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Gold & Platinum Group Metals Explode! Has Greenspan Sold Out to his Free Market Beliefs?

February 8, 2000

The price of gold exploded on Friday (02/04/00) when Placer Dome announced that it was planning to stop its hedging program. Reportedly, what this means is that approximately 2 million ounces of supply will be taken off the market as Placer Dome retires its forward positions and gold loans. The announcement resulted in an 8% rise in the price of gold the same day. This move is especially impressive if as reported it is true that Placer Dome realized an average gold price of $480/oz. last year on its forward sales. Placer Dome is the 5th, largest gold producer in the world and Canada's second largest producer. Placer's shares rose by nearly 25% yesterday on this news and the higher gold price that this announcement helped to bring about.

I suspect this move by Placer Dome may have resulted from the news that a class action suit was launched on Thursday by a New York law firm against the Board of Directors of Ashanti Goldfield's Co. As Bill Murphy observed on an e-mail to his subscribers on Thursday, this is big news because it serves notice to the management of all gold mining firms that they can be held responsible for losses resulting from overly aggressive hedging practices. I think this is wonderful news for those of us who have invested in gold from the long side of the market. If Frank Veneroso and Bill Murphy are right about the supply and demand fundamentals for gold, a price of $600 or higher may not be that far away. Why so? Because for many years now, there has been a dishording of gold from central banks, which was lent via bullion dealers like Goldman Sachs, to mining companies, hedge funds and others. In time, these loans must be repaid, and when they are repaid, the dynamic that depressed gold, (i.e. an artificial supply from central bank dishording) will now work to cause gold to spring to much higher prices. For hedge funds who are short gold, they will need to go into the market to buy it to pay it back. For mining companies, it simply means the gold they produce will no longer hit the market, but be returned to central bank coffers as they repay their loans.

Now some of the mining companies, have sold production for a long time into the future. Barrick Gold for example is said to have gold loans extend out as far as 15 years! This forward selling helps explain how supplies can be so short of demand year after year and the price of gold still fall below what Mr. Veneroso reckons is its equilibrium price of $600 per oz.

The short selling all works very well for the participants as long as the price of gold continues to decline, but when it starts to rise, it starts to hurt the short sellers. Now, gold mining shareholders are becoming agitated because their investments are not doing very well because the mining companies are not enjoying the "upside" form higher gold prices. In the case of Ashanti, aggressive hedging prompted for whatever reason by bullion banks has destroyed that company. Other companies may not be so close to death's door as Ashanti, but their earnings will be retarded when the price of gold begins to rise and that too will bring on the wrath of shareholders.

So what we may have seen on Friday is the first of a very big reversal of the dynamics that has suppressed gold to artificially low levels over the past number of years. The price of gold may be about to explode to levels few people, except students of the market like Veneroso and Murphy think is realistic. If companies like Barrick Gold, the granddaddy of all gold mining hedgers, or other majors like Anglo Gold, begin to buy gold in the markets, or if they simply apply some of their production to retire existing gold loans rather than roll them over, the price of gold may rise very substantially this year.

If this move in gold represents the start of a bull market, we may in fact be forced to begin allocating a larger share of our portfolio to junior mining companies. In fact this week we are recommending the purchase of a junior mining firm, IMA Exploration Inc. as a result of this move and its excellent properties in Argentina. A rise in the price of gold to over $350 will start to make these companies very exciting once again. Stay tuned!

JEFFREY CHRISTIAN'S ANTI-CONSPIRACY VIEW

I might take this opportunity to tell you the views of Jeffrey Christian, who told me in my interview with him that he does not share Bill Murphy's conspiracy theory regarding the bullion banks. Rather, Jeffrey simply thinks what was going on here can be explained by what one would expect to happen if a fox were put in charge of watching over a chicken coop. The bullion banks have had a gigantic conflict of interest problem here because they were not only advisors and middle men, but were actually the counter-party to these hedging transactions. These bullion bankers maximized their short-term profits and bonus payments by pushing bigger and more aggressive hedges on to the mining companies. This is unlike the role Jeffrey Christian's CPM Group plays when it simply structures hedging products for a fee without itself taking a position in the transaction itself.

If a small time stockbroker worked with his clients like the bullion bankers did with the mining companies, he could go to jail or be kicked out of the business. Most likely nothing will happen to Goldman Sachs and other bullion bankers because the mining companies with whom they dealt should have known better themselves than to do business with the fox outside of their coops. What might happen is that some of the bullion banks might suffer big losses if the price of gold continues to rise toward its true equilibrium. Bill Murphy asked the $64 question this weekend. What is the U.S. going to do now, sell its 8,000 tonns that are supposed to be in Ft. Knox to keep the price from rising and to keep the positions and salaries of Goldman Sachs employees intact?

PLATINUM, PALLADIUM & RHODIUM - HUGE MOVES

Although the price of gold shot up by more than $23 on Friday, February 4th, the real stars in the precious metals markets have been platinum and palladium, which closed the week at $502 and $520 respectively. One year ago, these metals were trading at $300 and $350 respectively. Palladium is at its all time high and platinum is at a 9 1/2 year high. Moreover, Rhodium, another platinum group metal closed the week at over $2,000 per ounce, which is more than twice its price two months ago. And base metal prices have been pretty strong too. Nickel for example, reached a 4-1/2 yr. high yesterday while copper is 22% higher than one year ago and zinc is up 19%. For a discussion regarding the outlook for various metals including the platinum group metals, are sure to keep your subscription current so you can read what Jeffrey Christian has to say about these markets.

In my interview with Jeffrey Christian, he provided an overview on most of the more prominent metals markets. While each of these markets is different, it may be that in total they are telling us that inflation is on the rise. If that is true, the party in the equities markets may be closer to ending that most people think.

STOCK & BOND MARKETS - TOO BIG TO FAIL?

Interestingly, our "slick" President thought he was going to score some political points by bragging about paying back debt faster than he had previously planned. As you and I would do if we were paying off our own debts, he started paying off the longer-term 30-year debt first. That makes the most sense because if you pay the longer-term stuff off first, the total amount of interest you will pay will be dramatically reduced. The trouble is our financial system has become addicted to debt. Insurance companies depend on 30-year debt for meeting actuarial needs and these instruments are also used for structuring interest rate swaps and other derivatives. Rumors were rampant toward the end of last week that several large hedge funds were once again in big trouble because of the huge decline in 30-year Treasury rates resulting from Clinton's decision to retire debt. Speculation abounded in this week's Barron's as to whether or not the Fed would once again bail out one ore more of these big boys.

Earlier in the week the stock market was roiled when these rumors first circulated, but then calmed down when it was noted that the institutions in question were "too big to fail". This is quite interesting because it suggests that in general, investors believe there is a floor under the stock market. In short, I believe the Clinton administration and even Alan Greenspan now think stock market is itself is too big to fail. As I explained in a recent www.newsgurus.com commentary, that is why I think the stock market party might go on for quite some time yet. I am convinced that Alan Greenspan, who once was as strong of a free market advocate as you could expect to find among mainstream economists, is now the very heart of a system that is fostering "moral hazards" on a scale the world has never before seen.

GREENSPAN SELL OUT?

I believe the pressures and powers of our political and financial system, which as John McCain notes, is in fact controlled by large corporate interests, have overwhelmed Mr. Greenspan himself. No doubt this view of John McCain's is part of the reason why this very decent man has been treated so badly by the Republican establishment. But getting back to Greenspan. After making his recent speech in New York, a gold bug friend of mine, who shall remain anonymous for now (until he gives me the permission to use his name) managed to have a few words with Greenspan after his talk. My friend asked him a couple of questions as Mr. Greenspan made his way toward the elevator in the hotel where he had made his speech. Mr. Greenspan reportedly said out of the blue, "You know, I have always been in favor of a gold standard". At that point, my friend asked him, "Well, why have you not pushed harder to return our system to a gold backed system". Mr. Greenspan reportedly said, "Because no one would listen".

As good as things feel now in America, history shows they can change very rapidly. A Wall Street Journal article recently referred to Mr. Greenspan as being "revered". But acclaim can be very short lived when conditions change. Harry Bingham recently pointed out that the last Federal reserve official who was referred to as "revered" was Benjamin Strong, President of the Federal Reserve Bank of New York, then the power center of the system. On his deathbed in 1928, Mr. Strong said: "We are now paying the price for the decision in 1924 to help the world back to a sound financial system". Of course, that was before the crash of 1929, so Mr. Strong did not see the ultimate price the expansion of money and credit exacted on America. Will history repeat itself? We think it will in some fashion, which is why we have structured a very defensive portfolio for this year.

Greenspan actually gave us gold bugs some reason to hope gold might be restored as money or at least that the yellow metal would play a bigger role in backing the dollar and keeping our currency from being so badly debased by way of the printing press. His views on gold were in fact expressed before he became Fed Chairman. But in the end, the intellectual views of this man were compromised by a system so big and powerful he was simply overwhelmed. I believe the remarks he made to my friend provides a bit of evidence that the courage of his convictions was simply not strong enough for him to resist the temptation to yield to the popular and common views of the establishment.

In my view, the result of Mr. Greenspan yielding to political pressures is that we now have a financial system that appears to be very healthy but which in fact is enormously rotten to its very core. I say that because money, credit and leverage have grown to levels which in the past have presaged financial devastation. Of course, people like Ian Gordon, Dr. Ravi Batra and David Tice have warned in J Taylor's Gold & Technolgy newsletter (www.miningstocks.com) that we are due for another devastating economic and market decline.

The remedy for the inflated stock market, if Mr. Greenspan has the courage to apply it, will be mighty painful because it will case the bubble to finally implode. So far the "gradual" approach of Mr. Greenspan has not been effective in deflating the bubble. In fact, the market is suggesting it is quite happy to let Mr. Greenspan continue to raise rates in a gradual manner. In short, I believe Mr. Greenspan's monetary policies are "behind the curve". Only if he pops the bubble with a sledge hammer, will the market be deterred. But what would that do to Mr. Greenspan's glorious reputation? In the end, the bubble will burst under its own weight and the inevitable calamity will take place. Surging bond yields, a collapsing dollar as foreign investors run away and plunging stock prices are all a real possibility, we think even this year, which is why we have 50% of our portfolio in short term bonds, 15% in gold shares and 5% in the Prudent Bear Fund.


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