You are here

Gold market straining, CFTC asking questions

Section: Daily Dispatches

10:15p EDT Tuesday, August 3, 1999

Dear Friend of GATA and Gold:

GATA Chairman Bill Murphy has been working non-stop for
the last few days and has consented to my sharing with
you his second quot;Midasquot; commentary in the last two days

Last night Midas told us that something was afoot at
the Commodities Futures Trading Commission in regard to
the gold market. Today, as you'll read below, a
dispatch from Bridge News confirmed as much. Bill and
GATA are wired to the gold market around the world, and
we think we're turning the tide. We really could use
your help.

If you like what you see here, consider checking out
GATA's informational web site at and
making a donation to our legal fund.

A two-week trial subscription to the quot;Cafequot; is free.
Check that out too at

Please post this as seems useful.

With good wishes.

Gold Anti-Trust Action Committee Inc.

* * *

By Bill quot;Midasquot; Murphy

August 3, 1999
Spot Gold $255.90 up $1.20
Spot Silver $5.44 up 8 cents

Technicals and Fundamentals

Would you believe that a gold price explosion is

The gold market see-sawed all day today but eked out a
small gain. The big news was behind the scenes, in the
spreads and the lease rates. Spot gold closed up $1.20,
October up $1.10, December up 70 cents, and April 2000
up only 30 cents.

The one-month lease rate is on the rise again and shot
up to 3.3 percent, while the six-month rate charged
into new high ground at 3.35 percent.

Meanwhile, the word on quot;the Streetquot; is that panic
producer selling is holding down the gold price. The
reason offered for the selling is pressure by the
quot;banksquot; on certain producers to hedge. The quot;banksquot; in
this case are the quot;Hannibal Lechters,quot; as it is the
bullion banks that lend to producers. Pretty neat. The
quot;Hannibals,quot; in like Flynn, went short just before the
Bank of England sale announcement, along with a few of
their big clients. The market panicked upon the BOE
news, the death of gold was pronounced, quot;Hannibalquot; sold
for weeks, and the gold price dropped $38 per ounce.

Now some gold producers feel compelled to hedge or are
panicking and selling forward as a result of quot;Hannibal
pablum.quot; Knowing a big rally is coming, Hannibal is
quietly covering his shorts, which the cowered
producers are handing him. Gold producers that are
selling forward now are being snookered by their own

Now to the good stuff. We believe that a short squeeze
of sorts is coming in the gold market. You will not
hear this from too many others because of this
quot;Hannibal pablumquot; phenomena, which has influenced
mainstream analysts and those in the press who report
on the gold market.

Why do we think as such?

First, the one-month lease rate refuses to ease -- 3.3
percent is four times what the one-month lease rate was
running until recently. After a spike up to 4 percent
and an ease-off to around 2.5 percent, the nearby gold
loan rate moved back up sharply today -- and with no
apparent reason. That occurred with a narrowing of the
spreads between the contract months on the Comex, so
Midas will offer his version of what is going on. You
will like it.

Regardless of the zillions of analysts who tell you
that the high rates are solely due to urges by
producers to sell, the truth is that the central banks
are very concerned about the liquidity of their gold
loans going into the end of the year. Many weeks ago we
told you that access to gold loans would be cut back to
the middle tier of borrowers on down. That is happening
at this very moment. Yes, certain borrowers can roll
over gold loans, but they must pay these much higher
rates and they must take a much greater price risk.

A move to $280 gold from here in a month would mean a
10 percent principal loss on any gold loan that was
rolled over today. Add to that 3.3 percent for the
lease rate. Annualize that and the cost of borrowing
becomes about 160 percent. Not such a great deal --
especially if one invested in Treasury bonds that are
sinking in price. Losses on all sides abound.

It appears that central bankers are finally waking up
and acknowledging the danger lurking out there in the
gold loan arena. The loans (10,000-14,000) tonnes are
out of control relative to mine supply (2,529 tonnes in

It also may just be that Y2K fears that are starting to
circulate more widely may be the catalyst that finally
woke the central bankers up. Maybe rising interest
rates around the world and the widening of the credit
spreads (expressing liquidity concerns) have them
taking action regarding the gold loans. No matter; the
jig is up for the shorts. Midas has been telling you we
have them right where we want them, that the conditions
for a bull market in gold are in place and the only
holdout until now is the gold price itself. And that
could blow sky-high any day -- or week.

I am not the only one who thinks this way. The XAU
soared 3.48 points today to close at 65.22. Silver came
right back in the face of the shorts to close at its
recent highs, and is close to taking out $5.50. In the
background, the CRB broke out and cleared all technical
hurdles by closing at 194.11. It has completed a
massive base. And bonds acted very poorly AGAIN today
as yields have risen to 6.16 percent and are close to
making new highs for the move. The tell-tale bank stock
index also closer lower again today. This is another
sign that all is far from well in Financial Land.

Now back to the spreads. Our British whiz kid who is a
master at commodity plays says the word is out in
London to buy December gold and sell April or June
gold. In addition to Y2K year-end fears, the English
value-added tax of 17 1/2 percent disappears on gold
purchases beginning Jan. 1, 2001. That means that gold
is 17 1/% cheaper in England on that day. There will be
a scramble to buy bargain gold just as Y2K problems may
be kicking in.

Demand will surge in the nearby months relative to the
distant months, so the spreads could go into
backwardization (with nearby months higher priced than
the back months), which is practically unprecedented in
the gold market, as gold normally trades at a contango
(with the back months trading higher, reflecting
interest rates, storage, and insurance).

Because the gold loans are much too large relative to
supply, a squeeze might develop. The front months could
soar relative to the back months as central bankers
become horrified at the possibility of facing force
majeurs, delivery defaults. Sheep that they are,
central bankers will cut back on the leasing of their
gold, driving up rates further and exacerbating the

Those who borrow short and lend long could face ruinous
consequences. During the mini-silver squeeze that
occurred after the news of Warren Buffett's buying,
some silver fabricators went bust as one-month silver
lease rates shot up to 70 percent. That's loan-shark

Bullion banks could suffer terribly as the short
borrower and long lender. If gold lease rates stay at
this level for long or go higher, problems will
surface. The producers that are heavily hedged could
run into problems too if there is a big rise in the
price of gold. They have credit lines from the bullion
banks. The producers have sold forward at fixed prices.
Maybe the credit line with the bullion dealer will be
OK up to, say, $325 gold. But if the price of gold goes
to $350 or more, the bullion dealer will say to the
producer: We need more collateral or you will have to
cover your hedgesquot; -- (forward sales) -- probably at
big losses. So while the heavily hedged companies are
King of the Hill now, when the price of gold explodes,
they might have serious problems themselves.

Get ready, gold bulls. Fasten your seatbelt. The good
gold ship rocket ride is coming.

The silver market continues to perform well as the
silver lease rates are firm also. Six-month silver
rates are around 5.3 percent, which is much higher than
normal and signifies that the physical silver market is
very tight. Our longstanding bullish target of $9.78
silver remains intact. Tickets are still available for
the quot;Silver Streakquot; rail ride.

Potpourri and the Gold Shares

More on the chatter about the Commodities Futures
Trading Commission from Christine Denver at Bridge News

quot;The U.S. Commodities Futures Trading Commission has
been in contact with major gold market players
recently, but that is just part of the agency's normal
surveillance, said a commission spokesman. The CFTC is
aware of the market fundamentals and feels recent
developments in the gold market are reflective of
supply and demand, he said.

quot;Some industry sources had speculated recently that the
CFTC was investigating the gold market. While the CFTC
typically cannot say if there is an ongoing
investigation, it has commented from time to time if
there is `heightened surveillance,' said the spokesman.
He noted that the CFTC conducts routine surveillance of
commodities markets and said that recent calls to major
gold market players were part of routine surveillance.quot;

In last night's Midas I informed you that something was
going on regarding the CFTC and the gold market. This
is confirmation.

But the CFTC is being a bit disingenuous here. A second
source tells me that he has conveyed information to the
CFTC about the gold market and is under court order not
to discuss that information with anyone, Midas
included. So stay tuned. The CFTC gold story is just
beginning. You can count on it.

Oh yes, counselor, one more thing. If this was so
routine, how come Midas knew about it yesterday Am I a
quot;major gold market playerquot;?

For the GATA file: At 11:40 a.m. today the XAU started
to rumble up and some excitement was building in the
golds. Spot gold was trading at $256.80 and moving
higher. Out of nowhere massive selling hit the gold
market -- stopping the XAU rally dead in its tracks
until the end of the day, when Comex was closed. Then
the XAU rose again.

From Bloomberg News:

quot;Comments by John Muery, head of the bullion division
at MTB Bank in New York, on rising gold prices amid
tightening supplies of American Eagle gold coins. Some
traders expect demand to rise later this year as
investors buy coins as a hedge against any computer-
related disruptions to the economy at the start of the
year 2000.

quot;`I think a lot of people were surprised that gold
prices have climbed as much as they have. Now they're
afraid of missing the boat. We're selling all the gold
coins we can get. It started last week, and it's this
week too. There's good gold demand right now. I don't
think it's Y2K-driven yet.

quot;`Everybody's understanding that there's a shortage.
People are buying Canadian maple leafs, our gold bar
business is doing extremely well, and we're selling a
lot of Krugerrands.'

quot;`Right now even primary distributors are trying to buy
coins from each other to satisfy the demands of their

More from Arch Crawford:

quot;The most important period of the year, as far as the
stars are concerned, is not Y2K-day. It's the upcoming
eclipse series and accompanying massive configurations.
About this momentous occasion the French psychic
Nostradamus wrote 430 years ago: `In the year 1999 and
seven monthsquot; -- old style -- from the skies will come
a King of Terror, To raise again the King of the
Mongols' -- (China?) -- `Before and after, Mars (God of
War ) shall reign at will.'

quot;Although the psychic world speaks to us more in
riddles, which can be easily understood only after the
fact, the timing of this one is hard to escape!quot;

quot;Nightmare scenarios pictured by those who attempt to
pierce the veil of the future: 1) Natural disasters,
including earthquakes, tidal waves, tornadoes,
hurricanes, flood, famine; 2) man-made disasters of
chemical, biological, or nuclear war or accident; 3a)
financial meltdown signaled by Chinese devaluation or
the unwinding of the Yen-$US carry trade, either of
which could lead to repatriation of money held in U.S.
Treasuries, or 3b) financial meltdown caused by
reversal of the huge gold short, either of which could
catch hedge funds in vulnerable positions; 4) major war
involving blockage of oil flow from the Middle East;
and finally 5) Y2K-related panic and bank runs. These
are dates most likely to bring the dirty laundry out
into view: July 14, 21, 26-28, August 5, 7, 11, and 17.

quot;August 11, 1999. This is the big one, the mother of
all solar eclipses, about which Nostradamus wrote: `A
king of terror will come from the skies.quot;

Arch is a firebrand and has a very big following here
in the States because of the accuracy of many of his

OK, more goodies. I got word today from London that the
pressure on Prime Minister Tony Blair and the Labour
Party to reverse the Bank of England gold sale program
is intense. At this moment there are government-to-
government negotiations. The damage to the economies of
sub-Saharan countries in Africa has been extensive. The
Labour Party guys are looking like louts in England.
The British bankers are looking like quot;buggers.quot; There
is a very good chance now that the gold sales will be
rescinded or something will be arranged to the same

If that happens, the groans of the shorts will be heard
around the world.

The Gold Anti-Trust Action Committee has an article
coming out in the August 1999 of the prestigious
International Mining Review, which is published in

Gold, silver, and precious metals shares have arrived
at the dance. It's time to party!