. Only buy very special situations. You want to be 25% in gold shares, 10% in gold bullion coins, 20% in bonds, 25% in money markets and 20% in stocks over the next 6 months. Work your way slowly from the market, but don't let outstanding gambles pass you by. Some good fundamental special situation will do well even in a declining market.