Gold Market Update

September 19, 2001

The New York Mercantile Exchange (Nymex), has been closed since the World Trade Center catastrophe on Tuesday morning, as the Nymex facilities are only a couple of blocks away from ground zero. According to Nymex, operations are intact and trading is planned to restart today. The Comex division of Nymex supplies the most widely watched pricing for the North American gold market. The over-the-counter gold market, while not as well known as Comex, is estimated to attract trading equal to at least several times as much as the volume traded on Comex. The Electronic Broker System supplies continuous price quotes from the over-the-counter market. This pricing is reported by five of the major bullion banks. To recap the past week's price action, gold was trading at the $272 level when the first plane hit. Subsequently, it moved quickly to the $290 level, peaking at an intraday high of $292. On Wednesday bullion settled to around $280, then staged another upward move on Friday to the $285 level. Today (09/17/01) as of 11:00 a.m. Eastern Time, spot gold was $291.50 and gold shares were recording strong advances.

On Wednesday, September 12th, the Bank of England completed its fourteenth gold auction. The results were similar to the last auction on July 11th, which was viewed as positive. Both auctions had above normal subscription levels of 4.3 and 4.1 times respectively, and both sold at a slight premium to the London a.m. fix. While positive, the results of Wednesday's auction seemed subdued, given the events of the preceding day. The global economy had just been served a negative shock, the depth and duration of which cannot be known. With so many players sidelined in New York, we await the return to normalcy to see how investors react.

It is difficult to envision a scenario that doesn't favor gold going forward. The latest data on jobs, industrial production, and consumer confidence shows the economy is still in decline, and corporations are not yet positioned to stem the collapse in capital spending. Increases in unemployment and a loss of product pricing power is moving the economy toward a deflationary mode. Increases in credit delinquencies and bankruptcies are starting to adversely impact the banks. Weakness in the financial sector has historically been good for gold and gold shares. Last week, the Federal Government quickly approved $40 billion in spending for the World Trade Center recovery and the War on Terrorism. Meanwhile, the Federal Reserve has pumped record amounts of liquidity into the financial system and cut the discount rate by 50 basis points. While these are emergency measures, the potential for a lasting change in policy to more aggressive monetary and fiscal stimulus could eventually become inflationary. Given the state of the economy and current political pressures, such intervention may need to be massive to gain the desired results in the short term. Additionally, real interest rates on one-year T-bills are hovering near 0%. The last time real rates were less than 1% was 1993, a year when gold rose $38 to $391. The last time real one-year rates were negative was 1980.

The winning of the Cold War ushered in unprecedented peace and prosperity in the nineties, but this was driven to excess that culminated with the Nasdaq bubble. Now, the market is in decline and talk of a new kind of war abounds. The level of market uncertainty and political risk has risen. It is utterly amazing how the pendulum swings to extremes - the way of the human race.

The purity of gold is measured in carat weight.

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