GATA causing jitters in gold market, Fedsure''s Goodwin says

Gold seen in powerful rally;
analysts point to leasing rates, short-sellers

By Thom Calandra
FTMarketWatch.com
March 12, 2001

LONDON (FTMW) -- This is make or break time for gold after a two-
decade decline for the precious metal.

quot;There are tremendous short positions in the market so it won't take
much to spark a massive rally,quot; said Larry Edelson, a former European
gold trader and managing editor of Safe Money Report in Florida. An
ounce of gold on Monday in Asia was selling for $273 an ounce, up
$1.50. The metal has rallied this month after descending to $255,
with lending rates for the metal as high as 7 percent.

Lawrence Eagles, a commodities analyst at GNI Ltd. in London, said
the soaring lease rates, which are set in essence by central banks
and other large holders of the metal that lend gold to dealers,
indicate a quot;tightness in the market.quot;

quot;To my mind there are lending institutions carrying on business as
normal and there are a large amount of short positions in the bullion
market and they are all looking to cover their positions,quot; Eagles
said. quot;And there isn't the supply around,quot; he added.

Gold prices could be getting a rare lift from institutions and
producers that use derivatives to forward-sell the metal. When gold
prices were falling, forward-selling by mining companies such as
North America's Barrick Gold (ABX: news, msgs, alerts) and South
Africa's Anglogold (AU: news, msgs, alerts) locked in higher prices
for the gold miners.

But as the price of the metal climbs, gold mining companies that
hedge their production in this way - as well as speculators who short-
sell the metal in hopes it will decline - must locate the physical
metal for instant delivery.

Edelson and others cite resistance for the metal's price, whose major
trading markets are London and New York, at $283 an ounce, $291 an
ounce and $305. quot;Blasting through $301 would confirm that gold has
bottomed and the 21-year bear market is over,quot; said Edelson, who says
as an arbitrageur with International Commodity Services in the early
1980s he traded as much as $175 million of bullion daily.

The Bank of England may also have assisted in gold's recent rally.
The bank is one of several European central banks that sell gold
regularly. Last week, it reduced its gold sales for the coming fiscal
year by about 20 percent. The final 25-ton gold sale in the bank's
current series is set for Wednesday.

Eagles said the bank's reduction was a quot;minor factor.quot; The Bank of
England has sold 250 tons since of the metal since fiscal year
1999. quot;Realistically, the Europeans have an arrangement to sell 400
tons of gold a year for the next five years,quot; Eagles said.

The pact among European central banks is known as the September 1999
Agreement and was set to make the bank sales more visible to the gold
market, which has languished even with jewelry and industrial demand
for the metal rising in recent years. The Bank of Switzerland alone
has a total of 1,300 tons of gold that it intends to sell, Eagles
said.

Still, as author Peter Bernstein explains in his new book quot;The Power
of Gold,quot; central banks for centuries have sold gold when the price
was low and hoarded the metal when the price was high.

Several economists, including Jude Wanniski at Polyconomics Inc. in
the United States, blame the Federal Reserve for the languishing gold
price. Wanniski in a recent report said general price deflation
across the American economy - and the Federal Reserve's tight reins
on the levels of money that member banks release into that economy -
are depressing gold prices.

Economics lesson

quot;The deflation can only be fixed by having the government indicate it
wishes to end it and also decide to re-balance the interests of
dollar debtors and dollar creditors by adding liquidity until the
gold price signals an appropriate level,quot; Wanniski wrote.

Aside from the economics lesson, analysts say gold mining shares may
be poised for a powerful rise if gold's price moves higher. For each
1 percent gain in the price of gold, gold mining shares generally
move between 3 percent and 5 percent higher.

Edelson points out that unhedged companies such as North America's
Homestake Mining (HM: news, msgs, alerts) have seen their shares lead
a recent rally. Homestake does not forward-sell any of its gold
production and so would have more to gain than hedged producers.

quot;Remember, it won't take much buying to send gold shares through the
roof,quot; he said. quot;The entire gold mining sector is about $30 billion
market cap. So if just one tenth of 1 percent of the money coming out
of equities scoop up some mining shares, the sky is the limit for
mining shares, and gold bullion.quot;

Indeed, many analysts expect the continued deflation of Nasdaq to
boost gold shares. The Philadelphia Gold and Silver Index of North
American mining shares has already risen steadily during Nasdaq's
decline this winter to the 2,000 level. The mining index (XAU: news,
msgs, alerts) , known as the XAU, has gained 19 percent in the past
month.

quot;Homestake, Agnico Eagle, Placer Dome (PDG: news, msgs, alerts) have
clearly turned the corner on the charts,quot; said Edelson. quot;They have
much higher to go.quot;