first majestic silver

The Gold Market and Precious Metals Commentary

October 15, 1998

Technicals -

The ticking of the gold short time bomb is ticking louder and louder. Since our last Midas, the open interest dropped by about 9,000 contracts and the gold price went up as this was occurring. This is bullish because some specs are liquidating and the price of gold is going up, not down which is usually what happens during a flush out of spec longs. Therefore, some of the short term speculative froth is being removed from the gold pits, thereby firming up the technical condition of this market. Gold continues to build a hearty technical base which can support a very, very move big move to the upside. Our objective is still $335 in the short term and $400 per ounce within one year.

Silver is rebounding nicely from its recent drubbing. A close above $5 will turn the technicals bullish again and the move up from here may be swift as the recent downturn is looking more and more like a killer move down for silver bulls. Moves like this, once reversed, are very positive. Silver could move up swiftly from here. We remain big picture bullish and still believe $10 to $12 silver ( at least ) is in the cards.

Fundamentals -


The bulletin that we have to share with you is not to tell you about the Federal Reserve cutting the its fed fund and discount rates by a quarter point. We are sure you know about that by now. It does demonstrate however, how precarious the financial situation is in the world. Alan Greenspan does not normally react like this. As we have alluded to in the past, the hedge fund problem positions are enormous and he knows that further blows ups could jeopardize the entire world financial system. The Chairman of Merrill Lynch said he thought it would take two years for Long Term Capital Management to successfully solve its problems. Two years!. Not two weeks or two months. And that is just one hedge fund.

Mr. Greenspan has cut our interest rates because these are desperate times and he is taking desperate measures. Of course, all this is very bullish for gold. The interest rate cuts further reduces the contango (reducing forward selling incentives by producers) and makes gold a more attractive investment vehicle versus interest yielding investments. But the real story here is the fear about what could happen to financial markets around the world and that fear is going around at the highest levels. When word of this gets out, and that type of real fear reaches the likes of you and me ( the public ) the desire to own gold will skyrocket from all sectors.

Here is what we found out regarding the gold part of the fear. In essence, all that we have been telling you since opened is on the money. When Long Term Capital blew up, an immediate review of investments and lending practices of all financial institutions was undertaken by our government and senior management officials of all kinds. They found out that many of these institutions have borrowed massive amounts of gold as a cheap borrowing source of capital and they are exposed financially because they have lent out massive amounts of gold. This is in addition to the thousands of tonnes that they have lent gold producers to sell forward and also lent our to jewelry fabricators, etc. Our government knows now that there is no way this amount of gold can be bought back in a short period of time without the price of gold going ballistic. It could easily go to $375 to $400 overnite in this type of situation (if a buying panic starts and the gold loans are called in).

Our government is trying to buy some time here to solve other aspects of the financial crises before they deal with gold. We received confirmation again that they are using arm twisting and cajoling of the strongest kind to keep the price down. We were told that the bears gave it all they had last week and tried to really break the market. It did not work.

And this is what our bulletin is about. It did not work and will not work because the Japanese and Chinese are buying gold and have been buying for 3 months now. Our government is so scared about what could happen, they have asked the Chinese and Japanese not to push the price of gold up. We do not know what was agree to, but we heard they said absolutely nothing when queried whether they would continue to buy gold.

There is a reason they are buying gold. It is our understanding that the China, Japanese, Taiwan, and Singapore are in the process of structuring an IMF type of banking institution that will have the yen as the reserve currency and this new institution will also include gold as part of its holdings. The yen will compete against the ecu and the dollar as a reserve currency. This is very bullish news for the gold market and not so hot news for the almighty dollar.

There is something else. Word is spreading in the bullion banking community that many of the other merchant banks have written massive amounts of calls. As long as the price of gold stays down, they earn nice money with this call writing business, but if the price of gold explodes, they will too will have to buy gold to honor their commitments. That is why there is such a battle going when gold rises above $300 and stretches out to $305. It is only a matter of time that Murphy's Law finds it way into this situation and the gold shorts are blown up. Good old gold will be that once again. Good old reliable gold. And those that disdained its relevance in modern day society and mocked those of us that know better, will rue the day they felt that way.

Potpourri and the Gold Shares -

The XAU rocked today closing at 75.52 up 4.70. It was strong all day but really streaked after the Fed made its move.

Lost in the late day news was the core rate of the PPI was up an unexpected 0.4. Highest number in over a year.

John Brimelow smells a good move up in platinum may be in the works. The bullish consensus today was only 12%,, which was the lowest since June 15. The only Anglophile on Tocom, Engelhard has started to rebuild its always long position on the Tocom. This would indicate the hedge funds have quit in their bear raid as they are covering shorts now. Japanese demand for platinum is really picking up as the stronger yen has reduced the price in yen terms and the premiums for Tokyo delivery have improved considerably. John felt this way before the Fed's rate cut. The cut can only make his case that much stronger.

Out of London, we hear that Ashanti may have recently just put out a 7 million oz. forward hedge. Sam Jonah of Ashanti is a good man, but if we are right I would not be a happy camper Ashanti shareholder. This selling is another example of how the producers continue to shoot themselves in the foot and helps to explain why gold set back recently.

As you all know we love the gold and silver shares, especially the little guys. Buy, Buy, Buy. Buy more, buy more, buy more.



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