first majestic silver

Gold Market and Precious Metals Commentary

November 20, 1998

Technicals -

Like a dog's eyes watching a bouncing ball. Up we go, down we go. Up we go, down we go. The open interest liquidated down to a very low 153,000 plus before new buying came in on yesterday's rally to bring it back to the 156,795 contract level. Still extremely low. Plenty of room for the specs to pile in and drive up the price $40. Bullish consensus only 37, which, historically, is also very low. The base builds and the bullish coil tightens.

The "gods" will not let gold move above $300 at the moment and they will not let silver stay above $5. For now. In our opinion, silver has its own bullish coil that is tightening. When the real bull move begins, this tightened coil should give silver one powerful thrust to the upside. Bullish consensus a low 37 and the base in silver is broadening, too. A "shortage of ready stocks" is keeping the Indian premiums strong- 10.8%, which is high enough to draw supplies into the country.

Fundamentals -

Slowly but surely, gold is sneaking its way back into fashion. Yesterday, the European Parliament backed calls for the creation of a 100 euro gold coin as legal tender once the European Union's single currency becomes widely circulated in 2002. The directly elected assembly approved the proposal by a big majority of about 2 to 1. The idea still needs the support of EMU governments and the European commission before it can become a reality, but the fact that this idea is now "in play" may be a very positive factor for the gold market as we get into next year. According to Bloomberg, if this plan were to be adopted, it could use as much as several thousand metric tonnes of gold.

After the first of the year, an EMU country will need permission to sell some gold from the ECB. France, Italy and Germany have been on record to be against sales, which should mean (they control the votes) that there should not be any significant sales in the first couple of years of EMU, while the Euro searches for reserve credibility status. If this plan is adopted, those countries that would like to unload gold, could unload it to the mints. The fear that the European banks will continue to sell gold, and thus depress the price, would completely evaporate.

The World Gold Council reported that Indian gold demand was 19% higher for the first three quarters of this year over one year ago. India is the world's largest gold consumer. Demand was also up in South East Asia, South Korea and in Indonesia where strong seasonal gold jewelry buying, for Christmas and Moslem Eid al-Fitr festivities in January, has begun in earnest.

The one month lease rate jumped up some 18 basis points to .74 overnite. Who might be borrowing some gold to keep a lid on the price?

The Australian dollar made six month highs and closed today at 64.33 and has really rebounded from its lows in the high 50's. The $40 turn around in Aussie gold has caused some of the Australian producers scrambling to cover some of their forwards. In local currency terms, the price of gold has plunged from over $500 to close to $460.

We have told you about the steady Asian buying that has been going on for the past three or four months. Information from a totally different source that an Asian central bank is a buyer, confirms our story.

Potpourri and the Gold Shares -

The XAU held its ground today to close at 77.43, down only .69. Cocktail conversation at the World Gold Council dinner in N.Y, has it that some of the bullion banks are starting to reign in on gold borrowers. Due to the world wide credit contractions in general, this had to happen. Perhaps, a bit of a conflict is now starting to emerge in the gold lending game. Officialdom wants it to continue in a liberal manner. Yet, some of the banking crowd, sensing some potential danger, wants to pull back a bit.

Danger! What danger? Well, veteran Midas followers know that we have been telling you that it is our opinion, and that of others we respect, that the world gold loans are probably as high as 7 to 8 thousand tonnes. Remember mine supply for 1998 is only supposed to be about 2550 tonnes. Producers, fabricators and financial entities ( hedge funds etc ) seeking low interest loans are the borrowers. To pay back the loan, you have to have the gold. We have focused on this before. What happens if the unexpected happens, and the price of gold soars and they borrowers decide to payback their loans about the same time. If 15% of the borrowers decide to do so and the loans are 8,000 tonnes, where does 1200 tonnes of gold come from in a week?

Sound a bit excessive? Michael Coulson, a gold analyst at Paribas in London, said last week that the loan number might be 14,000 tonnes. " When this whole spider's web starts to unravel it could be sensational,' he said. "It's (derivative trading) all been one way, all been shorting. No one knows what will happen if it all starts reversing."

The reversing process would already be underway if it were not for the bailing out of famed Long Term Capital by a central bank. We told you about this many Midas' ago too. No less an authority than Brett Kebble, the Deputy chairman of JCI Gold, has confirmed our story: " We have it on good authority that one hedge fund, with a short position of 12 million ounces, settled off the market to a central bank lender to avoid market panic." If this continues, the central banks of the world will not have as much gold as we think they have.

John Brimelow gave you a platinum alert in a previous Midas when it was trading around $346. The shorts should have paid attention to it as it has turned out be a wake up call for them and they are now starting to run for the hills. Platinum closed today at $361. The Palladium shorts are terror stricken as that market roared above $300 to close at $306. Both markets made 7 week highs in Tokyo yesterday and moved higher in the US today. Interestingly, the bullish consensus in platinum was only 20 this AM. It would not be the first time that these white metals paved the way for a gold move to the upside.

The big public news in palladium is that consumption is going to be much greater than was anticipated due to demand by the automotive industry for ecological compliance on its catalysts. The inclusion of trucks in a new California law on emission controls was not anticipated by the auto industry. Thus, greater demand for palladium. But the real news may be that it is turning out that the use of Palladium for lead frames in computers is superior to substitutes and can be justified even at high palladium prices. Then the real kicker, the Russians. Buyers figured they would supply the market. Our sources say they may be down to only 2,000,000 oz and have much less supply than is commonly known. The Russians are not answering the phone from buyers at the moment. The Palladium market could be a doozy again.

There could be platinum fireworks down the road too. Demand for platinum kilo bars is surging in both China and Japan. What is important is that this demand has exploded the past 6 weeks and caught the platinum community and the hedge fund shorts by surprise.

We would like to bring your attention to the "goldbug" thread (in the commentary section, which can be accessed at the bottom of this Table ). The question put forth by Le Metropole member, "Alex": Is gold cheap? If he can be convinced that it is, he will be a big buyer. It sounds like he has been so in the past. He is looking for documented statistical information from Le Metropole members that show that, indeed, gold is cheap. If you have such information, we would love for you to post it as response to his thread. If you are not a full member yet, and cannot do so, I will post it for you, if you e-mail the information to me. Thanks.


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