Last Chance to Buy Gold at Low

MIDAS COMMENTARY, MAY 10, 1999

Spot Gold $277.30 down $5.30
Spot Silver $5.40 down 1 cent

Technicals --

Not so fast, Rip Van Winkle. Just as the gold market
was finally stirring up serious bullish commentary all
over the world, it was bushwhacked on Friday as the
shorts had to call in the Bank of England cavalry,to
announce that they are selling 415 tonnes of gold, to
defend "Navarone." The price of gold was sent reeling
by some $13.

The volume was very heavy with Friday's turnover
estimated at 96,000 contracts and the volume today was
heavy too. In the past, volume in the 100,000 contract
area has been an inflexion and turning point for gold.
The open interest fell 6,329 contracts on Friday which
made it clear that there were more spec longs in the
market than most market watchers anticipated. We are
now trading at the low end of the recent one and one
half years trading range. Bearish commentary
traumatized market participants and there were just no
bids today.

Silver is decoupling from gold. Since our last Midas,
the price of gold is down $13 and the price of silver
is up 4 cents. We see no reason to sway from our very
bullish stance on its price prospects. It is even very
likely that since market participants, understanding
that the gold market is being held down for the time
being, might pour big spec money into the silver as an
inflation play and a proxy for gold when it traded
freely.

Special --

Based on the tremendous feedback we have been receiving
from around the world, it is clear that most market
participants now believe that there is an orchestrated
effort by certain "officialdoms" to hold down the price
of gold. We have been saying as such for the past 5
months and we just take it one step further by
suggesting that this orchestration includes "collusive
market activity" by various bullion dealers. We do not
know why GATA's allegations should rankle so many
people. The U.S. Justice Department has subpoenaed many
of these same institutions and is investigating them on
suspicion of the same price fixing, anti-trust
violations that we are looking into. The trading
patterns alone in the gold market these past 6 or 7
months suggest that something is very amiss. Markets
don't just happen to trade like this by accident. We
only ask for market observers to have an open mind.

As the highly respected Harry Schultze told his
followers in his newsletter, the fundamentals don't
mean a tinkers darn any more. For that matter, neither
do the technicals. The gold market is all about
suppression, orchestration, collusion, and propaganda.
To us, that is a given.

Caf members know our position. The day before the BOE
announcement, Deutsche Bank ( today, we heard J.P.
Morgan too ) told their clients, "THE PRICE OF GOLD
WILL NOT RISE ABOVE $290. How did they both know that?

Midas thought you might like to see what others have
had to say since last Friday morning.

From an email that I received: The Big Picture May 8,
1999

"England announces sale of up to 300 tonnes of gold -
gold drops as much as $10 per ounce."

Genius at Work; Do Not Disturb

Did you ever wonder how smart Bob Rubin really is? Do
you suppose when he left Goldman Sachs in 1992 that he
had this great plan? Move to Washington and take over
the economic apparatus. Use his market knowledge to get
the stock market up 500%. Manipulate the gold price to
keep inflation down to zero. Allow Goldman to sell
itself to the public at huge multiples. Then get out of
Washington and back to the Street before anyone caught
on!

After this morning's surprise, at least there is no
longer any doubt among the gold cognoscenti about one
thing. There is indeed an orchestrated effort to take
the gold price capped.

One could imagine this: since the Swiss referendum to
sell gold and the IMF deliberations to auction gold
have not been sufficient to hold the price down - in
fact the price is UP - that Rubin had to revert to Plan
C. The US Congress would be unlikely to buy into this,
so US puppet Britain was the quickest route to an
immediate dumping.

The inflation scare of the past three weeks has seen
capital rotating into resource and cyclical issues.
Bond prices tanked. Precious metals then start to rear
their 'ugly' head. Greenspan runs to the media with his
canned warnings. And Rubin, still hiding in the
shadows, hits the red alert button.

If scuttlebutt is even partly true, Rubin wants to get
out of DC before the end of Clinton's term. One eye on
the exit door and one eye on his legacy, he needs to
keep the stock market up, bonds steady, gold down.

Key question: does he have any more ammo or is he
playing his last card?

Early morning market comments seemed to think that
other central banks will now follow suit and there will
be additional announcements of gold sales.

Somehow I think this is more an act of desperation by
the Administration. Does it really matter whether gold
is $280 or $380 as far as the market and inflation are
concerned? What is so sacred about sub-$300 gold? If
not desperation, it is at least another case of
government micro-management.

Many will now retreat to the sidelines to reassess,
maybe to wait for the next salvo. That may be the
prudent thing to do for conservative investors.
However, my instincts tell me that this morning was a
great buying opportunity.

Stay tuned.

From the London Telegraph:

Gold for sale

The new Labour government thought that gold was a
barbarous relic. An up-to-date, trend-setting country
could manage without it. So the Bank of England was
told to start selling the gold in its vaults at $35 an
ounce, the price at which the Banque de France was
buying it. Which of them was right became clear when
the price went to $350 and then to $850. That was
Harold Wilson's first government and now today's New
Labour government is at it again. It has ordered a
clearance sale in Threadneedle Street and will not be
content until more than half of the gold that is still
there has gone.

By signalling its punches to the market, it makes sure
of getting the worst price. This is what Gordon Brown
would call transparency. At the end of a century of
inflation, finance ministers of his stamp still shun
gold and would rather have each others' promises to
pay. Gold's value does not depend on anybody's promise
and that makes an anomaly in their eyes and a challenge
to their own authority. They have already stamped out
competition among the currencies of Europe.

The Chancellor wants us to come into this monopoly and
use its Monopoly money, as the up-to-date, trend-
following thing to do. His clearance sale will clear
the way for it. As for the Prime Minister, he may well
believe that gold is "history", his term for everything
that happened before New Labour was invented. Gold has
a long history and ministers' promises a rather shorter
one, but long enough to teach us which of the two to
trust.

From Richard Russell:

Gold: It happened again and it does seem beyond
coincidence. The Bank of England announced that it will
sell 58% of its gold or 415 tons of gold. 125 tonnes
will be sold by the end of March 2000. The rest will be
sold over time, whatever that means. But, if you're
going to sell something, do you announce it in advance
and knock the price down?

Weird. Why did the Bank announce it at all, why not
just sell? At any rate, just when gold seemed to be
moving up day after day out came the announcement

One thing is certain in my mind, the central banks do
not want to see gold higher, in fact they would love to
wipe golf off the face of the earth? Why? Because gold
is real money and they cannot control it. They can't
bankrupt it. They can knock it down temporarily, but
it's still there. A paper currency can be destroyed but
gold can't be destroyed. So all the banks can do is to
try and keep gold from rising in terms of paper
contracts.

From the www.usagold.com website:

Market Analysis (5/7/99): The gold market came under
attack from the British last night in a surprise pre-
dawn announcement (U.S. time) that it intended to sell
off 415 tons of gold "in the medium term" -- over half
of its 715 ton reserve. The gold is scheduled to be
sold at auction by the Bank of England. The first
tranche will total 125 tons to be sold over a ten-
twelve month period beginning July 6. We have reported
on the odd behavior of the British toward gold on
several occasions in this report over the past few
months. That odd behavior came to a head last night.

The British auctions come after at least two years of
constant pressure from various bullion banks operating
primarily in London on the central banks of continental
Europe and the third world to sell their gold. When the
European Union and European Central Bank some six or
more months ago closed the door to gold sales, the
British Chancellor of the Exchequer, Gordon Brown,
began an extraordinary and vigorous campaign to
persuade the International Monetary Fund to sell a
portion of its gold holdings. He enlisted the public
support of both the Canadian and U.S. administrations
though stiff opposition surfaced in the U.S. Congress.
When those efforts were stymied by other G-7 members at
the recent meeting of the International Monetary Fund
in Washington, the British resorted to selling their
own reserves per the announcement last night.

This comes at a strange time with gold languishing
below $300. We have said time and again that nations do
not sell gold because they want to, they sell it
because they have to. Beyond concerns that should be
raised in the British parliament, one wonders what is
really behind this sale. Clearly their stated intention
to change the configuration of their reserves is not
the real reason. If that were the case, they would have
waited for a more propitious time -- not when the
market was trying to go over the key $300 figure. Why
kill a rally. Let the rally gather steam and then sell.
There is another, more telling, aspect to this sale
that we do not know about though I am sure various gold
analysts will begin offering opinions as early as this
morning.

There have been published rumors that the British owe
the Russians a large amount of gold on metal being
stored at the Bank of England from the days of the
Romanovs -- gold the Russians have publicly proclaimed
that they want back. There could also be concerns that
gold loans have gone sour and British financial
concerns are on the hook. Then there's the gold carry
trade -- a lending scheme that could go suddenly sour
if the metal were to start moving in a northerly
direction. Perhaps a British bank(s) is involved in a
counter-party guarantee that must be paid. This is all
speculation but clearly this announcement has more to
do with driving the price down for some reason that has
not surfaced....yet.

From Anglogold's Kelvin Williams.

Johannesburg, May 7, Bloomberg:

"The planned auction means that they are going to get
a far worse price than if they had done this
discreetly.

This calls into substantial question the judgement of
the BOE, which isn't a major player in the gold market,
though they were viewed historically with some awe.
Still, they are not large holders of metal.

They argue that they are doing this in the interests of
transparency in the gold market and quite frankly
that's nave. The gold market is not a transparent
market generally and for one person to stand up and be
transparent simply allows all the other players to take
positions against you.

There are those others who will question the timing
even more aggressively than I am. Why, when the gold
market looks robust and looks as if it has the bad news
build into it does ( Bank of England Governor ) Eddie
George choose this time to drop this news in the
market?"

Excerpts from prestigious Veneroso Associates' most
recent Gold Watch:

The Bank of England was at the very center of the
meetings between the producers and major central banks.
It implicitly was party to the reassurances of these
central banks. It understands well the highly symbolic
nature of its decision to sell its gold. Once again,
the UK is fully aware that they are seriously
undermining producer sentiment and will thereby
encourage larger and more desperate producer hedging
which in turn will depress the price of gold.

The decision by the Bank of England will also surely
encourage more speculative short selling by hedge funds
and carry trades by funds and bullion banks, which will
also depress the gold price. Consider attitudes by such
market players toward the yen/dollar carry trade last
year. We now know from the BIS and other sources that
funds and banks borrowed cheap yen and invested the
proceeds in higher yielding securities to a great
degree in 1997-98. There was, of course, a price risk
the yen could rally and inflict losses on these yen
short positions. The US was running a large and rapidly
growing current account deficit. Japan was running a
large and growing current account surplus. Repeatedly
since the early 1980s, these current account
imbalances and their attendant trade frictions led the
US and Japanese authorities to intervene to depreciate
the dollar and appreciate the yen. As the yen was
falling in mid-1998, Japanese Vice Minister for
International Affairs, Eisuke Sakakibara (Mr. Yen) kept
warning the market of possible intervention. Yet, until
the market turned, market participants kept adding to
yen short positions.

The gold carry trade provides comparable returns to the
yen/dollar carry trade. However, there are no central
banks threatening to intervene on behalf of gold.
Therefore, there is understandably a greater incentive
for funds and banks to establish gold carry trades
relative to yen carry trades. There is widespread
agreement, as we have documented in recent reports,
that such short positions in gold exist and are
growing. Again, the Bank of England, more than almost
any other central bank, is in a position to know of
such activities. Consequently, the BOE must fully
realize that their sale proposal will further encourage
the belief that gold has no constituency, thereby
perpetuating this practice. It is as though, at 145 yen
to the dollar last summer, the US or Japanese
authorities, rather than intervening in support of the
yen, announced that they wanted to see a much weaker
yen, thereby encouraging yet more leveraged
speculation. Years ago, the Bank of England, as
supervisor of the London gold market, moved to thwart
gold borrowings for non-gold purposes. Last Friday,
they moved in a way which was bound to encourage gold
borrowings for speculative purposes. Perversely, this
will depress the price right into the first auctions,
which the BOE plans to hold this July.

We conclude that the Bank of England has departed from
prior G-7 central bank behavior, knowing full well that
its highly symbolic actions would depress gold market
sentiment and the price of gold. Despite the supposed
advantages of auctions and transparency, the BOEs
advance disclosure of its gold sale, because of its
potentially large adverse impact on market sentiment,
is likely to generate for the Bank lower gold price
realizations than would have otherwise occurred had the
sales been conducted in secret, as all other central
banks have done since 1979. That it would front-run the
IMF gold sale it has advocated aggressively, and
thereby undermine in part the policy basis underlying
that sale, is even more bizarre. Its sole excuse is
that it wants to diversify a fairly small portion of
its reserve assets into higher yielding assets. Yet,
even this position is not wholly convincing. The Bank
of England now lends its gold on which it earns some
interest. Forty percent of the planned proceeds from
future gold sales are earmarked for Euros, which yield
little more than gold loans, and 20 percent will go
into yen, which yield no more than gold loans. All we
can say is that, given all of the above considerations,
the behavior of the Bank of England and Treasury seem
rather perplexing.

The Conspiracy Thesis Will Encourage Fund and Bank
Short Sales

Two months ago, we wrote a piece entitled, "Is There a
Conspiracy to Hold the Gold Price Down?" At the time,
unprecedented resistance to short-covering rallies in
gold led to considerable speculation on the Internet
and elsewhere that collusive behavior by central banks
and bullion dealers was "capping" the gold price.
Though we concluded that there did seem to be
unprecedented price resistance to powerful short
covering rallies, we doubted that the official sector
was involved in any attempt to hold down the gold
price.

Our reasons were multifold: producer hedging, scattered
official sector selling, dealer delta hedging of
options, and the like, appeared more plausible
explanations for golds curious price action. In
addition, official sector efforts to hold the gold
price down seemed to us to make little sense. We
believed that the central banks no longer view the
price of gold as an important barometer of inflation,
as the price of gold has departed many times from past
inflation trends and their accompanying psychology.
With deflationary behavior the current risk, it seemed
that a rally in the gold price, even if it did signal a
rise in inflationary expectations, would not be
unwelcome by the official sector. Though gold bugs
continue to regard the gold price as highly
significant, we guessed that the major central banks
would tend to agree with us that gold was now nothing
more than a commodity, and that any price rally would
have little overall significance (except that it would
increase the value of a perfectly acceptable reserve
asset). Consequently, we felt that the official sector
would have no motivation to prevent a long overdue
rally in a deeply depressed and oversold market.

Beliefs of a central bank conspiracy to hold down the
price of gold have been greatly strengthened by the
recent action of the Bank of England. As we noted
above, the actions of the Bank of England are not
easily rationalized, thereby conferring more legitimacy
to the conspiracy thesis.

We confess that recent price resistance in the gold
market is difficult to explain. Liquidations out of
commercial and investor hoards in the Far East ended in
the first half of 1998. Final demand for physical gold
recovered sufficiently by Q4 1998, with the World Gold
Council reporting record physical demand. From all we
can tell now, the undisclosed EMU related selling of
1997-98 ended late last year. The gold price should
therefore be rising. We attribute the recent low gold
price to accelerated gold borrowings, but we confess
that the large borrowers of such gold are not readily
identifiable. The conspiracy advocates are not on
uncontested ground here.

Second, there have been several powerful short covering
rallies this year. All were stopped dead in their
tracks, usually at crucial technical junctures.
Statements about IMF and Swiss sales were made at the
top of prior rallies. On this rally, a major theme of
global reflation was sweeping world markets. Cyclical
stocks were exploding to the upside. The price of oil
had risen some 80 percent off multi-year lows; other
commodities were beginning to follow. Despite very low
measures of US wage inflation, the US bond market broke
support to the downside. The XAU gold index decisively
broke above a downtrend line that defined its three-
year bear market. On the rally in the gold price
through Thursday, the price of bullion broke through
several key-moving averages, which would have normally
led to a large switch in fund positions from the short
to the long side. That rally would have completed a one
and a half-year reverse head and shoulders formation,
and a breakout above golds three-year downtrend line.
In todays world of momentum investing, the resultant
technical pattern would have attracted substantial
buying interest. At this very juncture the BOE, dropped
its sentiment-destroying bombshell on the gold market.

Though fund managers are loathe to discuss suspicions
of official sector intervention in the gold market to
the press, we assure the reader that such suspicions
are now rife, and on a global basis. We quote below
three comments to this effect, which landed on our desk
within a day of the BOE announcement -- one by a South
African brokerage house, one by an Australian brokerage
house, and one by the prior head of one of the worlds
leading commodity exchanges:

Three times, short covering rallies the past 8 weeks
-- every single time a Central Bank announcement follows
(e.g. Either G7 members backing IMF sales or intent to
sell its own reserves) to halt the rally. (Standard
Securities of South Africa)

Once again we can only marvel at the coincidence of
yet another selling announcement with a promising price
rally. But I'm afraid the rally is dead in the water!"
(J.B. Were & Sons, Australia)

After this morning's surprise, at least there is no
longer any doubt among the gold cognoscenti about one
thing. There is indeed an orchestrated effort to keep
the gold price capped. One could imagine this: since
the Swiss referendum to sell gold and the IMF
deliberations to auction gold have not been sufficient
to hold the price down in fact the price is UP that
Rubin had to revert to Plan C. The US Congress would be
unlikely to buy into this, so US puppet Britain was the
quickest route to an immediate dumping.

The inflation scare of the past three weeks has seen
capital rotating into resource and cyclical issues.
Bond prices tanked. Precious metals then start to rear
their ugly head. Greenspan runs to the media with his
canned warnings. And Rubin, still hiding in the
shadows, hits the red alert button.

If this scuttlebutt is even partly true, Rubin wants to
get out of DC before the end of Clinton's term. One eye
on the exit door and one eye on his legacy. He needs to
keep the stock market up, bonds steady, gold down.

We don't know what to make of the conspiracy thesis
anymore. As we said above, when we put ourselves in the
position of the Fed, BOE, or any other G-7 central
bank, official sector efforts to dampen the gold price
make no sense to us. The US Treasury made public a
statement on Friday that it has no intention to sell
gold, which they would not do if they were part of an
orchestrated effort to depress the gold price. Why
immediately undercut the position of ones British
puppet? Wouldnt silence be a more effective policy,
if one were genuinely trying to sow fear and confusion
in the hearts of gold bugs?

On the other hand, recent price resistance in the face
of massive short covering has been perplexing. The Bank
of Englands pre-announced sale in advance of an IMF
auction seems perverse. And, equally, given the
critical technical juncture of the gold market, the
timing of the announcement raises even more questions.
The BOE knows a lot about the technical market dynamics
of the gold market from their relations with the LBMA.
There is no chance that they did not realize the
significance of the first pre-announced gold sale in
almost two decades and its resultant impact at a
critical juncture in the bullion market.

Whatever the facts about the BOE's extraordinarily
timed and unique announcement, it has now turned many
of the suspicions of orchestrated intervention (which
have hitherto lurked in the background) into outright
conviction. Funds and proprietary trading desks will
duly take note and will surely be emboldened to sell
more gold short, since there is now a prevailing
conviction that 'City Hall' is behind them."

This cross section of commentary pretty much tells it
like is and is very informative. Midas will add his
take on all of this too for you. Here is how I see it.

In addition to the scenario for the announcement
described in the above commentary, I suggest to you the
world financial situation is FAR MORE PRECARIOUS than
any of us really comprehend. Our sources have been
telling us for some time that various Swiss, English
and US bullion banks and investment houses have such
large gold borrowings that they would be in serious
financial jeopardy should the price of gold rise
sharply. My guess is that the reason that this has
occurred is they are using the "cheap 1% gold loans to
bail them out from the fallout of the financial crisis
of late summer/early fall of last year (the LTCM
phenomena). A sharply rising gold price would crush
the maneuver.

$290 gold is a critical junction point and that is the
reason the BOE stepped in when they did. The "gold
carry trade" loans are rolled over. Any of us that
follow the market every day know how powerful the "Guns
of Navarone" resistance has been at this level ever
since last fall. The price of gold has probably
averaged about $290 for about a year and one half now.
More and more of the spec borrowing crowd are short (
borrowed ) at these levels. As we have identified to
Caf members so many times, it is this supply that has
been holding down the gold market.

Were the price of gold to rally sharply, the "cheap"
loans would become onerous and maybe untenable. If you
borrow gold at $290 and then have to pay it back at
$350, say in a 2 month period, the effectual interest
rate that you end up paying is not 1%, it would be 20%,
or more than 100% on an annualized basis. The
orchestrated, continued bailout of the problem banks
and "Long Term Capital type" investment houses would go
in the toilet under those circumstances.

The Swiss gold sale and IMF gold sale proposals to talk
down the market were failing as the previous commentary
has suggested. The gold market was about ready to
rocket. That is what the soaring gold shares around the
world were telling everyone-including U.S. officialdom
and English officialdom. So they put the rabbit out of
the hat and made this ludicrous BOE announcement. Did
it matter that Ed Balls), the Chief Economic Advisor to
Gordon Brown of the U.K., studied economics under The
Treasury's Larry Summers at Harvard? Did it matter that
Tony Blair and Bill Clinton are into this Kosovo mess
up to their eyeballs?

Many of us have been urging for transparency in the
gold market. This is it. Just not the way we thought it
would be. The English have made it transparent how
desperate some of the short players are in the gold
market and how desperate the Anglo/U.S. bailout crew
really is. It is transparent as it gets.

So what can be done about this latest travesty?

GATA has made some real in roads with the U. S.
Congress, as you all know. What no one really talks
about is that because the gold price is being kept
artificially low, the natural supply/demand deficit can
only grow. The gold loans are already 8,000 to 10,000
tonnes. They will have to grow further unless other
central banks follow the lead of the British (which is
just what they want to encourage ). That means the gold
loan time bomb will tick even louder.

That is what we are going to continue to inform our
Congressional contacts about and everyone else on the
Banking Committee that we can influence. We want them
to know that there is something far worse than a
"Savings and Loan Crisis" lurking right under their
noses. They must know about the size of the gold books
of the various dealers and the N.Y. financial
institutions that have the "gold carry trade" on. When
they learn ( confidentially ) of the enormity of the
potential problem, they will most likely make sure the
gold loan exposure of the provocative parties is
diminished. That means less gold loan rollovers to be
replaced by gold buybacks, which will boost the price
of gold, and then significantly boost the price of
gold.

The leading expert in the world on the subject of gold
loans is Frank Veneroso of Veneroso Associates. As a
former consultant to the World Bank, IFC, and a zillion
countries, he has the credibility and first hand
experience to explain this serious, potential danger to
the U.S. banking authorities. His 1998 Gold Book
Annual, which extrapolates on this subject, has already
been sent to several of the banking committees and they
are reviewing the content.

I was working with Frank when he discovered the
enormity of the gold loans. No one in the world has put
the time, study and effort into this subject than he
has. I saw how he cajoled his way into finding out who
probably had what on their books. Sherlock Holmes would
have been proud. The point is Frank can pull this off
with Congress and those in the world financial press
that really want to know what is lurking out there. He
can go into facts, detail by detail, to shore up what
the banking committee cannot find on their own. When
that happens, the spec gold borrowing shorts will know
the jig is up, they will cover, and the price of gold
will head toward an equilibrium point of about $500.

When the Mexican government was going through one of
their financial crises', they called for "The Priest"
(Frank Veneroso) for guidance on how to extricate
themselves from a big problem. Can the U.S. Congress
do no less?

One other note to rap this up tonight. I had a lovely
conversation with a reporter from the Financial Times
of London last Friday. That reporter was interested in
doing a story on GATA, so I was told. Today, I received
a phone call from a friend who heard that the same
reporter told someone else that she was told that GATA
was "dangerous" and to stay away. I truly hope this
reporter was not muzzled by the brass like others have
been. We are dangerous alright because we are talking
"truth". Time will tell on this one.

Bill Murphy (Midas)

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