Gold Market Update

January 31, 2001

Comex net short positions soared by 50% in the week before the January 23rd Bank of England auction, the tenth in a series of 25 tonne auctions. Speculators were betting on past patterns in which gold declines into the bearish mood that surrounds these auctions. The short selling drove gold to its low for the year on January 17th, however, this time the specs got a little too greedy. The low price attracted bargain hunters, the shorts were forced to cover, and bullion rebounded to an intraday high of $269.25 on the day of the auction. The last auction in this tranche occurs in March, after which the Bank of England is widely expected to review its policy for disposing of the remaining 140 tonnes it has said it will sell. Gold ended the last two-week period down slightly to $262.80, as the market weakened following last Thursday's severe earthquake in Northern India, which may temporarily dampen demand from that region.

If I may digress for a moment, over the past year, Americans have had to put up with a myriad of nagging inconveniences that have disrupted daily lives. Anyone who passed through New York airports probably encountered some delays at best, cancellations at worst. Anyone who lives in California must find the electricity shortage aggravating, for some it threatens their livelihood. Anyone who commutes by car in a metropolitan area must wonder why the roads weren't designed or modified to accommodate the traffic load. While these inconveniences are mostly local or regional in nature, they often impact surrounding regions. Looking a little deeper, these somewhat isolated occurrences are symptoms of a wider problem that is engulfing the nation. Critical pieces of the infrastructure in the U.S. have been unable to expand to meet the basic demands of a growing economy.

The energy crisis in California would be less severe if the politicians and utilities had concentrated more on the fundamentals of supply and demand when planning the deregulation process. Nonetheless, in all likelihood, the decline in hydropower caused by the drought in the Northwest alone would have caused energy problems for California of a similar magnitude. Weather-related problems become frequent in a system that is being run near its capacity. The heat in the Northeast caused blackouts during the summer of 1999. The unusually cool summer of 2000 kept this from recurring, for now. The nation has bet on natural gas as the clean-burning answer to our energy needs. However, while the U.S. gas rig count surpassed its all time high in the first half of 2000, preliminary analyst's estimates indicate that natural gas production for 2000 will actually decline. The gas supply in the U.S. and Canada comes from mature hydrocarbon basins with declining reserves. Meanwhile, there are only two facilities in the U.S. currently capable of processing imported natural gas liquids.

The U.S. has plentiful land and enough areas known to contain natural resources to support the infrastructural needs of the age of technology. The problem lies in the fact that the land has not been allocated to address these needs. We have talked to company managements that deal in mining, energy, pipelines, forestry, and refining. An overwhelmingly common complaint we hear from the executives of these basic providers is that limited land access combined with regulatory, legal, and environmental restrictions have kept them from developing areas or building facilities to meet demand. Modern gains in technology and engineering enable companies to operate in ways that are friendly to the environment, although not without impact. There are obviously many areas throughout the nation that should be preserved or protected from development, however, the wellbeing of many Americans is beginning to decline because the needs of an advancing society are not being met. This is a situation that has been building for years for which there is no quick solution. There must first come the political will and public support for a change in the regulatory and legal process that has stymied development. Once this occurs, it will take up to five years to explore and develop resources or to design and build processing and transport facilities, airports, power plants, or other pieces of the infrastructure that are operating beyond capacity.

Apologies for the digression, but the relevance to gold is simple. If the world's leading economic engine has an infrastructure that is no longer able to function efficiently, then how can its currency remain strong? The answer is it can't; its accumulated wealth will erode. Should this happen, we expect that an investment in gold will gain in value.

A one-ounce gold nugget is rarer than a five-carat diamond.

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