Gold, Silver & Platinum

September 25, 1999

The only purchasers of the Bank of England's gold sale were the 12 market makers and 50 ordinary members of the London Bullion Market Association (LBMA). Buyers included HSBC Midland, the parent company of Hong Kong Shanghai Bank, through its ownership of Samuel Montagu, one of the five banks that sets the daily gold price fix in London. Others were N.M. Rothschild, Bank of Nova Scotia, Barclays, Morgan Guarantee Trust and UBS. The Bank of England lost almost $800 million on the sale and the U.S. $9 billion due to lower market prices.

There is no question that the British engineered gold sale was executed to bankrupt financially weaker gold mining companies, which would then be gobbled up by financially stronger companies at fire sale prices. $252 to $260 an ounce gold is well under the average cost of production of $273 in S. Africa, $267 in Canada, $261 in Australia and $257 per ounce in the U.S. We recently mentioned a possible merger between Barrick and Newmont. Other cash rich predators are Anglo American and Rio Tinto. During this period of low gold prices these majors enjoy the luxury of shifting production to high grade deposits, which allows them to continue to generate profits or absorb acceptable losses. The lower gold prices have caused a 50% reduction in workers in S. African mines since 1990. In the last year and a half 103,000 miners have lost their jobs in S. Africa, while mining costs dropped from $342 to $273 an ounce. 50% of S. African mines lose money with prices between $252 and $260 an ounce. Over the next six months another 80,000 miners will lose their jobs if current prices persist. This will push the official unemployment rate to 35% and the real unemployment rate to 55%. This also effects surrounding countries, such as Mozambique. Miners send $50 million home to their families, where one wage packet feeds 20 people. Ghana's largest mining company, Ashanti Goldfields, is laying off 2,500 workers. At this point official gold sales are an act of contempt pointed directly at the world's poor.

The yen is again hitting new highs. Trading at this writing at 106, a reflection of lingering carry-trade positions and the purchase of yen to buy Japanese stocks. We now expect a short covering carry-trade rally is gold that will resemble the turmoil caused by the reversal in the yen caused by its carry-trade. Treasury rates for the long-bond have stabilized at 6% on the 30-year and are headed lower. The rate and the bond will soon have to contend with the sale of Treasuries by the gold carry-trade. What could trigger a panic buy-in situation is that not only has the yen and Swiss franc run against the speculators, but so have carry interest rates. They were 1% but are now 4%, which limits profit with Treasuries at 6%. If interest rates increase any further, there will be a short covering rally, which could easily propel gold back to $290 to $300 an ounce.

Rumors continue to abound concerning producer buy backs as the gold market finds its footing between $252 and $262 an ounce. It is also very significant that Goldman Sachs and Merrill are rumored to be major buyers of December 300 calls. On the other hand heavy selling appeared on August 23rd and 24th, as more gold carry-trades were put on. The world knows that another 8,000 contracts will be sold on September 21st, the day of the auction, so their isn't great incentive to go long. Long contracts have dropped 5,000 recently. Short-term the pressure is neutral to down.

Placer Dome is not expected to start production at the Las Cristinas property in Venezuela for at least 4 years. There has been a number of phone calls, faxes, and scads of email regarding our updates on the affairs of Crystallex and Placer Dome. I'm surprised there is such interest and that so many subscribers and brokers are interested in the company.

It has been reported by El Universal, a Venezuelan news agency, on Saturday, August 21st that three members of the KRY board met with President Chavez at Miraflores Place. It is believed those board members were Marc Oppenheimer, Robert Fung and Tejara Paris. Mr. Paris was former ambassador to Spain and a friend of U.S. presidents, back to President Johnson. Let's hope their efforts are fruitful.

Now that Cecilia Sosa, Supreme Court Justice, has resigned what better opportunity has Chavez than to expose the fact she was bribed by Placer Dome in its court confrontation with Crystallex. He could announce to Venezuelans that he had discovered her corruption, atypical of the former ruling elite and nullify Placer's claim to Venezuelan gold properties and expel them from the country. KRY would then file a suit to recover their property or have it granted by previous title and end up with the entire property.

From two publications we have gotten indications that some sort of deal is in the works between Placer Dome and Crystallex on the Las Cristinas property.

The Chinese Gold Bureau, under the State Economic and Trade Commission, says that China's gold reserves of 394 tons could rise to at least 1,000 tons as it only accounts for 2.3% of the country's total reserves.

It should be noted that yen strength is not only bad for the dollar and U.S. paper, but it is good for gold, because it makes it relatively cheaper to buy in yen terms.

Gold Fields Mineral Services upped its total gold loan figures from 3,500 to 4,500 with nary an explanation as to who did what. This kind of reporting, not divulging all the facts, puts these people in the pocket of the central banks. Just another trained seal that performs on command.

It has been announced that most of the funds received from the sale of gold by the Bank of England went into U.S. Treasuries. That bears out our contention that the sale was used to manipulate the price, but also to help the U.S. and others fight off derivative failures by banks and hedge funds.

Newmont Mining says they see gold bullion prices staying below $270 an ounce in the coming years. They recently bought put options, which gave them the right to sell 2.85 million ounces of gold, or almost 89 metric tons from August 1999 through July 2001 at $270 an ounce. It earlier had sold forward 483,000 ounces or 15 tons to be delivered in 2005, 2006 and 2007. They produce about 4 million ounces a year. Prior to this they had no known history of option or forward sales. As a result of the put sales, banks had to sell about 84 tons into the market as a delta hedge. This has driven lease rates to 3 3/8% to 4% over recent months.

Gold mine production rose 2% in the second quarter, versus the first quarter. Cash costs are down from $210 an ounce a year ago to $199.00. South Africa's mines are the most expensive, with an average cost of $222 an ounce compared with $169 in Canada, $189 in the U.S., and $217 in Australia.

The IMF said it was considering selling part of its gold reserves in so-called off-market transactions instead of the open market. The question really is whether they'll get the same heat they did from proposed auction sales.

World silver inventories continued to decline in 1998. GFMS figures show mine production increasing in 1989 to 545.5 ounces from 519.3 ounces in 1997. Sales from inventory fell from 98.2 million ounces to 47.2 million ounces. Lease rates varied widely between 10%-40%. Producer hedging and forward sales declined. Jewelry and silverware fabrication fell 10% and total supply declined 2%. India, a large consumer, had a drop off in consumption due to increased costs in rupee terms of 14%. Fabrication demand fell from 859.9 million ounces to 840.6 million ounces, thereby official sales were 52.5 million ounces. Photographic fabrication was up 5.6%. Long term we are very bullish on silver.

Some months ago when the IMF proposed a gold sale, we recommended that all they had to do was mark the value of their holdings to market prices and lend against the higher valuation. Their loans would be guaranteed by the member countries. On September 7th, the IMF proposed revaluing bullion instead of selling it. The revaluation would release $1.1 billion over current book value, which would be transferred to a new fund and invested in market securities.

It has also been revealed that 20 countries are likely to be invited to form a new informal group of "systemically significant nations" to discuss developments in the international financial system. Hitherto known as G-X this group will comprise both industrial and key emerging market economies. Working groups will be set up by the Financial Stability Forum, which combines leading finance ministries, central banks and regulators, and will report at a September 15th meeting in Paris. Their reports will include one on the regulatory expectations of hedge funds and other highly leveraged institutions. The IMF will place more of its focus on risks and vulnerabilities in particular countries. The intention is to engage the private sector in resolving financial crisis. Thus, we now have another unelected international body to tell the world what it may do.

As we recently predicted, major mining companies would go on a buying spree. Anglo American will spend up to $5 billion on acquisitions. We must be getting close to the bottom on gold prices.

On September 13th the London Gold Fix was 80 years old. Over those years twice each day five members meet at the offices of N. M. Rothschild to "fix" the world price of gold. The market began as a means for the British government to sell the gold it was looting from South Africa. The members are: Rothschild, HSBC (Hong Kong Shanghai Bank Corp.), Republic, Scotia Mocatta and Deutsche Bank.

China is poised to become world's biggest gold consumer.