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Gold Market Update

December 21, 2000

The price of gold, in our opinion, seems to be winding up for a further upward move from its November "intermediate bottom". It has been consolidating its 3% advance from $ 266.30 an ounce on November 22nd to $ 274.30 an ounce on December 6th during the last two weeks. Its price of $ 270.40 an ounce last Friday was 0.6% above its price as of our last December 4th Update. Bearish sentiment is falling as shown by the reduction in the net short "large speculator" C.F.T.C. traders' commitments position to 55.8 metric tons on December 12th. Additional signs of growing interest in gold are a pick-up in the gold/CRB Futures Index and the gold/silver ratios.

The rise in the price of gold since November 22nd has coincided with falling global interest rates and the U.S. dollar. The dollar is down 6.2% in terms of the euro. The U.S. current account deficit ballooned to $ 113.8 billion in the third quarter, about 4.5% of GDP and another record. The deficit has been financed by an inflow of capital from abroad, but the recent economic and corporate earnings slowdown in the U.S. may now make dollar assets less attractive relative to the euro-zone. In fact, in the first half of December the euro-zone has seen a $ 3.9 billion net inflow of merger and acquisition capital, reversing the outflow of the second and third quarters. The head of Hong Kong's Monetary Authority, one of the world's largest holders of foreign exchange, said last week that he remained apprehensive about the risk of a downturn and hard landing in the U.S. economy. In the week ended December 13 foreign central banks' holdings of U.S. Treasuries held at the Fed fell $ 3.6 billion, following a declining trend since earlier this year. If foreigners pull their money out of U.S. financial markets, dollar instability may again cause investors to seek the protection of gold, as a central banker recently said.

The prices of gold mining shares during the last two weeks have been consolidating their rapid advances, which began on November 17th. From that date the Philadelphia Gold/Silver Sock Index climbed 22% to its December 8th recent high. The ratio of that Index to the CRB Futures Index also rose rapidly.

Our last Update referred to warning signs of a possible bursting of our economic, dollar, stock market and debt "bubbles". Today, we add a possible fifth "bubble", the gold loan market.

Central banks, largely European, have rapidly increased their loans (leases) of gold from 900 metric tons in 1990, to 2,100 tons in 1995 and to 4,700 tons in 1999. The largest borrowers were the gold mines. The net amount of the producer hedging book, after taking delta hedging into account, at the end of 1999 was about 3,000 tons which represented 118% of total 1999 output. Hedging is profitable if the spot price of gold is stable or declining or if it rises at a lower rate than the contango premium. The bulk of the hedging volume matures in the next four years. The natural delivery of mined gold into forward contracts expiring during this period, even in the absence of a total buyback of the entire position, would imply that the short position would unwind reasonably swiftly. A reduction of some 700 tons a year from a total supply of 4,000 tons to the market could, of course, have a dramatic bullish consequence.

Many investors believe that some central bankers are trying to keep the gold price low. James Turk's Free Market Gold Money Report, dated December 11th, after presenting evidence concludes, "Despite Treasury Department denials, the Exchange Stabilization Fund is indeed intervening in the Gold market… the Treasury sent the Exchange Stabilization Fund to the rescue in 1996 to manipulate the Gold price, presumably forever, to prevent the banks from taking big losses " (on their short positions). A lawsuit was filed in the U.S. District Court in Boston on behalf of the Gold Anti-Trust Action Committee on December 8th accusing certain banks and top officials of the U. S. Treasury and U.S. Federal Reserve of conspiring to suppress the price of gold and of exceeding their constitutional authority.

The naturally occurring gold-silver alloy is called electrum.
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