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Gold Market and Precious Metals Commentary

December 16, 1998

Technicals -

Three, six, nine, the monkey drank wine. Gold moves higher. It is even trading like a monkey that does not seem to know where to go. Another price decline. Another bounce back. This does not surprise Midas followers. We know why this keeps happening. Bullish consensus is a very low 23. The open interest has gone up 6,000 contracts the past two days as the specs try the short side. They are meeting a brick wall laid out around $290 basis spot. Our opinion of the gold technicals has not changed in a very long time. An enormous base, that can support a very big move to the upside, is being formed.

The technicals in silver are very intriguing. Even with yesterday's healthy 9 cent rally the bullish consensus only rose to a piddly 22. Yesterday, silver closed above $4.87. This resistance level thwarted upward silver price movements 4 times in the previous weeks. Now, we have eased through this resistance and a bullish baton has been handed to the longs. In addition, silver also has a monster technical base with the same killer move down on the right side of the base that gold made when it took out the $278 area in August. Silver has no gaps to come back to fill either. This may seem trivial, but it is a big, big positive. Leaves room for a true breakaway gap some day. The final completions to the base will occur when silver first closes above $4.90 spot and then $5.00 spot. The price of silver is going uptown.

Fundamentals -

Thursday and Friday could be quite turbulent. Two big debates (votes) that can affect the price of gold in some way: The Clinton impeachment vote in the House of Representatives in the US and the lower house debate in the Swiss Parliament about Swiss gold sale proposals. Both a scheduled go for Thursday. Latest word is that any gold sales, if they are to occur at all in Switzerland, might be delayed. Bloomberg- Dec 14 - Bern - " The government said some parliamentarians have suggested the gold sales, announced last year, require not only a constitutional amendment, but also a change of law, meaning the framework won't be ready before March 2000. Our sources say the countryside Swiss folk in the various cantons are not favorably disposed to selling gold and this amendment may not pass anyway if it reaches them for a popular vote in the year 2,000.

We are hearing more and more about a revised, increased gold backing for the euro that might come about in 1999. The number bouncing around is 30 to 35% up from 15%. Most hot on the idea are the French. There are two reasons for this sort of talk. The first is that a big portion of the euro reserves are denominated in dollars. Many high echelon Europeans think the dollar is tapioca for some time to come. They want a strong euro, not a soft euro. The French, among others, think a more significant gold backing for the euro would be a big plus.

The other reason for adding to the official gold backing for the euro is fear of future competition from an Asian block currency or Asian financial entity that will have a substantial gold backing. We continue to inform members that the Asian official sector is buying gold for this purpose. Again, that is why we have not seen follow through break downs in the gold price when it is knocked down to the $290 area. We know that the Asians are there with a big gathering bucket. We have also told you that the Asians were asked by our officials not to push up the gold price while we sort out the derivative mess. They have complied - so far, happy to purchase gold so cheaply. They may not be so patient if they get wind of this gold strengthened euro talk and feel it has teeth.

The gold and silver premiums in India remain firm. The Hindu marriage season in December is expected to fuel strong gold demand in that country on through January. Gold offtake in India was some 19% higher in India for the first three quarters of this year.

Potpourri and the Gold Shares -

The XAU closed at 66.33 up .58. A move above 70 is needed to bring some oomph back into the gold seniors.

Not quite Saturday Night Fever yet, but great to see Placer Dome making such a strong bid to buy a 100% stake in Getchell Gold. We have noted to you recently that it appeared that "a buy the cheap asset" trend may have begun in the gold sector. This confirms that it has, and bodes well for some of the share prices of the quality juniors that have the goods. Two of our juniors (Greenstone Resources and Golden Star Resources) are prime candidates to be swept away at healthy premiums to their depressed share prices of today.

Two aspects of the merger were of particular note. First was the price- some $34 per share, which was more than double what Getchell was trading for on Friday. This turned some heads. Second, was the publicity the merger received on CNBC. It was highlighted all day. Early next year, this will surely attract the attention of portfolio money managers looking to spot and accumulate the shares of asset laden junior gold companies that are likely takeover candidates. One more thing. It is a psychological plus for the industry. One does not pay such a premium for the assets of another company if there are serious thoughts of gold sinking to $200 per ounce.

Le Metropole member and new gold fund, The Toqueville Fund, is a substantial holder of Getchell Gold. It is one of their top (first or second) gold holdings. John Hathaway, manager of the fund, told me that there were two other bidders (Homestake and Newmont) for Getchell and that the bidding war may not be over yet as John feels the price offered by Placer for Getchell was a fair one. He also made note that Placer Dome is becoming quite the formidable gold company with properties in South Africa, Nevada, Venezuela among other locations. John would not be surprised to see Placer re rated by the analysts to a higher level.

The oil market, like gold and many other commodities markets, is a debacle. Prices have just rebounded from single digit numbers ( Brent crude is back above $10 per barrel ). It is not psychologically helpful for gold players to see the price of oil be obliterated. Who and what can change that?:

Saudi Arabia. About ten years ago the price of oil was also collapsing like it has been recently. At the time I was involved in some oil dealings with Bam Bam Suharto. We took the number two oil minister of Indonesia, a Mr. Wuyharto, up to visit oil trading Phibro, in Connecticut. Wuyharto had just come from a contenscious OPEC meeting. Phibro was very short the oil market at the time. When Wuyharto told Andy Hall, honcho man at Phibro, that the Saudis had finished teaching their lesson to the rest of the oil world about cheating on production quotas and that they were going to curtail supply in a substantial way, his eyes grew as big as flying saucers. This commentary had not come out after the OPEC meeting and was the real story behind the scenes. Hall and Phibro covered, went long, the price of oil took off, and they made mucho denaro. Moral of the story, I think Saudi Arabia has made its point again. Look for the price of oil to move a good deal higher.

Reuters - Dec. 14 - London - London average daily gold turnover hit 27.5 million ounces in November, its lowest since the London Bullion Market Association began publishing data two years ago, the LBMA said on Monday. What does that mean? This fits right into the scenario that we have been laying out for you. The big gold lenders and derivative players are starting to pull back. Merrill Lynch and UBS are now history, yesterday's players. It tells us that there will be less gold supply to bomb the market in 1999 than was the case in 1998. This all fits into the general declining open interest on Comex and our comments, that in an overall sense, the trade does not want to be short at these price levels. The risk reward ratio of lending, shorting, and forward selling gold is not favorable any more.

Midas is on default alert that is leading to a credit vortex. Defaults will breed fear and fear will stimulate gold demand in a substantial way in 1999. Business confidence in Japan among manufacturers is a record low. Sentiment is at the lowest since the index was introduced in 1967. The Brazilian stock market dive bombed yesterday, down 7.4%. Argentina's economic performance is worsening. Rueters - Dec.14 - Buenas Aires - …"it will ask the International Monetary Fund for a waiver after accepting it will not meet deficit targets for 1998 and 1999".

Goldman Sachs ( goon squad leader of the gold cap sellers ) reported its worst profit picture in 4 years today. Public reason given: poor bond trading. First we have J. P. Morgan come out and say they could not trade ( stocks ) their way out of a paper bag last quarter and now Goldman ( with its hot line to Secretary Treasury Rubin ) says it could not trade bonds worth a darn. Phooey on both of you. You are really caught up in the derivative mess and it is causing you big problems. You are the leaders of the gold capper selling cabal and are using cheap gold loans to help maneuver your way out of this mess.

It is clear that our Fed is orchestrating the formation of a Maginot Line around $300 gold. The Fed, by its own admission, had to bail out Long Term Capital. Has a Maginot Line been created so they will not have to bail out the Morgans, Goldmans and other Wall Streeters that are caught in derivative plays that have gone the wrong way and not resolved themselves yet? Goldman only reported a big drop in profits. What about the losing derivative trades that are still on the books that have not been reported yet? Could this have a great deal to do with the fact they have postponed going public?

I must say that anecdotal event after anecdotal event says that our theory about what is going on in the gold market is on target. In recent times the derivative markets have grown exponentially. The trading was fostered to a great extent by borrowing cheap yen and gold. Certain types of derivative tradinghad never been tested in a recession. Trades started to go awry ( Long Term Capital went bust ). When the yen surged from 146 to 113, it caught the derivative community even more off guard. Many derivative trades went further south. Our own Fed was surprised by the extent of the moves ( probably why Goldman did so poorly ). The Fed had to bail out Long Term Capital Management for fear of "systemic risks" if it did not do so.

Derivative trading in the financial community was then scrutinized by the Fed and top management of financial institutions. A horror show was probably revealed. It certainly is the case that the Long Term crew, who managed to suck in central bankers as investors, was not the only financial entity in trouble. Gold lending by UBS and Merrill Lynch helped foster derivative schemes over the years. They know what they helped wrought. They also know how big the gold loans have become ( probably 7,000 to 14,000 tonnes ). It is important to remember that the gold loan area is a shadowy, secretive one. Very few really know what is what in this area. UBS and Merrill would have as good an idea as anyone would. Sensing serious potential danger that the gold loans have become to big to cover in a crises, they have recently said sayonora to the gold lending and derivative game.

Since some of the big lending players have pulled out and gold supply to the market has been reduced, Goldman Sachs was called on by our Fed to lead a goon squad of sellers to bash the gold market on rallies up to $300. The reason they are capping the gold market is to try and buy time so that losing derivative trades can right themselves. It is clear that the Fed knows the extent of these trades and what could happen to the financial system if they blow up (they acknowledged this fact publicly when they bailed out Long Term Capital Management).

Credit is generally tightening in the financial community, so to foster the time game, the Fed is encouraging cheap gold loans to do what it can to ease financial stress. A gold move above $300 would put some gold loans at principal risk, might cause a rise in the lease rates (thereby increasing costs), and certainly would bring in speculative buying which would exasperate the problem. A big move in gold at this time could jeopardize bullion bankers ( the lenders ) even more. Annual gold supply in only supposed to be 2550 tonnes for all of 1998. Therefore, our Fed is very fearful of a $300 plus gold price AT THE MOMENT and is pulling out all the stops to keep it from breaching this area.

Well you say, our Fed and its Wall Street cronies can do anything and can play this game forever. So why fight them and play gold? Very short term timing is difficult, true. However, the molten lava in this financial volcano is percolating and the heat is rising below the surface. The credit spreads are widening, not narrowing. In addition to Japan, Brazil and Argentina; Russia, Venezuela and Mexico have big problems that seem to be getting bigger. The dollar looks precarious. The Dow continues to falter. The official sector Asians are quietly accumulating gold. We have reiterated this fact to you over and over. It will not be too long that the Fed and its gold capping allies lose control of the situation. The ticking time bomb for the gold shorts is growing louder and louder.

Where have all the good bulls gone - long time passing? Many of them are missing the boat in their price forecasts, in my opinion. The price of gold will skyrocket next year to $400 plus as all this unfolds. Investors in the junior gold and silver shares will make mini fortunes. This will occur as the asset derivative plays become discredited and gold makes like "Silky Sullivan", the famous race horse, that used to come from way behind and win championship stake races from 20 lengths back.

The average human body contains 0.2 mg of gold with the bone containing .016 ppm and the liver .0004 ppm.
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