Two articles and an appeal

'Old Lady' swats the gold bugs

Some suspect 'cabal' is
protecting the short-sellers

Saturday, May 08, 1999

By William Hanley
The Financial Post

Pity the poor gold bugs. Just as they are getting ready
to get all caught up in a new wave of excitement about
a gold rally in the making, along comes the mean "Old
Lady of Threadneedle Street" to swat them yet again.
The Bank of England -- headquartered on Threadneedle
Street in the City of London -- yesterday took the
financial world by surprise by saying it would auction
off 415 tonnes of bullion over the next few years and
buy other countries' treasury bonds.

That the Old Lady would sell more than half its $6.5-
billion in gold reserves (all figures in U.S. dollars)
had some of the most intense gold bugs really bugged
about an "anti-gold cabal" that should be investigated
for rigging the bullion market.

The merits of such a charge notwithstanding, some gold
watchers estimate that world short position in gold may
amount to up to 10,000 tonnes, or about $90-billion,
based on the price of $282.75 an ounce after
yesterday's $6.80 tumble. Most of the metal for short
positions is borrowed or leased for a low rate of about
1.5% from official sources such as the world's central
banks, which reckon they may as well make some return
on that pile of metal sitting around collecting dust in
vaults. The amount of gold in central bank vaults is
about 35,000 tonnes, but with countries such as Britain
following Australia, Argentina, and Canada in selling
reserves, that amount has been falling gradually --
helping the price of gold to head lower.

It's reckoned the total amount of gold mined and still
in existence is 125,000 tonnes, with about 2,500 tonnes
produced and added each year. The people who track such
things say demand for gold exceeds the 2,500 tonnes
mined each year.

The people who have given up on gold say that's all
very well, but if the central banks are selling, why
should anyone want to buy?

Gordon Thiessen, governor of the Bank of Canada, is
known to be among those who agree with economist John
Maynard Keynes, who wrote in 1923 that the gold
standard -- and, by implication, gold -- is a
"barbarous relic." The Bank of Canada has been a
consistent and persistent seller of gold over the
years, and with the bullion price hovering not far
above the 18-year low, it has proved a sound strategy.
Thiessen & Co. have simply followed the universal
flight to paper financial assets that has characterized
the 1990s and left the gold bugs holding a relentlessly
depreciating asset.

Meantime, the United States, Japan, and Germany, the
major gold holders, have not been adding to their
reserves. So where from here? Alastair McIntyre,
director, precious and base metals, at ScotiaMocatta in
Toronto, says yesterday's gold price drop looked severe
but still amounted to only 2.5% -- hardly a
catastrophe. And with 125,000 tonnes of the stuff
around, the Bank of England's 415 tonnes over several
years won't make a significant difference overall.

Mr. McIntyre says yesterday's trading involved dealers
in Europe short-selling around $289 and covering those
positions in New York later around $281 to lock in a
profit and build a temporary floor under the price. He
says market participants will be watching trading early
on Monday to see if the fundamentals that were pushing
the price up before Friday's bombshell will reassert
themselves.

The fear among gold's champions is that the Old Lady of
Threadneedle Street has reinforced the bearish mindset,
and that Friday's U.S. economic numbers showing benign
inflation pressures will have added to that
reinforcement. Bob Hoye of Quantum Research in
Vancouver says gold was "overbought" in the recent
rally and went up for the wrong reasons. But he holds
out hope for the gold bugs, if not for those holding
paper assets: "Gold is set up for a rally brought on by
financial distress around the end of May."

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