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Midas commentary on BOE auction

Section: Daily Dispatches

10:50p EDT Thursday, July 8, 1999

Dear Friend of GATA and Gold:

I send to you here as meaty and timely a piece of
commentary on the gold market as you'll ever see --
GATA Chairman Bill Murphy's posting tonight at his
web site,

GATA operates separately from Bill's web site, but I
feel a little guilty pirating him so often for GATA's
purposes. In addition to waging the fight for gold
against its many powerful enemies, the guy is trying to
make a living as well. So I hope he'll forgive me for
giving him a plug here by recommending that anyone with
an interest in the precious metals markets and the
international economy generally would do well to check
out the Cafe. A two-week trial subscription is free,
and a year's subscription is only $99. There is much
else of both timely and philosophical interest to read
each week at the Cafe.

There was good news for GATA today: Pledges of $12,000,
recognizing the committee's continued leadership of the
gold cause in the world. GATA's officers are
uncompensated but the committee needs to finance its
investigation, publicity, and law firm work, and we're
taking on the most powerful financial interests in the world
and doing substantial damage. Please consider helping
us by sending a contribution to GATA in care of John D.
Meyer, Treasurer, GATA, Box 885, Great Barrington,
Mass. 01230.

Now for Bill's quot;Midasquot; commentary of tonight.

Please post this as seems useful.

Gold Anti-Trust Action Committee

* * *

Bill Murphy's quot;Midasquot; commentary for July 8, 1999

Spot Gold $256.50 down 30 cents
Spot Silver $5.24 up 2 cents


Very boring, yet VERY exciting. Today's session was a
quiet one as 20-year price lows were extended slightly.
Yet it appears to me that there are real dramatics
going on behind the scenes.

The lease rates continue to rise, indicating severe
tightness in the physical gold market. The one-month
rate rose 9 basis points to 2.4 percent, while the six-
month rate rose 3 basis points to 2.22 percent. It is
rare that the lease rates go into backwardization and
means there is a central bank sale at the moment, or
that the pool of borrowed gold is shrinking as central
banks rein in their gold loans.

We have been telling the Cafe for some time now that
sources have told us that gold loans will become more
restrictive for the rest of the year. This recent
tightness just confirms our information. If the lease
rates stay firm for an extended time, it will prove our
sources are correct.

In addition, Icarus pointed out to me that the Comex
spreads between the contract months also continue to
narrow. By itself that means little. But the open
interest has surged to 215,617 contracts. The specs are
pouring in on the short side again. If the cash market
is really that tight, the gold loan supply is drying up
to some extent, and the specs are massively short,
upside fireworks could be right around the corner.

It is time to be aggressively long gold.

Th silver market does not want to go down and is now
trading in the middle of a bullish pennant formation,
and the silver floor on Comex is generally friendly.
The premiums in India remain firm, indicating strong
demand in that part of the world. Silver could explode
above $6 at any time.

* * *


Nickel, aluminum, and zinc are all trading at or
exceeding new yearly price highs. If you want to see
evidence of strong upward price movement in the base
metals, have someone show you their charts. They are
powerful. Massive bases have been completed and
breakouts to the upside are under way.

Oil traded above $20 today and copper continues to hold
its recent big price gains. Only great weather in the
U.S. Midwest and a strong dollar, which are killing
grain and oilseed prices, are holding back commodity
prices in toto.

Yesterday South Africa, the world's top gold producer,
withdrew support of International Monetary Fund plans
to sell gold reserves to protest the U.K. auction. quot;The
South African government finds both incomprehensible
and unacceptable the insensitivity of the British
government and its monetary authorities toward the
pleas of gold-producing countries,quot; said Minister of
Minerals and Energy Affairs Phumzile Mlambo-Ngouka.
quot;This behaviour and the decisions of other
industrialized countries and the IMF on the public
handling of gold sales is having the effect of
defeating the very objective they profess to pursue.quot;

Today the crescendo from South Africa grew even louder.

quot;Johannesburg, July 8 (Reuters) -- South Africa said on
Thursday a high-profile delegation will tour European
capitals next week to demand a moratorium on central
bank gold sales that threaten thousands of jobs and
economies in Africa. The South African delegation will
include Minerals and Energy Affairs Minister Phumzile
Miambo-Ngouka and possibly the finance minister,
National Union of Mineworkers President James Motiatsi,
and Bobby Godsell, CEO of giant Anglogold. Other
African gold-producing countries such as Ghana, Mali,
and Tanzania will be asked to join the group.quot;

Tomorrow the IMF will meet to quot;discuss how to sell part
of its gold reserves without the bruising effect on
prices seen after the UK sale.quot; More bureaucratic
nonsense, I am sure. The IMF could not care less about
the poor countries, and that becomes more evident by
the day and by the comments of many of the poor
countries they are supposed to want to help. We can
expect only more hypocrisy from the IMF and the
sickening phrase quot;we will sell but do not want to
disrupt the market.quot;

All they have done is disrupt the gold market and they
have succeeded to date. If they really want to help the
poor and not the investment banks, all they have to do
is announce that the IMF gold sale idea has been put
off until gold reaches $350 per ounce.

* * *

quot;Economics of the madhousequot; -- a quote from the World
Gold Council. I had to revisit this one. The IMF is
supposed to be helping Russia out of its economic
problems, right?

quot;Moscow, July 7 (Interfax) -- Russian banks will not be
able to export gold profitably due to the drop in world
gold prices. Sergei Brahenko, head of precious metals
operations at Moskonmrivatbank, said the drop in prices
after the Bank of England sold 25 tonnes of gold from
its reserves will hit gold miners hardest. Before, the
critical level below which gold mining becomes
virtually unprofitable was considered to be $280 per
ounce, he added.... Yelena Krasikova, spokesman for
Lanta Bank, also said that miners have suffered most
from the drop in prices. The current situation is
virtually destroying miners, especially since
production costs in Russia are objectively higher than
in other countries, she said.quot;

All this suffering because of such low gold prices. So
what is really behind the quot;economics of the madhousequot;?

Well, we always come back to the same issues and they
are the Long-Term Capital Management bailout, the over-
leveraged positions of the hedge funds, quot;the gold carry
trade,quot; and the fragility of the U.S. bond market.

Speaking of bonds, today I spoke with the Cafe's
Charlie Peabody, a bond guru. Charlie has been looking
for a sideways, choppy bond market before yields head
up toward 7 percent later this year. The bond buying by
Salomon Brothers today confirmed his suspicions and he
now sees 118 to 120 on the September futures contract
before the big drop comes in the months ahead. He
wonders if that now means quot;theyquot; will quot;allowquot; the gold
price to rally here as the pressure eases off bonds.

This Dow Jones story by Stephanie Hoo yesterday may
indirectly shed more light on one of the reasons the
gold market is being manipulated:

quot;Dollar/yen inability to rally seen holding TSYS back.

quot;The dollar's perpetual inability to rally against the
yen may be curbing Japanese investors' appetite for
U.S. Treasuries, at a time when bonds are generally
pressured by improving global growth.

quot;When overseas investors put money in dollar-based
assets, they do so in the hopes the dollar will
strengthen -- or at least remain stable -- against
their own currency.

quot;But the dollar has shown a tendency to weaken against
the yen this year and especially this past month, as
fund managers flow money into rallying Japanese stocks.

quot;For Japanese investors putting money in treasuries,
`the risk is, the value of the foreign asset is going
to fall,' said Ram Bhagavatula, chief economist at
Natwest Global Financial Markets in New York. `It
doesn't take much of an exchange rate move' to wipe out
returns, he added.quot;

The two relevant points here: 1) The U.S. government
wants money flowing into U.S. bonds, not gold, so it is
doing what it can through various auspices to discredit
gold. 2) A sharp rally in gold will ruin the quot;gold
carryquot; borrowing crowd just as a similar move up in the
yen really hurts those Japanese who invest in U.S

One big difference. The Japanese can sell Treasuries;
the gold shorts cannot cover 3,000 tonnes of gold
borrowing short positions in a brief time. It just
cannot be done without driving the price of gold up
hundreds of dollars per ounce.

* * *

Potpourri and the Gold Shares

The XAU set back a bit today, closing at 61.88 down
1.00. I suspect 60 will hold and the XAU is headed
higher. Maybe much higher.

Here is something from David Gleason, the distinguished
South African journalist. This is his quot;Inside Trackquot;
column this morning in the South African Business
Report. It is one of the most significant stories on
the gold market since the Gold Anti-Trust Action
Committee was formed, and I hope that many of you will
send it to the media and to your favorite gold

quot;It is almost impossible in this dark week for the gold
mining industry to discuss anything other than the
apparently grim future for this most lustrous of
metals. Gold has been on a hiding to nowhere ever since
it reached those dramatic (and ill-judged) heights in

quot;And ever since central banks were persuaded that they
should sweat their gold assets, the bullion banks --
led in recent years by Goldman Sachs -- have been
enjoying a wonderful feast.

quot;Gold's imbroglio started more than a decade ago when
gold producers figured that the clever thing to do was
to sell all or part of their future production, thus
entrenching price levels a few months out. Since there
wasn't a gold futures market at the time, one had to be

quot;So here was the opportunity (opening?) for smart
merchant/investment banks. The bigger and stronger
among them persuaded a few central banks to `lend' them
some of their gold reserve (at a lease rate that has
averaged a tad over 1 percent), which they could sell
into the market, invest the proceeds at 5 percent,
while providing gold producers with the ability to lock
in prices. If, in this process, the investment banks
could also drive down the price of gold -- so that when
the time came to return to central banks the gold
they'd borrowed, they could buy it back cheaper in the
market -- well, so much the better.

quot;A side-effect, however, was that once central banks
made it clear that they would not only entertain the
idea of lending their gold but would also sell some of
it, investors got the jitters. They began to desert
bullion and gold shares. That made gold producers
increasingly anxious. And that encouraged a new concern
of the part of central bankers. This is a circle not of
virtue but of anxiety, which can easily turn to panic.

quot;Given our commitment to free and open markets, you
can't condemn a man for making for a profit. It is the
manner in which profits are made and taken that
attracts attention.

quot;Powerful U.S. investors now believe the so-called
`bullion banks' have `conspired' to drive down the
price of gold, and it is now in their interests --
because they are said to have taken on such huge short
positions -- to keep it down. This is probably the
reason some of the banks -- specifically Goldman Sachs
-- are able to offer five-year lines of credit to
inconsequential North American producers. The only
conclusion to be drawn from lending of this kind is
that Goldman Sachs must be satisfied that the risk
element in the loans is virtually zero.

quot;How does any bank arrive at that position? Because it
knows or is very confident that it is able to influence
profoundly what might otherwise be an uncertain

quot;It is at times such as these that it is most difficult
-- and most required -- to keep a cool head and remain
confident in the knowledge that all cycles turn (even
the unprecedented Wall Street bull run will end one
day). In bullion's case, what is needed is a financial
crack of some kind -- like the imminent collapse of
Long-Term Capital Management in the States last year.
It was rescued by a consortium of leading U.S. banks
when it held short positions, it is said, of about 300
tonnes of gold.

quot;That was when the metal was expected to rally sharply.
When it didn't, the non-event attracted attention. Now
it is being said that LTCM escaped because of an `off-
market' transaction -- in other words, a rigged trade
to ensure that gold wouldn't suddenly reverse course
and accelerate. The 14 financial institutions that got
together to bail out LTCM have since been asked by the
U.S. General Accounting Office for detailed information
on how this was effected. And the same institutions may
soon be challenged by angry bullion investors who want
to know how the Counterparty Risk Management Group, led
by Goldman Sachs (which has already complained about
me) and J.P. Morgan to manage financial sector risks,
can be deemed anything other than a cartel whose
actions violate the Sherman and Clayton anti-trust

quot;In all this it is worth remembering that Federal
Reserve chairman Alan Greenspan, who significantly
hasn't sold off an ounce of American gold, recently
told the U.S. Congress House Banking Committee that
`gold represents the ultimate form of payment in the

quot;Maybe not now but no one should doubt that there will
come a turn of the screw.quot;

* * *

Here's another goodie, from our friend Marshall
Auerbach of Veneroso Associates, who had this letter to
the editor published in the Financial Times today:

quot;Why is it that anyone who dares to criticize the Bank
of England gold sale is dismissed as a loony conspiracy
theorist? The fact is that neither Gordon Brown nor the
Bank of England have yet been able to provide a
coherent rationale for the sale and the manner in which
it has been carried out.

quot;The argument that the proceeds are going into higher-
yielding assets is suspect. The Bank of England
currently lends out the gold it holds and derives an
income from that.

quot;Forty percent of the proceeds of the gold sale are
earmarked for Euros, which has performed as badly
against the dollar as gold so far this year, and yields
about the same as gold loans.

quot;Twenty percent is earmarked for yen assets, which
yield less than gold loans. The balance is going into
the dollar at a time when the United States is on the
verge of experiencing a record current account deficit
(as a percentage of GDP), thereby rendering the
greenback very vulnerable to price weakness in the
event that savings are no longer there to finance the
current debt position.

quot;And why does the bank consistently resort to
accounting subterfuge when speaking about the sale from
the perspective of portfolio diversification? No other
central bank in the world measures its gold reserves on
a net basis. On a gross basis, the UK's gold holdings
are well below that of any comparable European country
and will be the lowest following completion of the

quot;Maybe this is wise. If so, why does the bank not come
out and say so, rather than resorting to a deliberate
accounting deception? Furthermore, why front-run the
IMF sale, which the current government has championed
so ardently? If debt relief is the real issue, why not
arrange this through bilateral government write-offs,
which would be far less destructive to the very
countries the UK is ostensibly seeking to help?

quot;And if the ultimate aim of the gold sale is to
liquidate an `anachronistic' relic and ensure its
ultimate demonetization, why not just come out and say

quot;If the UK monetary authorities were able to answer any
of these questions with a degree of clarity and
rationality, then the criticisms leveled and
concomitant conspiracy theories would disappear in a

quot;Yours truly, Marshall Auerback, Veneroso Associates.quot;

* * *

From Cafe member, David Baker, a great read from the
Daily Telegraph (UK). Two articles.

quot;The golden opportunity that we all richly deserve.

quot;So you couldn't rustle up $104,480 for a Bank of
England gold bar? Tough. The only consolation is that
next time the winning bid may be lower, given the way
the price took a dive after the results of the first
auction were announced yesterday.

quot;As a lesson in how not to do it, this whole process
takes some beating. You wait until the price has fallen
to its worst for nearly 20 years and then announce you
are going to dump your holding at whatever the market
will fetch, thus ensuring that its value falls still

quot;You then fix the minimum lot at a level far too high
for any normal individual to contemplate. This saves
you the bother of having to deal with the public, but
also ensures that there is no opportunity for
sentimental buyers to pay a premium.

quot;The result is general opprobrium. Gold has always
stirred emotions, which is why it has been considered a
store of value for so long. It is not only the vested
interests of the World Gold Council who feel uneasy at
replacing indestructible metal with other people's
paper promises in the heart of the central bank.

quot;Recent history has proved that reserves are of
precious little use in propping up the currency of a
mismanaged economy, since central banks can no longer
dictate the value of their currencies to the market.

quot;Just think of how it might have been, with a little
thought. What better way to celebrate the millennium
than by privatizing the nation's gold reserves? Those
ingots that are part of the bank's history could be
turned into coins, each one with its certificate of
origin, and offered to the people. In the event of
emergency, gold is far more use buried in Britain's
back gardens than it can ever be buried under the blank
walls of the bank.

quot;It is going to be hard enough, heaven knows, to find
anything to mark the millennium that might have some
chance of holding its value; a one-ounce coin,
containing gold worth 170 pounds, could be sold for a
modest premium. Not only would the coins hold the
premium (unless the market was mismanaged) but it would
bring in thousands of buyers who would never consider
holding bullion, perhaps on behalf of godchildren,
nephews, and nieces.

quot;To cap it all, the chancellor is obliged, under
European Union rules, to scrap value-added tax on gold
coins, and has already announced that the tax will go
on Jan. 1.

quot;It is not too late for the Treasury and the bank
between them to show some imagination. After all, there
is still quite a bit of the stuff left in the vaults.
Come on, Gordon, give us the chance to buy our gold.
Otherwise the people might think the real motive for
the selloff is merely political spite.quot;

* * *

Article No. 2 from the Daily Telegraph:

quot;The price of gold was $289 an ounce on May 7 when the
government broadcast its intention to auction the bulk
of Britain's bullion reserves. Yesterday the Bank of
England sold the first block of 25 metric tons at the
price of $261 an ounce, a fall of almost 10 percent in
value in two months.

quot;This fiasco was utterly predictable, and was in fact
predicted by almost every dealer, analyst, and banker
with knowledge of the trade. By alerting investors of
his plan to flood the world market, Gordon Brown
single-handedly engineered a price collapse that has so
far cost every man, woman, and child in this country 7
pounds, and done great damage to gold producers in the
Third World. Even if one accepts the New Labour mantra
that gold is nothing but a `barbarous relic,' this
method of divestment is willfully stupid.

quot;It is hard to see why the chancellor is so hell-bent
on his campaign against gold, unless his mind is
already fixed on Article 30 of the Constitution of the
European System of Central Banks in the Maastricht
Treaty. This states that members of the Economic and
Monetary Union must lodge a proportion of their foreign
reserve assets with the European Central Bank, and
gives the Governing Council of the ECB the statutory
power to decide what that proportion might be. If
Britain is to join the euro, great shipments of British
gold will have to be transferred to Frankfurt in
perpetuity, with no guarantee that they will ever be
returned. This must surely put Labour on spin alert.
The idea of such a final forfeiture of national wealth
would not sit well in middle Britain. Better to get rid
of the metal first, and instead send paper wealth to

quot;No doubt other countries have been selling a portion
of their gold reserves in order to get a better return,
mostly on foreign bonds, but Britain is already light
on bullion. Brown's claim that he merely wishes to
diversify our reserves with a minor portfolio
adjustment is not only disingenuous, it is the opposite
of the truth.

quot;The proceeds will be invested in euro, dollar, and yen
government bonds, further concentrating our holdings in
these three currencies. The bonds may perform well
enough over time, but they are unlikely to repeat their
stellar performance of recent years. If inflation
returns, as it usually does, those bonds could lose a
great deal of their value. The same could happen to the
U.S. dollar. The last time that Labour auctioned off
our gold, seduced by the obsolescence fashion of the
early 1970s, the metal promptly jumped 20-fold in a
space of six years, and bonds crashed.

quot;Ultimately, U.S., Japanese, and German treasury bonds
are nothing more than promissory notes made by heavily
mortgaged nations. Gold alone is nobody else's debt.quot;

* * *

The strangest commentary came from the highly regarded
Gartman Letter. This is what Mr. Gartman had to say

quot;Finally, her majesty's government in the UK responded
to reports made by a Tory member of Parliament (Quentin
Davies) that the Bank of England's gold auction was
done primarily to `save the bacon of firms that are
running short positions' in the gold derivatives
markets. The Treasury's spokeswoman, Patricia Hewitt,
called such report `nonsense and wild rumours.'

quot;We've no doubt that several firms are indeed quite
heavily short of gold, including Goldman Sachs (having
inherited a short position from Long-Term Capital
Management) and Barrick (having accumulated a large
short position over the past several years to hedge its
gold production going forward). However, this is the
United Kingdom we're talking about, and not the former
governments in Nigeria, Indonesia, or Cameroon, where
corruption is rampant.

quot;We may be naive, but we find it preposterous to
believe that a member of Parliament would even broach
the subject on the floor of the Parliament. We
congratulate her majesty's government for putting the
rumors to rest swiftly and succinctly.quot;

An open letter to Mr. Gartman, from Bill Murphy,
chairman, Gold Anti-Trust Action Committee.

Dear Mr. Gartman:

You have told your readership that Gold Fields Mineral
Service condemned our investigation into the
manipulation of the gold market and that you agreed
with this condemnation. Do you also condemn Newmont
Mining, Homestake, Ashanti, Placer Dome, Gold Fields,
and Anglogold for demanding a similar investigation?

Part of our investigation is trying to determine if
Long-Term Capital Management was let out of a borrowed
gold position in an off-market rigged transaction. That
could very well be a violation of anti-trust laws. And
of all people, you say in your own commentary that such
a transaction has occurred. What gives?

And finally, what did you expect her majesty's
government to say about the Bank of England's gold
sale? quot;Oh, yes, the sale is part of some sort of
collusive activityquot;?

Do you recall President Nixon's quot;I am not a crookquot; or
President Clinton's wagging his finger at the cameras
and denying any involvement with Monica Lewinsky? Did
you believe them too? Remember the embarrassed grin on
the face of Clinton's former press secretary.

You have a very good reputation, but you sure are
missing the boat on this one.

If you care, it would be my pleasure to get you up to
speed and explain to you a good bit of what we know is
going on here, and we will start by sending you this
Midas. You might also like to know that I spoke with a
major gold producer today and it says it is in quot;battle
station mode.quot; That letter to Prime Minister Blair was
not sent to the head of state of Britain with nothing
to back it up. The CEOs who sent the letter are very
conservative people and very proper.

You can be sure that was just a warning salvo. That is,
quot;Do something about the mess you have created or face
the consequences.quot; Along that line, Prime Minister
Blair canceled a three- day overseas trip today to
quot;work on the Northern Ireland problem.quot; As far as I
know the Northern Ireland problem has been around a
while. Perhaps Mr. Blair has another big problem to
deal with.

All the best,
Bill Murphy

* * *

Wrapping up: The Canadian Broadcasting Co. called today
and wanted to know about GATA, as the network heard
about the letter sent by the mining companies to Prime
Minister Blair. The CBC said that if only a portion of
what we are saying is true, it will be a bigger scandal
than Watergate, because people all over the world are
being devastated by this one.



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