"Midas" commentary for March 21, 2000

Section:

10:30p EST Sunday, March 19, 2000

Dear Friend of GATA and Gold:

Here's documentation of GATA's contention that
something is amiss in the gold market: Reports by
Veneroso Associates concluding that large undisclosed
official sales have been suppressing the gold price.

GATA is grateful to Veneroso Associates and the
report's authors, Frank Veneroso and John Brimelow, for
permission to distribute this copyrighted material to
our friends.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

GOLD WATCH from Veneroso Associates
March 2000

Copyright 2000, Veneroso Associates, all rights reserved.

The World Gold Council Demand Trends Data Survey:
Does It Point To A Large Undisclosed Official Seller?

Executive Summary

The World Gold Council estimates its survey encompasses
80 to 85 percent of all global demands for physical
gold as estimated by Gold Fields Mineral Services. The
Council surveys only jewelry, bar, and official coin
demands. It does not survey demands for electronics,
dental, decorative, industrial and medallions. We pose
the question, does the 80 percent to 85 percent global
coverage of the World Gold Council (WGC) demand survey
refer to just jewelry, bar and official coin demands or
does it refer to all gold uses? The WGC assumes the
latter. However, if that were so, the WGC 1999 survey
would cover roughly 96 percent of global demands for
jewelry, bar, and coin.

Gold Fields Mineral Services has provided estimates of
jewelry consumption in 1998 for only seven of the many,
many countries the WGC does not survey. Jewelry
consumption in these seven countries alone, according
to GFMS, is equal to more than 8 percent of their
estimate for total jewelry fabrication demand
worldwide. These GFMS estimates make it clear that the
WGC survey encompasses much less than 96 percent of
global jewelry demand.

If one compares the aggregate incomes of the countries
the WGC surveys versus the aggregate incomes of those
countries it does not survey, it would seem that the
WGC survey may encompass less than 80 percent of the
global markets it surveys -- jewelry, bar, and official
coin.

We "gross up" the WGC survey data from an assumed 83.2
percent coverage of the jewelry, bar and official coin
markets to a full 100 percent coverage. We then add
GFMS' estimates of demand for those gold markets or
uses the WGC does not survey. We also make small
additional adjustments for WGC under-estimates of
Chinese demands, Gold Fields underestimates of dental
and other demands, and positive inventory demands at
the fabrication and wholesale levels. This procedure
argues that GFMS global gold demand estimates were 500
to 600 tonnes too low in the 1994-1996 period. It
indicates that GFMS global gold demand estimates were
800 to 900 tonnes too low in 1999.

The above analysis suggests that the WGC demand data,
with possibly 80 percent or less coverage of the global
markets it covers, might need to be grossed up by more
than 25 percent -- not just 20 percent -- to arrive at
an estimate for global gold demands for jewelry, bar,
and official coin. This procedure points to total
global demands and a gold market deficit that was 1000
tonnes or more higher in 1999 than the GFMS estimate.

If the GFMS demand data is correct, one may need to
assume only a small level (200 tonnes or so) of
undisclosed official selling in 1999. If we (and the
WGC, though it does not realize this) are correct about
global demand, there was absolutely huge undisclosed
official selling in 1999.

* * *

World Gold Council demand surveys have indicated a
large rebound in end user demand for gold worldwide as
well as a sharp decline in liquidations of gold by
parties in financial distress in emerging Asia (which
are classified as scrap by Gold Fields Mineral
Services). At the same time, the Washington Accord in
September 1999 and the subsequent gold price explosion
has changed risk perceptions by market participants.

Trend-following funds have covered short positions and
have gone long. Mining companies have started to reduce
their aggregate hedge position. Bullion bankers using
value at risk and other trading disciplines have
probably started to reduce net short positions.
Improvement in supply/demand fundamentals and a move by
market participants who were formerly short sellers of
gold to cover short positions should have had a
dramatic positive impact on the gold price.

Instead, the gold price explosion of September/October
was almost completely reversed in late 1999 and the
recent rally has met with stiff resistance and has
effectively been reversed. The failure of the gold
price to rally despite improved supply/demand
fundamentals and short covering by former short sellers
points to a large undisclosed official seller.

The strength of the above argument depends upon one's
assumptions about the underlying gold market
supply/demand structure. If one assumes the GFMS
framework, there has been virtually no recent growth in
global gold demand and the gold market deficit was
modest in Q4 1999. We have turned to the World Gold
Council's estimates of gold demand for 1999 to argue
that gold demand has rebounded strongly from the Asian
crisis lows of 1998 and that there was a large gold
market deficit in the fourth quarter of last year.

Therefore, our case for an implied large undisclosed
official seller in that quarter depends upon our
interpretation of the World Gold Council's recent
demand surveys. In this report we will defend our
interpretation of the WGC demand estimates and our
contention that there has been a very large undisclosed
official seller since September of last year.

The Level of Demand and the Gold Market Deficit

The World Gold Council does a quarterly survey of gold
demand in those countries where it has an active
presence. It surveys demands for jewelry, bar and
official coin. It no longer surveys dental demands. It
has never surveyed gold demand for electronic,
decorative and other industrial uses as well as
medallions. The Council estimates that its surveys
comprise 80 to 85 percent of all global demand for
physical gold as estimated by Gold Fields Mineral
Services.

In the Gold Book Annual 1998 we assumed that the World
Gold Council's (WGC) coverage (roughly 80 percent at that
time) applied to only those markets or uses that it
surveyed. Applied to the current juncture, we would
interpret this to mean that the WGC estimate of global
gold demand of 3278 tonnes of gold in 1999 encompassed
80 to 85 percent of global demands for gold in jewelry,
bar and official coin only and not for dental,
electronics, decorative and industrial uses and for
medallions. Employing this assumption, we have
"grossed" up the most recent WGC demand estimates by
roughly one fifth (from 83.2 to 100 percent) to obtain
an estimate of global gold demand for just jewelry, bar
and official coin.

In the Gold Book Annual we added Gold Fields Mineral
Services' estimates of demands for gold in dental,
electronics, decorative, industrial and medallions to
arrive at a complete global gold demand estimate. Our
analysis indicated that further adjustments had to be
made for underestimates of Chinese demand by the WGC,
for underestimates of dental, electronics, and other
demands by Gold Fields, and for inventory demands by
fabricators and wholesalers.

Of greatest importance is the question, "Have we been
correct in assuming that the World Gold Council survey
comprises 80 to 85 percent of global gold demand for
only jewelry, bar and official coin uses?" Our position
calls for a justification since the World Gold Council
has argued that its demand survey encompasses 80 to 85
percent of all global markets for gold including
dental, electronics, decorative, industrial, and
medallions.

Why did Veneroso Associates assume in the Gold Book
Annual that the World Gold Council survey encompassed
(at the time) roughly 80 percent of only those markets the
Council surveys and not all markets for gold use? We
came to this interpretation by looking at the incomes
of the countries that the WGC surveys and comparing
their aggregate incomes to the aggregate incomes of
those countries it does not survey. We compared these
incomes along regional lines, as different regions
exhibit different "intensities of gold use". Such
comparisons argued conclusively that the WGC survey
covered 80 percent of global gold demand only for those
markets it surveyed -- not all world markets for gold.

In April 1999 Gold Fields Mineral Services provided
some estimates of jewelry consumption in a handful of
countries the World Gold Council does not cover in its
survey work. These GFMS estimates of gold end use
greatly support the interpretation of the Gold Book
Annual regarding the extent of the coverage of WGC
surveys.

Let us explain in more detail the above thesis. In
January of this year, GFMS announced a preliminary
estimate of global demand for gold in fabrication and
bar hoarding of 3875 tonnes. We can exclude their
estimate of Western investment demand of 203 tonnes, as
that largely referred to short covering by funds and
has no counterpart in the WGC survey. To make the GFMS
data more comparable to the WGC data, we should
subtract from their estimate of total fabrication and
bar hoarding demands their estimate of 464 tonnes of
dental, electronics, etc. demands which the WGC does
not survey. This provides a GFMS estimate of global
fabrication and bar hoarding demands for those uses for
gold that the WGC does survey of 3411 tonnes in 1998.

The World Gold Council's estimate of comparable demands
"by the trade" is 3278. The WGC estimate is equal to
96 percent of the Gold Fields' global subtotal for such
demands. The difference between the two estimates of
133 tonnes is equal to less than 4 percent of GFMS' estimate
of such demands for the whole world and is equal or
less than such demands in many individual countries.

It is often argued that estimates of world gold demand
by the WGC seem high relative to estimates by GFMS
because the WGC estimates demands by retailers (the
"trade") whereas GFMS estimates demands by fabricators.
To be sure, inventory change at the level of
fabricators and wholesalers causes a disparity from
time to time between these two measures of demand.
However, such inventory demands should be on balance
positive; therefore, they should tend to make the GFMS
estimates higher, not lower, relative to those of the
Council. (See chapters one and four of the Gold Book
Annual 1998).

For the time being, let us provisionally assume the
inventory issue is not material. We can then pose the
question, "Does the World Gold Council survey capture
96 percent of all global demands for gold for jewelry,
bar and official coin or does it capture only 80
percent to 85 percent of such demands?" We can
definitely conclude that the latter is the case. To
explain our unqualified answer to this question, let us
briefly consider the various regions of the world in
which the WGC conducts its surveys.

Europe: The World Gold Council surveys Germany, France,
Italy and the UK only. It does not survey Greece,
Portugal, Spain, Austria, Switzerland, Belgium,
Netherlands, Denmark, Sweden, Norway, Finland, Ireland
and the smaller European principalities. Gold demand
for jewelry, bar and official coin was estimated at 274
tonnes in 1999 for the four countries the WGC surveyed.
Gold Fields estimates jewelry consumption alone for
Greece, Portugal, and Spain was 107 tonnes in 1998.
Therefore, jewelry consumption alone in just three
countries accounts for almost the entire difference
between the WGC and GFMS estimates of demand for those
gold markets -- jewelry, bar and official coin -- which
the WGC surveys. The combined income of all the other
European countries which the WGC does not survey --
Austria, Switzerland, Belgium, Netherlands, Denmark,
Sweden, Norway, Finland and Ireland -- equals or
exceeds the incomes of every country in Europe except
Germany.

This would suggest that these countries taken together
may consume almost 60 tonnes or more of gold in
jewelry, bar, and official coin. These considerations
suggest that demands for gold for jewelry, bar and
official coin in all those countries in Europe that the
WGC survey does not cover may have approached 170
tonnes in 1999. This one region alone accounts for more
than the entire difference between the WGC and GFMS
estimates of demand for gold for jewelry, bar, and
official coin.

The Near East: The World Gold Council does not survey
demand in Iran, Iraq, Israel, Lebanon, Jordan and
Syria. Gold Fields Mineral Services estimates that
jewelry demands in Iran and Syria alone were 72 tonnes
in 1998. The odds are that total demands in these six
countries for jewelry, bar, and official coin might
have been well in excess of 100 tonnes in 1999.

Latin America: The World Gold Council makes estimates
for gold demand in only two Latin American countries:
Brazil and Mexico. These two countries had an average
gold demand of 63 tonnes in 1999. All the remaining
counties of Latin America -- Argentina, Uruguay,
Paraguay, Chile, Peru, Bolivia, Ecuador, Columbia,
Venezuela, Guyana, Surinam, and French Guyana -- are
not covered. Neither are the small countries of Central
America or the island countries of the Caribbean. Gold
Fields estimates that jewelry demand in Colombia alone
was 20 tonnes in 1998. Columbia's national income is
less than 5 percent of all of Latin America and less
than 10 percent of that of Brazil and Mexico combined.

The combined incomes of the countries that the WGC
neglects are almost equal to the combined incomes of
the two that are surveyed, which, according to the WGC,
consume 126 tonnes of gold. Conceivably the demands for
gold in jewelry, bar and official coin of these
counties not surveyed could be on the order of 100
tonnes. The Indian Subcontinent: WGC does not survey
Sri Lanka, Bangladesh, Nepal, Bhutan, Mauritius, and
Afghanistan. Their combined incomes approach that of
Pakistan, which consumed 122 tonnes of gold in 1999.

Far East Asia: The WGC does not survey Myanmar, Laos,
Cambodia, Philippines, North Korea, Mongolia and the
small Pacific island nations. Based on income and
ethnicity these countries combined may generate gold
demand equal to one medium-sized country in the region,
which might be somewhat less than 100 tonnes.

The Former East Bloc: This region is not surveyed by
WGC. Gold Fields estimates that jewelry demand in the
former Soviet Union was 43 tonnes in 1998. Income
levels in East Europe and the former USSR would point
to much higher levels of demand for jewelry, bar and
official coin -- possibly on the order of 100 tonnes
overall.

The Anglo-Saxon Countries: Canada, Australia and New
Zealand are not surveyed by the WGC. GFMS' estimates
Canadian jewelry demand at 24 tonnes in 1998.
Comparison with US and UK income levels would point to
total demands for jewelry, bar and official coin in
these three countries of almost 50 tonnes.

Africa: This region is the most intriguing. Only Egypt
is surveyed by the WGC. GFMS provides no consumption
estimates for the countries of Africa other than Egypt.
The World Bank estimates that the income of Egypt is
only roughly one tenth of that of all of Africa. The
cultures of many African countries suggest a generally
high gold intensity of use. Egypt consumes 125 tonnes
of jewelry, bar and official coin. Surely the rest of
Africa's demands are not nine time those of Egypt, but
they could be two or three times that of Egypt's. Two
times Egypt's demand would be 250 tonnes.

Conclusion: From such country-by-country considerations
it is clear that the countries surveyed by the World
Gold Council do not comprise all but 4 percent of
global demand. Gold Fields Mineral Services' estimates
of 1998 jewelry demand alone in only seven countries --
Greece, Portugal, Spain, the former USSR, Iran,
Columbia, and Canada -- total 268 tonnes, equal to more
than 8 percent of GFMS' estimates for such demands
globally. We have looked at eight different sets of
countries the WGC survey does not encompass. The
average likely level of demand of each of these sets
may approximate the 133 tonne difference between the
WGC demand total and the GFMS total for these same
demands. Our assumption that the GFMS survey
encompasses 83.2 percent of global demand for the gold
uses that it surveys assumes that all the other
countries of the world have such demands totaling 650
tonnes. The above country comparisons indicate that
assumption is reasonable. If anything it would suggest
a higher, not a lower, demand total for the combined
countries not surveyed by the WGC.

In a recent Gold Watch we argued that, if the WGC
demand surveys encompass 83.2 percent of total global
demands for jewelry, bar, and official coin, the WGC
demand estimate for the fourth quarter of 1999 of 806
tonnes would project total global demands of almost
1100 tonnes at a minimum and possibly 1200 tonnes. Mine
and scrap supply in that quarter was slightly more than
800 tonnes, suggesting a Q4 1999 deficit of almost 300
to 400 tonnes. The above analysis suggests that this
recent estimate of the fourth quarter deficit may have
been too low.

We believe that prior short sellers of gold -- funds,
producers and bullion banks -- reduced their shorts in
the fourth quarter of last year by at least several
hundred tonnes on a combined basis and probably more. A
quarterly market deficit of 300-400 tonnes plus short
covering of a comparable or greater magnitude had to be
offset by an equal volume of selling. With private
market participants covering short positions, selling
on such a scale could only have emanated from the
official sector. Yet only roughly 100 tonnes of
official selling has been announced for the fourth
quarter. Therefore, we argued that there must have been
undisclosed official selling of many hundreds of tonnes
and possibly even 1000 tonnes or more in that quarter.
The analysis presented in this report suggests that, if
anything, our earlier estimates of the fourth quarter
1999 gold market deficits and their implied undisclosed
official selling may be too low.

Let us consider the implications of the WGC demand
survey for global gold demand on an annual basis. If we
gross up the WGC 1999 total assuming a market coverage
of 83.2 percent, total demands for gold in jewelry, bar
and official coin by the trade were 3934 in 1999. To
this we must add 464 tonnes of gold absorbed by
fabrication of electronics, dental, decorative, and
industrial products plus medallions for a larger total
demand figure of 4398 tonnes. We would add an
additional 400 tonnes for a WGC underestimate of
Chinese demand, an underestimate of dental, electronic
and other demands by GFMS, and positive inventory
demands at the fabrication and wholesaler level not
captured by the WGC survey (See Chapter one, Gold Book
Annual 1998).

This generates a new global demand total of 4798
tonnes. If the suggested demands for the eight sets of
countries not surveyed by the WGC are in the ballpark,
total global demand for gold in 1999 was well in excess
of 5000 tonnes. It follows that the GFMS estimate of
global gold demand and the gold market deficit could be
too low by 1,200 tonnes or more.