The Gold Market and Precious Metals Commentary

November 10, 1998

Technicals -

Steady as she goes. While gold set back a bit today, it is running away from its $290 support level, basis Dec. All the important moving averages are coagulating around this area and may influence the day to day trading. The CFTC Commitments of Trader report, released after the close, was constructive. The big specs went from around 16,000 long to 18,000 contracts short as of last Tuesday. The little guys reduced their longs and the commercials went from 30,000 contracts short to 13,000 contracts long. No change here for us. We are bullish and continue to watch the base build. $335 is our first objective.

The price of silver has roared back from its trashing earlier in the week and the fact that it closed above $5 puts a smile on our face for the weekend. The premiums in India are still firm and are ample to draw supply into the country. We look for new highs in the recovery move to light up the scoreboard in the near future.

Fundamentals -

Rueters headline ( Nov. 5 ) - Japan sees biggest gold boom since 1995.

"Japan is now seeing something similar to its "gold rush" of bullion buying in 1995 against a backdrop of unrest after an earthquake devastated Kobe in January and a nerve gas attack by cult members on the Tokyo metropolitan subway system in March.

This time, traders said, the backdrop is global financial turmoil, Japan's worst banking crises in postwar history and the nation's "Big Bang" financial deregulation, all of which have made people think about the necessity of protecting their assets.

And in both cases what triggered the buying was the yen's surge against the dollar, as a stronger yen brought about lower retail gold prices on the local currency base, they said. "

As you know, we have reported that one of our sources has alerted us to consistent Asian central bank buying. That information was corroborated from a different source yesterday. It appears Goldman Sachs, good ole Goldman again, is going around to various producers telling them that gold is going to $260. At the same time, we understand that they are holding a big buy order from an Asian central bank. Even the news services know it. Reuters ( Nov.4 ) gold…." only recovered some ground today because of further heavy buying by one investment bank."

Times are changing. It looks like American Gold Eagle coin sales will be the best in 11 years in the U.S.

Bill O'Neill, the well known, Merrill Lynch precious metals specialist, and oft seen as a commentator on CNBC, called yesterday to say that I had left the wrong impression in my last Midas du Metropole commentary about their position on the central bank sale issue. I saw his point and told him I would let our members know that, indeed, they ( Merrill ) have been very correct on this issue. I was referring to a specific sale which is not worth going into. I also told him that in previous Midas commentary, we had given them credit for being the most right over the past two years.

Here, forward is another matter. Since I had the opportunity to chat with him, I asked Bill for his views. He said that he felt that the worst was over for the gold market, but that he was only neutral for the future price of gold. I told him that I saw $400 gold in the cards and explained the reasons for my view.

It is his opinion that a bull move is not in those cards for gold, unless gold becomes monetized again. His view is that they ( the central banks ) do not want the stuff anymore and will continue to sell. If that were to change, he would change his mind and told me he would rather be bullish, but he just cannot see the case at this point in time. This is no surprise coming from Merrill, but it appears New York Merrill is not as bearish as London Merrill.

London ( Reuters ) Nov. 4, - Merrill Lynch sees 5-year gold range of $200-$300. "Mine and central bank sales plus Asian dishoarding set against likely dollar weakness will confine gold to a $100 range an ounce for the next five years, Merrill Lynch said in a report seen on Wednesday. Capping the price would be sales, or feared sales ,by euro-zone national central banks, the International Monetary Fund, and Switzerland. " It would clearly appear that his associate in London, Ted Arnold, does not share Bill's view that the worst is over for gold.

We take a different view, are very bullish, and you know our reasons for disagreeing with the Merrill people. A big one is that we believe central banks do want gold. They are just Asian in origin. For example, we reported that Canada just reported selling about two tonnes of gold, but Mongolia just announced it has bought seven tonnes of gold so far in 1998.

We also have stressed that we believe gold WILL retain its safe haven role in the years to come while Merrill does not see that. "Economic dream team" member and widely followed banking specialist, Charles Peabody agrees with the Midas view. Last night, I drove down to Boston to visit with Charles, who was in town for a banking convention and we hit Beantown for some very good chow. After enjoying some fun family talk about his 5 kids, realizing we are both Merrill Lynch and Drexel Burnham alums and learning of his former stint in Europe as a professional soccer player, I pummeled Charles for his opinions on all that was going on in the banking world (his pieces will be posted shortly) and what effect it all might have on the price of gold in the future.

It is Charles's opinion that the well educated bankers of the modern generation have used every derivative play in the books and, in many cases, have used those derivatives to supplant the role of gold. He also believes more derivative blow ups are coming (possibly this spring) and that when it is all said and done, that it will be the excessive use of the derivatives that will go into disfavor and the role of gold will come back into favor as the safe haven place to be among the banking community. So, Charles sees a healthy bull move in gold on the horizon. (P.S. Announced today- Nov.4 - Bloomberg - "Long- Term Capital Management,.., may sell about $1.5 billion of German government bonds as part of a planned reduction of its investment portfolio. Gerd Neitzel, German money manager," They're saying to the banks, bid for our bonds and we'll pay back on our loans, eventually.")

Then we touched on the Department of Labor's leaking of the U.S. non-farm payroll number that showed more weakness in the employment front than was anticipated. It is Charles's opinion that it was flagrant manipulation of the market place as the 5 and 10 year note auctions went poorly and the 30 year auction did look too good. The government was concerned that if the triple bottom at 126.02 (about the 100 day moving average too) was broken, the market could dive, so they leaked some bullish news for the market to absorb. It just so happens that their maneuver worked but today the bond market swooned down to 125 before rallying a bit.

How much do you think it saved our government to keep the price up higher for that one extra day?

Charles thinks, like we do, that our government is manipulating the markets ( including gold ) and that history will show this. It his is opinion that some day in the future we will have another Pecora Commission. Back in the 30's Ferdinand Pecora presided over the financial tycoons of the day and sent some of them to jail for manipulating the markets.

Potpourri and the Gold Shares -

The XAU has had a meteoric thrust to the upside to 85 yesterday before setting back today to close at 79.28 down 3.78 as it held its 50 day and 200 day moving average points (a divergence from the bullion which did not) and its up trend line. A move above the 86.5 area will break a 1 1/2 year down trend. This is not unusual action (the XAU move up) prior to a big gold move.

As we have said before, the so called smart money, smelling a gold move parks some big dough with the well capitalized gold companies. They do so because of the liquidity, safety, ability to buy (and sell) and the fact that an investment in the shares does not have the time constraint, or contango issues, that options and futures have.

The next ones to move (in general) should be the juniors that have production, then the exploration firms that have found resources, and finally those looking for the resources. There are many good precious metals companies out there and we will be talking about a lot of them in the Café in the months and years to come. We will try and present the ones that we like, and are investing our own money in, to you. A good many of them will be brought to our attention by you, the Café members. I am no rockhound, but we have access to, and are utilyzing, one of the best in the business to assist us in making the best judgement calls that we can. We are running out many ground balls on various companies. It takes time to do the due diligence (for our own investment purposes). At the same time we stress that we are not investment advisors. This is a Café. We will evaluate companies ourselves and continue to present appropriate commentary from the members, so that we can all try and tell it as we see it. We believe that, in the giant precious metals bull move to come, there is much money on the table, if one bets on the right horses. The Café search for thoroughbreds is on.

Thus far we are in:

Golden Star Resources - 1 1/2

Canarc Resource Corp - 30 cents Cdn.

Durban Deep - 3 1/16

Greenstone Resources - $2 Cdn.

We have an outstanding silver play (they are hard to find) that we will be bringing to your attention shortly, as we wait to learn if a financing package goes through that will allow the company to go to commercial silver production by the end of the first quarter in 1999.

Midas

Minting of gold in the U.S. stopped in 1933, during the Great Depression.

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