Gold - Part - 3

October 19, 1999

We have to go somewhere we haven't been before. We started writing about markets in 1967, seven years after becoming involved in world financial markets. Never did we think our sometimes lonely road would lead to where we think it's now headed. In the late 1970s the Hunt brothers attempted to corner the silver market. They almost made it happen. In 1869 Jim Fisk attempted to corner the gold market. He was unsuccessful, but he like the Hunts, brought on recession and depression. Recession between 1980 and 1983 and depression and financial panic between 1870 and 1874. In 1869 gold sold for $162.00 an ounce. In those days ranch hands made $10.00 a month plus board and keep. Today they make $3,000.00 plus board and keep. It's obvious that if gold was worth $162 in 1869 and is only worth $300 today, after all the years of inflation, deflation and financial debauchery, something is dramatically wrong. If you extend today's real gold value you could end up with a price between $3,000 and $8,500 an ounce. All this is informative, but let's get to where we are going. After seeing Goldman Sachs reportedly purchasing 500,000 ounces of gold and Merrill Lynch making large purchases, prior to the central bank announcement, which are totally out of character, we suspect something bigger and more sinister is about.

As we look back we should have known gold was being accumulated by the elitists. Bush, Mulrooney and Margaret Thatcher's husband, Dennis, are on Barrick's board. They wouldn't have been on there unless something big was in the making. Barrick is very close with Hollinger and Conrad Black. Both Monk of Barrick and Black are very close with Britain's Royal Family. Over the past five years central banks have been selling 500 to 1,000 tons of gold a year, which was purchased by elitist's and their institutions. Barrick received first right of refusal to mine Bre-X through the good offices of their puppet Suharto. Before it was discovered to be a hoax it was supposed to be the largest gold mine in the world. After the debacle gold prices headed lower. Barrick, et al, had to know down the line that gold was headed higher eventually. The sales previously at bargain basement prices continued to deliberately keep gold prices depressed and in a last effort to place more gold, that belonged to British citizens, in the hands of these elitists they drove prices even lower. All this when all central banks knew of the effort to stop official sales and leasing at least 4 to 6 months ago. Knowing this, how could or why would the Bank of England be selling their gold? It has to be a give away. We think now that there will be an effort at these still low prices by the elitists to purchase as much gold as possible to create a corner on the market. This is not fantasy, but a very real possibility. If we are right prices over $1,000 an ounce won't be for fetched. This move could also be signaling the collapse of the financial system and all the dangers it entails.

The joint venture of Placer Dome and Western Areas, despite a higher gold price, has resulted in 2,500 miners being laid off. Placer has again officially repeated they will not, anytime soon, reopen development of the Las Cristinas property in Venezuela. We are sure this is not going to go down well with the government, which has included it in their financial projections.

As the short squeeze goes on, that is shorts, producer forward sales and option sales, derivatives, leasers trying to cover, and bullion banks who are worried to death that some of their leasers will go under, the word in the pits is that the FED has already guaranteed gold to Comex buyers. What buyers we don't know, and for whom we can only guess. It could be other central banks. There is no liquidity in the market. Goldman's option trader was fired. Some mining companies may have over hedged and may be over the abyss. Some of these parties, which we'll collectively call shorts, have buy orders between $280-$300., a price zone we may never see again! The only event we can see that would drive prices back down is major bullion sales by central banks, which they have stated they won't do. We have heard from several sources that producers' sales have come to an almost complete halt.

The Crystallex Board of Directors have been back and forth to Venezuela in five of the last six weeks at the request of the government. It could be they are looking at or negotiating purchase or leasing of other properties. We think a resolution of the Las Cristinas situation is coming. The company came out with the second consecutive quarter of profitability and growth, increased production, improved efficiencies and a successful hedge program combined to generate record levels of revenue and net income in the second quarter ended June 30th. Six month earnings were $.07 per share. If KRY ends up with LC 4 & 6, the stock will certainly trade higher. We have no financial arrangements with this company.

The gold market will remain uneasy for sometime to come just based on the damage miners' hedge books have suffered during the recent rally. The first declared victim is Cambior, which announced it had hedge 2.7 million ounces at an average price of $318 an ounce. They will pursue discussions with their counter parties concerning the management of the situation of its hedge book.

Another heavy hedger is being handed its head, Ashanti Goldfields. A net hedge of 10 million ounces has backfired spectacularly leaving the company exposed to the tune of $570 million at a gold price of $325. an ounce. Lonmin, 32% shareholder, has bid to buy Ashanti out.

Among the sophisticated it's thought that the FED had held off on raising interest rates to protect prominent institutions still enmeshed in large losses from short gold positions. We think the idea is well founded. The next rate hike by the FED and the ECB should be early next year, if necessary. The FED 1/4% and the ECB 1/2%.

Dealers caught in the crossfire are Goldman Sachs $105 million, Societe General $82 million, Credit Suisse First Boston $62 million, UBS $61 million, AIG $32 million and Chase Manhattan $25 million. This has forced Ashanti into merger talks with Lonmin, a UK mining group.

As we warned in the last release don't buy Newmont until we can see how much damage has been done. Newmont's stock has since fallen several points as has Barrick Gold. This trap central banks have set is the culmination of 15 years of gold mining companies being the antithesis of what they should be. Instead of shutting mines down due to lower prices, they hi graded them and sold forward selling off their most valuable ore assets just so they could keep themselves in fat salaries and directors' fees. Investors should have been throwing them out of their positions, but they didn't. Forward contracts and options are now burying these mining companies and their investors. Let the lawsuits begin. These forwards and options are now major liabilities. All those poor investors that bought major gold stocks are getting screwed for not finding out the companies' hedge position. Barrick has sold forward 13.3 million ounces of gold at an average price of $385 an ounce through 2001. If the gold price reaches those levels, and there is a good chance it will, then Barrick won't make much money. As Riley used to say, what a revolting development this turned out to be.

Here are a few companies, that as far as we know, have either low or no forward positions. We warn you, that if you want to purchase these issues, that you personally call the company to double check our research. We are here to try to help, but we don't have all the answers, just most of them. Those with no hedge positions that we know are: Battle Mountain, Buenaventura, Freeport MacMoRan, Harmony, Agnico-Eagle and Goldcorp. Those with some leverage: Homestake - position unknown, Kinross 12%, Anglogold 11%, Durban Deep 5%, Gold Fields 2%, Western Areas 2%, Glamis - position unknown, Meridian 11%, Kidston 13%, Iamgold 5% and Randgold 5%.

Gold hedging by producers is not surprising. Bema has hedged for 2.3 years, but at the same level as Barrick, $385. an ounce. If prices are higher they'll be losers. Even if companies' forward sales and put options to cover come out even the mines will have made no money. We wrote a long article about this in 1992. Approximate hedged positions are as follows: Barrick 3.9 years, or 26% of reserves; Cambior 4.3 years, or 52%; Echo Bay 2.5 years, or 23%, Kinross 0.9 years, or 12%; Placer Dome 2 years, or 19%; Bema 2.3 years, or 14%; Eldorado 2.8 years, or 28%; Meridian 3.8 years, or 11%; Teck 2.5 years, or 33%; Ashanti 7.4 years, or 49%; Randfontein 1.6 years, or 20%. Australia is unbelievable, Acacia 4.7 years, or 73%; Delta 2.3%, or 47%; Goldfields 4.4 years, or 54%; Lihir 3.9 years, or 21%; Newcrest 9.5 years, or 81%; Normandy 7 years, or 91%; Sons of Gwalia 8.9 years, or 113%. These and many more issues should be avoided if hedging is above 20% of reserves. That doesn't leave much to buy does it? Can you see the massive mismanagement. Shareholders sue the hell out of the officers and directors, personally.

Merrill Lynch has raised price estimates for most nonferrous metals for the rest of 1999 and 2000, due to accelerating Asian growth and continued strength in the U.S. Nickel prices should average $3.24 per pound, up 35% from their previous estimate of $2.40. It estimates prices in 2000 at $3.50 a pound. copper in 2000 at 85 cents and zinc at 57 cents.

Our latest information is that Cambior will produce 630,000 ounces of gold this year at $215.00 an ounce, and 700,000 ounces in each of the next three years at $200 an ounce. As of June 30th they had hedged 1.3 million ounces at an average of $350 an ounce. On September 30th they reported having sold forward 2.67 million ounces at an average price of $318 an ounce and had also sold call options for 1.9 million ounces at an average price of $315 an ounce. Of those call options, 921,000 were at $287 an ounce, maturing before the end of 1999. 299,000 ounces at $323 in 2000; 382,000 at $352 in 2001, and 303,000 ounces at $348 in 2002. They now are naked on calls for 1 1/2 years production and are already out of the money, $30.00 an option. They were assisted in accomplishing this feat by bullion banks who provided them with a $250 million, 5-year, revolving credit facility. Again, the action to be taken is for shareholders to sue the officers and board of directors. The company should also sue the bullion bankers who knew these changes were coming. These lenders and writers of derivatives had a fiduciary responsibility to Cambior to inform them of the impending change of direction regarding gold by European Central Banks. Gold will rise higher and Cambior and all those other highly leveraged gold producers will go into bankruptcy. This is part of the worldwide systemic problem facing world financial markets - as gold goes higher the rush to flatten positions will become manic. This, as you can see, is only the beginning of the gold run. It has a long way to go even after the shorts cover.

South Africa is launching a millennium version of the world's best selling gold bullion coin. The 22-carat Krugerrand 2000 gold coin in the classic 1 ounce, half ounce, one quarter and one tenth ounce. Demand for the newly-minted coins is expected to exceed 4 million ounces in 1999.

The party is over. The European central banks declaration that there will be limited gold sales and no leasing for five years signals recognization that the world financial system is bankrupt. You readers may find this observation harsh, but after 40 years in the financial trenches we know when the tide is turning. The bankers know the jig is up. You can only paper over implosion for so long. EU bankers have brought gold back into the financial system as a gold-reserve system. The ECB, Sweden, the BofE and Swiss national banks, all included, hold 12,574 tons of gold, making them collectively the world's largest single holder of gold. Abandoned, is the position, that gold is barbaric or an absurd anachronism, which earns no income. These negotiations have been going on for at least 6 months. No one was listening when in May Alan Greenspan told Congress, "We should hold our gold." Debt borne paper currency by its very nature is fiat, but gold is always accepted. The return to gold is a return to institutional sanity.

Speculative shorts, derivative freaks and those enmeshed in the gold, yen and Swiss franc carry-trade are taking massive losses. The sure bet is over. A witness to the deluge is 30 year U.S. Treasury yields that have hit 6.35%. A good part of all those borrowed funds went into the long-bond and those bonds must be sold to raise cash to liquidate carry positions. As long as the yield continues to rise you'll know there are still speculators out there covering their shorts. We suspect the Fed has bought billions of dollars worth of Treasury paper to keep the yields from going into the stratosphere. That is monetization and it's very inflationary. Some important events that are about to follow are national bankruptcies. Ecuador is the first and over 100 will follow. Inflation and default the worst of all worlds' accompanied by a flight to quality, which is gold.

It has come to our attention that Glamis Gold (GLG.TSE) has hedged 36% of 2000 production at $275, of which 63,000 ounces at $288 are forwards and 19,000 are spot deferrable call options. For 2001, 24% of projected production is hedged with call options at $295 an ounce. For the balance of 1999, about 55% of production is hedged with 16,400 ounces of forwards at $288 and 20,500 calls on 20,500 ounces at $301. Here is another producer that has themselves in deep water. We'd invest in some other gold mining company.

Eldorado Gold Corp. (ELD:TSE & USE). We cannot get excited about ELD's Kisladag property in western Turkey. The area is in the midst of what could easily soon become a battle zone. We'd think otherwise if Russia wasn't having its current conflict in neighboring Islamic nations. We think that part of the world could lead to a third world war. Irrespective the company made 4 cents a share earnings on record gold production of 98,553 ounces at a cash cost of $190 an ounce. The problem is ELD now has 510,000 ounces of gold hedged, representing 100% of production for the next three years at an average price of $297 an ounce. Hedging is 10,000 ounces a month at $310 and 200,000 ounce spot deferred at $260-$270. Fundamentally this is a good company whose earnings potential for the next three years is poor. What was management thinking about, gambling in the derivative market? We would not buy this stock at this time.

The new Venezuelan mining law is in effect. It stipulates that all mining development must proceed with the consent of the holder of a "registered concession." Parties that only hold mining contracts must convert the property to be mined to a registered concession before continuing mining work. They have 90 days from approximately Oct. 7th to complete the process. Crystallex, through one of its subsidiaries, is the registered holder of the Las Christinas concession. Place Dome, on the other hand, has a contract relationship with CVG to develop Las Christinas and according to the new law PDG has 90 days to go to KRY, as registered holder of the land, to seek KRY's consent to register PDG as holder of the concession. PDG cannot continue development without consent of the registered holder. If this view is correct then PDG will have to inform its shareholders and the public explaining its new found position. The bottom line is everything flows from title. If our assumptions are correct, and because we are not Venezuelan attorneys, we have to consider our assumptions guesses, then KRY has a tiger by the tail.

Palladium, platinum and silver are the most common substitutes for gold that closely retain its desired properties.