Gold Market Manipulation

May 16, 2000

In my interview with Congressman Paul, which was published in the May issue of J Taylor's Gold & Technology stocks, the Congressman Paul said he believes the powers that be are intervening in the gold markets to keep the price of gold suppressed. He implied that it was probably being done with a "wink and a nod" between banking institutions but that it would be difficult to uncover. He also said he thinks this practice is likely to continue for quite some time. However, he believes that eventually the forces of the market will prevail over the forces of intervention and that the price of gold will rise to much higher levels, just as happened when government intervened in the 1960's.

Although gold market manipulation may prove difficult to prove, that task or at least the task of getting Congress to look at this allegation, has not stopped the Gold Anti Trust Action Committee (GATA) and its leader, Bill Murphy from trying. Last week, GATA assisted by Chris Powell and gold market heavy weights, Frank Veneroso and Reginold Howe visited some very senior people in the U.S. Congress. The word that came back from Bill was that their reception was more positive than they could have expected. GATA and its associates are arguing that huge derivative operations are not only boosting the fortunes of major investment banks at the expense of the American public, but that it is also creating a huge threat to the stability of the global banking system.

Some of the most recent signs of possible intervention comes from an enormous growth in off-balance-sheet gold derivative contracts on the books of Morgan Guarantee Trust Co., which according to GATA increased from $18.36 billion to $38.1 billion in the last six months of 1999. The belief is that this number, which represents gold loans and forward sales of gold into the market, was used by the powers that be to push the price of gold lower, just as the yellow metal looked poised to begin an explosive move toward $400 late last year. It is suggested that the anti-gold crowd (i.e. establishment Wall Street and major gold bullion houses and their clients) were caught off guard by the more pro-gold European establishment when the Europeans announced plans last Fall to stop selling and leasing more gold from that time onward. This could have meant major problems for companies that had very large short positions in gold including some of the major gold mining firms. Indeed two sizeable gold mining firms did in fact go "belly up" as a result of a $84/oz. rise in the price of gold at the time of the European announcement. No doubt, more problems would have followed, had the price of gold continued to rise toward the $600 level some of us believe is its equilibrium price. GATA believes Central banks leased gold to Morgan Guarantee and others last Fall to keep the lid on the price of gold. Not only did this help the bullion firms and their clients cover their posterior ends from potential losses but also helped keep the price of gold low and hence confidence in the U.S. Dollar high so that the overheated stock market could keep on rising.

WITH OR WITHOUT A GOLD FOCUS,
PROBLEMS SEEM TO BE MOUNTING

Whether you focus on gold or not, if you look beyond the smiling faces, and empty repetitious words of CNBC's talking heads, you will discern growing evidence of financial trouble from a number of directions. Take the continuing weakness of the Euro vis-à-vis the U.S. Dollar for example. Marshall Auerback of David W. Tice & Associates points out (www.prudentbear.com or 1-888-778-2327), there is reason to believe the continued weakness of the Euro is due at least in part to significant overstatement of strength in the U.S. economy. Marshall points to evidence provided by some analysts that suggests faulty statistical methods related to inflation and productivity accounting have been employed and as such are painting a false picture of U.S. economic strength. Whether this is true or not, it seems as though European policy makers are buying into that idea. If it is untrue, they are most likely implementing exactly the wrong policies. But whether there are statistical distortions or not, one cannot deny the great weakness in the Euro Currency/US Dollar exchange relationship which seems unwarranted by relatively good economic conditions in Europe. Whatever the cause, the great decline in the Euro is itself is destabilizing event.

DECLINING COMMERCIAL BANK CREDIT QUALITY

Meanwhile, Charles Peabody, a very accomplished banking analyst, pointed out at www.lemetropolecafe.com that major banking institutions are once again taking on increasingly risky loan portfolios, the likes of which they vouched to stay away from following the brief but severe (for banks) recession of the early 1990's. I remember clearly as a lending officer to Barnes & Noble during those days, the struggle we lenders at ING Bank had in convincing our credit committee to increase our loan commitment from $50 million to $75 million. This was needed to make up a short fall in a $160 million credit facility to Barnes & Noble, because other major banks had either chosen to walk away entirely from lending to Barnes & Noble or to reduce their commitments to this company. The banks were simply scared to death by the enormous credit risks they faced in the early 1990's. How quickly these lessons are forgotten! As Mr. Peabody notes, the lure or riches is causing banks to once again become principals in these merchant banking arrangements.

It was interesting to note that again this past week, an emphasis from the Federal Reserve (Alan Greenspan and Richmond Fed President Al Broaddus) was made concerning the need for the Fed not to continually intervene when ever the markets begin to face turmoil. We recall again Greesnpan's speech the two or three weeks ago in which he suggested that Fed intervention should take place about as often as one expects to rely on 100 Year flood insurance. Oh Really! We wonder if this talk might not be intended as a guise to lead us to believe the Fed will not act when the rubber is about to hit the road? Is the Fed jawboning? Will it back off when it finds itself at the edge of the Grand Canyon? Or is it deadly serious? Either way, things should get very interesting in the days ahead.

GOLD INDUSTRY REVIEW

10% IN PRODUCING GOLD COMPANIES

We recommend that you place approximately 10% of your total investment portfolio in gold mining companies that are now generating positive cash flows from their gold mining activities even as gold is selling at a paltry $275/oz. Please note the companies labeled "A" under the quality column on the back page of our newsletter. All of the companies classified as "A" companies, except one, namely Southern Era are appropriate for inclusion in this 10% allocation of your portfolio. I will have another comment or two on Southern Era in a few minutes.

Among the "A" quality companies, I suggest you concentrate first on buying the major gold producers which include Anglogold, Barrick Gold, Newmont Mining, Placer Dome and Stillwater Mining. Of these companies, Stillwater is a palladium and platinum producer which I encourage ownership of as part of the 10% gold allocation. I like all of these major companies very well but you should be aware that the least hedged companies among this group are Newmont and Placer Dome. The most highly hedged is Barrick Gold, which is one reason may gold bulls refuse to own this stock. My own thinking here is that if gold continues to trend lower, owning Barrick reduces portfolio risk but of course hurts upside potential somewhat if gold begins to rise rapidly.

Repadre Capital Corp. is basically a gold royalty company that holds interest in some fairly good sized gold projects. I like this company very much and think compared to some of the better known gold royalty companies, it is a better buy.

Goldcorp is about to commence gold production on its high grade Red Lake project in Ontario, which is one of the highest grade gold deposits in the world. This will be one of the lowest cost gold producers in the world and production should climb toward the 250,000 oz. per year level over the next couple of years. This is one of my favorites in this category.

Aurizon Mines and Richmont Mines are small underground mining companies that are well managed and are producing positive cash flows. I believe it is highly likely that these two companies will survive the existing tough times and when gold turns around, will instantly reward investors with major gains.

Getting back to Southern Era. This is a South African diamond mining stock. It has been producing diamonds and generating very substantial cash flows. However, it is being severely penalized for being in South Africa. In general, let me say that I am becoming increasingly uneasy about any investment in Africa. As noted in the Financial Times last week, the prospects for a continent wide war seem to be growing. For that reason, I am downgrading Southern Era from a "Buy" to a "Hold". Upon further investigation, I may recommend a sale of this fine company which has as its only sin, operating a business in the proximity of total anarchy and depravity.

10% IN JUNIOR MINING FIRMS

I am also suggesting that investors allocate an additional 10% of their portfolio to non-producing mining companies which I am dividing into two categories, namely gold mining and non gold mining. In this, hotline option # 3, I will briefly make some comments about those companies that have some substantial exposure to gold and other precious metals.

Let me suggest that within this category, investors weigh their allocation toward those companies with a "B" quality rating. A glance at the Portfolio Scorecard on page 16 reveals an error in the quality rating column for my favorite mining stock for 2000, namely Golden Phoenix. The rating should read "B" rather than "D" To refresh your memory, a "B" quality stock is one that has a project advanced to the pre-feasibility or feasibility stages, but which has not yet been placed into production.

For reasons often noted in my weekly messages, Golden Phoenix has been listed as my favorite mining stock for 2000. I continue to regard Golden Phoenix as my favorite mining stock, but my most recent addition to this list, namely X-CAL RESORUCES is a close second. The reasons for my high regard for X-Cal should be clear to you once you have read my May issue which features the company. Both Golden Phoenix and X-Cal have what could become major Nevada gold projects.

Other favorites in the "B" quality are CANARC RESOUCRES and PANGEA GOLDFIELDS. Canarc is in fact producing approximately 10,000 oz. of gold per year from a placer operation in Suriname and it has a couple of gold projects in British Columbia and Suriname that could become substantial but mining gold in both of those locations brings with it special challenges and increased political risk. Pangea Goldfields has a couple of advanced stage projects that look like winners.

There are three other "B" quality mining stocks with considerable precious metals exposure that I am not as enamored with at this time. They are ASIA MINERALS, CORAL GOLD and POLYMET MINING CORP. At current gold prices, the prospects for Asia Minerals and Coral Gold advancing their projects toward production to not appear overly promising. Asia Minerals has a small high grade section that would in theory provide good cash flows at current gold prices, but not a sufficient amount of this exists to justify capital expenditures at this time. Coral Gold looks like it is mostly on hold, unless another major can be attracted to its project to take the place of Placer Dome. The trouble is at current gold prices, none of the majors are in a hurry to cut a deal with these junior companies.

Polymet Mining has been one of our biggest disappointments. Management, which is top rate in my view, but who does not know how to promote its prospects and hence efficiently raise capital, believes NorthMet poly-metallic project, located in Minnesota would, if placed into production, be highly economic given current prices for gold, platinum, palladium, copper, zinc and silver. However, the management has been unable to convince the markets that this would be true, so the company's share price has drifted lower and lower at a time when it needs to raise capital. I continue to believe in the merits of the NorthMet project, but it does not really matter what I think when the collective opinions of the market disagree.

At this juncture, I am downgrading these three "B" quality stocks from a "Buy" to a "Hold". A rise in the price of gold to $300 or so would quickly change the prospects for Coral Gold and Asia Minerals and would also be positive for Polymet as the prospects for the mining sector in general would tend brighten considerably.

There several more speculative non-producing precious metals stocks on our list labeled as "C" and "D" quality issues. "C" quality stocks are those that do not yet have a pre-feasibility study but which have outlined mineralization that is beginning to show potential to become commercially feasible. "D" quality are those that have not yet quantified a possible ore-body but which, based on surface sampling and limited sampling, and given known size of mineralized structure, appear to hold potential for outlining a commercial deposit.

BARRAMUNDI GOLD is a "C" quality stock that has a large gold target in the Yukon . Exploration work is being funded by Newmont Mining who will have to find something large to keep them in the project. Barramundi also has a very promising Australian gold target where exploration is also being funded by an Australian major mining firm. Overall, at its current price of $0.09, this looks like a very attractive penny gold stock speculation.

Another stock that I am now upgrading from a "D" quality to a "C" quality as a result of some good exploration results on its platinum group metals target in Ontario is PACIFIC NORTWEST CAPITAL. This company's properties are considered highly prospective for the discovery of one or more commercial platinum group metal deposits. However, bear in mind that this stock, is up 267% so far this year and 341% since we recommended its purchase last year. Huge land claims give this company many more drill targets and other companies are now flocking to it for joint venture deals. So, Pacific Northwest seems to be in a good position. But again, at its current price, it may not, necessarily represent a superior junior mining stock speculation at this time.

Among "D" quality companies, listed on the back page of our newsletter, EAGELCREST, IMA EXPLORATION and VIRGINIA GOLD all have great prospects. Eaglecrest holds a target in Bolivia that hosts some very high grade gold mineralization and currently a bulk sampling program is yielding good results. IMA EXPLORATION has begun exploration work on what has to be considered some of the most under explored highly prospective gold targets in the world located on the Chilean and Argentine border. Expectations are high that some great intercepts will be encountered there. Virgina Gold has an enormous land position in Quebec and some highly prospective gold and platinum group metal targets as well as base metal targets. The company is also still fairly well funded and exploration on a number of its projects are being funded by others.

ENERGOLD is a "D" quality stock that also has some good prospects, but given the current gold price, I do not expect too much to happen with this company. I view an investment in it at this time pretty much as "dead money". There fore, Energold is considered a "Hold" on our list.

These "D" quality companies have been retained on our list because we think they all have a reasonable shot at outlining one or more world class precious metals deposits. But the risk levels level remains higher for "D" quality issues than for companies with higher ratings. The odds of success for the companies would improve markedly and their risk would be reduced sharply with higher gold prices. Regular subscribers to this newsletter know that we recommend that investors NEVER allocate more than 2.5% of their portfolios into any one stock recommended in our newsletter, at the time purchase of our recommendations are made. It is especially important that this guideline be followed with "D" quality stocks.

China has only 2% of its Total Foreign Reserves in gold.