The Gold Market and Precious Metals Commentary

Technicals -

Say it's not so, Joe. (The public outcry that went out to Chicago White Sox outfielder, Shoeless Joe Jackson who was accused of fixing the 1919 World Series). In all my years I have never seen a market act like this. Every breakout situation is squelched. Over and over again. I believe we did have a technical set up that was about a 10, as I indicated in the last Midas. Then how come we are now $4 lower in price?

Somebody, or combination of somebodies, poured gold into the market to soak up speculator demand in a very big way. The commitment of traders report shows that the speculator position has swung some 70 to 80 thousand contracts in the past number of weeks from a fairly decent sized spec short position to a decent sized spec long position.

That sort of spec turnaround and buying might have driven the price of gold up $30-$40 or so per oz. in the past. Yet, the price has gone nowhere as we are about in the middle of a $290 to $305 trading range basis Dec. That means an extraordinary amount of gold has hit this market, once again. What is peculiar to the gold market, compared to any other market I have ever followed, is that the gold price is now being stopped JUST as it starts to break out. Even in the past, the gold market open interest reached 220,000 contracts and the price allowed to go up before the specs were taken to task. Not now. In all other markets that I have ever followed, if specs buy in this quantity, the price of the commodity involved rises swiftly and the commercials gradually sell into the rally, or really unload into the market AFTER a decent move up, not as it begins.

Therefore, while the long term chart picture remains decidedly bullish, the internal technical make up of the market deteriorated quickly in a traditional sense (at least, on the surface). Over the past couple of years, this sort of technical development has signaled gold price declines. We will have to see whether this time the case is different. I am struck by how almost everyone I speak to is dismayed and not bullish in the short term, once again, because of this commitment of traders report. The point here is that I think this type of open interest analysis is now run of the mill and widely disseminated via the speed of the internet, etc. Taken as a solo indicator as a predictor of future gold prices, it might prove to be a lame one in the future. The speculators have been short gold on average for years and been right. Why should they not be long for the next couple of years and be right on that side of the trade too, even if we have a bit of a shake out in the very short term?

Silver suffered through a bearish outside day on Thursday (higher high than the day before, a lower low, and a close below the previous day's low ) and that led to another pounding on Friday. As a result, the technicals turned bearish very quickly. Normally, a liquidating silver market is not a pretty sight for a couple of weeks. Rallies are usually sold. The open interest numbers that came out Friday showed the specs to be very long and many have been, and are, being shown the exit door. This sort of swift debacle is why we like owning the physical silver and the silver shares versus playing the silver futures market.

Fundamentals -

Who are those guys? - that are supplying tremendous quantities of gold into the market. I took a trip to N.Y. City on Friday to try and get a handle on this. There are many potential culprits.

It is no secret that our Fed is trying to inject money into our financial system. From former Fed Governor, Wayne Angell," We have never seen an outpouring of liquidity like this by the Federal Reserve". The reason according to analysts surveyed by Reuters," Deep losses suffered by hedge funds and bank proprietary trading desks in recent months has led to a pullback in capital and credit available in most global markets", analysts said.

With money pouring into the system, our Fed and Secretary Treasury Rubin do not want it to appear that the fight against inflation has been thrown out the window. As public evidence of that, they want the price of gold to diddle, so as not to sound a weak paper money (dollar) alert. In addition, they know that other financial entities are using gold as a cheap borrowing source. They do not want that source disrupted for the time being and they do not want these entities to have to cover their gold shorts at this point in time for many obvious reasons.

We know on Thursday, the Fed was checking rates on the dollar/yen. Whether they intervened or not, this stopped the yen rally abruptly. We know our government stepped up to the plate to bail out LTCM and there are many savvy minds that believe they have been active in the futures markets to halt stock market meltdowns. It is not much of a stretch to envision a government orchestration of making sure that plenty of gold was fed into the market place at a critical juncture and making sure that the "word" of that just happening to be passed on to the "right people."

I learned for a fact that one of the big gold producers was offered huge quantities of gold with no credit restrictions, which has never been the case in the past. This offering just happened to come from Secretary Rubin's old firm on Wall Street. This firm was urging this producer with great fervor to hedge future gold production and they were urged to do so last Thursday and Friday. It is no wonder that one month lease rates have collapsed to less than 60 basis points.

Other sources of gold supply were of the rumor type. One was that Barrick put some gold out. We found that one interesting as we suggested at the opening of Le Metropole and over $20 lower ago, that Barrick might be covering hedges. This raised an eyebrow to us because Barrick covered hedges about 2 and 1/2 years ago below $400 and put them out again about $416 ( $20-$25 or so higher ) and stopped that gold breakout cold then, too.

John Brimelow also suggested we may also have seen borrowed gold hit the market again from the Meriwether gold that was back in the bullion dealers hands once again.

Do not despair gold bulls. The big picture brightens every day for the future price of gold. Demand is soaring and that burgeoning demand is going to eventually take its toll on the gold bears. Coin demand is up some 800% for many coin dealers over last year. The buying is coming in as a result of the turmoil in the equity markets, the fall in the dollar, and fear of future turmoil as a result of a looming Y2K problem.

(Reuters)Russia plans to boost its budget and guarantee its bank reserves by mining gold coins from central bank reserves, the leading business newspaper Kommerzbank Daily said on Friday". According to this report, 20 tonnes of reserves would be used by the end of the year but up to 200 tonnes could be used in all. That is a healthy chunk of gold and is a strong indicator that gold demand appeal is growing.

Gold demand in Japan has come to life and is surging too. "The World Gold Council estimated gold sales in Japan in September jumped fivefold to roughly eight to ten tonnes from a month earlier", (Reuters). The premiums paid for Tokyo bullion were quoted at 50 cents to $1.50 over the London benchmark. These premiums have not been seen for a long time and a very healthy sign for the future price of gold.

I believe it is important to put this demand in perspective. At the moment, it is like a guerilla army fighting a superpower. One hedge fund returns 300 plus tonnes of gold and here we are talking about Japanese demand ( the entire country ) zooming to ten tonnes for an entire month. In the short term, certain financial entities and governments may win the gold battle by flooding the market with this orchestrated supply, but they are going to lose the war - and sooner than they think. Volatility in the world financial markets is not going away anytime soon. Fear that economic conditions are out of control around the world is growing. A default here, a bail out there, etc. And soon, as the expression goes, it will add up to some real money. As fear continues to creep into the psyche of individuals around the world, many will be more aggressive in adding gold to their portfolios. This army of individual investors ( aided, I suspect by Asian central bank buyers now looking askance at the dollar ) will overpower the government desperadoes trying to keep the price of gold subdued and our guerilla army will win the war.

Potpourri and the Gold Shares -

The hot money giveth and the hot money takeith. After an extraordinary run, the XAU has been walloped the past three trading sessions and dropped about 15 points before it rebounded to close today at 76.10 down .58. Momentum traders ran for the hills and so did many money managers scrambling to lock in profits. It is worth to note that the XAU corrected a normal 40% plus since the move started.

The news and vibes from our people at the Denver Gold Show was very positive. Many of the analysts there felt a good number of gold companies had really streamlined their operations for the recent environment. In addition, we understand American Barrick was roundly attacked for its hedging policies and was given no end of grief. We continue to rail about buying junior golds.

More LTCM funny business that we are sure to hear about in the future:

1) In an obviously planted story in the Financial Times ( to counter the previous day's very negative Wall Street Journal ) people close to the fund are quoted as saying " neither is it holding any gold". You have got to be kidding me. More Clinton speak. The real story was not about LTCM holding gold, it was that they had borrowed gold and yes, true, did not hold it. That is why they had to be bailed out of the position.

2) In a recent document, The Union Bank of Switzerland admits to breaking investment guidelines by investing in LTCM and actually assumed the hedge fund was operating on as much leverage as "250 times". In a real blow to the little guy and to the good intentions of our own regulatory agencies, the Financial Times article goes on to say," The document said LTCM had eight strategic investors, "generally government owned banks in major markets ," which then owned 30.9 % of its capital. They gave LTCM "a window to see the structural changes occurring in these markets to which the strategic investors belong".

This stinks to high heaven and makes the "bail out boy" position of our own government to be outrageous. Gold family people, scream: FOUL - GOVERNMENT HYPOCRITES - INSIDER TRADING FOR THE BIG GUYS. Is there any doubt in your mind that they are trying to keep the gold price down in the short term to avoid more embarrassing stories that could surface if the price of gold took off and all the other big gold loans that we have discussed, ad nauseum, could not be covered? How many banks would be exposed for improperly lending too much gold that could not be repaid by borrowers on an unexpected sharp advance in the price of gold? Defaults could surface in all the wrong places and prove, once again, the herd mentality central bankers have not been minding the store.

Here is a good example why some of these "arrogants " think like they do and have created a big mess. From Jude Wanniski, noted supply side economist:

"I'm credited with bringing classical economics back into discussion as "supply-side economics". "For the last 18 months I've been running around begging people to see a monetary deflation is going to hammer the world. I not only send arguments about what is going to happen, but point out along the way how the world is acting the way I said it would. I write to all the reporters I know and pester all the editors I know. Also, at the center of my assessment is gold, and gold is not a word that the major media are allowed to discuss in front of women and children. An op-ed editor at one of the major papers had an assistant call and tell me that the piece I wrote about fixing the Russian ruble with gold unacceptable, that when they said they would like me to write a piece about the new Primakov team, they did not think I would mention gold. The Wall Street Journal editorial page, which has been citing the importance of gold as the key monetary signal for 20 years, now fails to note that the global financial convulsions have occurred while the Federal Reserve has allowed the gold price to fall by $100 an ounce. Alan Greenspan and the Fed are responsible for the global meltdown, but it is not nice to say so even if you know it is true.

Jude Wanniski is right. What is frightening is that the mainstream crowd of bankers and editors of the world have ignored gold to the point of disaster. I fear that the central banks, through the bullion banks, have lent out gold irresponsibly and if all hell breaks loose they cannot get it back. As said in earlier commentary, I think that the scrutiny going on of financial institutions is, or will, expose this "tiger by the tail".

Tick…tick….tick….tick…..

Midas