from gata on gold

  1. 470 Posts.
    Gold backers -- finally -- in Nirvana
    Researcher catalogues vast 'short' position in metal

    By Thom Calandra, Editor
    Friday, December 13, 2002{A1C189C9-1E7F-4676-

    SAN FRANCISCO -- Their kingdom for a freeze-frame.

    Gold's supporters, for nearly a decade deprived of lasting
    gains, are licking their chops. The metal's spot price Friday
    morning reached $336 an ounce. That's the highest since
    Oct. 5, 1999, when the price briefly touched $339 after central
    banks in Europe and the U.S. agreed to limit their auctions
    of the metal.

    Even Andy Smith, the circumspect and widely followed
    precious metals analyst for Mitsui Global in London, is
    (slightly) impressed. "In the last 10 days, gold has entered
    a macro Nirvana -- almost perfect positive correlation
    with the euro, almost perfect negative correlation with the
    Dow. Maybe the poison in the body economic has taken
    hold?" Smith said Friday.

    Smith, who has been advising clients to steer clear of
    gold for years, turns out to have the year's most accurate
    forecast for the gold price -- so far -- among commodities

    In the fourth quarter of 2001, Smith forecast an average
    price for the metal this year of $315 (with a $355 high).
    That view will turn out to be correct if the gold price
    exceeds $330 for the rest of December. Smith has long
    believed the traditional buyers of gold, Indian families
    with discretionary rupees to spend, are turning to more
    practical purchases, like Nintendo Gameboys and
    mobile phones.

    The analyst says his 2003 forecast will come out after
    Christmas, and he won't say whether this week's strong
    rise in the precious metal will influence his thinking to
    any great degree. He does hint, "There are indications
    that gold has developed some macro-macho since 9/11."

    Smith was good enough to provide me a copy of the
    1997 research paper that may have been in part
    responsible for the years of down time for gold.

    In it, then-Federal Reserve Board staff member Dale
    Henderson and Stephen Salant, of the University of
    Michigan, slaughtered the golden lamb by analyzing
    the repeated net sales of gold by central banks from
    1974 through 1996.

    At the time, central banks held about a fifth of all gold
    in the world, including gold located but not mined from
    the earth. The two economists wrote their gold note as
    central banks, among them Belgium and the Netherlands,
    already were unloading their bullion and switching into
    other reserve assets.

    The economists observed, "Each government makes
    more revenue if it sells its gold before other governments
    either sell or announce a sale. Thus, without coordination
    there could be a rush to sell, which could strain relations
    among countries and cause abrupt changes in the gold

    For his part, Smith in London sees gold in the past 10
    days tracking the strength of the euro against the dollar,
    step for step. Gold, seen as the anti-stock market holding
    for those who disdain equities, also has formed a
    convex-mirror image of the Dow Jones Industrial
    Average in the past two weeks, he says.

    Smith, who notes the long-term trend for gold has been
    down, at least since 1996, also says the metal must next
    surpass $340 if it's to become something worthy of respect.

    Other bullion observers are far more ebullient.

    "Gold has broken out of a 6-year base, and gold is in a
    major bull market," says James Turk, operator of payment
    system and longtime editor of Freemarket
    Gold & Money report.

    Turk says the reasons for the metal's rise this week go
    beyond usual suspects: terrorism talk, weak dollar,
    horrendous trade deficits and a faltering stock market.
    Instead, Turk points to a paper that was published earlier
    this month by Reginald Howe, who two years ago filed a
    federal suit against the Switzerland-based Bank for
    International Settlements, Fed Chairman Alan Greenspan,
    the U.S. Treasury, J.P. Morgan Chase, and others, alleging
    governments and commercial banks colluded to depress
    gold's price as they engaged in profitable leasing and
    forward sales of the metal.

    A federal judge in Boston dismissed Howe's lawsuit this
    year, effectively saying Howe hadn't demonstrated whether
    he or any citizen had the right to sue government agencies
    over their financial practices.

    In the December paper, Howe, an attorney, catalogues 20
    years of data and academic theories about central-bank
    and commercial forward sales and leasing of the metal,
    and their use of complex derivatives to "hedge" the
    massive trading activity. Total gold derivatives tracked by
    the Office of the Comptroller of the Currency, for instance,
    rose 21 percent in the first half of 2002 from a notional $231
    billion in December 2001 to $279 billion in June of this year.

    Howe, who operates Web site,
    concludes that central and commercial banks are lending
    more gold than they actually have -- by vast amounts. Such
    a steady stream of leasable gold has diluted gold's price
    for years, say he and others, notably the Gold Antitrust
    Action Committee.

    Howe points to figures showing that gold's lenders could
    be short, or lacking supplies, to cover as much as 15,000
    tons of gold. He also refers to Robert McEwen, chief
    executive of Goldcorp, a successful Canadian gold miner
    that buys bullion for its corporate treasury.

    McEwen is a critic of producer hedging, in which miners
    use forward sales to increase slightly the amount of money
    they get for their bullion. In exchange, the supply of real and
    derivative gold released by such hedging depresses gold

    Howe notes that McEwen "recently tested the liquidity of the
    spot market by placing an order to purchase 40,000 ounces
    (of gold) and encountered significant constraints in availability."

    Turk, the newsletter editor, told me Friday, "This article by
    Howe was published on Dec 4., and the gold price has been
    rising ever since. This report is spreading through the big
    hedge funds and money managers like wildfire because it
    provides more evidence of the size of the gold short position."

    Turk says gold "could be at the beginning of an explosive
    move to the upside as the shorts get squeezed, which will
    take gold from its current undervalued level to a more normal
    valuation in the weeks and months ahead."


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