Gold soars in classic investment ''squeeze''

MIDAS COMMENTARY FOR MAY 20, 2001

By Bill Murphy
www.LeMetropoleCafe.com
May 20, 2001

Gold $286.50 up $12.65
Silver $4.55 up 8 cents

On Friday I informed you that it was the bullion
dealers and trade that ran up the gold price after it
broke above $275. I explained that it was clear to me
that once the dealers saw the Gold Cartel losing, they
panicked -- for they know what is coming down the road.

The following came in yesterday from one of your Cafe
members and confirmed what I already brought to your
attention. By the way, pathetic Bloomberg and Reuters
(whom I met with personally two years ago, yet still
refuse to even mention GATA) reported that it was spec
buying that drove gold to nine-month highs in the
biggest one-day move higher since the Washington
Agreement. Wrong!

* * *

Hi, Bill:

I have been a member of the cafe for what is now going
on my third year and I am also a Comex member and have
been so for 20 years. I would like to share my
observation of Friday's move.

Since Thursday Chase was trying to defend the 275
number. Every time we approached it, Chase sold 200
August contracts every dime up. The June/August switch
was offered at a buck, so Chase started selling August
at 275.20-275.80, and Goldman was a seller in June from
27450 to the high of 274.90. Whenever another trader
bid 90, Goldman's broker screamed, quot;Sold. Come on!,quot;
which I am sure you know means that Goldman had the
world to sell. I turned to another trader and said that
Chase and Goldman would not let this market trade above
275, and it did not, settling at 274.30.

Now on to Friday.... The market opened a dollar lower
and quickly traded down to 272.60 on small volume. The
Euro was on its lows and the dollar was on its highs
(you know that is not a good sign for gold), and it
looked like it was going to be a down day. Then Moore
Capital started to do some buying in June and Refco was
a buyer in August and the market was drifting higher,
and because of the Euro and the dollar, most locals in
the ring were short.

Goldman and Chase again tried to defend the 275 level,
but on this day it would not work. Massive buy stops
were hit above 276 and we were off to the races.

One of your articles this morning stated that it was
fund buying, and CNBC is telling the world that gold
and oil were up on Friday due to unrest in the Middle
East. I want you to rest assured that the buying from
276 to 288.50 was mostly trade buying. I have been on
the exchange a long time and I have heard and seen it
all, but this, my friend, was TRADE BUYING.

Thanks for listening to me and thanks for all you and
your staff are trying to do for the gold world.

* * *

Important feedback from another Cafe member: quot;A
financial man on Wall Street spontaneously observed
that gold was moving. A mutual fund manager innocently
asked why, to be told by the firm's commodity people
had said that it stemmed from anxiety concerning the
lawsuit in Boston alleging BIS involvement in gold
price manipulation.quot;

This is what we know:

* The specs who got long on Thursday are big winners,
so big that they can freely add on dips -- or whenever
they chose to do so. This is now a dream trade.

* The dealers rarely buy on strength or technical chart
breakouts, so this indicates a bit of panic on their
part. Most bullion dealers are not part of the Gold
Cartel, but most had to know what was transpiring and
some had to be going along for the ride. Now they have
to be stunned at what is happening. The big move has
occurred since the Gold Anti-Trust Aciton Committee
went public in South Africa and received so much media
attention there as a result of the GATA African Gold
Summit in Durban. It is no coincidence that gold has
rallied more than $30 per ounce lately. The arrogant
bullion dealers cannot believe that this is happening
to them -- gunned down by GATA's guerilla forces.

* If the dealers are scrambling to cover shorts and the
specs are long and want to get longer, who is going to
sell? The producers? Certainly not the Aussies. The
Aussie gold price is now around $552. Many of their
hedge books are under water and sinking fast. They
(Sons of Gwalia types) are liable to panic once they
realize that GATA is winning and gold is headed for
$600 per ounce.

Certainly not mega-hedger Barrick. Barrick just added
substantially to its hedges near the bottom. From a
recent story at www.TheStreet.com: quot;Barrick Gold is one
of the most heavily hedged gold producers. In fact, the
company actually added to its hedge book in the most
recent quarter, selling gold forward at an average
price of $270 per ounce. Analysts estimate that Barrick
has between 27 and 39 percent of its total reserves
sold forward, a huge number for a gold company.quot;

Another significant hedger, AngloGold, announced
recently that it had REDUCED its forward sales by
800,000 ounces. AngloGold will more than likely
continue to reduce hedges in the future, not increase
them.

If dealers want to buy and some producers need to
cover, then who could the sellers be?

Certainly, not the specs. They want to buy, and the
ones who are already long prior to Friday have big
cushions to do so with. It is not just the quot;black boxquot;
types who want in. One of the legendary
traders/investors was said to be a big buyer on Friday.

That leaves only the Gold Cartel or the central banks
to quash another rally. The problem there is that GATA
is breathing down their necks everywhere they turn.
Especially Fed Chairman Alan Greenspan, who, it turns
out, may have been one of the ringleaders of the gold
fraud ever since he abruptly took his seat on the Board
of Governors of the Bank for International Settlements
in Switzerland.

Let us examine the pickle Greenspan is in. It will
illuminate Bob Chapman's bulletin he sent our way early
last week, which included this:

quot;Our intelligence sources have informed us that Alan
Greenspan has given the bullion banks until the end of
May to clear up their hedging and outstanding gold
derivative positions.quot;

Let us regress to Greenspan's letter to Sen. Joseph I.
Lieberman of January 19, 2000.

* * *

The Hon. Joseph L. Lieberman
United States Senate
Washington, D.C. 20510

Dear Senator:

Thank you for your recent letter from your constituent,
Chris Powell, concerning the open letter published in
the Thursday, December 9, 1999, edition of Roll Call.

The letter asserts that the Federal Reserve has been
seeking to manipulate the price of gold by intervening
in or otherwise interfering with the free market in
gold. This is not true.

The Federal Reserve owns no gold and therefore could
not sell or lease gold to influence its price.
Likewise, the Federal Reserve does not engage in
financial transactions related to gold, such as trading
in gold options or other derivatives.

Most importantly, the Federal Reserve is in complete
agreement with the proposition that any such
transactions on our part, aimed at manipulating the
price of gold or otherwise interfering in the free
trade of gold, would be wholly inappropriate....

* * *

Note Greenspan's words: quot;The Federal Reserve does not
engage in financial transactions related to gold.quot;

Several Cafe members brought to GATA's attention a
European central bank publication that gives examples
of certain kinds of ECB financial transactions.
Amazingly, they involve what GATA calls the Gold Cartel
and some of those institutions that GATA consultant Reg
Howe has cited in his lawsuit.

It could not be more clear that some scholarly
bureaucrat was explaining certain kinds of European
Central Bank transactions. No one could possibly make
up these names and have them match almost exactly what
GATA and Howe have been alleging. Not after Howe
uncovered the now-infamous reference in the January 31,
1995, minutes of the Federal Reserve's Federal Open
Market Committee meeting:

quot;MR. MATTINGLY. It's pretty clear that these ESF
(Exchange Stabilization Fund) operations are
authorized. I don't think there is a legal problem in
terms of the authority. The [ESF] statute is very
broadly worded in terms of words like 'credit' -- it
has covered things like the gold swaps -- and it
confers broad authority.quot;

A swap requires a counterparty, and GATA found one for
the Federal Reserve. Greenspan presided over that
January 1995 FOMC meeting, and that brings us to the
specifics in the ECB discovery:

* * *

European Central Bank

Statistical treatment of the Eurosystem's international
reserves

October 2000

Postal address:
Postfach 16 03 19
D-660066 Frankfurt am Main
Germany
Telephone #43;49 69 1344 0
Fax #43;49 69 1344 0

Internet: a href=http://www.ecb.inthttp://www.ecb.int/a

Page 37

IV Appendix: Some numerical examples

This section includes examples of some transactions
involving external reserves. The following types of
transactions are considered:

* Gold transactions

* Credit Lines

* Repurchase Agreements

* Interest rate swaps

* FRAs

* Forward foreign exchange contracts

IV.1 Gold transactions

An NCB quot;Aquot; of the euro area performs the following
transactions in gold:

5 Dec. 1999: purchases 20,000 ounces of gold from the
Bank of England at USD 300/ oz. This transaction is
settled by means of a credit entry in a six-month
deposit in USD in the Bank of England in quot;Aquot; (at 3
percent).

15 Dec. 1999: one-month gold deposit of 10,000 ounces
in J.P. Morgan, New York. JPM places USD 3,100,000 in
U.S. government securities as collateral. Under the
terms of the loan, JPM agrees to return the gold on
demand; otherwise, the collateral would be exercised.
At maturity (on January 15, 1999), in addition to the
gold, quot;Aquot; receives from JPM USD 3,000; this amount is
placed in a deposit denominated in USD in JPM. At the
same time, the collateral returns to JPM.

20 Dec. 1999: quot;Aquot; undertakes a gold swap with the
United States Federal Reserve in which quot;Aquot; provides the
Federal Reserve with 1,000 ounces of gold in exchange
for USD 300,000 in currency. The transaction will be
reversed on 20 January 1999, at the spot price of the
gold prevailing in the market at the moment.

* * *

The European Central Bank (Bundesbank), the Fed, J.P.
Morgan, the Bank of England -- it all fits perfectly.
GATA has them nailed and the investment world is coming
to grips with the fact that GATA is correct and so are
most of our allegations -- maybe all of them. That is
most likely why the gold price took off once Dow Jones
reported our charges 11 days ago, reporting that GATA
was in South Africa to expose them to African
governments. The GATA-watching smart money knew that
the jig was up. Once gold took out $275 and observers
saw Chase and Goldman Sachs overpowered on Friday,
panic set in among other shocked gold shorts.

Which brings us back to Senator Lieberman and Alan
Greenspan. In an extraordinary move, and as a result of
the GATA/Howe/Turk revelations, Senator Lieberman has
gone back to Greenspan for clarifications. I have a
copy of the letter Senator Lieberman recently sent to
Greenspan. Regard what Chris Powell, who has known
Lieberman for more than 30 years, told us:

* * *

3:43p ET Wednesday, May 9, 2001

Dear Friend of GATA and Gold:

Below are the questions I have put to Fed Chairman Alan
Greenspan and Treasury Secretary Paul O'Neill through
Sen. Joseph I. Lieberman. It would help if others in
the United States asked their congressmen to do the
same.

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

1) What are the quot;gold swapsquot; cited in the minutes of
the January 31, 1995, meeting of the Federal Open
Market Committee?

2) What quot;gold swapsquot; have been made by the ESF, the
Treasury Department, or the Federal Reserve in the last
10 years? Whose gold was involved? What other parties
were involved? What is the status of these quot;gold
swapsquot;?

3) What was the purpose of these quot;gold swapsquot;? Do these
quot;gold swapsquot; facilitate the lending, leasing, or sale
of gold by other parties? How did these quot;gold swapsquot;
come about? What does the United States gain from them?
What becomes of gold that is quot;swappedquot;?

4) Were these quot;gold swapsquot; ever made public or reported
to Congress? If so, how? If not, why not?

5) Have these quot;gold swapsquot; encumbered or otherwise put
in jeopardy the gold reserves of the United States? If
so, in what amount and to what extent?

6) Why has the gold at the U.S. Mint at West Point,
N.Y., been reclassified from quot;gold bullion reservequot; to
quot;custodial goldquot;? Is this gold still owned by the U.S.
government? If not, what is the authority for its
having left the possession of the U.S. government?
Whose gold is it now? What has the United States
received for it?

7) If, as Chairman Greenspan suggested in his letter of
January 19, 2000, to Senator Lieberman, the Federal
Reserve System does not interfere in the free trade of
gold, why were quot;gold swapsquot; discussed at the FOMC's
meeting on January 31, 1995?

8) Exactly what is the policy of the Federal Reserve
System, the Treasury Department, and the Exchange
Stabilization Fund toward gold and the gold reserves of
the United States?

* * *

How can Greenspan possibly respond to this without
setting off a few financial time bombs? Did he lie to
Lieberman the first time? It sure appears that he did.
It is important to remember that he may have to testify
under oath in the Howe lawsuit. What is this poor,
deceitful man to do?

Abandon ship, that is what. And that can explain Bob
Chapman's intelligence report that Alan Greenspan is
warning the bullion banks to run for the hills. They
have been found out, and the reverberations from the
revelations are only starting. As was planned more than
two years ago, Shaka's quot;Enveloping Hornquot; has the Gold
Cartel surrounded. I refer to my closing statement at
the GATA African Gold Summit:

* * *

quot;The 'enveloping horn' is now in full battle formation.
By acting decisively together we can close the back end
of the 'enveloping horn' on the Gold Cartel. These
financially and politically powerful institutions are
likely to be slightly bewildered. The truth will see
the light of day and we will win. So will all of sub-
Saharan Africa.quot;

Siyabonga kakhulu! (Thank you.)

Hambani kahle! (Go well.)

Ukuthula kube nani! (Peace be with you.)

* * *

It is not just Senator Lieberman who is breathing down
Alan Greenspan's neck. I know of at least one official
party that is following through on the GATA action plan
presented at the GATA African Gold Summit, which
included the following:

quot;Alan Greenspan of the U.S. Fed and Paul O'Neill, new
U.S. Treasury Secretary, should be asked whether the
United States intervened in the gold market in any way
following the sharp price rise after the Washington
Agreement.....

quot;To the U.S. Federal Reserve Bank Chairman: On July 24,
1998, before a House Banking Committee and on July 30
before the Senate Agriculture Committee, you stated:
'Central banks stand ready to lease gold in increasing
quantities should the price rise.' Since then, that is
exactly what happened every time there was a gold price
rally -- to the detriment of the African gold-producing
countries. How did you know that and what specific
central banks were you referring to?quot;

What is Greenspan going to say to African governments
who query him? What is he saying NOW to them? How will
U.S. Secretary of State Colin Powell respond to these
questions when he visits Africa?

It looks to me like the Federal Reserve chairman is on
a hot seat, one that is growing hotter.

The more one reviews what GATA has said and the
evidence that we have collected over the years about
the gold market manipulation, the more the brightest
people in the gold industry realize that we are right.
Few are brighter than Peter Hambro, who sent this
letter to the Financial Times in response to its recent
article slighting GATA.

* * *

8 May 2001

Ms. Gillian O'Connor
The Financial Times

Dear Gillian:

Thank you for the piece on Professor Neuberger's
excellent work on gold derivatives. May I add some
observations based on 10 years as a bullion banker and
11 as a gold producer and one who has seen it from both
sides of the fence?

The professor concludes that because the banks'
derivative positions in gold are just 0.3 percent of
their total derivatives this exposure is
inconsequential. What he does not tell us in the
executive summary that I have downloaded is what the
absolute numbers are, nor does he compare these paper
promises of gold to the real thing.

He does not remark on the very small (when compared,
say, to the foreign exchange market) turnover in real
gold, nor the very shallow nature of the physical gold
market. He should have compared this to the volume of
its derivatives

It is important to do this because gold is gold and
money is an invention. Governments and central banks
can increase the supply of the underlying item in
almost all financial derivatives from U.S. dollars to
zloty, but only us miners can deliver the gold. That
means that unbridled creation of gold derivatives is
inherently dangerous.

To combat this risk, the prudent bullion banker
requires his derivatives counterparty to put up initial
and variation margin on the position. I learnt this
credit policy from my then-chairman and proprietor, Dr.
Henry Jarecki, himself the principal counterparty to
the Hunt brothers in their attempt to corner the silver
market in 1979.

My inquiries at the Bank of England and the British
Treasury, however, lead me to believe that this is not
what the United Kingdom is doing. Rather the Bank of
England, on behalf of the Debt and Reserve Management
Office of H.M. Treasury, is engaged in quot;balance sheetquot;
or unsecured lending of our gold. It would also seem
that there are no provisions for the borrower to mark-
to-market the monetary value of the gold loans they
have taken.

The corollary to this recklessness is the extension of
margin-free facilities by the bullion banks to their
downstream customers, many of whom are struggling
miners with little or no cash reserves and who, if the
market rises substantially, would find it impossible
either suddenly to make physical delivery of the gold
they have sold forward or to find the cash equivalent.
That is why the sudden gold price rise was so damaging
to Ashanti, where such large gold derivative positions
had been created.

When I was a bullion banker and before I became a
producer, I believed that Gold-in-the-ground plus
equipment equaled gold in the bank.

On this basis I thought our gold lending was almost
risk-free. I now know, from experience as a producer,
that my rule of thumb was wrong. Mining is much more
difficult than that.

It seems likely that this Pauline conversion on my part
may well also have happened to Ashanti's counterparties
when they understood the yawning void in their profit-
and-loss accounts that another increase in the spot
price could create from nowhere.

A 10 percent move on the 7,000 tons of loans the
professor identifies is roughly US$6 billion. How
simple then, and how sensible it would be to use their
big balance sheets in the little gold market to keep
things stable. It would be easy too in a market he
describes as lacking transparency. The only people to
get hurt are the mines' workforce and their
shareholders.

As Professor Neuberger so clearly says, quot;They [also]
have an interest in acting in a way that maintains an
orderly market,quot; which is what GATA believes and you
describe as a conspiracy theory. Given the sound
economic reason he sets out for such manipulative
actions, is it not possible that his paper serves more
to confirm than to debunk the popular myth?

* * *

Speaking of the smart ones.... Throw in Mark Wellesley-
Wood, chairman of Durban Roodeport Deep. He picked up
on one of the most important points of the GATA summit:

quot;Bullion bankers, many of whom are our counterparties,
are increasingly in what GATA's Frank Veneroso termed
an 'inadvertent corner.' They will be under increasing
pressure to unwind their positions. Let's just hope
that they do not create too much havoc in the industry
in the process.quot;

Frank told the attendees at the summit how the jewelry-
buying women of the world had cornered the gold market
inadvertently and that many bullion dealers had become
quot;prisoners of their own shorts.quot; Friday's stunning move
up is evidence that is true, and that is what gold
players are finding out.

Mark Wellesley-Wood's open support of GATA is a
breakthrough for GATA and gold shareholders all over
the world. It will help us immensely in our African
efforts. So I urge gold shareholders everywhere to buy
Durban Deep shares. By doing so, you can send a message
to other gold producers that it is time to wake up and
stand up.

This is no request for charity. Durban Deep has
significant gold reserves that require a higher gold
price to make them profitable to mine. Few gold
producers will benefit as much as Durban Deep as gold
rises to $600 or more per ounce. Then then share price
of Durban Deep will fly. The more gold producers follow
Durban Deep's example and help draw attention to our
claims, the more the massive gold shorts will be forced
to cover. The price of gold then will rise even
further. Then you will make more money on all your
other gold and gold share investments.

We are at the initial planning stages of a
www.LeMetropoleCafe.com and GATA extravaganza at the
Blanchard Gold Conference this fall in New Orleans.
Details will be forthcoming shortly.

Durban Deep was a big favorite of the legendary Jim
Blanchard, whom I had the pleasure of meeting. It will
be most fitting for many of us to meet at his
conference and celebrate the good times.

By buying up Durban Deep shares, you can actually
contribute to your own financial good fortune, as a
Durban Deep share price spike up will call attention to
the company's support of GATA. The more publicity GATA
receives, the more the gold price will go up as more
investors realize what is coming and why. Please send
this heads-up to all gold investors. This is a win-win
situation for all of us.