'Midas' Commentary

October 11, 1999

Technicals

Like deer looking into headlights. Another extraordinary week for the gold market. That should be just about the norm for most of the coming weeks, months, and years. These days the gold price moves more in an hour than it used to in an entire quarter of a year.

For some time I have suggested that the old law of physics, "for every action there is an equal an opposite reaction," would apply to the gold market too. That is what is happening, and why the move up here is so violent.

For years the gold market was manipulated by the New York bullion houses, et al., to serve their own scheming purposes. Cheap capital was borrowed via practically interest-free 1-percent gold loans and invested elsewhere. As long as the price of gold did not rise or went down, this play was a bonanza for the in-the-know players. Every time the price of gold tried to rally, these dealers, whom I have called Hannibal Cannibals, would make sure, via coordinated trading (done with a wink), that the price of gold never breached certain points. During this period, junior gold companies, gold shareholders, gold miners, and all of us associated with the gold industry were devastated.

One can go back just over the past year alone and see that the Hannibal-defended price points were the $306 area, then the $296 area, then $290, and a final ill-conceived attempt to hold $262. When the $290 area was about to be taken out to the upside and the Hannibals were running out of gold supply last May, the Bank of England was called on to add supply and psychological devastation to a market that had been battered for years but was finally showing signs of life. It would appear that the Bank of England maneuver was orchestrated by Hannibal Lecter himself -- Goldman Sachs -- and the other Hannibals with some help from the New York Fed and the U.S Treasury.

All this time the gold supply/demand deficit was growing and growing. Frank Veneroso of Veneroso Associates believes it rose to 160 to 180 tonnes per month this summer with gold trading in the $250s. At the same time the gold borrowing by confident short speculators was growing too. After all, if the Wall Street big boys, the U.S. government, and the bullion bankers' momma, the Bank of England, were dissing gold, how could it ever go up? Shorting it was a sure winner.

The propaganda machine of these financial powerhouses relentlessly told the world that gold was dead. Anyone who invested in gold or was bullish on it was taunted. The bullion boys, who had the money and the connections to the press, chided us for our views and told gold-market reporters and financial journalists that we had no credibility.

To further demoralize our camp and the gold investing world, the Hannibals instituted a $2 rule, by which they made sure that the gold price never closed more than $2 higher on any given trading session. I recall one day when they slipped up and gold closed $2.70 higher. Someone must have been balled out, as gold tanked the next day. Such control over the gold market killed any interest in gold as an investment.

That was the action. It was sustained, intense, and universally expounded by the mouthpieces of the New York bullion house machine. It is either that or the majority of the gold analysts in New York are just not very bright.

Now we see the reaction. Again I share the opinion of Veneroso that the equilibrium price of gold today, free of manipulation, is a bit north of $600. The gold market was unnaturally forced to go down to $252. Thus, a slingshot has unwittingly been set in place by the malign forces that pushed gold so far down for so long. The slingshot was stretched and stretched and stretched. Pushed to the limit. It was yinged and yinged and yinged. Now it is yanging.

The power behind the yanging and the thrust of the slingshot is beyond the comprehension of most and has surprised most in the investment world. It has not surprised Reginald H. Howe, John Hathaway, Midas, or the Gold Anti-Trust Action Committee.

All summer, with gold staggering around $256, I told the cafe that investing in gold, silver, and the public with their problems so far. Sources tell me that Cambior is already in the hands of the banks and that management remains there only to keep things going. Ashanti's fate also belongs to the banks now; it too is in deep, deep trouble.

Many producers, not just these two, have these "structured deals" as well and so they also want the price of gold to down right now so they can unwind them without too much pain. Many of them are telling money managers that option volatility has risen so high that now is not the time to unwind these time bombs.

Wrong again! Now IS the time. These companies must stop acting like deer staring into the headlights of an oncoming car. Deer freeze, and so have many of the gold producers.

It is a recipe for disaster.

If they cover now, they might have to admit to shareholders that they blew it. They might get fired because their performance will be so poorly regarded. But their companies will be saved and as the gold price rises, shareholders will be rewarded for their gold investments, not annihilated. Catastrophe must be avoided, even if some managers who acted irresponsibly must be axed.

A highly respected technician I know just got a sell signal on the XAU. How can that be? It can be because the XAU is loaded with North American gold producers that have had a love affair with the Hannibal Cannibals.

Now for the gold technicals. They are extraordinarily BULLISH.

The Comex Commitment of Traders Report issued after the close on Friday was the most stunning ever. In 1993 the gold market rallied $80. At the end of that rally open interest rose to 221,000 contracts and the speculative long position grew to 110,000 contracts. A big correction followed.

Yesterday's report showed the large specs to be net SHORT 22,000 contracts. The small specs are net long only 9,500 contracts. This is mindboggling news. If 1993 is to be repeated (and there is no reason it should not be), another $80 move up is coming at the MINIMUM, since the open interest on Comex is already close to 221,000 again and yet the specs are short, not long, 110,000 contracts.

That would suggest $400 gold is coming -- MINIMUM!

The trading action the past three days has been superb as the bears tried to take gold down sharply early in each session. But the $315 area has held with strong support surfacing.

Here is how I see it. A bullion dealer told a source of mine that he had not seen a great deal of covering yet by the big hedge funds. Time and time again I have stressed to you how short the gold-borrowing crowd is. AND MANY HAVE STILL NOT COVERED. That has to be so. The reason is that every technical black box trading system now has to be long. It is hard to fathom any that would have given a sell signal as of last Tuesday. Who is short this market? The shorts have to be the hedge funds in good part and maybe one other big player.

After an $80 move or any big move like this, the commercials in the Comex commitments report would normally be short. Yet they are long now. Why?

Doug Pollit of Pollit & and Co. in Toronto explains it well and offers one possible interpretation.

Historically, after such a monster move, Doug says, the commercials would be short the board against their physical inventory. Because gold is in such tight supply now, the commercials are long Comex and the gold OTC market against physical delivery commitments. That tells you that they don't have gold in their basements like they used to.

On top of all this, many of the large-cap gold producers need to reduce their call exposure by buying them back or buying futures against them or both. There is a big mismatch for producers at the moment. They owe money short (margin calls) against owning assets long. These margin calls can eat some companies alive if they tarry too much and do not act quickly. Those that wait for a dip will most likely be left standing at the altar. The train will leave the station without them. They eventually will be buying in panic at much higher prices.

So we have the hedge funds that need to cover and the producers that need to unwind forward sale "structured deal" hedges. That represents powerful buying that has not hit the market yet. Look out above!

The specs have been long silver all year and it still goes up. I see no reason for that to change until silver approaches $9.78 or so. As long-time silver watchers now, silver can rally $3 in a week, even in a day. Silver has a massive base that can support a move to much higher prices.

Fundamentals

Just as bullish as the technicals. First take a gander at the precious metals lease rates. They are four to 20 times normal, an indication of tremendous physical tightness. There is just not a lot of precious metal supply out there.

Platinum lease rates are extraordinarily high. Will the gold lease rate go that high? The trapped gold shorts talk about new lending coming into market. Fine, but who wants to borrow gold in this environment? Why take a one-way trip to the poorhouse? What producer is going to want to roll over its forward sales?

Shareholders are already besieging corporate headquarters around the world trying to find out what their forward sale exposure is. Newmont Mining is conducting a hurried conference call on Monday.

Allow me to give you a specific example of what is going on out there. Take Barrick Gold. I know of several money managers who have called Barrick to get the lay of the land. Barrick tells them that all is OK. Yap, yap, yap. One money manager spent 20 minutes on the phone with Barrick about this. I just happened to call him up after I learned that Barrick has written 3.2 million ounces of calls at a 360 strike price -- 600,000 ounces for the year 2,000, 600,000 for 2001, 600,000 for the year 2002, and 1.4 million ounces beyond that. It would appear that this is in addition to Barrick's forward sale position of 13.3 million ounces of gold sold through 2001 at an average price of $385. This sharp money manager was unaware of this Barrick written call position.

The volatility on these calls has skyrocketed. The bottom line is that the price of the calls Barrick has written has soared. To buy them back now will be too costly. But not to buy them back could be corporate suicide. Sources close to Barrick tell me that around a gold price of $325 Barrick's hedge book is neutral at the moment. That number can fluctuate as it is partly a function of lease rates and call volatilities. But a gold price move well above $325 could start to stress the Barrick financial system.

Every Barrick shareholder should know about this kind of exposure. I can assure you that many Barrick shareholders have no knowledge of the company's call position exposure. It is only fair to ask for disclosure -- the truth told and dangers exposed. If you are a Barrick shareholder, I urge you to get on this fast. Speak, Barrick! Stop postponing your conference calls.

Bullion dealers are stressed out all over the world with margin call problems. How much margin extension can they give all these gold producers that are caught flatfooted? How many Ashantis might there be out there?

The manipulation of the gold market is backfiring on the bullion dealers. Corporate management of the bullion banks is livid. Firings and rumors of layoffs are everywhere. The boards of directors and CEOs are coming in and telling bullion dealers to begin clearing out their positions and exposure. The heat will only grow on these gold finance outfits. Then who extends the margin call money to the producers?

Barrick has done well over the years because of its hedging. The company has flaunted that the investment community. But Barrick may have arrogantly stayed at the party too long. The Wall Street Journal says this in a recent article about Barrick: "However, if the spot price does rise above $385, Mr. Sokalsky (Barrick's CFO) said, Barrick has the luxury of deferring its forward contracts for as long as 15 years and instead selling its gold production at the spot price. That means the company can wait for spot prices to return to lower levels before returning its borrowed gold to the central banks."

I do not know exactly how all these deals work, as they are very complicated. But I can't believe that a responsible CFO of a gold producer could make a statement like this. If I owned Barrick shares, I would freak out.

Thus far Midas' assessment of the gold market and what should happen to the price of gold has been correct. The proof is in the pudding. To verify that, all one needs to do is go to the cafe library.

It is my opinion that the price of gold is headed for $600. What will Barrick do in that case? What will its stock price do? If you are a Barrick shareholder, it might be a good idea to ask that question NOW.

I am not trying to bash Barrick. I am trying to get information out to the public so investors can be make their own judgments. I have worked on this all year. The mainstream U.S. press has been loathe to tell our side of the story, yet has extolled the bearish gold market commentary of the Hannibals.

I just received this email from a Cafe member.

"Is there an article that discusses how to find the junior mining companies that have NOT sold their future production at give away prices?

"By the way, I've conducted a multi-year, intensive investigation into media manipulation, especially as it applies to widely covered stories. Generally it's a safe bet that the bigger the story and the more widely it's being covered, the more likely it is that the facts presented are 180-degrees wrong and there is manipulation involved. A handful of stories seeded at critical times can start a theme going, and once started, these themes, like locomotives, become almost impossible to stop. Reporters don't report, they repeat. And investigators don't investigate, they elaborate.

"Price changes, of course, have a nice way of cutting through this kind of news manipulation. Interestingly, if my reading and conversations are any indication, NO ONE seems realize what is behind what just happened and that the triggering conditions are still very much in play.

"Though I trade futures, I'm not a particular student of gold, but this summer I detected an undeniable and very obvious media campaign to bash the metal. Finding the very intelligent analysis on your site -- thanks to my friend Sam Smith, the most censored journalist in Washington -- has filled in the blanks.

"It's been a rare intellectual thrill. Thanks again.

OK. Let's get to some good stuff and another reason why the gold price is going to go uptown.

During the summer I reported to you that well-connected GATA supporters told me that serious government-to- government negotiations were going on about the gold market after the Bank of England gold sale announcement. These negotiations were prompted by the collapse in the gold price.

Just recently I related that the Germans, French, and Italians were behind this decision, with the Swiss and British told to sign on the bottom line. The door was locked on Gordon Brown, Britain's chancellor of the exchequer, as he was kept out of the deliberations.

Now further elaboration for you and I believe it is significant information.

As the European central bank was coming into existence, the Germans, big gold holders, brought gold onto their balance sheet for the first time. It was a technical maneuver that brought their budget deficit into compliance with the new ECB requirements.

Everything was groovy for the Germans until the British sabotaged the gold price with their nonsensical gold sale announcement. The gold price plummeted and so did Germany's ECB budget compliance. The Germans were furious at the British and the others instrumental in bringing about the Bank of England's announcement.

So the Germans were the orchestrators of the surprise European central bank announcement, which way more than countered with the British did. The Germans quietly went around to the French and Italians, and then others, to gain support. After that, they strongarmed the Swiss and the British into signing the agreement.

This tells me that what we have in place here is going to stick. The European central banks with big gold holdings have had it the with British, the United States, and the bullion dealers that were denigrating the banks' own valuable asset for dishonorable purposes.

What was good for the goose has to be good for the gander. The British, at the prompting of the United States, surprised everyone. The Germans surprised everyone right back.

To all my good British members of the Cafe: Nice gold sale trade by your Abbott and Costellos at the Exchequer and the Bank of England. They sell gold at $261 and $258 to buy U.S bonds, which now are going straight down as gold itself goes straight up.

Potpourri and the Gold Shares

I think the good junior gold and exploration companies are steals right now. Gold futures and gold call options have moved straight up. The investment world still cannot fathom this gold move, as the world continues to get disinformation. Soon the world will "get it" and look for companies that have gold resources. Many great gold companies are still priced at close to bankruptcy levels. Their upside potential is staggering.

Almost last, but not least. Y2K talk is heading into high gear. With the tightness in the physical gold market it might be prudent to think about what this Cafe member has to say:

"I am convinced that in most parts of the world there will be y2k-related software, hardware, and embedded system failures that affect the reliability of electric power, fuel supplies, telecommunications, equipment operation, and just-in-time inventory systems, just to mention a few pieces of the economic puzzle. In a nutshell, this means significant lost production.

"My feeling is that magnitude of lost production in the extraction and refining industries will be huge. Although I can't prove it, suffice it say that 'fix on failure' is the Y@K remediation policy for practically all capital-intensive industries, and this means guaranteed downtime. If you want a second opinion on this conjecture, contact Dr. Leon Kappelman at the University of North Texas, who is an internationally-recognized expert on the subject of global y2k remediation and contingency planning.

"Has anyone factored in Y2K-related production losses next year for gold, silver, platinum, palladium, copper, nickel, etc., and the potential price effect on these metals?

"Sincerely, Randy."

One more thing. We have received many reports that the New York Fed is selling calls, trying to hold down the gold market. The Fed is authorized by law to lend gold and sell calls. They just cannot SELL the gold. Is the New York Fed jeopardizing the U.S. gold supply to help out the Hannibal Cannibals? This is a matter for Congress to look into. We have been notifying congressional committees of what we have been told.

Where there is this much smoke, there probably is a fire. Is the New York Fed the big short along with the hedge funds? How much Fort Knox gold is on the line here?

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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