Little GATA starts the dominoes falling for gold

By Doug Pollitt
Pollitt amp; Co., Toronto
May 22, 2001

The last several weeks in the gold pit have seen a
most constructive pattern develop. Up a buck, up 90
cents, down a dime, up $2.10. Good action, good
two-way trade.

Now the bid side has always been thick, deep, and
stubborn, but ever since those rumblings about the
Bank of England choking up on the supply of lent
metal, the physical trade has tightened up markedly
and the aggressive selling, short or otherwise, that
killer of sentiment, is seemingly easily absorbed or
absent altogether.

It used to be that getting hit beneath the market was
a pretty safe proposition; now you've got to chin-up
a little, and hence the drumbeat nature of the march
from $260 to $275. A very constructive pattern.

Then comes the breakout last Friday afternoon. Pop!
See where a little buying will get you? Scratch the gold
market hard enough and ... that smell? That's the smell
of blue sky.

What got us here? No doubt there has been some
fresh buying interest encouraged by a supportive
economic backdrop. Taking a lesson from history,
the Fed has decided to address the inflation threat
by simply declaring victory and moving on to more
pressing problems, like telco inventories.

Meanwhile, salvos burst at the perimeter: electricity
prices, gas prices, etc. If we're not seeing this in the
Fed transcripts or the morning talk shows, we're
seeing it in the bond market and now the gold market
too.

With the passing of yet another BoE auction -- how
many left to go? -- the attitude toward the monetary
overhang may also be changing. Somewhere down
the line the market will reach a psychological
nflection point that rotates the outlook away from
quot;we've got to chew through all that?quot; and more toward
quot;you mean, that's all there is left?quot; Indeed, maybe that's
a hill we just crested. The realization that mine supply
will soon plummet no matter the gold price is also
coming to the fore.

Lastly, short sellers are getting tired. Lease rates have
crept higher and stayed higher (something we haven't
seen for a long time, if ever.) What used to be a 500-bp
spread (or carry) between Eurodollar rates and gold
lease rates is now a 150-200-bp spread --surfing the
contango wave ain't the fun it used to be. Moreover,
gold is a market that just doesn't seem to want to lie
down; as soon as you stop leaning on it, it comes right
back at you. The spectre of fatigued positions is easy
to see in this environment.

A natural question then arises: How do I reverse the
position? How do I cover?

Normal, consumptive demand sees mine supply
spoken for, it sees scrap spoken for, and it sees monetary
flows spoken for; indeed, it sees flows derived from lent
gold spoken for too. This is what turns a constructive
pattern into a breakout. The asymmetrical nature of liquidity
in the gold market has reared its ugly head before -- no one
has to sell you gold, no one has to take you out of your
position.

There have been many head fakes in the past and every
time the market gets long and cocky it has ended in tears.
One can't be faulted for being jaded.

This move has, however, distinguished itself by the
absence of news -- nothing has 'happened.' Rather, the
gold market has pulled itself off the mat by its own
bootstraps and that's what's important, not the pop at
the end.

The favourable conditions extant during the confidence-
building march from $260 to $275 remain extant. If the
market can hang on to its gains, consolidate a little, and
then repeat the slow, steady pattern upward, the quot;threat
of a good examplequot; will clearly be established. And
there's nothing that brings money to markets like the
threat of a good example.

The real short-covering pop won't come at $290; it will
come at $390.