Inside
Gold
Inside
Gold
by Michael J. Kosares
The
gambit attempted by the British Chancellor of the Exchequer to convince
world markets that Germany had joined Britain in favor of selling the International
Monetary Fund's gold failed miserably causing a mad scramble in early October
by traders to square short positions. At one point the key December gold
contract was pushed over $305 per ounce.
The
British gambit suffered a severe blow when Germany's Bundesbank Deputy President
Juergen Stark said "Gold sales, or gold pawning, has not been an issue
here." The disdainful use of the word "pawning" summarizes
Germany's attitude toward the British proposal.
There
is a direct correlation between a falling currency and a rising gold price.
If the Federal Reserve and United States government are indeed interested
in a weaker dollar visa vis other major currenciesincluding the upcoming
eurocan higher gold prices be far behind?
Gold
production cuts resulting from its low price in recent years could put the
brakes on production three to five years from now, according to Bakes Mitchell,
well-known mine sector analyst. He says that 50% of the projects slated
for the U.S. are on hold and 26% in Canada.
Those
same low prices are fueling strong demand for gold in the United States
and Europe.
T.
Hoare & Co. metals analyst Rhona O'Connell reports an interesting phenomena
in the Japanese gold market. "Physical demand for gold is starting
to build up," she says, "with jewelers reporting a steady increase
in business in Japan, notably for kilo-bars and the local price has now
moved to a 20 cent premium to London, having been at a discount since April."
The
Russian people are panic-buying food and gold, according to a recent Reuters
report. With ruble inflation running wild, hoarding simply exacerbates the
problem. A liter bottle of sunflower oil costing 12 rubles before the crisis
broke out now sells for 50 rubles. All foodstuffs are being purchased and
stored. As the value of the money declines, the demand for foodstuffs rises.
"It's an investment," says SovEcon's Adrei Sizov, "Just as
some people invest in gold, so now you invest in flour, groats and salt.
It's not from a physical shortage of goods, but from the fact that you don't
know what the price will be tomorrow."
Some
of the more memorable video news clips I have seen in awhile were the ones
of Russian citizens trying to knock down bank doors to get to their savings.
The
neighbors of Italian Financier and former head of the powerful P2 Masonic
Lodge, Licio Gelli, wondered why he had such an intense gardening interest
especially his large pots of geraniums and begonias. They found out last
month when Italian police found $1.76 million in gold at the bottom of those
pots. Mr. Gelli is being investigated in connection with the collapse of
Banco Ambrosiano the largest such collapse in Italian history.... Oh, the
joys of gardening.
The
Russian central bank is now buying gold, according to press reports a far
cry from the London-based rumors last month that Russia was selling gold.
Always consider the source when assessing the validity of rumors about gold.
That particular rumor is thought to have started in the London office of
Merrill Lynch notorious gold bears. In fact, the Russians are now talking
about minting a gold coin for circulation in Russia an attempt to bolster
the sagging ruble.
Also
boosting gold is a report in the China Economic Times saying China should
increase its gold reserves "to guard against financial risks."
Liu Shanen of China's Gold Economic Development and Research Institute says
that China should increase its gold reserves from its current 397 tons to
1000 to 1500 tons. One rumor making the rounds of the internet gold discussion
groups is that China plans to purchase in excess of 10,000 tons and is using
the announcement of the smaller figure to mask their activities. The obvious
question is where is China going to find that much gold?
Money
Forecast Letter: "Recently, really smart, sophisticated investors have
come to realize that the flood of money pouting into America from all over
the world is almost surely going to trigger the biggest inflation since
1990, when prices were rising at a 6% annual rate. They took another look
at gold, and realized it been driven so low in value by hedge fund short
selling that odds of it doubling in price within a few years look pretty
good....Bear in mind that we expect more inflation over the next ten years
and we believe gold will recover to the $840 level it hit briefly in early
1980...only next time, when it reaches $840, it will be the solid base of
value."
The
big news in the gold market as we go to press is the possibility that the
hedge funds, mired in a sea of margin calls and trades gone bad, may have
to square their enormous short positions in the yellow metal.
Those
who read these pages know that we feel that the hedge fund short positions
are the primary reason the gold price has not moved upward in recent years.
Now Reuters reports that "U.S. gold traders are viewing the recent
rally in gold prices driven by hedge funds covering their short positions
at a time when central banks are looking to restrict gold supply in the
market." Such views are a sea change from what has gone on in the past.
Says
Ian MacDonald in that same Reuters article: "(Hedge funds) borrowed
gold to short the market earlier in the year because it was one of the cheapest
sources of money. But now the central banks are concerned over the worldwide
financial situation and they want the gold back in reserves." Meanwhile,
according to Reuters, many hedge funds are lining up to declare losses they've
sustained in Russia and other markets and are increasingly short of cash.
"They're in the double whammy," says McDonald, "because they
don't have the money to buy the gold back and they will be forced to cover
in a market that's moving against them." Couldn't happen to nicer bunch
of guys.
Dinsa
Mehta from Chase Manhattan Bank says that the central banks are beginning
to constrict gold supply in the face of the mounting worldwide economic
crisis.
Gold prices are now trading at their
highest level in three months as we go to press.
Speaking of Japan, the following
recently appeared in The Weekly Post , Japan's best selling magazine, under
the heading "Financial War between the US and Japan": "Japan
and the US seem to be in World War III. The US won the Pacific War, Japan
won the industrial war of the 1970's and 1980's, and the US is winning the
financial war of the 1990's using new weapons in the financial markets.
Will Japan lose?"
"Gold's
$30 rise since August has been the result of short covering and rising investor
demand, say some experts. Reuters reported recently that Japanese investors
are on "buying spree" for gold with "wealthy investors buying
in bulk." World Gold Council estimates that Japanese gold demand jumped
five-fold over the past month. This is the first report we have seen of
strong public buying in Japan for some time.
At
last month's Denver Gold Forum, James Robert Moffett, the CEO for mining
giant Freeport-McMoran, delivered a rousing speech against gold skeptics
and critics saying that heavy selling of bullion over the past year has
been short-sighted. He also lambasted speculators for the recent currency
crises in Asia and Russia and heaped scorn on the World Bank and International
Monetary Fund for attempting a quick-fix solution to the problems of troubled
economies around the world."
At
that same conference, Salomon Smith Barney's Leann M. Baker said gold has
exhibited stubborn, lackluster price behavior because "...speculators
have been borrowing gold, selling it back into the market, and this adds
to the supply...and we end up with a supply-demand situation where the over-supply
of gold tends to lower its price."
With
all the problems at the hedge funds, gold analysts have reason to believe
that those short positions Ms. Baker refers to are at least neutralized,
if not in need of squaring a process which could drive the price higher.
"I've been saying we should expect the price to average $350 year.
We're bullish," said Baker.
Susumu
Takahashi, chief economist at the Japan Research Institute, told Reuters
recently that "While the United States economy has little in common
with Indonesia's, some analysts say the dollar could come under the same
types of pressures that hit the beleaguered rupiah as `borrowed capital'
flows back home in a time of growing uncertainty. `There is a chance, he
says, "that the U.S. currency will follow in the footsteps of emerging
market currencies if capital flows to U.S. markets keep dwindling.
Obviously
referring to the beleagured Connecticut hedge fund, a recent full page ad
on gold sponsored by the World Gold Council reads: "Gold. When you
read today's headlines, you'll realize it's the only real Long Term Capital.
Adding
to the woes of the gold shorts, Bank of France governor, for good measure,
once again re-iterated France's position that it had "absolutely no
plan for gold sales." He went on to say that "As far as the Banque
de France is concerned there is absolutely no plan for gold sales, and to
my knowledge its the same as regards the major owners of gold holdings,
which are if I'm not misled, the U.S. first, Germany second, France number
three and Italy four."
Adding
heat to the building interest in gold is the fact that the dollar policies
are coming under attach globally. The Japanese Finance Minister Miyizawa
says that much of the currency crisis in Asia resulted from "over-dependence"
on the dollar.
Editor's Note: Michael J. Kosares is the author of the book, The ABCs
of Gold Investing: Protecting Your Wealth through Private Gold Ownership
and the editor of In the Footsteps of Giants: The Inside Story on the
Gold for Oil Deal That Could Rock the World's Financial Centers.
To order the book(s) or receive a free copy of his newsletter, News &
Views: Forecasts, Commentary & Analysis on the Economy and Precious
Metals. Please address you inquiries to Centennial Precious Metals,
3033 E. First Avenue, Suite #403, Denver, CO 80206, or call 1-800-869-5115.
You are invited to go to www.usagold.com on the internet.
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