Hedge Funds go Scratching for Gold

September 27, 1999

Spot Gold $266 up $1.80

Spot Silver $5.26 unchanged

Technicals

We have a market again! Gold was trashed early today falling almost $2. Unbelievers were everywhere -- on the Comex floor, on CNBC, in the press, etc. After almost $10 in gains in two days, who woulda thunk gold could go up even more? Certainly not those guys.

But lo and behold, buying came in from all over and gold quickly reversed to go up on the day and stay there. Today's reversal was classic bull market action -- and we have not seen that type of reversal thrust in a long, long time.

"Hannibal" Chase Bank was a one-man gang today trying to hold down the gold price. They had some early help from "Lecter," but not enough to stem the bull tide.

The technicals are superb. In the past I have noted that, in my opinion, it would be very constructive if the open interest did not decline on a decent move up in the gold price. Over the past couple of years that has been the case. On Tuesday, the open interest went down only 4,700 contracts on a $6 up day. In past rallies it might have gone down 12,000 contracts on a $1.80 up move.

And on yesterday's $3.60 move up, the open interest went UP 2,201 contracts and now stands at 207,560 contracts. That means new buyers are coming in. For the market to thrust sharply higher, it needs those new buyers and they are coming in. This is very constructive.

Market analysts were generally not prepared for this sort of open interest market action. For example, this was the morning comment about the open interest figures from Prudential: "We would expect a number in excess of 4,750 today, possibly pushing into five figures. A large open interest drop would suggest some near-term softening."

For the past few days the volume on the upside has been two to three times normal. That also is very constructive. There are very few gold bulls, as very few gold market analysts and industry participants really understand the dynamics that are now in place to propel the gold price sharply higher. That also is very constructive, as the gold market will climb a wall of worry for a long time, just as the stock market did most of the '90s.

Long silver/short gold spreads are being unwound. Those trades are holding back the silver market as there is also minor technical resistance at $5.30 basis December. Our short-term target for silver is $5.60. Midas' year-long price objective of $9.78 still stands.

My basic analysis of the past couple of months remains intact. Buying gold, silver, and the precious metals shares is the best risk/reward opportunity I have ever seen. The long-awaited gold bull market is under way. The forces that have been orchestrating a lower gold price and manipulating the gold market are beginning to lose control. The price of gold will double and triple in the years to come.

Fundamentals

I know the CNBC economic pundits, like Lawrence "of America" Kudlow, continue to assert that there is no inflation out. All is always well. But crude oil closed at $24.85 per barrel today, up 73 cents, and the CRB index moved sharply higher to finish at 202.29, up 1.76. Will anything that happens in the real world every matter to the bull-market apologists?

On top of that, unemployment claims dropped much more than expected and to their lowest levels since 1974. That is just one more indication of how strong the economy is and how strong demand is. Of note also was that the Utility Index was battered again, finishing sharply lower. Bonds rallied, but it appeared that much of the buying was fear-based. Do the big boys smell a stock market debacle?

Cafe member Richard "The General" Harmon was very disturbed about a Sept. 14 Bloomberg story. It was on the predictions and analysis of the gold market by Gold Fields Mineral Services, an organization that feeds supply/demand analysis to the gold industry. Both Richard and I believe that GFMS is bought and paid for by the "Hannibal Cannibal" crowd. The data they pawn on gold analysts and gold producers is widely reported by the press. We don't agree with their data or their outlook In fact, I would be happy to debate them in New York about the gold market. Do you think they have the courage to accept the challenge?

This is some of what GFMS had to say with gold trading around $254.

From Bloomberg News Service:

"Gold Seen Falling as Producers, Governments Sell.

"Gold prices will keep falling for the rest of the year as mining companies and central banks overwhelm the market with supply, according to Gold Fields Mineral Services Ltd.

"Gold will probably average $252 an ounce in the second half of 1999 and trade in a range of $240 to $270, the London-based research and consulting firm said."

The article went on to say how increased producer hedging would depress the market.

I could not understand how they could get away saying this. Yes, some companies would do some hedging because of credit pressures exerted by their "Hannibal" bankers, but we heard of just as much producer forward sale covering coming in as forced producer selling. And that was proved to some degree as Gold Fields Ltd. (the gold producer) and Anglogold Ltd. tried to buy the Bank of England auction on Tuesday.

Harmon called Anglogold and asked if they would respond to Gold Fields Mineral Services. Whether coincidence or not, Reuters reported this today:

"Anglogold sees less gold forward selling.

"By Kenneth Barry

"HONG KONG, Sept. 23 (Reuters) -- Forward gold sales by producers and hedge funds, which has depressed the price, should decline in future, Anglogold Ltd Chief Executive Bobby Godsell said on Thursday.

"That change and flat or declining new mining production over the next three to five years should contribute to gold's climb back above 20-year lows, Godsell said in an interview.

"In addition, Britain's latest sale of gold reserves, which sparked a rally, has helped the market realize central bank sales would not be nearly large enough to fill gold's supply/demand gap, he said.

"Godsell said he expected forward selling to decrease because of higher gold leasing rates.

"The rise in rates from historical levels of one percent to 3.5 or 4 percent recently has changed the dynamics of forward selling, Godsell said. `If the interest rate contango diminishes, there is less value to be found in futures. I would expect less gold to be sold forward,' he said.

"The narrowing interest rate differential was also putting pressure on hedge funds holding large short positions, Godsell said.

"`If prices continue to move as they are, some people are going to be in difficulty,' he said.

"Godsell predicted flat to declining new mine production in the next three to five years because of recent low prices. `That is also positive for the price,' he said.

"The Anglogold executive said Asian demand would contribute to gold's price recovery.

"`The fundamentals for gold are very sound with the return of economic growth in this part of the world,' he said.

"Godsell said Japan, Thailand, South Korea, and Hong Kong showed signs of recovery. `These are major markets,' he said.

"Godsell said he expected the price to move higher as the market realizes that potential central bank gold sales will never fill the gap between supply and demand for gold of 1,200 tonnes annually.

"`This market will return to a physical demand and physical supply equilibrium that really should be at a level considerably higher than US$264,' said Godsell, whose company is the world's largest gold producer. With that equilibrium the gold price should rise to US$300 to US$350 an ounce, Godsell said.

"Anglogold was looking for gold mine acquisitions and expected consolidation in the industry, Godsell said.

"`We are looking at acquisitions. We would like geographical diversity and mining diversity,' he said.

"The objective would be to replace low-margin production with high-margin production. `Our target is a $50 profit margin on each of our 7 million ounces of production. We are pretty much there,' he said.

"Godsell was in Hong Kong to present awards for gold jewelry designs in a competition sponsored by the company and the World Gold Council."

Potpourri and the Gold Shares

The XAU held up under the stock market debacle today as it finished about unchanged at 69.30.

Tiger Watch: Because we believe that the famed Tiger hedge fund is short hundreds of tonnes of gold and one of their own investors is concerned about their gold position, we are keeping an eagle eye on some of their significant equity positions. U.S Airways stock looks like it dropped off a cliff on a chart but was down only 1/8th today. Intel was hit for 5 5/16 points and sank to 77. At some point the heat may become too great and this once-noble hedge fund may have to buy back its mega-gold short position -- if it can find the gold.

The president of Microsoft came out today saying that the tech stocks, including Microsoft itself, were very overvalued. So did another well-known high-tech analyst -- citing Taiwan delivery problems. The NASDAQ did a dive bomb after that hit the tape and went from 25 higher to 108 lower. Technically, that reversal is important as it came on the same day as the Dow broke the key support point of 10466.93 for the Richard Russell Dow Theorists. Both the Transporations and the Dow have now broken down, signaling that a "primary" bear market has arrived -- at least that is the way they see it.

I called a CNBC producer today to tell them that the past three days I had listened to several analysts that they brought on to talk about the gold market and, in my opinion, none of them had a clue as to what was really going on and why. Most of the analysis presented was "Hannibal" pablum, talk that the gold rise was no big deal and it was just a matter of time before gold collapsed again. Dead silence on the end of the phone. Don't look for me on the tube any time soon.

Our camp finds it of note that there was little if any, mention in the press about the next Bank of England gold sale. After the previous auction it was plastered all over the wire services. Not this time. Sources have told me over the past month (as I have reported to you) that there are serious government-to-government negotiations going on regarding future Bank of England gold sales that will be helpful for the gold price. That lack of press commentary on the next Bank of England gold sale may be the first hint that something is up on this matter.

The disinformation I spoke of the day before the Bank of England gold sale (still presented at the Matisse Table) when gold was right above its lows is still coming from most mainstream gold analysts. Maybe it is lack of information.

From Reuters on Sept. 23: "`It's one thing to exploit a high level of fund short positions in the market. It's another to actually convince them to switch to the long side or to really make a strong fundamental case for gold,' said Tim Evans, analyst at Pegasus Econometric Group. `I have yet to be convinced that the fundamentals for gold are really any different this week than they were last week,' Evans said."

Aldon Bentley, whom I have met, put out this Reuters story. Alden, give me a jingle. While www.LeMetropoleCafe.com is not as glamorous as Pegasus Econometric Group, we can give you better information than Tim did.

For two months Midas has said that there is a 160-180- tonne gold supply/demand deficit that has been filled, in large part, by borrowed gold hitting the physical market. That was the most significant way the "Hannibal" crowd could add gold supply to the physical market to keep the very strong gold demand from boosting the gold price sharply higher. That is why the lease rates have risen so much. Since May and the Bank of England gold sale announcement, the one-month gold lease rate rose from 1 percent to more than 5 percent at one point.

Repeatedly you have received information from our sources that the gold borrowings are much, much bigger than the mainstream analysts know. Again, we have been alerted that just four hedge funds have borrowed 30-50 million ounces of gold. Ironically, our camp heard today that one of those four funds may have be covering now -- but we learned of another big one that also may be short.

Word is that the one we think is covering might be ready to take on the shorts!

The lease rates have come off a bit on this rally, as the one-month rate is 3.36 percent, but that is still more than three times normal. Producers sell scale up normally. If that were the case at the present, lease rates should not be coming down. But if hedge funds or spec borrowers were turning in some gold to exit some gold loans, it could account for the modest reduction in the lease rates.

That fits perfectly into our scenario and is consistent with all we have telling you.

Now for the scoop of the day.

There has been much conjecture of late as to whether the Swiss can sell some of their gold. There have been stories about when they might sell their gold and doubt about whether they really will sell any at all. Some politicos in Switzerland have even been suggesting recently that a Swiss gold sale next year is a fait accompli, with the wishes of the populace being irrelevant. Yet the newspaper La Tribune de Geneve reported yesterday that the referendum process could put off potential gold sales until 2001. Others are reporting that the people in the countryside Swiss cantons will vote the gold sale proposal down. It is all a very confusing and unpredictable issue.

The "Hannibal" bullion dealer camp and the officialdoms that are part of the manipulation of the gold market are desperate to find physical gold. Remember, many of the gold shorts have borrowed gold, sold the physical, and used the proceeds to invest in the markets. They cannot just buy back a futures short position. They have to deliver the gold back to a bullion dealer.

So where do they get hundreds of tonnes of gold?

They were counting on the IMF gold sales, etc. All the while they had no idea the monthly gold supply/demand deficit was so large. They were not getting the correct information. They listened to GFMS and not Frank Veneroso, whose deficit numbers are much higher and, most likely, correct.

You have heard me say this often. I have known Frank for 20 years. He was known in the IFC and the World Bank as the wonder boy on macro-economic matters. The former finance minister of Mexico would call for "The Priest" (Frank) when that country had a financial crisis. The former finance minister of Chile also called for Frank under similar circumstances. The man knows his stuff.

The question that needs attending to is: Are the Swiss and/or the IMF up to some clandestine activities regarding the gold market? Is the IMF leaving a loophole for countries like Mexico to buy gold, then sell it in the market and return the cash to the IMF? I don't know. But I have not seen anything in the press suggesting that this would be forbidden. Regarding Switzerland, there have been so many conflicting noises that it is hard to know what will happen there.

That is a big buildup to what I have to say, but it had to be laid out for you as background for the importance of what I have been told. The Cafe has contacts all over the world now that are some of the most sophisticated in the gold industry.

Today one of them called me from Zurich to let me know that two high-level hedge fund operators just arrived in Switzerland trying to find out if the Swiss National Bank would sell gold to them in size. Knowing that a Swiss referendum is needed to sell gold, this seems to be a stretch on the surface, but THEY ARE THERE LOOKING FOR GOLD IN SIZE TONNAGE. So they might be there to find out what the prospects are of the Swiss passing the referendum so they can contract for future physical gold at a price (way above the market, I am sure) and continue their gold loans until the physical gold can be secured.

The mission has to be to find a way to secure physical gold so they can sleep at night. They can always buy calls for further price protection against their gold loans, or buy futures. But they still need the physical gold.

That is, the hedge funds are over there looking for ways to get out of their gold borrowings. They now know they have a big problem.

The word is starting to circulate that the gold- borrowing shorts are realizing that they are trapped. The physical gold market is very tight. That is why Goldman Sachs took 90 percent of the August deliveries on the Comex; they needed protection.

The gold shorts are looking for a way out. They need physical gold or a plan for locating it soon. It must have been a shock to them to discover that Gold Fields Ltd. and Anglogold Ltd. of South Africa, two big producers, bid for gold at the Bank of England auction.

Sources of gold are drying up fast. The shorts know it. They can feel it. They are looking for a way out. The gold loans are probably in excess of 10,000 tonnes now.

What if just a third of the gold-borrowing shorts want out? Where do they find the gold? That would be 3,000 tonnes of buying, while mine supply this year will be only about 2,550 tonnes.

Gold is widespread in low concentrations in all igneous rocks.

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