Editor's Note: The following is a Reprint of an insightful and cogent article posted recently on the Internet.

The bottom line that we have to remember is why it is up here in the first place, and exactly what there is out there that might suddenly turn it round again. My personal estimate (and hope, for my own career prospects!) is that gold will finish 1999 with a bang, not a whimper. I have been trying to not listen to the bearish droning and whining about the gold price for the last two weeks - as most of it is coming from self-interested bullion dealers and even gold mining companies, for one major reason: risk.

The gold price's move north of $300 caused a lot of problems in an industry self-absorbed and fatalistic, used to big contangoes and hedging as a means to profiteering in a bear market, and gold mining as a sideshow. The hedge books of companies in some cases were bigger than their market caps, and represented big unrealized potential gains at $250 gold, should the management be brainy enough to take the money and run. The simple fact is that these hedge books are still there, and I can think of at least five companies that have sold TEN times their yearly production (can you believe a gold company would be that bearish on its core commodity that it would give away production for ten years???) - only expose themselves to serious financial risk in the case of one of those hundred-year events, a gold price explosion.

What a bunch of turkeys.

My own opinion is not worth much, but I am vehemently anti-hedging. And the endless bull - management has been feeding shareholders about how safe these hedge books are - is making me feel cheated out of performance from a sector that I had written off for a lot of this year. Consequently my recommendations for good situations is limited to those with new projects (exploration companies in some cases), and to producers that haven't sold the family jewels already.

The gold price has dipped below $300/oz on light volume selling - and the usual crap from US-friendly central banks helping out beleaguered bullion dealers - and gold companies from a very tight spot (this time the Kuwaitis).

The facts driving this market at present are still the same. And I am getting pretty bullish on the gold price, and particularly bullish on some of the smaller situations that have been knocked down to bargain prices again - and in some cases trade lower than they did before the gold price rise! (e.g. Viceroy at $1.25!!!). If you are a chartist, gold has come back and filled the gap it made during its rise to $340 on that mad morning when a hedge fund covered. At $300 it is testing solid support and I believe a lot of gold companies are opportunistically looking for a chance to cover hedges, many of which involve options struck at $300. You have to remember some key facts as to why the price is as high as it is:

1) World demand is approx. 4500 tonnes per year vis-a-vis production of 2500-3000 tonnes

2) Physical demand is up 20% this year, mainly from Asian buying when the gold price tested $260.

3) Approximately 10000 tonnes has been lent out into the market to finance hedge books, many of which are unprofitable and present credit and financial risk to counterparties.

4) Counterparties (bullion & lending banks) have worn derivative debacles in Yen, bonds, swaps and copper in the last two years, mostly from hedge funds getting caught.

5) hedge funds are short to the tune of 3000 tonnes, uncovered by any production or reasonable way of covering positions, mostly through options.

6) The gold lease rates normally trade at 0.5% for 12 months. They spiked to 10% for a week, causing pain everywhere when option books started blowing up and the precious "contango" ie the premium of future prices to spot deteriorated. They still remain above 1.5%-2% and mark the new status of gold as a commodity in short supply.

7) Gold traded down to $250 because of aggressive short selling by producers, bullion banks, and hedge funds looking to make a buck from a bear market without considering the risks.

8) The marginal cost per ounce of increasing production globally is approximately $270. This represents a cutoff level where gold companies usually make a loss from extra production. This is especially true in old orebodies in Australia and South Africa. And for all the announcements you see of Barricks' Pierina producing at sub-$100, there are four projects out there with unprofitable production that have to be seriously looked at for future viability.

9) Exploration budgets are one-third or less than what they were two years ago. New ounces are not being discovered faster than they are used, and many mines have been high-grading to maintain profitability in a falling gold price (another one of the things I loathe in companies!!)

10) The announcement of the European Central Banks decision to curtail new sales, and most importantly lending will effectively limit new hedging (where can they borrow the gold from????) and actively discourage renewal of old hedges as contangoes evaporate and the bottom line reason, the profit, disappears.

11) The US economy has finally acknowledged that inflation is alive and well (implied by bond yields of 6.40%) and interest rate hikes are on the way. The US dollar is under serious pressure from other world currencies (the euro and the yen for what its worth!) due to its mushrooming deficit and the huge amount of credit creation from good old Mr. Greenspan. Gold has been shown time and time again to be a hedge against US dollar weakness.

This is why I am bullish and this is why I don't care that the gold price is under $300 again. I believe there are a lot of Ashantis out there, and most of the them will not be disclosed until we get another spike in gold -- which I believe is not too far off.

Look for a base around $295, then another event (such as a falling Dow, a hedge book explosion, a credit default, the announcement by the Swiss that they wont sell etc etc) to set it off and running. If you are a chartist, you will recognize a flag pattern and consolidation formation in the last month or so, signifying a volatility explosion in the not-too-distant future. I believe the direction of this explosion will be up, for the reasons listed.

Basically there is too much random uncertainly out there right now to not be bullish gold - stocks are volatile, bonds keep falling, the US dollar keeps weakening,Y2K is alive and well, and the world is looking increasingly like it is sick and tired of the US dollar being the only alternative. Many Asians were upset by the attitude of the US to their plight when Asia crashed, and the Europeans were mortified when their brand new currency lost 20% in its first quarter. There are big moves going on behind the scenes and I am plugged into only some of them. I have heard the following rumors:

1) The Europeans agreed to stop lending gold to prevent further loss in the value of their reserves. The resulting volatility explosion was a planned event meant to further undermine the US dollar and cause headaches for Wall Street banks and hedge funds that had been actively shorting the euro.

2) George Soros had been plugged into the above and was a massive long gold player and still holds a big position, with full intent to squeeze some competitors (e.g. Tiger) shortly.

3) The Saudis have been huge buyers (I can confirm this is a fact - don't know why though) and are involved in the Euro thing as a repeat of their huge win in silver in the 1970s (see Bunker Hunt's squeeze). etc etc etc I am trying to illustrate that the market is pretty complicated and the gold price is like a window on to the credit flows of the world. It has been used as a funding mechanism by hedge funds (massive shorting to buy bonds) and a profit centre for bullion banks and gold producers. The smart in-crowd made stacks on the way down and are giving some of it back on the way up - I am not shedding too many tears.

Hopefully, you now feel a little more comfortable about holding gold companies in your portfolio… and you should see gains in the gold price before year end (at the very least, as a Y2K spike.)