Midas Commentary for May 10, 1999

Section:

HARRY BINGHAM COMMENTARY, MAY 10, 1999

Following is a gold report by Harry Bingham,
internationally acclaimed gold expert, president of Van
Eck Institutional Advisers and manager of PIMCO
Precious Metals Fund among other accounts. Furthermore,
he is a well-known speaker of frequent Gold Conferences
in the U.S. and Canada and is often interviewed on
nationally syndicated TV programs.

Weekly Gold Market Update

Hello everyone, this is Harry Bingham reporting on May
10, 1999. During the first four days of last week, both
gold and gold shares rose to their highest levels since
before the renewed IMF gold sales proposals in March.
Through Thursday gold had risen $2.90 an ounce during
the week to $289.70 and was up $11.40 from its April
bottom of $278.30 an ounce. Gold shares had been up
about 8% during the week through Thursday and were up
more than 20% from their April bottoms.

Britain's announcement that it would conduct a series
of bi-monthly auctions to dispose of 415 tons of gold
drove gold down more than $10 an ounce in a matter of
minutes. By the close, gold had recovered a third of
its loss to end at $282.90 an ounce, down $3.90 an
ounce for the week. Gold shares still closed up about
2%. The British Treasury justified the sale as a means
to increase the return on its reserves by investing in
dollar Euro and Yen denominated government debt
securities.

On Friday morning The Wall Street Journal reported that
despite a booming economy junk bond defaults are
running far higher than last year and at more than
twice the 1997 rate. The explanation was that
increasing investor demand was leading to "growing
issuance of junkier junk bonds by small or shaky
companies." Higher yield, of course means higher risk
which is why the first principle of monetary management
should be: junk bonds are to government bonds as
government bonds are to gold.

Britain has now joined its two Commonwealth Brethren in
disposing or planning to dispose of most of their gold
reserves. As the Mother of the Commonwealth Britain's
announcement may have had the greatest temporary market
impact. None of these nations, however have been
significant gold holders.

It is also ironic that Britain's Issac Newton defined
The British Pound in terms of gold and silver almost
three hundred years ago. At the time the pound was
stated to be worth a quarter of an ounce of gold and a
pound of sterling silver. Britain was also the
instigator of a European-wide gold standard after the
Napoleonic wars, which was codified in 1870. Except for
an interruption during the wars with Napoleon, the
pound maintained its parity with gold and silver until
1931 when Britain formally refused to redeem pound
notes for gold. Today the pound is worth 1/170th of an
ounce of gold and less than 1/3% of an ounce, not a
pound, of silver and this for the only paper currency
that has survived for as long as three hundred years.

It has been noted that during the Halcyon gold standard
days of the 19th century the British Treasury held very
little gold. Less noted is that Britain issued very
little paper. Private banks issued paper money against
gold deposits. The British Treasury held gold and the
people held gold and paper. Soon it appears the people
will hold paper and some more gold and the government
will hold only paper. Historically the purpose of
monetary reserves was not to earn a return but to give
value to paper money which had no intrinsic value of
its own. This permitted paper money to serve as a store
of value and as the denominator of long term contracts.
If conspiracy is too harsh a word then it is a strange
coincidence that every gold rally in recent years has
been squelched by calls for or announcements of
official gold disposals. Central Banks by now may have
done their utmost to the market. There can be no one
who does not expect gold sales. Perhaps that is why
gold has not fallen to new lows despite a further
decline today, and has been developing a solid base for
more than a year.

Other items of note last week:

Allen Greenspan mused about inflationary pressures, but
inflationary pressures are already in the economic
system in the form of excess credit. The bond as well
as gold markets have been sensing the movement of
credit into commodities, which, because of fragile
international financial conditions central banks are
disinclined to slow. At last week's Business Council
Meeting Sanford Weill of Citigroup said: "This is the
best of times" and noted unbridled economic expansion.
Unbridled was a great name for a Kentucky Derby winner,
but perhaps not for US monetary policy. Also, little
noted last week was a 6.7 point rise in the Purchasing
Manager's Price Index. This index has risen a very
substantial 18.9 points to 49.9 since December:

The recent bombing of the Chinese embassy cannot be
helpful to Chinese-US-European trade relationships, nor
can China's reneging on certain trade and investment
concessions. Closely related is:

A Wall Street Journal editorial page article by the
president of Asia-Pacific Research stating that Asian
trade surpluses are beginning to shrink and that
failure to implement structural reforms will likely
lead to a drying up of foreign investment, rising
interest rates and renewed currency depreciation. A
Chinese devaluation as the culmination of deteriorating
relations with the United States would not help.

Central banks gold sales have never stopped a gold bull
market. They were ineffective in the late 1960's and
again in the late 1970's. Toward the end of those
episodes they were seen as acts of desperation and
became counter-productive. History once again may
repeat.

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