Gold Market and Precious Metals Commentary

December 5, 1998

Technicals -

Rope a dope time. Looks like us bulls will have to let the bears punch themselves out. One of the papa bears continues to flail away at us using every trading trick in the book; ie, selling closes, quiet times, and so on. The moving averages have been taken out to the downside, but not by much. At 28, the bullish consensus is very low. The trade does not want to be short anymore at these price levels (technical generalization) at this point in time and the specs could care less, so you have an open interest that dropped to 143,000 plus contracts before going up yesterday back to 148,000. The specs are now hopping on the short side, at least that is what today's Commitment of Traders Report showed.

In a big picture sense, gold continues to build a powerful base that can support a monster move to the upside in the gold price.

Silver was finally mauled. With other commodities so weak and the precious metals unable to overcome resistance, the silver bears "worked the turf" and broke the back of some short term silver bulls. The price got all the way down to $4.53 in overnite trading on a blatant, bozo raid play. Remarkably, silver clawed its way back to $4.87 basis March today before settling back, but must close over $4.90 spot to be respectable again. We still remain bullish and think that this raid won a minor skirmish for the bears and that is all. A close above $5.00 is needed to hand the technical baton back to the bulls.

Fundamentals -

We have told you that the official sector in Asia has been accumulating gold for months while western central banks have been selling their gold or lending it at sub $300 price levels. We have received further confirmation that the US asked the Asian official sector to refrain from being aggressive in their gold accumulation while the Fed tries to engineer a soft landing to the subterranean financial crises that is lurking around the world. The Asians are very happy to accommodate us. In general, their times frames for doing what they want to do is different from the west. They think in terms of years and decades. We think in terms of weeks and months. In those years to come, many short sighted western central bankers will look just that - SHORT sighted.

It came across our desk that the big sellers of dollars recently were from the Mideast and Asia. That is the first time we have ever heard that combo mentioned. Yen target for the sellers is the 105 area. It certainly makes sense why the Asians would be sellers. If we say to them to refrain from being aggressive gold buyers because we have some problems to deal with, why hold dollars in an excessive way?

Especially when they, and everyone else, can see that the credit spreads are not coming in like they have to in order that certain derivative positions can be closed out without catastrophic losses. Our camp says that the refusal of these risk spreads to narrow amidst continued interest rate cuts, foreshadows coming financial blow ups.

Chase and the Bank of Boston cancelled credit offerings last Monday because the market balked at their terms and wanted too much a premium to Treasuries. There still is big league concern about the credit derivative market and potential defaults. It has yet to be tested in a recession. Greenspan knows this and hence his pressure to keep "defaultless" gold in the weeds. Rumors were also swirling today that the Deutsche-Bankers Trust merger was in trouble due to surfacing derivative problems. Those rumors were denied.

Then you have Brazil. The big domino. Politically, they said no to certain IMF austerity measures and the IMF gave them the first tranche of bail out money anyway. With a delayed negative reaction, Brazilian stock market swooned yesterday. Venezuela ( which also cancelled a debt offering ) and Mexico are already reeling under the oil price collapse. Japan and Asia, in general, benefit from low oil prices as they are such big importers. That could partly explain Mideast selling of dollars all of a sudden. They know the oil situation is bleak and that Japan will benefit from that. The other part of the explanation is that the Arabs are already being clobbered by low oil prices. Oil is priced in dollars. If the dollar dives too, it is a double whammy. With the eruo coming on stream, it makes sense for them to diversify by buying the euro, as well as some yen. Maybe even price their oil some day in euros as well as dollars.

The surprise European rate cuts are bullish for the future price of gold of course. In addition to the public reason given for the slashing of interest rates across Europe, we understand much of it had to do with them trying to keep the dollar stable. A slosh of European CB money was parked in the dollar recently according to one of our sources. This source tells us the Europeans do not want chaos as the euro comes into existence.

Many years ago I made my entry into Wall Street by working with Ray Dalio as he formed Bridgewater Associates, now a prestigious consulting firm located in Westport, Connecticut. It appears that Ray and his crew think this euro rate cut was a sign of the bankers caving to the politicos - and insinuated as such in their recent daily observation called "Is Europe Going Soft"- Dec 4 - "The promise behind the euro and Maastricht is that "the euro will be as strong as the mark", the ECB will be as monetarist/inflation sensitive as the Bundesbank and the participants fiscal deficits will be small". It struck us that if Ray Dalio thinks this surprise rate cut may suggest Euro softness, other gurus do too. That being the case, the pro gold hardliners in the EMU are more likely now to win the day. The role of gold takes on a greater symbolic role at this point. This is a subtle, but strong, plus for us.

From Dick Ware of the World Gold Council's Center for Public Policy Studies. Reuters, New Delhi, (Dec. 1 ) - Asian Economies Hunger for Gold. " People ( in Asia ) used their gold last year and early this year when they were in distress. They have seen how valuable it is and now want to rebuild their stocks".

What I found of note in the rest of his interview was that India consumed about 740 tonnes of gold last year and this year that pace has gone up almost 20%. That would take their intake ( demand ) of gold to one third of anticipated world mine supply in 1998 ( 2550 tonnes ). Much of the increase is due to gold buying deregulation in India. China consumed 220 tonnes of gold last year and is also deregulating its gold industry. Ware: " If the Chinese consume gold at the Indian rate, then you are talking of additional demand of five, six, or seven hundred tonnes for the long term". Mine supply is not all that elastic. Exploration for new supplies is contracting now, not expanding. This data here says China and India ALONE will consume 43% or so of the gold mine supply this year and that number will grow in the years to come.

Think about this. Historically, central banks have been slight net buyers of gold. In the past number of years they have been noted sellers. Although, as we have reported, the Asian official sector is quietly accumulating gold to no fanfare. The natural supply demand deficit is some 700 to 800 tonnes now (which has been met by CB sales, forward sales, and borrowings). The gold loans to producers, fabricators, hedge funds, and general borrowers probably is around 7 to 8 thousand tonnes (some say it could be as high as 14,000 tonnes). Cheap oil prices cannot help but grease the Asian economic engine which is the demand engine for gold ( after King India ). The price of gold has been depressed so long now, exploration cutbacks are the norm. Survival is the cry of gold explorers, not finding ounces.

Pre EMU gold sales have ground to a halt or grinding to a halt. On Jan. 1, they are history for some time, or so we have been told by top EMU officials. While gold lending is provoked by our Fed and some other central banks for the time being, general credit restrictions are the call of the day. It is only a matter of time before credit restrictions spread to bullion lenders. Already Merrill Lynch has pulled out of the game and now UBS has pulled out too. The Union Bank of Switzerland's commodities chief, Ed Mount, was let go today which demonstrates their commitment to retreating from the gold derivative game. These two financial institutions were the most renowned bears and advocates of gold lending in the game and now have pulled out of that lending game. Why? Could it be that they KNOW the loans have become too big at this point in time? They helped to foster the creation of this time bomb, know what could happen in the future, and want no part of the consequences. Thus, this is the way I see 1999. The official sector is likely to be a buyer (because of Asia ), not a seller. Gold lending will contract as the word of the size of the gold loans spreads and is understood. The credit concerns, that have affected financial institutions, will spread among the bullion dealers. The gold loans will slow. Because of gold deregulation in various gold consuming countries, cheap oil prices, and a falling dollar, gold demand will surge. There is already a big, natural gold supply demand deficit that cannot accommodate 1999 mine supply. Investment demand will explode as Y2K nightmare scenarios proliferate. The only way all this can be accommodated is by a sharp rise in the price of gold to at least $400. If a gold buying panic develops, well, who knows how high the price could go late next year.

Potpourri and the Gold Shares -

The XAU closed at 67.16 up .99, and meandered today. It has broken down technically and must move above 70 to be on solid technical footing. We think it will regain that solid footing fairly quickly.

Greenstone Resources has put its considerable assets on the auction block. Nesbitt Burns has been retained to do the "ally ally in free call" for suitors, or to try and stave predators off from buying those considerable assets at a give away price from the shareholders. Greenstone was the crème de la crème only a year or two ago of the juniors. Highly regarded by the most respected Canadian analysts. Now this. While takeover talk might prop up the Greenstone share price next year on some takeover bid, it reveals what dire straights this group of the gold sector is in. The gold siege has just gone on too long. Many of the juniors and exploration companies are trading at their lows ( in many cases at bankruptcy prices ) while the XAU is still 19 points off its low in August and gold is $16 off its low. However, we still like the junior sector very much because we are so bullish on the precious metals. When the price of gold and silver charge north next year, quantum returns will be made. Very, very, big, quantum gains.

Grapevine material. We are hearing more and more predictions from some savvies about $400 gold by the middle of next year. Nice to have this kind of company.

Chase and the Bank of Boston cancelled credit offerings last Monday because the market balked at their terms and wanted too much a premium to Treasuries. There still is big league concern about the credit derivative market and potential defaults. It has yet to be tested in a recession. Greenspan knows this and hence his pressure to keep "defaultless" gold in the weeds. Rumors were also swirling today that the Deutsche-Bankers Trust merger was in trouble due to surfacing derivative problems. Those rumors were denied.

Also hearing more about call writing that is helping to keep the price of gold depressed. Over the past few months we had heard about $315 calls being written, etc. Now we are hearing of $350 long dated calls being written. A portion of the call is hedged by selling a percentage of the gold value (say 20 to 30 %) into the spot market. This adds to near term gold supply and has been putting pressure on the gold price .

The CRB, which closed today right above 195, is at 26 year lows. The bullish consensus for the oil complex is a robust 4. Talk about depression. Is there worse out there? Yes, try being a hog farmer and thriving on $15 hog prices in the year, almost 1999. Then again you could be in the copper business in Arizona, which is going Grand Canyon silent. Times are hard in the commodity world. Why should gold be attractive in this environment then? Easy, it is being artificially depressed first of all and two, its monetary role is about to make a big comeback. Not so for copper, hogs, oil, etc,

Genie in the bottle feedback. From Tokyo and THC. He tells me that he met with a rep in the futures industry and was told that it is "amazing the amount of gold that is thrown around as gold goes to $300". "They also have heard about interest free gold loans for producers ( that we told you about ) and also believe that gold is being controlled and contained".

The Asian gold premiums remain firm and intact in Singapore, Hong Kong and in Tokyo. The Tokyo premium to London is 100/120 which is close to recent highs.

More on Russia and the Vat - Reuters, Moscow ( Dec. 3 ) - " A government source told Reuters that a draft presidential decree on creation of a gold, silver and platinum coin market was being coordinated by different government ministries and the central bank".

Buffet and silver. Every time silver swoons, Buffet selling comes up. We have told you in the past that we were told by the horse's mouth last summer that he was pleased that the price of silver stayed down because the supply was being rationed off too cheaply. This ( low silver prices ) will require a much higher price down the road to ration future supply, than other wise would have been the case. It is well known that Mr. Buffet takes on these sort of investments with a 3 to 4 year time horizon. Why should silver be different? The silver stocks recently rose about 5 million ounces in the Comex warehouses to about 78,500,00 oz. ( still a very low number ). Knowing his silver trader, he probably did that himself to flush out weak longs and encourage the bear raid that occurred. In rare fashion, silver rallied 30 cents from its Wednesday night low. Normally silver does not do that after such a flush out. Would not surprise us if wise ol' Mr. Buffet was standing there with a silver bucket saying: thank you very much.

14 karat gold is 58.5% pure gold